Infrastructure: Not just a sporting challenge

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Brazil needs to invest heavily in basic infrastructure to support its expanding economy. Progress is being made, but it is a daunting task. 

Guarulhos Airport lies 25km good from the centre of São Paulo. But getting there in the cauldron of vehicles and blaring klaxons can take longer than you expect: air travellers are often advised to leave five hours before departure to make their scheduled flights in good time.

The inability of Brazil’s airports, roads, railways and utilities to keep pace with development is a major policy concern. A growing middle class, nourished on rapid economic expansion, is one reason for the glut. Passenger traffic in Brazil has doubled since 2004. In 2010 alone it jumped 21%. The issue has become all the more worrying since the country won the bids to host the 2014 FIFA World Cup and the 2016 Olympic Games.

Major sports events are litmus tests for emerging economies. Hosting these events raises a country’s profile, fires national pride and attracts investment. They also offer the opportunity to governments to get their houses in order. Unlike China, South Africa or India, however, Brazil is hosting not one but two of the world’s biggest sports events in the next four years. The strain is showing. As of September, only seven of the 12 host cities had broken ground on projects.

The government knows what it’s up against and has taken action to reverse 30 years of declining infrastructure investment. Public spending on infrastructure (from the central government and state-owned enterprises) has risen steadily over the past decade, reaching 3.1% of GDP in 2010. Not enough, according to Morgan Stanley, a global financial firm, which said that to achieve the level of infrastructure attained by Chile, the current leader in South America, Brazil will have to set aside around 4% of annual GDP for infrastructure investment over the next 20 years.

In 2007 the government launched the Growth Acceleration Programme (Programa de Aceleração do Crescimento or PAC) to spur both public and private investment in infrastructure. Although it spent a significant sum in the first phase of the programme, Brazil’s Institute for Applied Economic Research (IPEA) says that only 82% of the funded projects were completed.

Brazil’s vast road system is one of the longest in the world, a nearly two-million-kilometre network, of which less than 14% was paved by 2008. Yet Brazil’s economy depends more on the health of its asphalt than do countries of comparable size: 60% of freight is transported by lorry, almost twice that of the US and three times that of China, reflecting the state of disrepair and underdevelopment of railways. More has to be done to resolve this. Meanwhile, some BRL23 billion has been allocated to improve the nation’s highways, which is well short of the BRL170 billion recommended by the IPEA.

Energy is another sector feeling the strain. A growing population will push up electricity consumption by 5% per year until 2019, according to the Ministry of Mines and Energy. Some 80% of electricity generation comes from hydropower. More facilities are planned, but are often delayed by disputes over environmental licenses, some of which have halted projects for over a decade. Although the licensing process has been streamlined, frequent disputes often slow projects down. When a license is finally granted after a public call for tender, it will end up costing the winning bidder between 15% and 20% of the total project, of which only a very small amount is related to environmental requirements. While the sector attracts some private investors, most shy away from it because of the lack of strategic planning, inadequate pricing and institutional weaknesses.

The situation of water and sanitation is grimmer still. Sewage is collected for just under half the population and only 20% of it is treated. Over half of municipalities, including major ones like São Paulo and Rio de Janeiro, will also face water shortages by 2015 unless BRL22 billion can be found. Easing these pressures will require publicly funded operators to expand the network while ensuring affordable tariffs for the poorest households. Over the next two years, investment is expected to rise by 92%, thanks to federal money.

When the first phase of PAC ended in 2010, the government decided to increase funding to BRL394.9 billion (around 2.7% of GDP per year). Some 30% of the financing in the first phase came from the private sector. Luring more private investment is key to achieve government targets. But investors remain wary. Despite some progress, the business and institutional environment do not encourage private firms to invest in infrastructure projects as private investors still perceive them as high risk projects. In addition, corruption dogs many of Brazil’s infrastructure projects, including those major sporting events.

However, without private investors, PAC could flounder. But if infrastructure significantly boosts economic growth, the Growth Acceleration Programme could in principle pay for itself. If not, Brazil’s deficit will deepen. To avoid such an outcome, private investment will have to significantly increase, an ambitious objective given the current business climate.

In 2004 the massive amount of private investment needed to safeguard Brazil’s infrastructure prompted the government to adopt a law regulating public-private partnerships (PPPs) in addition to concessions. Brazil has considerable experience in signing concessions with private investors, especially in the road sector. Unlike concessions, however, PPPs involve some subsidies and guarantees from the government so as to make projects profitable for private investors. But this makes them more risky for the public sector. The new law has increased transparency and reduced regulatory uncertainties, but unfortunately it has yet to produce tangible results. So far the government has signed only two PPP contracts (both in the road sector). The situation could improve with standardised contracts, an overall streamlining of the process and by gaining more all round—experience of PPPs.

Brazil has a great sporting tradition, with its soccer team in particular setting the standard for others to reach. Can it set a similar standard in hosting the World Cup and the Olympics? Success would be the laurel for the reform efforts undertaken since the mid-1990s. With the right approach, Brazil’s infrastructure, whether in sanitation, transport to the airport or sports, will turn out for the better.

OECD (2011), Economic Survey of Brazil, OECD, Paris.

Morgan Stanley Blue Paper (May 2010), Brazil Infrastructure, Paving the Way.

Reuters Special Report (March 2011), Brazil’s Olympic Push. IPEA (2010), Infraestrutura Econômica no Brasil: diagnósticos e perspectivas para 2025, Livro 6, Volume 1, Brasilia.

See also:

Brazil's Programa de Aceleração do Crescimento (PAC)

Brazil’s Institute for Applied Economic Research (IPEA)

©OECD Observer No 287 Q4 2011

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