The road forsaken
Brazil’s infrastructure needs are huge. So is the job of attracting private capital
Aug 11th 2012 | SANTOS | from the print edition
Let the games begin
IF MITT ROMNEY, America’s Republican presidential candidate, doubted London’s preparedness for the 2012 Olympics, what must he think about Brazil’s? The 2016 Olympics and 2014 football World Cup will happen in a country where only 14% of roads are paved. The World Economic Forum ranks Brazil’s quality of infrastructure 104th out of 142 countries surveyed, behind China (69th), India (86th) and Russia (100th). On a recent visit to Santos, Brazil’s largest port, your correspondent watched men clean up the remains of a ship that had exploded carrying chemicals—in the 1970s.
In theory, Brazil’s urgent infrastructure needs should provide rich pickings for investors. From 2011-14 the government will spend 163 billion reais ($80 billion), or 1% of GDP a year, on infrastructure as part of its “growth acceleration” programme. That is not enough, says Arthur Carvalho of Morgan Stanley. According to a 2010 report by the bank, Brazil would need to spend 6-8% of GDP annually to catch up with South Korea in 20 years and 4% per year to catch up with Chile.
In this section- My dollar, my rules
- The power of faith
- The Lazarus of Wall Street
- Making moaners pay
- »The road forsaken
- Draghi’s plan
- Baby monitor
But there are plenty of reasons to think that private capital will not rush to fill the gap. Infrastructure projects require lots of debt, but long-term financing in reais is extremely expensive. Loans are available from BNDES, Brazil’s giant national development bank, at a more affordable rate, but its activities have the effect of crowding out other lenders. The Brazilian government is trying to encourage projects to use tax-free infrastructure bonds, but so far there has not been a successful issuance. Exactly who will buy these bonds is unclear since Brazilian investors can get a comparable yield without taking on so much risk.
There is a lot of risk to go round. Getting hold of environmental licences to undertake big projects is a huge hassle. They have been known to delay a project’s start by as much as five years. One aggrieved investor recounts how his firm had to wait months to get approval to take over a port terminal, because it needed 21 separate entities to sign off. Dilma Rousseff, Brazil’s president, has at least made it possible to fast-track approval for certain infrastructure projects. Yet it is not unheard of for a project to be halted when it is nearly finished, as happened earlier this year to a São Paulo mall because of a missing licence. The introduction of “completion insurance” could help, says Fernando Gentil of Darby, a private-equity firm, but no one offers it in Brazil at the moment.
Whether investors are willing to put up with delays, bureaucracy and other costs ultimately depends on what sort of return they expect to achieve. Most infrastructure funds in Brazil say they target nominal returns of around 20%. But a licence to operate three airports that the government auctioned in February looks set to yield only 8%. Investors in infrastructure also want long-lasting projects with stable cash flows, which means they will probably leave it to the government to build stadiums that may barely be used after the 2016 Olympics. As for other projects that matter a lot more to the country’s future, Ms Rousseff has lots to do if she wants to lure private money to back them.
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