A new wave of Brazilian infrastructure investment

Revised regulations, and a focus on privatisation, has helped Brazil keep its national and local economies booming

In recent years, Brazil has experienced a new wave of privatisations. The need for significant investments in infrastructure comes as an inevitable requisite for the economic and social development of the country, and forthcoming international events such as the FIFA World Cup in 2014 and the Olympic Games in Rio de Janeiro, 2016, have forced the government to review its investment policy, turning to the private sector for the implementation of projects in essential sectors of the economy.

The government needs to do its homework and make the final adjustments to existing regulations

After having executed concession agreements for the construction of several large power plants, such as the hydropower plants of Belo Monte and Jirau, the government also transferred the management of various airports – Brasilia, Guarulhos and Viracopos (these last two located in the state of São Paulo) – to the private sector. At the moment, the market waits for similar measures to be taken with respect to the airports of Rio de Janeiro and Minas Gerais. On the other hand, and in furtherance of its privatisation policy, the Federal Government has recently launched the first part of its Investment Program in Logistics, which provides for the application of approximately BRL133bn in the renovation and construction of federal motorways and railways. The government has also published a new bid notice for the operation of a high-speed railway transportation system between the cities of Rio de Janeiro and São Paulo.

During the last two years, Brazilian states and municipalities have also launched a variety of infrastructure projects (stadiums, motorways and underground systems), again in preparation for the forthcoming Fifa World Cup and the 2016 Olympic Games.

New financing products
Such measures have long been expected. What is new in the current wave of privatisations, and which does raises legal concerns and discussions among economists and social scientists, is the form of transfer of the government activities to the private sector. In the 1990s, the process was characterised by the sale of assets to private investors through the transfer of controlling interests in state-owned companies from the mining, telecommunications and banking industries. Recently, the government has opted to make use of one-off concession agreements and public-private partnerships (PPPs) in an attempt to maintain a stake in its business assets. In the new concessions package of motorways and railways, the government has decided on a bidding process which targets the lowest toll rates for users, without any price to be paid for the granting of the concession itself. As for the railways and the anticipated privatisation of the international airport of Rio de Janeiro, the government’s proposal is to use PPPs.

Economically, the government’s efforts have been dedicated to the stabilisation of the exchange rate and the decrease of the basic interest rate, where measures are expected to improve demand and reduce the cost of capital. Likewise, the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES) has been an important arm for the government when it comes to financing infrastructure projects.

BNDES has granted a significant number of loans, and new financing products have been developed for investments in this sector. For instance, the projects for the new Investment Program in Logistics count on a significant portion of BNDES financing (65-80 percent), with a repayment deferral period ranging from three years (motorways) to five years (railways) and an amortisation period ranging from 20 years (motorways) to 25 years (railways).

Regulatory procedure
The government has also recently made changes to the country’s legal regulatory framework. In an attempt to optimise the procedure for contracting with private providers, the government has recently issued a so-called ‘differentiated regimen for contracts’, which will apply for civil works and services related to the 2014 FIFA World Cup, the 2016 Olympic Games and projects that are part of the Growth Acceleration Plan (PAC).

In Brazil, according to regular contracting procedure, the public administration is required to prepare a basic project for any construction or service prior to offering it to the market. Once that basic project has been defined, the contracting would be subject to a bidding procedure in which, prior to assessing the commercial proposals of the interested parties, the government will certify the technical and economic capacity of the bidder to carry out the project. The need for compliance with all such steps has always been a major cause of delay of projects. Pursuant to the differentiated regimen, the government can contract the full implementation of a project, from the basic engineering design through its completion, and is able to alter the order of the stages of a bid by assessing the commercial offer and examining the technical capacity issues of the winning bidder.

The government has also worked on reducing tax burdens in order to increase the level of foreign investment in the country. The Brazilian National Treasury recently issued a special tax regimen, the so-called RECOPA, which exempts the payment of federal taxes levied on operations of importation and sale of machinery, equipment, construction materials and services when applied for the construction, expansion, renovation or modernisation of soccer stadiums that will host official matches of the FIFA Confederations Cup in 2013 and of the FIFA World Cup in 2014.

Although the efforts have been laudable so far, optimisation of private infrastructure investments in the country have so far been made on a case-by-case basis. Broader changes are necessary if a suitable environment for developing large businesses is to be created.

Smoothing out the red tape
The simplification of the bureaucracy involved in the incorporation of companies and the implementation of businesses in Brazil is currently a vital issue. Incorporation of a company in Brazil is still a lengthy procedure, especially because there are a great number of permits and licenses required for a company begin its operation. The existence of a multitude of federal, state and local agencies in charge of supervising companies’ activities is also an unnecessary hindrance. An example of such bureaucracy is the confusing regulatory framework for obtaining environmental permits; more than a handful of projects have had to be suspended after having obtained federal and state environmental clearance, only to be postponed while they fulfil a municipality requirement.

Regarding concessions, a review of governmental pricing policy is urgently needed. In general, the government has prioritised the lowest rates as the criterion for selection of investors. However, this has often been a discouraging aspect for investors, especially in light of the great number of responsibilities and obligations imposed by the government already, as well as the weak stability of the regulatory agency and the lack of clearer regulations. Difficulties faced by the government to attract investors to projects such as Belo Monte and the High-speed railway (RJ/SP), as well as delays in investments due from concessionaires in relation to motorways subject to bids in 2007, suggest that such policies are outdated.

The government must also improve its procedures for assessing the performance of concessionaires. The recent failures of telecommunications service providers reveal the need for an increment of state supervisory actions on one hand. On the other hand, the same facts bring to light the lack of objective criteria for the assessment of activities in relation to concessions, which, if in place, would help to avoid subjective and political judgments.

Partnership laws
The law that governs PPPs also calls for amendment. The greatest evidence of this is that, although the PPP laws have been in effect since 2004, very few PPPs have actually been established since then. In general, the procedure for formation of PPPs is extremely bureaucratic. It is worth noting that any federal PPP must be subject to the approval of a committee formed by members of three different ministries (federal government departments) of the Executive Branch, and that the relevant partnership invitation must be subject to the consent of the Federal Accounting Court, both prior to the PPP being launched to the market. There are also no clear rules on how the private sector may initiate projects that could be developed by PPPs; ie, how private investors should submit project they deem feasible to the government, which restricts governmental access to new business ideas.

Brazil has already realised that both its expansion projects will provide some room for private investors, and a basic regulatory framework for raising the necessary funds for its endeavours is already in place. Now the government needs to focus on doing its homework and make the final adjustments to existing regulations. Then PPPs, regardless of respective types, will be able to grow in the environment for the development of profitable business, with clearly defined rules to guide investors.

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