As presented at our 2016 Rio de Janeiro findings workshop by IRIBA researchers Edmund Amann and Thomas Trebat.

1. Infrastructure,
Regulation and
Development:
Evidence from
Brazil
Edmund Amann & ThomasTrebat
(Leiden University) (Columbia University)
www.brazil4africa.org

2. Infrastructure: at the heart of Brazil’s
current problem (and solution)
•A legacy of under-investment in infrastructure
creates capacity constraints
•Poor and expensive to access infrastructure a
source of social unrest
•Disturbances in mid 2013 and early 2014
•A barrier to exports and export diversification,
perhaps particularly in agriculture

3. A long-term decline in infrastructure
investment

4. Infrastructure spending: a long term decline
Source:
Morgan
Stanley 2010

5. Infra and Growth: Econometric Results
•We examined state-level public spending on three items of
infrastructure (communications, energy and transportation)
•Luminosity data was considered as an alternative to
national accounts at the sub-national level
•Spending on communications yielded a high effect on GDP
and GDP per capita growth rates
•Spending on energy infrastructure reported the lowest
effect
•Spending on transportation reports the highest coefficient,
which we identify as the driver of the general result. The
estimated coefficient is 10.3% for GDP growth and 6.6% for
GDP per capita

6. Infrastructure and social unrest

7. Brazil Infra in Perspective

9. A snapshot of the issues: highways
•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.
•Relatively little set aside for highway maintenance
•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

10. A snapshot of the issues: railways
•The railway network is substantially smaller than that for
paved roads in Brazil
•Unlike in China and India for example – rail transportation is
almost exclusively the preserve of freight, of which iron ore is
79% of total rail cargo).
•The Brazilian rail network possesses significant narrow gauge
as well as standard gauge element. Such a feature poses a
major challenge to network inter-operability.
•Unlike in Europe, or even the USA, no meaningful steps were
taken to provide a publicly 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

11. The Growth Acceleration Program (PAC)

12. Policy response: the Growth Acceleration
Programme (PAC)
•The PAC was divided into two phases:
•(PAC 1) running from 2007-10 and the second (PAC 2)
from 2010 to 2014.
•They consisted mainly of projects to increase
infrastructure spending in critical, growth-sensitive
areas, and also in housing
•Both fell short of their targeted spending levels
•Project design implementation were persistent
problems

13. Post-PAC Initiatives under Temer
• More emphasis on PPPs
• Further private sector concessions – e.g in
ports, airports, and highways
• Water and sanitation as well
• Renewed stress on foreign participation

14. •The state does not have the technical or managerial means to
accomplish these projects by itself
•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 investment activity
Policies for ramping up infrastructure spending

15. •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
sector
•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
8.12.2013).

16. •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
Regulatory issues

17. •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 lagged behind schedule
Are regulatory issues holding back infra?

18. •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

19. Regulatory issues: the role of
environmental licensing
The Controversial Proposed Belo Monte Dam

20. •Perhaps the most glaring obstacle is 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
•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 appeals.
•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
Are environmental regulatory issues holding back Infra?

21. •The private sector has been expected to fill the breach left by
the public sector
•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
•The BNDES has played a very active role in supporting the
provision of infrastructural provision through the extension of
long term credit.
•Foreign investors have, and will continue to play an important
role.
Financing issues

22. •The role of technical capacity should not be underestimated
•Brazil possesses world class technical expertise and home grown
infrastructure project specialist multinationals such as Odebrecht
and Camargo Corrêa.
•However, a legacy of under-investment in human means that this
expertise is now very thinly spread.
•In the absence of increased foreign participation in Brazil’s
infrastructural investment, these constraints will continue to bite
in the short and medium term.
Infrastructural investment and technical capacity

23. • The multifaceted corruption probe surrounding Lava Jato has
impacted on several of Brazil’s largest infra contractors
(Odebrecht being an outstanding case)
• Scandal likely to impact on capacity of major contractors given
senior management under investigation
• Will subject future contracts to much closer scrutiny
• Corruption and diversion of resources will have impacted
adversely on projects in the past as is becoming clear. Would
be a good focal point for future papers.
Lava Jato and Corruption

24. Learning from the Brazilian experience

25. •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
political salience
•Addressing a legacy of decades of under-investment is a huge
challenge
•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

26. •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
•The role of corruption is significant and requires addressing
Learning from the Brazilian experience
(cont.)
www.brazil4africa.org