Shooting for glory

Four years ago, infrastructure spending in Brazil was stagnant. Now, Latin America’s largest economy is teeming with thousands of projects in response to the crowded airports, long-abandoned railways and sluggish energy production that threaten to curb the country’s booming economic growth.

With two major sporting events on the horizon – the 2014 soccer World Cup and the 2016 Summer Olympics – Brazil is luring private investors to help finance a R$959 billion ($570 billion) spending plan over the next four years.

Analysts speculate that President Dilma Rousseff will allow Brazil’s airports authority Infraero to auction concessions to build and upgrade airports in Rio de Janeiro, the Olympics’ host city, and Sao Paulo in the next couple of months.

“There is also talk of floating Infraero on the stock exchange to allow private investment and management” to increase private investment in the industry, says Marcelo Tavares of the UK Trade & Investment Office in Rio de Janeiro.

Brazil: big emerging
infrastructure market

Infraero manages nearly 70 percent of airports in Brazil, accounting for 97 percent of air traffic, according to the agency. Air travel has ticked up 35 percent in the past two years with the growth of the middle class – which has swelled to nearly half of the country’s 200 million population – and the agency has initiated a R$4 billion ($2.4 billion) project to upgrade transit hubs.

Tavares says that large Brazilian developers such as Odebrecht Infraestrutura, Constructora OAS and Andrade Gutierrez are interested in constructing and operating airports in Brazil’s largest cities. Meanwhile, Mexican airport operator Grupo Aeroportuario del Sureste, or Asur, said it would be interested in bidding to build the Natal airport in northeastern Brazil ahead of the World Cup.

High-speed rail

Auctions for the planned high-speed railway between Sao Paulo and Rio de Janeiro will likely open on April 29, and global logistics giants like Bombardier, Alstom and Siemens, plus Chinese, Japanese and Korean technology firms, are expected to place bids, Tavares says. The railway will cost R$30 billion ($18 billion) to put into operation and serve 33 million passengers per year along the 518-kilometre stretch.

While the government expects to spend roughly R$200 billion ($120 billion) on transportation, logistics, water and sanitation projects by 2016, nearly half of the R$959 four-year spending plan will go to the energy sector – whose stable regulatory framework has long attracted investors since the industry was privatised in the 1990s.

Already the largest energy company in Latin America, state oil giant Petroleo Brasileiro, or Petrobras, announced plans in February to invest R$7.8 billion ($4.6 billion) to increase onshore and offshore drilling by 24 percent. Petrobras recently approved the bidding process for the construction of the first seven of a total of 28 offshore drilling rigs. The seven rigs are projected to come into operation in 2015.

In the hydropower sector, Alstom signed a contract last month worth about R$1.1 billion ($678 million) with Norte Energia of Brazil to provide power equipment for the 11,230-megawatt Belo Monte Dam, the world’s third-largest hydroelectric power plant. Plans for the dam have been in the works since 1975, and after years of environmental reviews and permits, it is now expected to provide electricity to 35 million people upon its completion in 2019.

Despite confidence among investors in energy regulations, other sectors such as water and waste treatment are only now providing legal recourse for mismanaged or unhonored long-term concession contracts, says Fernando Gentil, managing director of Darby Overseas Investments’ private equity and mezzanine finance activities in Brazil.

“The government understands that providing regulatory comfort is a very important motivator for both private sector and international investors to come in,” says Gentil.

Investment firms such as Darby and BNY Mellon ARX Investimentos, the Brazil-based equity manager of the Bank of New York Mellon, are tapping into projects across the board.

BNY Mellon ARX said in February that it would focus 70 percent of its R$750 billion ($450 million) Latin American Infrastructure Fund on Brazilian projects through to 2015.

In Brazil, BNY has invested in more than 100 companies operating in the areas of heavy construction, transit, ports, shipbuilding, toll roads, energy generation and construction materials like steel.

Alex Gorra, a senior strategist for the firm in Rio de Janeiro, says an increasing number of infrastructure companies are entering Brazil’s market as the real interest rate drops to less than 6 percent – down from 12 percent a decade ago.

“We’re in the early stages, but for Brazilian companies, equity in general has been a very good place to make money even in volatile times, and now with the macroeconomic policies more stable, it is going to be very profitable for infrastructure companies,” he says.

Darby Overseas, the private equity arm of Franklin Templeton Investments, which launched a R$400 million ($250 million) Brazil Infrastructure Fund in 2008, announced in February that it would invest approximately R$300 million ($200 million) in four to five Brazilian companies “in the areas of oil and gas, transport and logistics, renewable energy and water and sewage”.

The firm said it would open a second Brazil Mezzanine Infrastructure Fund with an investment target of about R$835 million ($500 million) once all investments are completed and the first fund is closed out.

Playing catch-up

“I foresee continued investment in infrastructure because there is a lot of catching up to do and because, frankly, the economy will come to a halt if we don’t invest in infrastructure,” says Gentil.

“There is no choice. It’s invest or invest,” he says, adding that the economy’s projected 5 percent growth this year – down from 7.5 percent in 2010 – depends heavily on improving the transportation networks that a Brazil Tourism Report from Q1 2011 listed among the world’s poorest.

Brazil places 95th out of 130 countries ranked by the United Nations World Tourism Organization for transport infrastructure. Less than 10 percent of roads are paved in Brazil, and airports in Rio de Janeiro and Sao Paulo are already operating at capacity – and that’s without the 500,000 football fans expected to visit Brazil for the World Cup.

The high-profile sporting events are only a necessary kick-start to the long-term infrastructure investment needed to keep this emerging economy on par with the scale of activity in its BRIC counterparts – Russia, India and China – says Gentil.

Gorra says that the World Cup will contribute about only two-tenths of one percent to economic growth over the next four years, although many of these projects will carry over into the Olympics, which will have about a 2 percent overall growth effect before 2016.

Still, Gorra says he is betting that Rio de Janeiro – which is hosting the World Cup final in addition to all Olympic events – will undergo a “Barcelona effect”.

Much like the 1992 Olympics in the Spanish port city, the 2016 games have drawn international attention and encouraged the government to clean up abandoned ports, reduce crimes in the city’s 500-plus favelas, or slums, and improve basic services like electricity, water, internet and cable television for its residents.

Budget cuts

Amid these plans for infrastructure spending, however, comes a R$50 billion ($30 billion) package of budget cuts to curb rising inflation and interest rates and strengthen fiscal credibility among private investors.

Brigitte Posch, an analyst at bond fund giant Pacific Investment Management Co in Newport Beach, California, says: “All that together translates that the government will focus on greater participation of the private sector. And they have to work on a model” to do so effectively.

If these plans do indeed come together, Brazil should be able to boast an infrastructure legacy that will easily outlast the World Cup and Olympics.