Brazil’s Infrastructure Outlook 2018

Brazil’s economy has begun to recover from a series of economic and political crises which have dogged the country since 2013. Between Q1 2015 and Q4 2016, GDP shrunk in eight successive quarters. The lava jato(‘car wash’) scandal, which continues to rumble on, to date has indicted over 170 high-profile people and involved 16 of Brazil’s largest companies.

With elections looming in 2018, the new President will benefit from an economy which is slowly finding its feet again, but will still face massive challenges. Not least of this is dealing with Brazil’s creaking infrastructure. Brazil’s territory is the world’s fifth largest by area and home to the world’s fifth largest population, creating obvious challenges in infrastructure.

 

The World Bank, looking at infrastructure investment gaps - the difference between investment needs and current trends in investment - predicted Brazil to have a US$1.1 trillion infrastructure investment gap between 2016 and 2040. It’s a considerable sum - by their estimates, the third largest of any country after the United States and China.

 

The key to much of the infrastructure planned in the country lies in finding suitable partners for PPP (Public-Private Partnerships) projects. The incumbent President Michel Temer has already got the ball rolling by bringing in private investment on several infrastructure projects, including auctioning off some publicly-owned airports. This is likely to continue under the next President.

 

There’s every sign in 2018 that much of the private side of PPP infrastructure projects will be funded by China Inc. Highlight infrastructure projects involving Chinese corporations and Brazilian assets include the State Grid of China acquiring CPFL Energia for $12.3 billion, Sinopec acquiring 40% of Repsol Brazil, and China Merchants acquisition of 90% of TCP ports for $1.2 billion.

 

Since 2016, when 145 PPP infrastructure projects were outlined by the Brazilian Government, 75 such projects still remain. A target area for the coming investments will be in the country’s practically non-existent rail network. This has long been seen as an Achilles’ heel in Brazil’s infrastructure network, particularly in the transporting of its agriculture exports to its ports.

 

Marcelo Kayath, former head of Credit Suisse in Brazil sees the natural synergies that exist between China and Brazil in the years ahead: “I think it’s a natural match. China has the excess capital and know-how in infrastructure and they need what we have, which is raw materials and food.” And as China’s investments globally shrink, they’re growing in double digits in Brazil.

 

However, China is not alone in looking to invest in Brazil’s PPP-backed infrastructure. The auctions to participate have already attracted interest from 17 different countries and this trend is likely to continue in the years ahead as the economy strengthens and a degree of political stability that institutional investors are comfortable with, returns.

 

The hope in 2018 is that with a relatively weak Brazilian Real, an improving economy, a political class which is being reshaped because of Lava Jato, and a new government in the second half of the year, Brazil can finally begin to develop its infrastructure which has for so long held back its massive potential.