Destinations Central & South America

Brazil is relying on private investors to improve its roads, railways, and ports

Aug 16, 2012 10:52 am

Skift Take

With an Olympics and the World Cup coming up soon, Brazil will be in a precarious position should no company want to risk taking on its ailing infrastructure issues.

— Samantha Shankman

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Brazil’s government on Wednesday unveiled measures to lure up to $133 billion reais ($66 billion) in private investment for road and rail projects, part of a new state-led effort to improve the country’s aging and overburdened infrastructure.

The stimulus measures, the latest in a flurry of government steps aimed at giving Latin America’s largest economy a boost and paving the way for higher growth rates, focus on concessions for improvements to road and rail. Similar concessions for airports and seaports are expected in the coming weeks.

Combined, the projects amount to the biggest batch of concessions ever launched by Brazil, a continent-sized country struggling to upgrade transport infrastructure before it hosts the 2014 soccer World Cup and 2016 Summer Olympics.

The steps are also an effort by President Dilma Rousseff to modernize Brazil’s economy, which has stalled over the past year, following average growth of more than 4 percent over much of the past decade.

By making improvements to infrastructure, the government hopes it can clear troublesome bottlenecks and make the economy more efficient. Not only would such improvements help lower costs for business, they are needed to accommodate future growth in a country where the government is scrambling to speed up investment and planning for big infrastructure projects.

But the investment plans are almost certain to run up against a series of hurdles that could slow their implementation, from Brazil’s mind-boggling bureaucracy to long delays in obtaining environmental permits.

“This is a crucial step to lower the ‘Brazil Cost’,” said Humberto Barbato, head of the association representing the country’s electronics industry, using a common phrase used to describe the mix of high taxes, red tape and infrastructure woes that make Brazil such an expensive place to do business.

“Now, the real question is how long this is going to take,” he added.

Rousseff, speaking before dozens of business leaders in capital Brasilia, said the measures would help Brazil become “richer, stronger, more modern and more competitive,” and give the country “infrastructure compatible with its size.”

Even as she urged the private sector to invest in infrastructure, Rousseff stressed that the government will continue to take the lead. A new state-run company will be created to manage future infrastructure planning, she said.

Brazil’s BNDES development bank, the main source of corporate credit in the country, will provide subsidized loans for the projects.

“We will continue to fulfill our role as the driver of development,” Rousseff said.

The government hopes the investments can also help jump-start Brazil’s economy. The Rousseff administration has taken a series of consumer-focused measures over the past year, such as tax breaks for targeted industries, but the economy has been slow to react.

Rousseff, speaking to reporters after the ceremony, said the steps should help pave the way for Brazil to eventually reach annual growth rates of about 5 percent.

That would mark a big jump from growth of less than 2 percent expected this year. But officials noted that the investments would take place over a five-year period, meaning that the impact would be felt sooner rather than later.

“This isn’t a program for investments to be diluted over the next 15 or 20 years,” said Transport Minister Paulo Passos.

Obstacles Remain

The program foresees concessions to expand the country’s old and overloaded road and rail systems. In addition to plans for major highways, the government hopes to attract investments for up to 10,000 kilometers (6,200 miles) of Brazil’s rail network.

Economists welcomed the measures, having long argued that Brazil must clear its clogged roads, ports, railways and airport terminals if it ever hopes to loosen the economy from structural shackles that have long held it back. So deficient is the country’s existing infrastructure that many of its big mining, steel and other commodity companies operate their own private rail, road and port facilities.

Compared with recent efforts to spur consumer spending as a remedy for stalling growth, economists say, the infrastructure projects can do far more long-term good.

The government, however, must take care to ensure that concessions are attractive enough to generate investor interest.

Past concessions were focused on keeping costs low for end users, meaning some highway operators and other infrastructure investors have found margins too low, discouraging upkeep and improvements. Bureaucracy and legal obstacles also made it difficult for investors to follow through on concession and investment plans.

“Concessions have to be granted from a market perspective, not a social perspective,” warned Paulo Resende, a logistics professor and dean at the Fundação Dom Cabral, a business school in the southeastern state of Minas Gerais. “Investors need to know they can afford and follow through on the bids they make.”

Brazil’s poor infrastructure slows the movement of goods and services and drives up the price of everything from fuel to warehouse space and labor. In turn, that exacerbates Brazil’s historic battle against inflation and makes local businesses less competitive against foreign rivals.

Compared with China, where the government has invested rapidly and heavily in infrastructure, the projects Brazil promised to pursue during a recent boom were slow to materialize. Due to bureaucracy, legal issues and costs that quickly get out of control, some of them never did.

As a result, goods still take at least twice as long to move the same distance as they do in China and other more efficient markets, logistics experts say.

Additional reporting by Tiago Pariz, Jeferson Ribeiro and Silvio Cascione; writing by Paulo Prada; editing by Todd Benson, Gary Crosse, Leslie Gevirtz.

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