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Brazil Infrastructure Report Q4 2011
Business Monitor International, Sep 2011, Pages: 106
Despite the fact that Brazil’s construction sector has huge growth potential, we believe it will not fully achieve this potential over the short term, as bureaucracy, tight access to finance and difficulty in attracting the private sector, stymie growth opportunities. However, we still anticipate robust growth of 6.5% in 2011, driven by government investment into the second growth acceleration programme (PAC II) and private investment to support the mining industry.
There are many drivers of growth in Brazil’s construction industry:
- Real growth in 2010 was the highest in more than a decade – at 11.7% – and this has created significant excitement. However, we believe this was due to a combination of base effects, the final year of the first PAC, the fact it was an election year and a spike in commodity prices, and therefore that it will not be repeated in 2011 (although growth will remain strong at 6.5%).
- Brazil is set to host high-profile sporting tournaments (2014 FIFA World Cup and 2016 Olympics) which will see tens of billions invested in sporting facilities and stadia as well as hotels and transport infrastructure.
- PAC II: BRL955bn (US$534bn) is to be invested in construction projects between 2011 and 2014, with 81.6% of this to come from the public sector. A further BRL631.6bn (US$351.9bn) is to be invested beyond 2014. President Dilma Rousseff claims to have ring-fenced this section of the budget. However, budget cuts in February saw the ‘Minha Casa, Minha Vida’ programme – which is part of the PAC – take a funding hit, putting other programmes at risk.
Despite these factors we do not believe Brazil’s infrastructure will live up to the hype. Steep bureaucratic obstacles and the dominance of domestic players mean that even if significant contracts are on offer, only international companies with a competitive advantage or those experienced in the Brazilian construction industry will be able to reap the rewards.
Bureaucracy is also preventing a lot of government funding from trickling down into PAC II projects in a timely manner. On top of this, there is pressure on the government to stop spending and cool the economy because of an uptick in inflation on the back of high government expenditure. Most government procured, private sector infrastructure investment is also supported by government funds from the Brazilian development bank (BNDES), which is lending at below market rates. As the only lender capable of meeting the long-term financing demands of the infrastructure sector, there is little potential for this to be wound down if big-ticket projects are still to be pushed through.
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