Global tendencies – risks and opportunities: (i) demography, (ii) cities, (iii) institutional, and (iv) technology and knowledge. World crisis and collapse. Challenges for Brasil - reversion of expectations. Infrastructure financing
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PR - 2016 - rics - infrastructure in brazil
1. Luiz Nelson Porto Araujo
São Paulo, October 11th, 2016
Infrastructure in Brazil
The Royal Institution of Chartered Surveyors - RICS
2. 2
Infrastructure in Brazil – October 2016
"The Social Science … is a
dreary, desolate, and indeed quite
abject and distressing one; what
we might call ... The dismal
science"
c1849
"Prediction is very difficult,
especially if it's about the future"
c1950
Niels Bohr
Thomas Carlyle
Source: Delta analysis
5. 5
Infrastructure in Brazil – October 2016
Global tendencies – risks and opportunities
• Population aging; impact on
consumption, savings, and interest
rates
• Each country has a unique set of
risks and opportunities
• Disparity and competition among
cities; in developed countries
favorable environment for
investment
• New and increased political and
regulatory risks will bring new
challenges
Demography
Cities
Institutional
Technology and
knowledge
Source: Delta analysis
6. 6
Infrastructure in Brazil – October 2016
World crises – from h2h
• Crises and
austerity
• Fall of
consumption,
employment and
production
• Decrease of
international trade
• Decrease in public
spending
• Fall of relative
price of commodities
Now, adjustment
• Conventional
capital flows
• Excess savings in
developed countries
• Low interest rates
results in lower debt
growth
• Managment of
public debt and
"outliers"
• Financial setor
deregulation
• Tax environment
interactions
An interpretation of
the first decade
Source: IMF; Delta analysis
Not the end of
the world
7. 7
Infrastructure in Brazil – October 2016
Investment colapse
Source: OECD, BIS calculations; Delta analysis
8. 8
Infrastructure in Brazil – October 2016
Sustainable development
Source: Delta analysis
Sustainable
development strategy
Inflation,
and interest
rates
Social
inclusion
Public
governance
Production,
employment,
and income
Challenges
• Reforms (tax, labor,
regulatory)
• Income distribution
• Infrastructure
• Corruption
• Competition
9. 9
Infrastructure in Brazil – October 2016
Macroeconmic agenda
GDP growth and
social inclusion
Low interest rates
and sustainable
public debt
Expansion of
infrastructure
Low and stable
inflation rate
Agenda
• Total failure of "New Economic
Matrix": populist, inconsistent, and
unsustainable
• Political and economic challenges
should not be underestimated,
especially in 2016-2018
• Stabilization, reforms, and reversion
of expectations
• New political and electoral setting
• Corruption fighting
Source: Delta analysis
10. 10
Infrastructure in Brazil – October 2016
Reversion of expectations
Source: Delta analysis
Octávio Bulhões
Roberto Campos
Stabilization of 1964-1967
Programa de Ação Econômica do Governo - PAEG
• Control and reduction of public deficit/debt
• Increase in savings rates (public and private)
• Inflation stabilization
• Expansion of infrastructure (then, public; now, private)
Program
11. 11
Infrastructure in Brazil – October 2016
GDP
Source: IBGE; Delta analysis
1,2
5,7
3,2
4,0
6,1
5,2
-0,3
7,5
2,7
1,0
2,5
0,1
-3,9
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Real GDP growth (%)
Growth bellow
historical average
12. 12
Infrastructure in Brazil – October 2016
Employment
Source: MT (CAGED); Delta analysis
0,9
1,9
1,8
1,9
2,5
1,8 1,8
2,9
2,2
1,1
1,5
0,6
-1,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Net creation of "formal" jobs (millions)
29. 29
Infrastructure in Brazil – October 2016
Financing – environment
Environment Main issues
Brazilian economy - Crises (economic, political)
- Risks (political, regulatory, exchange rate)
Local public financing - BNDES, FI-FGTS
Local private financing - Restricted capital market
- Long term Project Finance
- Competition with return on public debt
Agent (investor) - Restrictions imposed by "Operação Lava-Jato"
- New players (smaller)
International capital markets - Negative interest rates
- Low growth in developed economies
Source: Delta analysis
30. 30
Infrastructure in Brazil – October 2016
Financing – BNDES
Source: BNDES; Delta analysis
43
144
253
311
376
413
473
159
165
175
189
205
219
243
75
78
121
125
134
150
99
0
100
200
300
400
500
600
700
800
900
2008 2008 2010 2011 2012 2013 2014
Sources of financing (R$ billions)
Treasury loans FAT/PIS/PASEP/FGTS Others
Loans from National
Treasury are no longer
instruments of economic
policy
31. 31
Infrastructure in Brazil – October 2016
Financing – regulatory risk
Legal stability
Fundamentals
of regulation
Existence of
legal framework
Institutional stability
Existence of
institutional
framework
Fiscal stability
Stabilization and
growth
State reform
Investments
and returns
Tariff model
Market
organization
Regulation
In Brazil, investments and returns
are conditioned by legal,
institutional and fiscal stabilities,
which have to do with the state of
the economy
Source: Delta analysis
32. 32
Infrastructure in Brazil – October 2016
Financing – exchange rate risk
Proposal Analysis
Debt – exchange rate
pass-through to tariffs
- Unfeasible: impact on tariffs (consumers and inflation)
Compensation accounts - Needs more discussion; but, it is also most probably
unfeasible without bounds on pass-through
Long term swap offered
by National Treasury (with
cap)
- Hardly feasible: state of public finances at all levels;
limits imposed by PEC 241 (under approval)
Hedge offered by
National Treasury
- Needs more discussion; but, it is also most probably
unfeasible without bounds on pass-through
FGP includes securities
"indexed" to exchange
rate, in PPP contracts
- Most probably feasible
Source: Delta analysis
33. 33
Infrastructure in Brazil – October 2016
Financing – compensation accounts
Sector/company Period Conclusion/result
- Oil (Petrobras): Conta
Petróleo, Derivados e Álcool
- Electric sector: Conta de
Resultados a Compensar
(CRC)
- Electric sector: Conta de
Compensação de Variação de
Valores de Itens da "Parcela
A" (CVA)
- Gas (utilities in State of SP):
Conta Gráfica
- 1964-1998
- 1971-1993
- 2001-present
- 2012-present
- Balance: U$ 4.83 billions
- Balance: U$ 26.45
billions
- Yearly adjustment; full
pass-through
- 90 days; pass-through
cost of gas and
transportation; bounds:
+/-3.5%
Source: Delta analysis
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Local Development & Logistics Strategy & Operations
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