Brazil's rapid economic growth over the last decade, as well as the emergence of a new middle class, has put a strain on the country's transport infrastructure. Brazil is now the sixth largest economy in the world but ranks just 104th in respect of the quality of its infrastructure according to a 2011 survey by the World Economic Forum, behind all other BRICS (Russia is ranked 100, China 69, India 86 and South Africa 60). Over the past 10 years Brazil has been investing around1% of GDP in infrastructure each year, as against 7.3% for China. In fact, Brazil needs investments of 3% every year just to avoid the deterioration of existing infrastructure. Transport bottlenecks are hurting the competitiveness of major industries such as mining and agribusiness and Brazil will be in the international spotlight as it hosts the upcoming 2014 football World Cup and the 2016 Rio Olympics. However, Brazil's Federal Government is making an effort to tackle the issue.
On 15 August, Brazil's President Dilma Rousseff announced the "Programa de Investimentos em Logística" (Logistics Investment Programme, "LIP") a new plan to promote investment in the roads and railways. This 'new stage' consists of the adoption of PPP models for projects requiring investments of R$133 billion (US$64 billion) over the next 30 years, R$79.5 billion being invested in the first five years and R$53.5 billion following over the next 20 to 25 years. This includes R$91 billion to be spent on railway projects stretching over 30,000 km and R$42 billion on the country's road networks with the construction or upgrade of over 7,500 km of highways. On the launching of the programme, President Rousseff said, "Brazil will finally get an infrastructure compatible with its size."
Under the LIP, the government has created a public company called "Empresa de Planejamento e Logística" (Company of Planning and Logistics, "EPL") to help implement the investment plans for the roads and railways. EPL has a legal mandate to ensure the money is invested correctly and projects are completed and will help the government structure projects and monitor their progress. In the coming weeks, President Rousseff's administration will be announcing investment plans for the country's ports and airports, which will also be overseen by the EPL under the LIP.
Pursuant to the LIP, the railway sector will see an initial R$56 billion investment over the first five years and R$35 billion over the following 25 years. The government is seeking to revive rail freight and break the current monopoly in the provision of rail services. This is intended to address competition and industrial policy concerns, reducing transport costs and improving the competitiveness of Brazilian exports. Using the proposed PPP model, concession contracts will be awarded by the government for the construction and operation of the new lines. The government will purchase capacity on the railway through the federal railway construction agency Valec and sell it on to independent freight operators and freight concessionaires moving their consignments.
Brazil's roads have historically suffered from a lack of investment. Almost 50% of the road network has significant maintenance problems, with 88.3% of federal highways being single-carriageway and 42% having no hard shoulder. Under the LIP, there will be investment of R$23.5 billion over the first five years focused on duplicating single-carriageway roads, with a further R$18.5 billion over the next 20 years focusing on integration between roads, airports, railways and ports. Tolls will begin to be collected after 10% of the work is complete but urban traffic will be exempt.
To help attract investors, the government has pledged that the Brazilian Development Bank (BNDES) will be offering loans on 'favourable' terms and with repayment periods exceeding 25 years to finance projects forming part of the LIP.
Another aspect of Brazil's infrastructure investment drive is the revival of the high speed train linking Sao Paulo to Rio de Janeiro. Despite plans being announced four years ago, the project has suffered a number of setbacks as the tender was cancelled on three separate occasions amid concerns of bidding companies regarding the levels of fares. On 23 August 2012, a week after the LIP was announced, the Brazilian government announced the revival of the project, which will also now form part of EPL's agenda. There will be an initial public consultation phase which is expected to last until September 2012, followed by two stages of auctioning for the concessions. The first is for the technology and operator, which is expected to be decided by December this year. The second is for the construction of the rail infrastructure, which should take place by 2014. The estimated cost of Brazil's bullet train is R$16.5 billion (US$8 billion) and it is expected to be finished by 2022.
There have already been a number of PPP initiatives this year in the Brazilian transportation sector. In June a public consultation was launched in relation to the Porto Maravilha regeneration initiative in Rio de Janeiro, for the construction of a light rail system. This was followed by the state-owned STM and Metro issuing tender documents for the construction and financing of its light rail projects in Sao Paulo.
The government is expecting major progress in time for the 2016 Olympics and even possibly by the 2014 World Cup. However, there are some risks for investors and contractors. For instance, environmental licences are notoriously hard to obtain with applicants often having to wait up to five years although President Rousseff's administration has tried to alleviate the worst of the licensing problems by allowing for certain projects to gain fast-tracked approval. Private sector investors also have to be aware of high wages and price inflation and their potential impact on margins.
Although the investment figures may seem impressive, Brazil is a country of continental proportions and it remains to be seen whether the new programmes are sufficient to overcome years of under-investment and keep up with the socio-economic pressures on Brazil's infrastructure. In addition to the LIP, there are positive indications from the current administration in relation to ports and airports and willingness to adopt PPP models. If these initiatives are successful, it is to be hoped that they are just the tip of the iceberg and there will be many opportunities to come.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 03/09/2012.