Regional report: Latin America

Brazil continues to lead Latin American infrastructure investment and is forecast to increase spending in the run up to the 2014 Football World Cup. Richard High reports.

Infrastructure spending in Brazil could reach US$ 225 billion over the next three years, according to financial management and advisory company Merrill Lynch. The company's latest report, The US$ 2 trillion EM infrastructure theme, predicts annual infrastructure spending in emerging markets (EM) - Africa, Middle East, Latin America, Eastern Europe and Asia - is expected to jump +80% over the next three years.

EM infrastructure spending, it said, would rise from US$ 1.25 trillion to US$ 2.25 trillion annually over the next three years, thanks to more aggressive government spending programmes, fuelled by decades of under-investment in power, transportation, and water, and higher analyst estimates.

In Latin America, said the report, Brazil, which was ranked fifth overall behind China - US$ 725 billion, the Gulf - US$ 400 billion, Russia - US$ 325 billion and India - US$ 240 billion, continues to lead the way, with Merrill Lynch raising its spending estimate for the country to US$ 225 billion, from US$ 180 billion.

The upward revision, said Merrill Lynch's Latin American strategist Pedro Martins Jr, reflects infrastructure spending projects highlighted in President Lula's Growth Acceleration Plan (PAC). The bulk of the projects in PAC are Energy (US$ 100 billion, 55% of the total) and water/sewerage (US$ 60 billion, 33%).

"We believe that additional capital expenditure related to recent oil discoveries by Petrobras could result in further upward revisions to our estimates going forward," he said.

Mr Martins flagged housing and bulk infrastructure as key drivers of strong medium-term economic growth. "Shortfalls in the federal budget pose a risk, but we believe they will be addressed through concession programs with the private sector," he added.

There are other risks to Infrastructure spending in Latin America too, added Mr Martins "Bureaucracy is the primary risk most commonly cited by our regional analysts. Projects may be delayed due to indecision, slow approvals and so on.

"Rising costs for labourers and commodities used for infrastructure projects add to the bureaucracy in decision making, budgeting and approval process. They are indicative of tighter supplies of resources and the greater need to allocate across projects."

A collapse in commodity prices, he added, "Will hinder spending programs for many resource-linked EM countries", but "Budget surpluses, massive foreign currency reserve balances and large current account surplus positions should keep infrastructure spending programs intact."

PAC

Launching the PAC in January 2007, Brazilian President Lula said it was designed to "unlock" the country's economy and boost its growth rate from the average of +2.6% seen since 2000, to +5% by 2010.

According to Roberta Primasi, marketing manager at Brazilian consulting engineering company Proficenter Planjamento de Obras, PAC will expand the country's infrastructure. Profilcenter, which specialises in the preparation of technical and commercial proposals for construction, infrastructure and public service concessions, told iC US$ 128 billion has been earmarked for the energy sector, US$ 27 billion for transport and US$ 80 billion for housing and sewage.

Investments in the transport sector will focus on the construction and rehabilitation of more than 42000 km of highway (US$ 17 billion), 2518 km of railway (US$ 4 billion), 20 airports (US$ 1.5 billion), 12 sea ports, and 67 river ports (US$ 1.4 billion). Only part financed by the government (US$ 31.7 billion), it is hoped the rest, US$ 204 billion, will come from state-owned companies and the private sector.

Much of that private sector investment has, and will continue to come from overseas. Foreign direct investment (FDI) nearly doubled in 2007, hitting a record US$ 34.6 billion, according to a Central Bank statement in January. (In 2006 FDI was US$ 18.8 billion.) But it also warned that FDI could fall to US$ 28 billion in 2008.

However, investments in PAC are already behind schedule, according to Paulo Bernardo, the Planning Minister, while others have questioned whether all the projects will be completed by 2010. According to José Luiz Alquéres, vice president of infrastructure and basic industries association, Abdib, less than 40% of the infrastructure projects outlined under PAC will come to fruition.

There are also questions over whether the amount of investment currently earmarked by the government is enough. Speaking to BNAmericas in December last year Norman Anderson, CEO of consultancy CG/LA Infrastructure, said, "Brazilian companies - especially companies like Odebrecht, Camargo Corrêa and Andrade Gutierrez - are all investing more outside Brazil than they are investing inside the country, simply because Brazil invests about a quarter of what it should invest in infrastructure."

Mr Anderson added that even with the growth of infrastructure investments in Brazil, especially through the PAC program, the key issue to be addressed was how Brazil could be competitive in the global economy.

"One of the keys is that governments need to be clear about how their countries are going to be competitive and what kind of infrastructure they need to be able to compete, so they need to have a clear vision over the 20-30 year period of how a country 'plugs in' to the global economy," he added.

Spending plans

However, what is sure is that many PAC projects are happening. In June this year Brazilian ports minister Pedro Brito announced the authorisation for dredging works to deepen the Galheta channel at Paraná state's Paranaguá port. The works will increase depth from 11.3 to 15 m, and BRL 60 milllion (US$ 37.3 million) will be spent on the port.

Funding also looks to be secure. In May Brazil's federal savings bank Caixa Econômica Federal (CEF) said it planned to lend about BRL 11 billion (US$ 6.6 billion) to PAC projects this year. In 2007 it lent BRL 37.2 billion (US$ 21.2 billion), an increase of +101% over 2006. This is almost three times more than in the first quarter of the year, when CEF lent PAC a total BRL 3.7 billion (US$ 2.3 billion).

According to CEF finance vice-president Márcio Percival, PAC loans for housing totalled BRL 2.9 billion (US$ 1.8 billion) in March and will reach BRL 6.2 billion (US$ 3.9 billion) by the end of June. PAC resources for infrastructure and sanitation projects from CEF should reach BRL 4.5 billion (US$ 2.8 billion) in the first five months of the year.

Elsewhere, Brazilian development bank BNDES approved two PAC project loans totalling BRL 177 million (US$ 102 million) for construction and modernisation of the subway in Rio de Janeiro's state capital and Ceará state capital Fortaleza city. Rio de Janeiro will receive BRL 34.3 million (US$ 21.6 million), while Fortaleza will receive BRL 142 million (US$ 89.3 million).

In Fortaleza subway project has a total budget of BRL 804 million (US$ 506 million), of which BNDES is financing 17.7%. In Rio de Janeiro the BNDES loan is providing 62% of the project budget of BRL 55.6 million (US$ 35 million).

There is also inward investment. Brazil's federal workers' unemployment insurance fund FGTS will invest BRL 5 billion (US$ 2.8 billion) in infrastructure projects in 2008. The investments will be mainly for basic sanitation and low-income housing. FGTS' total investment budget will increase to BRL 17 billion (US$ 10.7 million) 2008, up +50% on 2007. Of this, around BRL 3 billion (US$ 1.9 billion) will be allocated to private banks for financing low-income housing.

Outlook

While some have expressed doubts over PAC funding, Brazil's construction sector is expected to grow +6.5% this year, according to the Brazilian Construction Industry Chamber (CBIC) thanks mainly to "the government's continued commitment in stimulating the construction sector". BNDES, for example, funded US$ 15.4 billion in infrastructure projects last year, a +62% increase compared to 2006.

Brazil will host the FIFA (Fédération Internationale de Football Association - International Federation of Association Football) 2014 World Cup, which also result in a number of large infrastructure projects as the country prepares itself.

This, alongside PAC infrastructure initiatives, should boost and sustain positive growth in the construction sector well beyond 2010, PAC's original completion date.