Beefing up its infrastructure is something all emerging market nations, the BRIC nations in particular, need to do, and infrastructure is one of the most important measures for foreign investors. Brazil, however, is a notorious laggard on this front, ranked 107th out of 144 countries in the World Economic Forum’s latest Global Competitive Index, and last among the BRIC countries.
The country is seriously behind in most of its infrastructure requirements, including railroads, roads, ports, bridges and airports. Although the Brazilian government did announce in 2012 a broad infrastructure expansion plan that would include increased federal spending as well as private sector incentives to build up power generation, roads, ports, mass transit within the cities, railroad tracks and airports, things have not gone very far at all.
There’s little doubt the potential Brazil offers on the infrastructure front looks very attractive from the outside, but investors such as Aaron Visse, portfolio manager at Forward Management, believes that the Brazilian authorities have not sufficiently motivated the private sector to invite increased investment in infrastructure.
Concession programs in various areas, notably in the power sector, are not detailed enough, he says, or initially promise to deliver one thing and then get changed around. Internal rates of return are also low for private sector investors compared to the risk of doing business in Brazil, and over all, the heavy-handedness of the government in the infrastructure sector is proving to be both a disappointment as well as a drag to many investors.
“When you have government intervention in regulated industries, many of which are related to infrastructure, there are ramifications,” Visse said. “So there’s a lack of trust on the part of investors because the investment environment doesn’t seem transparent and is clearly subject to change, and this is working against Brazil.”
The federal commitment toward infrastructure financing also remains very small, so as much as Brazil continues to be an attractive investment destination and has a long way to go in the dynamic of consumer-driven economics, its lagging infrastructure is already proving a serious dampener to economic growth, partially because it slows down manufacturing and reduces the country’s international competitiveness.
“Brazil’s economy in general, and manufacturing in particular, have seen their competitiveness erode over the past several years, clearly limiting long-term growth prospects,” Fernando Sedano, an economic consultant with The Manufacturers Alliance for Productivity and Innovation (MAPI) stated in an October 2012 paper. “The country’s poor growth performance is arguably more of a structural issue than just a cyclical one. Specifically, a persistent and rather structural multi-decade strong currency, together with Brazil’s historically high tax burden, low-skilled labor force, and poor infrastructure quality, makes the country uncompetitive and increasingly reliant on domestic market growth.”
Now, with Brazil hosting the 2014 FIFA World Cup soccer tournament as well as the 2016 Olympic Games, things are starting to get really serious. These are huge events for the country and an opportunity for it to showcase its very best, but in the run-up to them, Brazil has had to contend with criticism from various quarters.
At the beginning of March, Brazilian finance minister Guido Mantegna kicked off an international roadshow to various financial centers around the world, designed to shore up investor interest in infrastructure, thereby underscoring, perhaps, a sense of urgency on the part of the government to get things in working order ahead of the two major events.
But even if the clock is ticking louder now, it’s going to take some serious convincing on the part of the government to make the private sector believe that investing in Brazil’s infrastructure is a worthwhile endeavor, because “investors are now at a point where trust and lack of transparency are real issues,” Visse said. “The environment in Brazil with respect to infrastructure is murky because we don’t know what will come next, and this is counter-intuitive for a country in such need of infrastructure investment.”
The Jose Havelange Olympic Stadium, which needs urgent repairs to its roof and whose capacity was supposed to be increased from 45,000 to 60,000 ahead of 2016, has been shut indefinitely. Brazil is now in a down-to-the-wire situation with respect to the sporting events, but while it may be able to scrape through by 2014, the country’s longer-term economic growth will hit some serious roadblocks in the absence of a proper infrastructure policy.