Brazil Infrastructure: New Model Hopes Fade

The World Cup and Olympics offer a once-in-a-lifetime opportunity for Brazil to engage the private sector and foreign banks to update infrastructure.

In 2007, after a plane accident in which 199 people died, a short-lived movement to protest Brazil’s woeful infrastructure was born. But the cansei ("I’m tired") movement withered because of president Lula’s popularity and the homogeneity of its elitist membership.

The protest may have died, but the logistics issue has not. Brazil winning both the 2014 World Cup and 2016 Olympics, on top of forecast 2010 GDP growth of 5%, have pushed infrastructure to the top of Brazil’s priorities.

On paper, much appears to be getting done. By 2014, Brazil is set to spend some $92 billion per year on infrastructure, compared to $61 billion in 2008 and just $30 billion in 2003, says Paulo Godoy, president of the Brazilian Association of Infrastructure and Basic Industry (ABDIB). He has been travelling the world to speak to investors and drum up interest in the sporting events and explain the opportunity. Local construction companies like Odebrecht are likely to benefit significantly. The company is focused on engineering including construction of metro systems and mass transit systems, as well as the construction and modernization of arenas, says João Borba, director of business development at Odebrecht.

Brazilian companies will likely joint venture with foreign firms for know-how and technology, says José Roberto Martins, partner at law firm Trench, Rossi and Watanabe, Baker & McKenzie’s associate in Brazil. Companies with experience of the World Cup in South Africa to be held this year could particularly benefit, he adds.

Private Sector Frozen Out
For many investors, however, interest is already on the wane, at least for the soccer tournament. Initially, there was optimism that municipal and state governments might experiment widely with public private partnership (PPP) contracts, concessions or Build, Operate Transfer and models that include the design stage too, says Martins. That hope is more timid now.

The problem for investors is that plans to bring in the private sector are being dropped in favor of safer public works contracts for a number of interlocking reasons.

First, the government is keen to ensure the work gets done on time, and so is offering hefty financial assistance. Second, the International Federation of Association Football (FIFA) has been stepping up provisions on security and the environment, making contracts more complex.

"FIFA is constantly changing its mind and adding requirements and costs and that has made it hard for municipalities to finalize stadia contracts," says Mauricio Girardello, a partner at PricewaterhouseCoopers (PWC) in São Paulo. That has already compelled some municipalities to redraft contracts to incorporate additional demands, he notes.

Odebrecht believes opportunity in infrastructure will be through public sector works. In the case of multi-use stadia, this may involve PPPs, depending on the viability of financing, adds Borba.

Competing With BNDES
Government funding has been a boon for the municipalities hosting World Cup events. The Growth Acceleration Program (PAC) for the World Cup, which was launched in January 2010, will provide 20.2 billion reais, with monies from the Long-Term Workers Fund (FGTS).

The BNDES is flush, after receiving a 100 billion reais injection of loaned funds from the government last year. It continues to undercut private sector rates substantially and is poised to play a major role. "Whenever we analyze Brazil from outside, we wonder: ‘how can you compete with the financing terms and tenors of BNDES?’" says Fuensanta Díaz Cobacho, head of Americas infrastructure at WestLB.

"We are making efforts to talk to decision makers to incentivize them to optimize resources, including from foreign banks, and not depend just on BNDES and the local banks. There’s a bucket of money that the government is not using to its full extent," she adds. Cobacho would like to work with the BNDES and thinks it would be useful if it capped financing per project at levels that allow significant private sector participation.

The BNDES, however, has been setting the cap high. For example, the bank is able to provide up to 400 million reais for stadia in each of the 14 cities hosting World Cup matches with a generous cap of 75% of each stadium, says a spokesman at the development bank.

White Elephants
For public sector entities, the long-term TJLP rate – at 6.0% in February – plus a 1.9% spread will be used in stadia constructions, the BNDES spokesmen adds. For private arenas, the bank will carry out operations via a financial agent, which will charge a discretionary risk spread, he says. There are just three private stadiums in existence, in Curitiba, São Paulo and Porto Alegre.

Part of the issue is that investors will only support event-related projects that stand on their own merit, such as airports and roads, says Martins. Areas directly connected with the games, such as stadia and hotels, may prove white elephants once the events wrap up, making a concession model problematic, he adds.

WestLB is more interested in long-term projects that will underpin economic growth than those vital for the World Cup and Olympics, which may not have much relevance after that, agrees Cobacho. That puts extra pressure on municipalities to use public works contracts where the government assumes the risk of a stadium in the long-run.

A further disincentive for innovative contracts is timing. The World Cup may still be four years away, but Brazil pledged to have the stadia ready in 2012 as a condition of hosting the event, notes Martins. Several contracts were about to be released as of February.

Hotel Investment Heats Up
Infrastructure needs for the international sporting events can be split into two camps: those directly connected to the tournaments, like stadia and hotel building, and projects that answer longstanding needs, like urban transport and road upgrades.

Salvador in the Northeastern state of Bahia was the only city to have awarded a PPP contract for its arena by early February. The 591.7 million reais project was awarded to a consortium of Odebrecht and OAS. The BNDES will finance 400 million reais and the consortium will need to seek the balance from the market.

Salvador, however, may be one of the few to pursue a PPP. Rio has already dropped its PPP plans for the renovation of the famous Maracanã stadium, Latin America’s largest. Time pressures, together with BNDES support of up to 75% of the project, meant that it was safer to use a government contract, according to Marcía Lins, the state’s secretary for tourism, sport and leisure. Belo Horizonte, capital of Minas Gerais, one of the few states to have used PPPs in Brazil to date, opted for a public works contract for its arena too.

The hotel industry suffers from concerns regarding the viability of works carried out for the events. The problem is what happens afterwards, says Alvaro Diago, LatAm head for Intercontinental Hotels Group (IHG). Overall, he is cautious on Brazil, seeing greater opportunity in countries like Colombia, which has a more generous tax allowance for hotel building and renovation.

Martins agrees that hospitality groups will not build on the merits of the events alone. He believes São Paulo will attract hotel investors, as the city needs more rooms anyway. Martins adds that Rio – a host city for both events – should be able to attract investment to help it meet its aim of doubling hotel capacity to 40,000 rooms. Cities in the northeast with tourism activity may also draw some private hotel investment, but it is hard to see such cash flowing to interior cities or the south, he notes.
Longer-term, transport projects are getting a shot-in-the-arm from the events, particularly airports. FIFA secretary general Jerome Valcke cites air travel as the main concern in Brazil. "There are no good airports," he told local journalists last year.

Airports Start to Move
There are 16 terminal projects directly linked to the World Cup and Olympics which will receive an estimated 4.6 billion reais in investment, according to the government body for airport infrastructure, Infraero. The most significant plan is the upgrade to São Paulo’s Guarulhos, which will gain a third terminal and have runways and aprons modernized at an estimated cost of 1.37 billion reais. Rio’s international airport will meanwhile see works, including expansion and modernization of terminals, at an estimated 688 million reais spend.

Presidential elections have scotched plans to privatize some airports, this year at least. The Lula government had planned to sell São Paulo’s third airport, Viracopos, as well as the international Galeão airport in Rio, after the TAM crash in 2007. Privatization has been successfully resisted by Infraero, which employs some 11,000 people. Some remain confident that opportunities for private investors will open up once elections are over. "Airports will see many concessions," says Mauricio Portugal, head of the infrastructure advisory services for Brazil at the IFC. "Not in this administration, but after 2010 it will happen," adds Portugal, a former head of the PPP unit at Brazil’s ministry of planning, budget and management.

Ambitious plans for public transport schemes including metro and light rail have been pared back in favor of bus lanes, which are cheaper and easier to implement. Many cities sought money for light rail solutions but could not justify the investment, notes Martins. Only Fortaleza, São Paulo, Manaus and Brasília have received the green light for more ambitious light rail and metro programs, according to the ministry of cities. São Paulo, Rio de Janeiro and Manaus are getting most of the funds.

However, the urban transport construction boom has barely started and spats have already erupted, owing to alleged irregularities in tendering and works. Work on the Brasília light rail system to connect the city and the airport was suspended at the end of January by investigations into contract award irregularities.

Already, president Lula is getting involved to ensure such legal wrangles do not delay the World Cup or Olympics. He has pointed the finger at the government accounting watchdog, the TCU, and environmental licensing agencies, demanding that they loosen up criteria to ensure work happens on time. Brazil’s two sporting victories will no doubt be carried off with the panache and spontaneity for which the country is famed. The infrastructure legacy will also be significant.

Yet, it is unlikely that they will be the hoped-for catalyst for wider private sector participation. It is sobering to remember the unmet promises of Rio’s Pan-American Games in 2007.

While heralded as a success for occurring peacefully, the government failed to fulfill promises to build new roads, a light rail, metro lines and carry out a comprehensive clean up of Guanabara Bay. Cost over-runs were huge. The João Havelange stadium alone, initially budgeted at 60 million reais ended up costing 400 million reais. LF

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