Brazil risks lost decade as it bungles infrastructure boost; Transport investment still lags far behind other large economies

September 22, 2013 2:22 pm

Brazil risks lost decade as it bungles infrastructure boost

By Joe Leahy in São Paulo

Transport investment still lags far behind other large economies

Officiating at a railway project last week in Rondonópolis in the Brazilian soya bean state of Mato Grosso, President Dilma Rousseff said the country was “two centuries” behind when it comes to building its rail network. A similar point, although to a lesser degree, could be made for the rest of the country’s transport and logistics networks. Brazil’s highway system lags behind probably by 50 to 60 years, the same for ports, urban transport and airports. The government is trying to fix this. But as shown by two landmark tender processes last week – one for highways and the other for oil exploration blocks – it needs to get moving or risk condemning Brazil to a lost decade in terms of higher potential economic growth. Who is responsible for this mess? Most countries, developing or developed, struggle with infrastructure construction and Brazil is no exception.Ms Rousseff’s government came to power with the explicit aim of addressing this bottleneck through grand infrastructure-building schemes, such as its R$1trn (£280bn) Growth Acceleration Programme(PAC).

The country’s development bank, the BNDES, the main financier for the PAC, has mushroomed in size. Its loan disbursements have risen from just R$40bn in the whole of 2004 to R$88.3bn in the first six months of this year.

Yet despite this huge government stimulus, investment as a share of gross domestic product continues to lag behind other large economies. It stood at 18.6 per cent at the end of June compared with what economists say should be a minimum of 22 per cent.

Something is not working here.

Part of the reason is the government’s poor ability to execute. In last week’s auction, for example, two big highways – said to be the best of a large set of roads to be offered in the coming months – were put to tender to private bidders.

One, the BR262 from the inland state of Minas Gerais to the state of Espírito Santo on the coast, attracted no bids at all. The tender seems to have collapsed because of a silly mistake. It included a large stretch of works that would be conducted by the federal highways department. Bidders naturally did not want to run the risk that this department, which has a poor record, would fail to deliver on time. Not only would the private concession holder be fined, it would also lose toll revenue.

The government denied this risk existed, saying it would provide guarantees, but it was too late. The confusion meant bidders stayed away from the tender.

Then there was the case of the oil auction. The government demanded signing fees that analysts considered “onerous” for any successful bidders in the auction of theLibra field, the first of many promising ultra-deepwater discoveries off Brazil to be offered for tender.

Most of the big private sector oil companies stayed away, including Chevron, Exxon,BP and BG. It was a disappointing result for a field that was supposed to be so attractive that the government had said 40 groups were interested.

Critics say the government is obsessed with controlling private sector returns, to the point of making Brazilian projects unattractive.

The joke is that Ms Rousseff’s centre-left Workers’ party has such an instinctive distrust of the private sector that it wants to invent a new type of economic system: non-profit capitalism.

Ms Rousseff insists the government is committed to providing sufficient returns to the private sector. She blamed politicians in Espírito Santo state for objecting to toll fees.

In any case, with the delays to the current round of road auctions, she now has little time to get her infrastructure programme off the ground. Brazil will all but close for the Christmas-carnival break between December and February and then again for the football’s World Cup in June. Presidential elections follow in the second half of 2014.

If the projects are deferred until 2015, they will not be completed until 2020 at the earliest. Counting the last three years of weak economic progress, Brazil will risk a decade of slow growth. It may not be two centuries but, in the age of globalisation, a decade is a long time to lose.