Thomas White Global Investing
New Business Opportunities in Brazil Infrastructure Sector
New Business Opportunities in Brazil Infrastructure Sector Stamp
October 12, 2012
A Postcard from the Americas
New Business Opportunities in Brazil Infrastructure Sector

An unpaved road in Brazil

Only 14% of Brazil’s roads are paved. Journalists write stingingly of how motorways in the country are more suited to horse carts than vehicles.

Those doing business in Brazil will be familiar with the “Brazil Cost.” It’s a disparaging pointer to the extra expenses investors inevitably incur in the country due to its befuddling bureaucracy, high taxes, and most of all, creaking infrastructure.

Indeed, only 14% of Brazil’s roads are paved. Journalists write stingingly of how motorways in the country are more suited to horse carts than vehicles. When exhausted truck drivers arrive at Santos, Brazil’s biggest port, they are prepared to wait 3-4 days to unload their cargo. The Economist says this August, the port cleared a massive pile of debris — it was the wreckage of a chemicals-carrying ship that exploded in the 1970s!

No wonder a World Economic Forum survey on the quality of infrastructure in 142 countries has ranked Brazil a lowly 104. Its rail and road networks are so poor that many large Brazilian firms operate their own private facilities. In fact, it is believed that infrastructure bottlenecks shave off 10%-15% of the nation’s GDP every year.

But change is around the bend. Now, Brazil is intensifying preparations to host the 2014 Soccer World Cup and 2016 Summer Olympics.

The Dilma Rousseff administration recently announced that more than $60 billion would be poured into rebuilding the country’s roads and railways over the next 25 years. And, nearly half of this money is set to be invested by 2017. The government plans to construct 10,000 kilometers of railroads and 8,000 kilometers of roads as well as attract foreign investments for rundown ports and airports. Undoubtedly, this program is a big boost to the flagging Brazilian economy. But more significantly for North America, several American and Canadian firms have begun to sniff opportunities this infrastructure thrust has created.

For instance, the U.S.-based design and engineering firm AECOM has capitalized on its role in the London Olympics to bag a major contract for Rio 2016. NYSE-listed Brookfield Infrastructure Partners has formed a $1.7-billion joint venture with a Spanish firm to buy a giant Brazilian highway toll operator. Global engineering firm Arup and technology solutions giant Oracle already have a foothold in the country.

While Arup has been engaged in highway and metro rail work, Oracle has been selling its Primavera project management software to infrastructure-based ventures. Moving forward, both are eyeing new opportunities. As well, Canadian builder of portable shelters, Weatherhaven, has expanded into Brazil to take advantage of the demand for its products at construction sites.

Not just businesses, economists have also hailed the infrastructure stimulus, having always advised Brazil to improve its roads and unclog its ports in order to remove the structural hurdles on its growth path. What’s more, as a Reuters report says, economists are happy that compared to the government’s recent endeavors to boost consumer spending as a solution for stalling growth, “infrastructure projects will do far more long-term good.”

Brazil’s government is leaving no stone unturned to clear the way for such projects. A state-run company is being set up to manage infrastructure planning in the future, while the country’s government-controlled development bank, BNDES, has been instructed to provide subsidized loans for infrastructure ventures. President Rousseff has declared these measures will give Brazil “infrastructure compatible with its size.” In fact, the government is expecting the stimulus to jump-start the emerging economy, which has lost some shine lately amid falling global demand for its mineral exports.

Media reports quote top government officials as saying that since most of the investments have been planned over a five-year period, the impact of the stimulus will be felt sooner rather than later. Moreover, the government appears to have changed its approach to infrastructure building. As a Wharton University article says, in the past, the government directly awarded contracts and kept a hawk’s eye on projects, but this time “the focus is on private investment through concessions and deeper public-private partnerships.”

Certainly, the foundation has been laid to erect a spanking new infrastructure in Latin America’s largest economy. But only time will tell if the government and investors will see the “Brazil Cost” translating into profits.

 

Image Credit: eugeni_dodonov’s photostream on Flickr under a Creative Commons License

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