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.