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Brazil: Infrastructure Push Creating New Opportunities Across Sectors

February 11th, 2013

by Team

of Thomas White International

Both corporates and the federal government have started investing heavily on overhauling Brazil’s infrastructure.

Brazil’s Achilles’ heel is its infrastructure. Its ports are clogged, roads unpaved, airports outdated, and railroads inadequate. Moreover, the country desperately needs additional electricity for a growing number of factories, mines, and increasingly affluent households.

In the World Economic Forum’s Global Competitiveness Report for 2012-13, Brazil is ranked a lowly 107 among 144 countries in overall infrastructure quality. More specifically, in terms of quality it is ranked 123 for roads, 100 for railroad infrastructure, 135 for port infrastructure, and 134 for its air transport infrastructure.

According to one estimate, less than 15 percent of the roads in this Latin American economy are paved. Journalists write stingingly of how motorways in the country are more suited to horse carts than vehicles. When exhausted truck drivers arrive at Santos, Brazil’s biggest port, they are prepared to wait 3-4 days to unload their cargo.

Indeed, the “Brazil Cost” is a disturbing reality for businesses in the nation. The term is a disparaging pointer to the extra expenses investors inevitably incur in Brazil due to its befuddling bureaucracy, high taxes, and most of all, creaking infrastructure. In fact, it is believed that infrastructure bottlenecks shave off 10 percent-15 percent of its GDP every year.

But change is around the bend. Corporates, especially in sectors such as telecommunications, as well as the federal government have started investing heavily on overhauling Brazil’s infrastructure.

THREE FACTORS ARE DRIVING THE INFRASTRUCTURE PUSH

Upcoming mega sports events : Brazil is hosting the 2014 Soccer World Cup, which will be held in 12 cities, as well as the 2016 Summer Olympic Games in Rio de Janeiro. So, it needs not just new sports venues but also better roads and airports to manage the flow of tourists during the two events.

Reducing inland transportation costs is a priority : Brazil is one of the world’s top exporters of iron ore and agricultural goods like coffee, soybeans, sugar, orange juice, and beef. Yet, it fails to fully reap the benefits of its export potential due to two reasons.

As such, Brazil’s land area is vast. Hauling commodities from where they are mined or harvested to a port can sometimes involve a journey of thousands of miles. Pockmarked, unpaved roads and a hopelessly inadequate railroad system make it worse for exporters. No wonder the cost of exporting goods in Brazil is one of the highest among major economies. According to the World Bank, the cost of exporting a 20-ft container — which includes inland transportation expenses and all related fees — is about US$2,215 in Brazil, but only US$500 in China.

Sources: Financial Times, WSJ, Global Post, barryshlachter.net, The Economist, the World Bank

The good news is Brazil has realized that to capitalize on the rising Asian demand for agricultural goods, it must reduce its inland transportation costs quickly. And, that means more roads and a wider railway network.

Stimulus measures : To jumpstart the economy amid the global slowdown, the government is relying on infrastructure-building programs.

SEVERAL FEDERAL GOVERNMENT PROGRAMS HAVE BEEN LAUNCHED

Besides periodically allocating funds for sports venues, the government has announced various plans. The biggest among these, PAC II (Growth Acceleration Program II), was launched in 2010. In 2012, three relatively smaller packages were released.

Q1 2010: Program to Accelerate Growth (PAC II)

    • Plan involves investments of up to $480 billion in areas such as transport and energy between 2010 and 2014 and up to $316 billion beyond 2014
    • $186 billion has been spent already on various projects, like adding 1,120 kms of highways and increasing electric-generating capacity by 4,244 megawatt hours

Feb. 2012: Airports Package

  • Licenses to modernize/operate three of Brazil’s busiest airports offered to highest bidders
  • Three consortiums offered the government a total of $14.2 billion to operate the airports for 20 years

Aug. 2012: Economic Stimulus Package

  • Package involves selling private companies rights to operate 7,500 kilometers of roads and 10,000 kilometers of railroads
  • Entails an investment of $40 billion by 2017 and about $26 billion over 25 years
  • Brazil’s BNDES development bank has been asked to provide subsidized loans for projects

Dec. 2012: Ports Plan

  • Plan launched to increase private investment in ports
  • Involves an investment of $26 billion through 2017
  • Concessions to modernize at least five ports are on offer

INDUSTRIES ACROSS SECTORS ARE SEEING AN INVESTMENT BOOM

The infrastructure push has created business prospects in many areas of Brazil’s economy. So far, the segments that appear to have benefited the most from the trend are those that are directly related to building activities, such as construction and engineering, as well as those that supply inputs to the building sector, like cement and steel.

As numerous concessions have been awarded for roads, railroads, and airports, firms in the toll systems and logistics industries have also gained. In the run up to the two global sporting events, the federal government is giving special attention to increasing Brazil’s electricity-generation capacity and improving the country’s urban infrastructure. So, new opportunities are emerging for public utility firms. Similarly, the telecommunications sector is aggressively upgrading its technical infrastructure to be able to provide gold-standard services during the soccer world cup and the Olympics. However, key domestic players and not the government have primed the pump in this sector.

Not surprisingly, the foreign players that have been operating in Brazil for some time now are taking advantage of the conditions. But as the boom gathers momentum, new overseas players are looking to enter Brazil.

SOME DOMESTIC PLAYERS

COMPANY

BUSINESS

CONTRACT/PROJECT

Gerdau S.A.

Steelmaker; Brazil’s leading maker of long steel, which is used in civil construction

Involved in several infrastructure projects as well as the construction of eight soccer stadiums

Companhia Siderurgica de Nacional (CSN)

Primarily a steelmaker; also operates in the Logistics, Cement, Energy, and Mining segments

Has a public-private partnership (PPP) with the federal govt. to build the 1,728-kilometer Transnordestina rail line

CCR SA

Brazil’s biggest highway operator

Owns a 33 percent stake in a consortium that has won the contract to build and operate the Transolímpica expressway in Rio de Janeiro for 35 years

EcoRodovias Infraestrutura e Logistica SA

Highway concessions and associated services

Part of a consortium that has won a US$1.2 billion contract to expand a major highway in southeastern Brazil and operate it for 25 years

TPI Triunfo Participacoes e Investimentos SA

Primarily a highway operator; also engaged in ports administration, coastal shipping, and energy

Part of a consortium that has won the contract to modernize Viracopos airport

Oi SA

Telecommunications

Spending heavily on developing a 4G telecom network; aiming to achieve 50 percent network coverage in seven Brazilian cities by mid-2013

Telefonica Brazil

Telecommunications

Planning to expand its upgraded LTE service in 10 cities by the middle of 2013

TIM Participacoes

Telecommunications

Looking to have at least 80 percent of the country’s major cities connected via fiber optics by 2013

SOME FOREIGN PLAYERS

COMPANY

BUSINESS

COUNTRY OF LISTING

CONTRACT/PROJECT

Scomi Engineering

Logistics engineering

Malaysia

Building two monorails in Sao Paulo and Manaus; planning to bid for 12 more monorail projects

ARCADIS NV

Infrastructure services

Netherlands

Its Brazilian subsidiary has signed a $54 million deal with domestic utility SABESP; the unit is involved in a project to improve waste water management in Sao Paulo city

Brookfield Infra. Partners

Infrastructure asset management

Canada, U.S.

Formed a $1.7-billion joint venture with a Spanish firm to buy a giant Brazilian highway toll operator

AECOM Tech. Corporation

Engineering & Design

U.S.

Designing the Rio 2016 Olympic Park

Oracle Corp.

Enterprise software

U.S.

Selling its Primavera project management software to infrastructure-based ventures

Goldman Sachs

Investment banking

U.S.

Its Brazilian unit is looking to make private equity investments in select infrastructure projects

Sources: altassets.net, freemalaysiatoday.com, investinbrazil.biz, business.financialpost.com, moneyweek.com, barrons.com, cenews.com, The Motley Fool, enr.com, airport-technology.com, Reuters

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