Infrastructure, Regulation and Development: Evidence from Brazil
Dr Edmund Amann,
University of Manchester &
SAIS, Johns Hopkins University
Despite its recent slowdown Brazil remains a
remarkable success story in many ways:
•The World’s 6th
•A track record of comparatively decent, pro-poor
•A strong anti-inflationary record
•A strong record of attracting inward FDI, especially in
the public utilities sectors
• Growth performance (av. 2-3% p.a.) easily
outstripped by EMEs in E and SE Asia
•Capacity constraints give rise to higher than
global average inflation – need for high base rates
•Overreliance on primary product exports and
exposure to commodity cycle
•Sense that consumption led growth model on
point of exhaustion and scope for further poverty
But challenges remain
•Brazil has a legacy of under-investment in
infrastructure and that creates real capacity
•Poor and expensive to access infrastructure a source
of social unrest (disturbances in mid 2013 and early
•Poor infrastructure a real barrier to competitive
export sector and export diversification
•Issue in spotlight – FIFA 2014 World Cup and Rio
Infrastructure: at the heart of the problem
Infrastructure spending: a long term decline
Econometric evidence suggests strong links. Ferreira
(2007) suggests that for Brazil:
•A 10% increase in public infrastructure stock leads to a
long term 3.3% rise in output per worker
•The correlation between GDP, GDP per capita and
infrastructure stocks close to 1
•The biggest GDP impacts come from increased
investment in power generation, then fixed and mobile
phone lines then paved roads, according to the study
•We are performing our own econometric analysis and
will employ satellite luminosity data as one of our
infrastructure stock indices – watch this space!
Infrastructure and growth
Infrastructure and social unrest
CC. Ben Tavener / Flickr
In Brazil, infrastructure is not an abstract
economic or technocratic issue; it has real political
resonance on the street
•Protests over high public transport fares and their
associated regulatory structures
•Protests in favour of ramping up investment in
“social infrastructure” rather than Olympics/World
and social unrest
Brazil’s infrastructural issues are epitomised by
delays around the FIFA 2014 and Rio 2016 projects
CC. Jeff Belmonte / Flickr
•Brazil has the world’s 4th
largest road network
•Of 1.75 million kilometers of highways, only 18% are paved
•60% of Brazil’s freight moves by road.
•In the budget for 2011-14 less than 1% of GDP per annum has been set
aside for highway maintenance. According to the World Bank, 6% of
GDP would be necessary to catch up with advanced industrial countries.
•The South and South East are comparatively well served with divided
multilane paved highways,
•The same is not true in some of the less developed regions of the
country, notably the North, the North East and the Centre West.
•Transportation costs are notoriously high in Brazil: spending on logistics
represents 15.4% of Brazil’s GDP. In advanced countries this is typically
closer to 8-10%
A snapshot of the issues: highways
•The railway network is substantially smaller than that for paved roads in Brazil
(five times smaller in fact).
•Unlike in China and India for example – rail transportation is almost exclusively
the preserve of freight, the latter being heavily dominated by iron ore (which
accounts for no less than 79% of total rail cargo).
•Brazil possesses just 3.4 km of rail per 1000 square km compared with 14.7km
in the United States.
•The Brazilian rail network possesses significant narrow gauge as well as
standard gauge element. Such a feature poses a major challenge to network
•Unlike in Europe, or even the USA, no meaningful steps were taken to provide
a publically subsidized long distance service.
•Partly as a result, today’s highway and airport infrastructure has come under
acute pressure, especially in the heavily trafficked corridors between Curitiba,
São Paulo, Rio de Janeiro and Belo Horizonte.
A snapshot of the issues: railways
CC. GOVBA/ Flickr
The Growth Acceleration Program (PAC)
•The need to ramp up infrastructure spending is acknowledged
and has become a policy priority.
•The resulting program is known as the PAC (Programa de
Aceleração de Crescimento – Growth Acceleration Program)
•The PAC has divided into two phases,
•(PAC 1) running from 2007-10 and the second (PAC 2), under
the administration of Dilma Rousseff, from 2010 to 2014.
•They consist mainly of projects to increase infrastructure
spending in critical, growth-sensitive areas
Policy response: the Growth Acceleration
The Growth Acceleration Programme (PAC):
spending by sector (%)
•PAC I envisaged spending of R$ 503.9 bn over
its four year period
•PAC 2 proposes spending of R$ 958.9 bn over
its lifespan (around 2.7% of 2010 GDP per
year), with a further R$631.6bn of investments
planned beyond 2014.
I Brazilian Real= 4.54 South African Rand (15.3.14)
PAC 1 and 2
•PAC 2, investments fall under six key initiatives: My House, My
Life (housing), Water and Light for All (Water, Sanitation and
Electricity), Bringing Citizenship to the Community (safety and
social inclusion), Better Cities (urban infrastructure),
Transportation (railroads, highways and airports) and Energy
(renewable, oil and gas).
•Whether projected post PAC 2 investments take place as
scheduled (or at all) will depend on the outcome of the
October 2014 presidential elections
•The PAC also aims to address issues infrastructural quality and
durability by increasing public resources targeted at operation
•The state did not have the technical or managerial means to accomplish
these projects by itself, lacking the financial wherewithal to see these
projects through to completion.
•It was thus decided to turn to two models; the Public Private Partnership
(PPP) and the longer-established model of concession contracts.
•In the Brazilian context these structures – or modalities of PPP – have
included Build Own-Operate, Build Operate Transfer and Build Own
Operate Transfer formats.
•However, PPP contracts, as established under a 2004 law, always envisage
an injection of public sector resources to support the private sector’s
Making the PAC work: modalities
•Concession contracts, by contrast, under the terms of the law,
require no such public funding and should be able to sustain
themselves by the levying of (regulated) user charges alone.
•They have recently been used successfully in the airports
•The PPP approach was pioneered in the highways sector in the
1990s and has continued to be applied in that area with 17,904
km of roads under private sector operation by late 2013,
compared with 15365 km by the end of 2010 (O Globo, p.49
Making the PAC work: modalities (cont.)
•In a savings constrained economy such as Brazil, need to draw in FDI
to capital intense, long term projects
•Regulatory arrangements thus need to strike a difficult balance:
1.To set tariffs over the long term at sufficiently high levels to draw in
foreign capital and to offer adequate compensation for exchange
rate risk and a uncertainties about the trajectory of long run demand
2.To address the social clamour for “affordable” infrastructure
(especially acute in wake of protests)
3.To extend the physical reach of infrastructure into disadvantaged
communities whether or not through universal service provisions
4.While balancing 1 through 3, not to do so on the basis that long
term maintenance and upgrading are sacrificed
Making the PAC work: regulatory issues
•The authorities have adopted a very cautious approach in
running bidding competitions for PPP contracts and concessions
•Presidents Lula and Rousseff, appealing to their political support
base, changed the regulatory model for new highway
concessions, selecting winning bidders on the basis of those able
to offer the lowest tolls rather than on the basis of track record or
capacity to deliver.
•Correspondingly, the pace of private sector-driven upgrading of
the highway network has lagged behind schedule
• There are curiously high disparities in toll levels between
highways governed by Cardoso-era and Lula/Rousseff era
Are regulatory issues holding back the PAC?
•As a result, tolls now vary between R$1.99 and R$18.56 per
100km (O Globo 8.12.13).
•Similarly, the need to rein in tariffs underpins at least in part,
the failure of much needed additional power generation and
distribution capacity to be put in place in the urbanized South
and South East.
•Stemming from this, power outages are by no means an
infrequent occurrence in these economically critical regions.
•Regulatory uncertainties and a State Oil Company (Petrobras)
centric model for exploiting vast new pre-salt deposits have
retarded foreign investment in the hydrocarbons sector
Are regulatory issues holding back the PAC
Regulatory issues: the role of
CC. Brent Milikan/ International
Rivers / Flickr
•Perhaps the most glaring obstacle to accelerated process has centered on the
delayed issue of environmental permits by IBAMA and state-level bodies.
•The delays here have largely concerned the slow operation of dispute resolution
procedures and the licensing mechanisms rather than the environmental regulatory
•Brazil’s environmental licensing procedure involve a three stage process involving
the issue of Preliminary, Installation and Operating licenses, each of which requires
its own procedures and creates separate scope for the generation of disputes and
•This stands in marked contrast to the more streamlined processes which are
typically found in other emerging and developed economies.
•According to a recent World Bank study, no less than 15-20% of the budgets of
hydroelectric projects in Brazil are accounted for by environmental licensing costs
•Easily the most celebrated case in this regard has been the Belo Monte dam
project, which, in the wake of environmental disputes, has met with repeated delays
and budget overruns.
Are environmental regulatory issues holding back the PAC?
•While public attention has been focused on the role of regulatory obstacles to
accelerated infrastructural investment it is important to recognize the role of
two other critical factors: access to long term finance and technical capacity.
•Since the 1980s the capacity of both the federal and sub-national governments
to expand the scope of discretionary spending in the field of capital investment
has been severely restricted.
•As a result, and as already made clear, the private sector has been expected to
fill the breach.
•However, at least as far as the domestic private sector is concerned and unlike
its counterpart in high-investing, China, its ability to perform this function has
been severely constrained by the comparative shallowness and illiquidity of
domestic capital markets
•At the same time, and, again in telling contrast to China, base real interest
rates have been maintained at among the highest levels in the emerging market
world as part of the authorities’ counter inflationary strategy.
Infrastructural investment and the PAC: financing issues
•Consequently, for potential domestic private sector infrastructure
operators, the provision of capital has become a binding constraint
• The only viable sources here are retained earnings, or, more usually,
subsidized credit from official sources such as Brazil’s BNDES
development bank or the International Finance Corporation.
•The BNDES has played a very active role in supporting the provision of
infrastructural provision through the extension of long term credit.
•Still, the scale of the investment challenges involved will require
additional sources of capital if growth constraints are to be alleviated.
•Foreign investors have, and will continue to play an important role.
However, following a burst of foreign participation in infrastructure
projects following major privatizations in the 1990s (notably in the
telecommunications sector), the surge of foreign infrastructural
investment has slowed largely as a result of a less favorable regulatory
•The role of technical capacity should not be underestimated in considering
the challenges that Brazil faces in trying to ramp up spending on complex
and technologically demanding infrastructure projects.
•Brazil possesses world class technical expertise and home grown
infrastructure project specialist multinationals such as Odebrecht and
•However, a legacy of under-investment in human capital born of the 1980s
and 1990s infrastructure squeeze, means that this expertise is now very
•Although this technical capacity constraint is being alleviated through a
renewed commitment to training and investment within the construction
and other relevant sectors, there are considerable lags involved.
•In the absence of increased foreign participation in Brazil’s infrastructural
investment, these constraints will continue to bite in the short and medium
Infrastructural investment and the PAC: technical capacity
Learning from the Brazilian experience
CC. Thomas Sennett / World Bank / Flickr
•Infrastructure is vital for growth, competitiveness and trade.
Under investment can severely retard progress
•Increasingly in aspirational emerging market societies, access to
good quality affordable infrastructural services is an issue of real
•Addressing a legacy of decades of under-investment is a huge
•The role of the foreign private sector is key given fiscal
constraints and thin domestic capital markets
•There will be regulatory conflicts between the need to
incentivize investment and the need to address social objectives
Learning from the Brazilian experience
•Effective regulation is not just about balancing the interests of
investors and consumers; it is about ensuring predictability of the
de facto regulatory arrangements and rapidity in decision making
•Efforts to ramp up infrastructural spending need to take account
of the availability of domestic technical capacity. This can be
spread very thinly once projects begin to multiply
Learning from the Brazilian experience