gridlines

1 8 11 13 Inside The long game A few words with Ports, reimagined Soft solutions Paulo Resende

Crunch Time for Brazilian Infrastructure Spring, 2013

As South America’s biggest economy races to meet World Cup and Olympic deadlines, ’s long game also comes into view

By Carlos Biedermann and Hazem Galal It’s nearly impossible to overstate Brazil’s structure program that includes, among commitment to developing its infra- other things, $US 1 billion dedicated to 64 structure. Last year, Dilma Rousseff’s regional airports in the country’s remote government awarded concessions to northeast and nearly billion to 67 airports redevelop and operate three major airports. in the north, with an overall goal of having On cover: Laborers work at night on the construction of the new Corinthians stadium, which is being prepared to host Between six and seven more airport conces- 96 percent of the country living within 100 matches during the 2014 World Cup, in the district sions are anticipated. This “second wave,” kilometers of an airport.1 In mid-August of Itaquera. with a bolstered and improved concessions 2012, the Brazilian government announced Above: , Airport bidding process, is expected to boost a new round of transport concessions, © 2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which private investment confidence in the air including $US 45 billion for 10,000km of is a separate legal entity. Please see http://www.pwc.com/ structure for further details. passenger and air freight sectors. In Decem- railway expansion slated to begin early this 2 PwC firms help organisations and individuals create the ber of 2012, the administration announced year. It’s all part of an attempt to make up value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to a $US 3.5 billion regional airport infra- for lost time — a decades-old pattern of delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us 1 “Brazil Announces Regional Aviation Expansion,” Center for 2 “Company Returns Assured by Government in Rail Expan- at http://www.pwc.com. Aviation, December 21, 2012, http://centreforaviation.com/ sion,” Christiana Sciaudone, January 11, 2013, Bloomberg, This content is for general information purposes only, and news/brazil-announces-regional-airport-infrastructure-invest- http://www.bloomberg.com/news/2013-01-11/all-vale-break- should not be used as a substitute for consultation with ment-plans-196166?utm_source=BenchmarkEmail&utm_ up-amid-assured-returns-corporate-brazil.html professional advisors. campaign=Jan_03_2013_Email&utm_medium=email.

1 | Gridlines | PwC The country’s great hope may rest upon a vision of Brazil’s long game — the long-term bet that hinges upon harnessing the country’s astonishing assets.

infrastructure under-investment, which has Brazil is staggeringly rich in natural ten places in 2010 and 2011 in the World also combined with an astonishing rise of resources — a country completely energy Economic Forum’s overall country competi- millions of into the middle class. independent, with vast hydro-electric tiveness report, last year breaking into the This has created more demand for basic capacity, burgeoning wind and solar world’s top 50 economies (to 48th out of infrastructure — electricity, air travel, generation, mature ethanol production, 142). Now ranked higher than Russia and use, freight and passenger travel, the whole and newfound oil discoveries, the so-called India, Brazil was the only BRIC country, in gamut of activity associated with rapidly “pre-salt” fields, that are thought to rival fact, to see its ranking rise last year — and expanding purchasing power and those found beneath the North Sea. Brazil it is closing upon Italy and Spain as the discretionary income. is the world’s biggest producer of iron ore; Euro-zone financial troubles linger.4 it is the largest exporter of beef, sugar, Indeed, every week, it seems, a With Europe struggling, a recent analysis coffee, and orange juice; and is the second new announcement is made to of the outlook for the Brazilian economy enable further expansion of the largest exporter of soybeans.3 These and by International Monetary Fund suggests infrastructure sector. Much of this, other resources have made Brazil a global that Brazil’s economy will likely overtake of course, is targeting the up-coming 2014 commodities powerhouse strategically France’s by 2015, putting Brazil 5th in the World Cup and 2016 Olympic games. And located between major trading partners world after Germany.5 Brazil’s sustained while there are many reasons for Brazil in Asia, Europe, the United States, and the commitment to strategic public spending, to celebrate these tournaments — Middle East. moreover, a rarity in these austere times, nearly a quarter million jobs will be Such assets are bolstered, moreover, by has brought about one of the lowest unem- generated along with more than $US 116 other competitive strengths: Brazil lands ployment rates in the world, helping to fuel billion in direct and indirect economic solidly in the first or second quartile of one of the world’s largest internal markets, benefit for the World Cup alone — the the 142 countries measured in the World which, in last year’s survey by the World realities for Brazil, the great promise and Economic Forum’s Global Competitiveness Economic Forum, broke into the top ten the big challenges, transcend these two Report, with a sophisticated business domestic markets, ranking 9th globally, near-term events. The country’s great hope environment, efficient financial markets, with a newly emergent middle class of may rest upon a vision of Brazil’s long and high rates of technological adoption. 46 million consumers. That kind of buying game — the long-term bet that hinges upon (Brazil has the 6th largest IT market in the power and demand for products, some say, harnessing the country’s astonishing assets. world, representing 8 percent of Brazil’s has helped buffer the Brazilian economy GDP). All of this has allowed Brazil to jump from global economic woes.

3 “Brazil: Platform for growth,” The Financial Times, March 15, 15 and 32, http://www.weforum.org/reports/global-competi- of-global-economy-argentina-and-venezuela-most-vulnerable. 2011, http://www.ft.com/intl/cms/s/0/fa11320c-4f48-11e0- tiveness-report-2011-2012. Spain and Italy, which are at the “Europe Dodges a Bank Crisis in Spain, but Perils Lurk,” 9038-00144feab49a.html#axzz1yutYABcf top of the second quartile of WEF 142 ranked countries, are Jack Ewing, The New York Times, June 10, 2012, http:// widely viewed as vulnerable in the Euro-crisis, while Chile, www.nytimes.com/2012/06/11/business/global/as-focus- 4 IT stats are from Antonio Gil, president of the Brazilian As- Peru, Mexico and Brazil are the countries in Latin America shifts-to-rescuing-spanish-banks-worries-grow-over-greece. sociation for IT and Communication Companies (BRASSCOM), most insulated from the Euro-zone crisis. “Fitch: Chile, Peru html?pagewanted=all presentation at the 2012 Brazil Summit, April 23, 2012. best prepared for downturn of global economy; Argentina Brazil’s business environment is 31st out of 142 countries; 5 “Brazil is expected to pass France by 2015, says Mantega,” and Venezuela most vulnerable,” June 4th 2012 , Merco financial markets are 40th and technological adoption is 47th. Folha de São Paulo, 12, 28, 2011, http://www1.folha.uol.com. Press, South Atlantic News Agency, http://en.mercopress. “1.1 The Global Competitiveness Index, 2011-2012,” Global br/internacional/en/national/1027086-brazil-is-expected-to- com/2012/06/04/fitch-chile-peru-best-prepared-for-downturn- Competitiveness Report, 2011, World Economic Forum, pg pass-france-by-2015-says-mantega.shtml

PwC | Gridlines | 2 Not that Brazil is by any means immune to recent economic forecasts put GDP growth priorities — with the lion’s share going to macro-economic shifts.6 Last November’s at just under 1 percent in 2012 — look investments in housing (US$ 151.4 billion), Economic Outlook from the OECD, for positively sunny compared to projections transportation (US$ 104.5 billion) and instance, underscores both the struggle elsewhere for Germany (0.6 percent), everything else that Brazil needs following and the vitality of the Brazilian economy. France, (0.5) and for the United States thereafter — a massive build out in basic On the one hand, Brazil’s GDP growth has (2.1 percent).8 But whatever challenges one sanitation, in the electricity grid, and in been revised downward to 1.5 percent, might point to in the near term, one com- telecommunications systems. News of the the lowest of all the BRICs, yet the same mon feature stands out in every forecast or cooling of Brazil’s principal commodities report projects that Brazil’s GDP growth projection: the need to build and improve trading partner, China, and the subsequent will bounce back to 4 percent and more in Brazil’s infrastructure is so clear, that, slowing of the Brazilian economy seems to the next two years.7 Indeed, the debate is as Filipe Jens, director of finance for the have only increased the resolve of Brazilian not if, but when Brazil will come booming Brazilian construction giant Odebrecht put President Dilma Rousseff’s government back again. And even gloomier assessments it recently, “For Brazil, not building infra- to leverage the beneficial economic multi- of Brazil’s US 2.5 trillion economy — some structure is not an option.”9 plying effects of continued and sustained infrastructure stimulus while at the same time lowering interest rates to attract foreign investment.11 “For Brazil, not building infrastructure is The environment for private, long-term investment in infrastructure is improving, not an option.” with estimates for foreign direct investment in Brazil raised to $US 63 billion, according to the Brazilian central bank, $US 13 billion above the bank’s prior estimate — with new Brazil has been making news for incentives like infrastructure bonds offer- the size and scope of its infrastruc- ing tax relief and other financing strategies ture ambitions ever since they were becoming part of a mixture of ideas for jump-started in 2007 by the government’s addressing the question of private invest- Growth Acceleration Program of Invest- ment. The search for mechanisms that ment — PAC I — followed by a second will attract private financing in Brazilian program that began in 2010 — PAC II — infrastructure has led to a conversation that that has led to more than twelve thousand sometimes turns to global infrastructure private and public infrastructure projects in funds, on the one hand, or to ideas about 10 the works. Oil, gas, and biofuels account privatizing the country’s pension funds, as for about half of the nearly trillion dollars Chile has done successfully, in order to cap- ($US 885.9 billion) of PAC II’s planned italize large infrastructure works. Either of infrastructure investments by 2016 and these methods, some say, could be applied beyond, according to Business Monitor to infrastructure projects in Brazil — International. The other half will be offering more attractive returns of between divided between many other pressing 9 and 10 percent rather than what the

6 The Bank of International Settlements recently cited the Eu- to grow only about 1 percent in 2012,” wrote Simon Romero, maintaining economic sustainability is infrastructure: “Despite ro-crisis as a notable reason for Brazil’s economy growing just in “Brazil Registers Anemic Growth, Surprising Economists,” being a painful process, the shift away from a consumption- 0.2 percent in the first quarter and showing seasonally adjust- the New York Times, December 1, 2012, http://www.nytimes. based growth model towards greater fixed investment is ed growth over 12 months of under 2 percent. “Harder Times com/2012/12/01/world/americas/brazil-registers-slow-eco- what Brazil needs to put the economy on a more sustainable Coming For Brazil, Says Bank For International Settlements.” nomic-growth-in-3rd-quarter-shocking-economists.html. long-term trajectory.” “The Party’s Over,” Latin American Kenneth Rapoza, Forbes Investing, June 24, 2012, http://www. Monitor: Brazil, Vol. 29, Issue 7, July 2012, Business Monitor The slowdown in GDP growth is largely because of “the forbes.com/sites/kenrapoza/2012/06/24/harder-times-coming- International, italics added. country’s consumption-based growth model,” according to for-brazil-says-bank-for-international-settlements/ Business Monitor International. To this add Brazil’s top-heavy 9 Filipe Jens, Brazil Summit presentation, Brazil-American 7 “General Assessment of the Macro-Economic Situa- commodities economy, which has brought about a classic rise Chamber of Commerce, New York City, April 23, 2012. tion,” OECD Economic Outlook, Vol 2012/2, November in the exchange rate of the real, which in turn has been a factor 10 “Principle Brazilian Infrastructure Investments Until 2016,” 27, 2012, pg 31 and pg 222. http://www.keepeek.com/ in driving consumption — compounded by easy access to Sobratema.org, April, 2012. Digital-Asset-Management/oecd/economics/oecd-economic- credit, and this has resulted “in the Brazilian consumer becom- outlook-volume-2012-issue-2_eco_outlook-v2012-2-en. ing one of the most leveraged globally.” Now factor in that the 11 “As Growth Ebbs, Brazil Powers Up Its Bulldozers,” Simon high rate of exchange for the real limits export competitive- Romero, New York Times, June, 21, 2012, http://www.nytimes. 8 “Brazil Analysts Cut 2013 GDP Forecast, Raise Inflation ness. Something has to give eventually, according to BMI, and com/2012/06/22/world/americas/brazil-combats-slowdown- Call,” Bloomberg, Jan 7, 2013, http://www.bloomberg.com/ the likely scenario involves currency depreciation and a further with-even-more-stimulus.html?pagewanted=all news/2013-01-07/brazil-analysts-cut-2013-gdp-forecast- slow-down of economic growth. In all of this, a key element to raise-inflation-call-1-.html “Brazil’s economy is now expected

3 | Gridlines | PwC In perspective: Five-year plans for infrastructure

China $US 1 trillion Brazil $US 885.9 billion India $US 1 trillion

current PPP models of roughly 6 percent of- its pre-salt oil fields, in inflation-adjusted of overall infrastructure quality, Brazil sits fer. So far, however, the primary engine for terms, than NASA did in the great, can-do near the bottom — 104th out of 148 coun- the country’s infrastructure build-out has technological boom of the 1960s and 70s tries surveyed, and this creates a significant been Brazil’s Development Bank (BNDES), to put a man on the moon. In the United drag on the economy. Paulo Resende, of the which, despite the gloomy economic States, the phrase “Apollo-like” is mostly Center for Studies in Infrastructure and Lo- forecasts, lent a total of $US 21.8 billion a rhetorical device used occasionally to gistics in , Brazil, estimates for infrastructure projects from January invoke the need for big thinking, especially that the logistics costs of poor infrastruc- to May last year, up 1 percent for the same when it comes to things like rebuilding ture amount to an average economic drag period a year earlier.12 The development America’s aging infrastructure, but in Brazil on the Brazilian economy of 12 percent of bank, moreover, whose loan book is nearly rhetoric has been replaced by a visionary GDP, compared to 8 percent for the United four times bigger than the World Bank’s, commitment to build — hammered out in States, and 6 percent for Europe.14 When was committed to $US 77 billion in infra- steel and concrete — with a big-thinking, asked at a recent meeting in New York City structure last year alone — just part of the breath-taking, Apollo-surpassing inten- to prioritize Brazil’s infrastructure needs, estimated $US 639 billion needed, accord- sity that even now is reaching a fever-like Filipe Jens of Odebrecht put transportation ing to BNDES, for infrastructure between pitch, as the deadlines for the World Cup infrastructure at the top of his list. But as 2010 and 2013.13 games in 2014 and the Olympics in 2016 with any other challenge, the infrastructure approach. Other countries are spending more on 12 “Brazil’s BNDES loan disbursements unexpectedly rise infrastructure. India’s new five-year plan, The reason for Brazil’s resolve to bet this year,” Reuters, July 19, 2012, http://www.reuters.com/ article/2012/07/19/brazil-economy-bndes-idUSL2E8I- which began in April 2012, announced big on infrastructure becomes clear JL3Q20120719 $US 1 trillion in infrastructure spending. the more one sees how the growth of any 13 “Brazilian Fostering of Private Financing of Infrastructure economy can be slowed because of poor Projects,” Ricardo Somoes Russo, Enrico Bentivegna, Joao China’s current five-year plan also amounts Fernando A. Nascimento, Latin Infrastructure Quarterly, No 4, to a $US 1 trillion for infrastructure invest- infrastructure — and, in fact, the Brazilian June, 2012, pg 18, http://www.liquarterly.com/issue4.pdf. ment, including a 19,000 mile high-speed “infrastructure gap” plays a big role in 14 A World Bank report puts the logistics costs in Brazil at between 15 and 18 percent of GDP, (“How to Decrease Freight rail system, the largest transport infrastruc- slowing growth that would be much Logistics Costs in Brazil,” World Bank Report No. 46885-BR, greater, given Brazil’s resources, but for February 8, 2010, pg 96), but this figure has changed since ture project in history. But Brazil offers the report was published two years ago, according to Paulo many similar head-spinning indicators. shortfalls, especially in transportation Resende. “Logistics costs to Brazil are now 12 percent of GDP due to the decreases in transportation costs in the last Brazil’s state-run oil company, , infrastructure and logistics. According to two years, mainly in the State of São Paulo due to highway for instance, will invest more to produce the World Economic Forum’s assessment improvements and port costs reductions due to private investments in terminals.” Paulo Resende, 6-6-12.

PwC | Gridlines | 4 gap offers great investment opportuni- government bureaucracy.”17 Overlapping the truly strategic infrastructure build-out ties as well, and Brazil has been making regulatory regimes at the federal, state lies in the humbler areas of the transpor- great strides in attracting such investment, and municipal level have helped delay big tation sector — , ports, waterways, especially in the transportation sector. infrastructure projects for many years. It’s and rail. Inefficiencies in this sector have That priority is well-founded, according to a challenge that is not unique to Brazil, of become emblematic of the kind of burden Resende. “Transportation,” he says, “must course. In the United States, for instance, that continues to slow Brazil’s economic become one of the highest priorities if Bra- large electricity transmission lines can be growth, while strategic improvements in zil is to achieve true competitiveness with delayed for decades because of regulatory freight rail, seaports, costal shipping, and other countries.” hurdles imposed by eleven separate federal the development of intermodal facilities Two other priorities are in the area agencies, but for those wondering how between rail, trucking, and sea cargo offer of governance. While Brazil’s solid Brazil’s tremendous promise will be fully so much economic promise. We also look institutions and established democratic realized, many observers suggest two main at important areas of governance, as these governments have brought forth consistent areas of governance — “bureaucracy, and have long been identified as pivotal parts economic policies that have enabled the the tax structure,” says Resende. “These of a puzzle that will enable Brazil to meet Brazilian economy to hit inflation targets, are the huge, huge barriers — the bottle- its challenges. Brazil’s attempt to reform to establish exchange rate flexibility, and necks — that Brazil has to overcome.” its governance systems could be the true legacy, in fact, the thing that most will to move toward concessions and privatiza- Against the sweeping backdrop of the remember, long after the events of the tion in the infrastructure sector,15 these Brazilian economy, the World Cup and World Cup and Olympics have passed. same institutions are also some of the most Olympics seem like flourishes in a much 16 bureaucratically complex in the world. grander movement. It’s this larger move- 15 Carlos Langoni, director of the World Economy Center, Reform of Brazilian governance systems FGV Foundation, speech and panel discussion, “The World ment — Brazil’s long game, the role that Economy and Brazil,” New York, May 15, 2012. has long been viewed as pivotal, if Brazil infrastructure plays in all of it, and the 16 Filipe Jens, director of finance, speaking at The Brazil is going to fully flower. The tax structure, challenges and opportunities for infra- Summit, New York City, April 23, 2012. for example, is complex, as is its regulatory structure in the coming years — that is 17 “2.1: Country/Economy Profiles, Brazil, Key Indicators,” Global Competitiveness Report 2011-2012, World Economic regime. The World Economic Forum’s 2012 the focus of this issue of Gridlines. The Forum, pg 126, http://www.weforum.org/reports/global-com- Executive Opinion Survey found that “tax challenges of air transport are apparent to petitiveness-report-2011-2012. rates” and “tax regulations” were the top anyone visiting Brazil, and while much is two most problematic factors for doing changing in this realm, with concessions business in Brazil, followed closely by granted to renovate three major airports, “inadequate supply of infrastructure,” (see the interview with Paulo Resende), “labor regulations,” and “inefficient

“Transportation must become one of the highest priorities if Brazil is to achieve true competitiveness with other countries.”

5 | Gridlines | PwC Bridging the infrastructure gap begins with a strategic focus on transport — freight rail, seaports, and intermodal facilities

The causes of the transportation infrastruc- ture gap in Brazil can be summed up in two words: pace and balance. The infrastruc- ture gap exists in the first place because the slow pace of infrastructure investment over the last three decades has not kept up with demand. Up until the 1980s, Latin American infrastructure investment aver- aged about 4 percent of GDP, and this dropped by half after 1985, yet according to the World Bank, major economies spend 5 to 7 percent of their GDP each year on infrastructure.18 According to Odebrecht’s Filipe Jens, even though Brazil’s infrastruc- Brazil maritime and rail freight is projected intermodal mix has been out of balance, ture investment has grown at a rate of 13 to grow at or near double digits annual leaning heavily upon road transport. Even percent (CAGR) between 2003 and 2011 to 2016.20 And Brazil’s electric generating today, 58 percent of all transport in Brazil (from $60 billion to $160 billion, for an capacity will need to nearly double, rising is through the country’s crumbling road average of 4 percent of GDP), the problem 47 percent from 107,000 MW in 2010 to system, the third largest in the world, of remains that the “level of investment is only 223,000 MW by 2030, to keep pace with which, however, just 12 percent is paved — replacing the existing infrastructure in the power demand. “In Brazil,” says Paulo and only half of that in good condition.22 country. We’re not growing infrastructure. Resende, “we have not been building out Water transport — the most efficient way 19 We’re conserving and maintaining it.” ahead of future demand.21 We have always to move anything in bulk — accounts for Demand, on the other hand, has risen, been just catching up to past demand.” only 17 percent of Brazilian transport, and especially in urban centers. In the Brazilian freight rail, the next-most efficient mode of But a key challenge, as many airport sector, for instance, where passen- transport, is just 25 percent.23 Developed ger terminals are already saturated at 13 observers have noted, lies in what’s known as the “intermodal matrix,” countries, by contrast, show a much greater of the country’s 20 largest airports, air the mixture and makeup of investment deployment of freight rail — the United passenger traffic is estimated to grow 35 between roadways, railways, water and States with 43 percent, Canada with 46 percent per year, from 111 million pas- other transport. For decades Brazil’s percent, and Australia with 43 percent of sengers in 2009 to 312 million in 2030.

18 “It is estimated that Brazil has invested, on average, ap- 20 “Brazil Infrastructure Report: Transport Q3, 2012,” Business 21 “Emerging Markets Strategy,” September 28, 2011, Royal proximately 2 percent of its GDP in infrastructure since 1985.” Monitor International, Industry Forecast Scenario, May 1, 2012. Bank of Scotland, pg 12. “Brazilian Fostering of Private Financing of Infrastructure Proj- Total tonnage growth of 12.2 percent is projected for Brazil’s 22 12 percent of Brazil’s road system is paved, compared to ects,” Latin Infrastructure Quarterly, No. 4, June, 2012, http:// largest port, at Santos, which is responsible for more than a China, 54 percent; Russia, 80 percent; and the United States, www.liquarterly.com/issue4.pdf. Other figures from World Bank quarter of Brazil’s trade. Annual growth of over 10 percent which weighs in at just 67 percent of its roads paved. Filipe Report No. 46885-BR, How to Decrease Freight Logistics is expected at the port of Itajai, and rail freight is projected Jens, Brazil Summit presentation, Brazil-American Chamber Costs in Brazil, February 8, 2010, pg 14. to grow by more than 10 percent in 2012 and continue at an of Commerce, New York City, April 23, 2012. average of 8.3 percent annual growth to 2016. “Brazil Freight 19 Filipe Jens, Brazil Summit presentation, Brazil-American Transport Report Q1 2012, Business Monitor International, 23 “Rail network Expansions Program” Francisco Luiz Baptista Chamber of Commerce, New York City, April 23, 2012. Industry Forecast Scenario, December 12, 2011. de Costa, Ministry of Transport, Nov 10, 2009.

PwC | Gridlines | 6 Rebalancing Brazil’s intermodal mix: A vast nation needs freight rail to ease dependency on crumbling roads

(percent of national transport)

25% 43% 43% 46%

Brazil United States Australia Canada

all transport carried by rail; and a much costs for bulk products and distances above speed rail) accounting for nearly half — better balance with road transport — US, 550 miles are approximately 40 percent or just over $US 39 billion — of all proj- 32 percent, Canada, 43, and Australia 53 lower than road costs, yet two-thirds of the ects currently underway in the transport percent.24 The poor condition of Brazil’s soybean grain production in Brazil is still sector, according to a Business Monitor roads, moreover, raises transport costs 28 carried by road. Despite the advantages of International report this past May, with percent on average, but that cost can be rail, the total length of the railway network an average of more than 12 percent of all much higher, depending upon the product in Brazil has actually shrunk by nearly a transport investment each year going into and the region in question.25 third between 1930 and 2009, and rail projects between now and 2020.28 What intermodal connectivity at the city level follows are eight solutions suggesting the Two-thirds of the cost of finished paper remains inefficient.27 contours of mid-to-long-term planning that products in the state of São Paulo, for are currently under way in Brazil beyond instance, is attributable to truck transport All of this is changing dramatically, the World Cup and Olympics. and logistics costs of hauling products by however. And while it’s true that the road between pulp and paper factories and World Cup and Olympics preparations have About the authors the . For some products like added a spike to airport and urban rail auto parts, for instance, over half of the construction, (and have taken most of the Carlos Biedermann, based in , cost of production is attributable to road media spotlight), when it comes to Brazil’s is the leader of PwC’s Brazil infrastructure long game, freight rail and water freight practice ([email protected], transport and logistics costs — even though +55 51 378 1708). Hazem Galal, formerly based those same factories in the São Paulo Met- have taken center stage in Brazil’s trans- in Rio de Janeiro and now in Doha, Qatar, leads ropolitan Region are, on average, within 52 port investment programs, with new and PwC’s global state and local government sector ([email protected], +974 4419 2852). miles of the port.26 By comparison, railroad on-going projects in rail (not including high

24 “Investment Opportunities In Brazil,” Francisco Louiz Resende, Paulo (2006), “Notes on the Current Conditions of transport costs illustrate Brazil’s and São Paulo’s heavy reli- Baptista Da Costa, Ministry of Transport, November, 2009. The the Brazilian Logistics Infrastructure,” Funacao Dom Cabral, ance on trucks instead of more efficient modes such as rail.” transport mixture has hardly changed since this report was Nova Lima; found in, “Promoting Infrastructure Development World Bank Report No. 46885-BR , How to Decrease Freight given, according to Paulo Resende, director of Logistics and in Brazil,” OECD Working Paper No 898, pg 24, http://www. Logistics Costs in Brazil, February 8, 2010, pg 73. Planning. oecd-ilibrary.org/economics/promoting-infrastructure-develop- 27 OECD Working Paper No. 898, “Promoting Infrastructure ment-in-brazil_5kg3krfnclr4-en. 25 The World Bank gives a range of costs due to poor road Development in Brazil, Annabelle Mourougane, Mauro Pisu, conditions of between 10 to 30 percent. World Bank Report 26 “The pattern that emerges is that transport costs account October, 2011, pg 22, http://www.oecd-ilibrary.org/economics/ No. 46885-BR , How to Decrease Freight Logistics Costs in for the largest share of transport and logistics costs (TLC) for promoting-infrastructure-development-in-brazil_5kg3krfnclr4- Brazil, February 8, 2010, pg 34, http://siteresources.worldbank. five of eight sectors: Foodstuff (56.3 percent), Automotives en. org/BRAZILINPOREXTN/Resources/3817166-1323121030855/ (45.1 percent), Chemicals (48.7 percent). . .Automotive Parts 28 “Brazil Infrastructure Report, Q3, 2012,” BMI, Industry FreightLogistics.pdf?resourceurlname=FreightLogistics.pdf (51.3 percent). . . .[In] the aggregate, transport is the main Forecast Scenario, May 1, 2012, Key Projects Database Paulo Resende suggests an average figure of 28 percent. contributor to the TLC. . . . These flows, to a large extent, use figures are correct from August 9, 2011. trucks to get to the Port [of Santos]. These products with high

7 | Gridlines | PwC A few words with Paulo Resende

Paulo Resende, PH.D and MSC in transportation planning and logistics, is the head of the Center for Infrastructure and Logistics at Fundação Dom Cabral, Brazil, where he has worked for thirteen years. During that time he has been a main source of infrastructure analyses for global media agencies such as Financial Times and Reuters. Professor Resende is also consultant of logistics, trans- portation planning and supply chain in Latin America, and is the author of several studies and logistics reports for the World Bank, InterAmerican Development Bank, and multinationals operating in Latin America.

In 2011 you were quoted as saying long-term infrastructure needs and also the airport in Porto for infrastructure — may actu- that fewer than half of the World with short-term projects that Alegre, in the south of Brazil, in ally be the most important thing Cup construction works will be are mostly to satisfy the needs of Salvador, , and also at of all. Then there’s just the sheer done on time. How do you feel the World Cup. Current airport the airport in — these fact of the infrastructure gap about the infrastructure for the construction is an important temporary terminals will even- in the first place — I’d put that World Cup, a year later? example. We have made tually have to be pulled down third. Logistics — warehouses, I still feel that way, mainly when concessions to private compa- in order to guarantee access to inventory, transportation, we talk about urban mobility nies at three important airports the terminals that should have infrastructure inefficiency — projects and the airports. These in Brazil — airports that are been built in the first place. cost an average of 12 percent of have not advanced much in the already congested. So there is Brazil’s GDP, according to the How would you prioritize the risks last year. One big project — to no question about the long-term yearly report from the Federal to the Brazilian economy now? build a new runway at São need for new terminals, but University of Rio de Janeiro’s Paulo- airport, which what we are getting, just in Well, there are several things, no logistics department. These are was a worry last year — looks as time for 2014, are not the single one more important than the bottlenecks that Brazil has though it will not be completed new terminals we need but the other but taken together to overcome. in time for 2014, mostly because temporary terminals. they pose risk. There’s the What about Brazil’s infrastruc- of legal and environmental problem of attracting foreign ture investments in energy? problems. On the other hand, The second issue is this: private investment in infrastructure. At least half of the nearly $US work is going well with the companies with private manag- There’s the bureaucracy, which 1 trillion investment is going stadiums, which will probably ers are pressured by short-term includes the regulatory system, priorities, as opposed to the towards the Pre-salt development, be completed by 2014. But when the legal system, the complex- and nobody’s saying that this is we talk about urban mobility, needs of Brazilian citizens. In ity of the bidding process for Brazil, moreover, we are not a bad idea. Do you have a there are significant challenges. infrastructure projects, and the different opinion? The subway lines, for instance, used to private management like — which in Brazil is very, are not moving along as fast as at airports. We’re in a time of very heavy. Then there is the No, no. I think this is a good we need them to. Some of the transition for these two types tax structure. idea. Pre-salt development is so-called BRTs, the bus rapid of management organizations very important, as is natural gas. trains, will not be done in to learn to live together — but If I were to prioritize the risks, But I think that we should invest time — except for the projects unfortunately, from the point they would be, first of all, in a more sustainable energy in Belo Horizonte, which are of view of the Brazilian govern- bureaucracy, because the more matrix in Brazil. I think that we on schedule. ment, what counts the most is complex and the less transpar- are too dependent on petro- image in 2014. The needs of the ent the bureaucracy, the more leum. I think that we should What’s causing the slowdown short-term horizon take priority, likely you’ll have corruption. work on some other sources of with infrastructure projects? and this is a mistake. Thirdly, Next would be the tax struc- energy, like the solar, wind, even the “new” temporary termi- biofuel energy, ethanol. I think First, I think that Brazil has ture second — nobody really nals, which is happening at the that Brazil has a good chance made a big mistake in mixing understands it, so simplification Confins, Belo Horizonte airport, to build for the future and build together, on the one hand, — and providing tax incentives

PwC | Gridlines | 8 a different supporting energy Getting back to the issue of that will fulfill future demand. be how London implements its matrix so we can guarantee inefficient bureaucracy and So, there is an accumulation of urban toll, a tariff that you have stable energy without too much over-regulation. Critics like you demand. And the longer these to pay when you go in certain cost to the environment. have pointed to inefficiencies in projects take to get built, the rings downtown. That was a the spending of the BNDES in- more inadequate they become societal decision. But public Would you say that, since Brazil frastructure funds. What are the to that future demand. This sort managers won’t tend to take has a history of making early numbers you are seeing in terms of thing — not running after the these difficult actions, because decisions to move ahead in bio- of the government being able future but constantly catching it’s politically risky. Yet this is fuels, for instance, that there’s a to actually disperse funds and up to past demand — is happen- what Brazil needs. Some sort of cultural expectation that Brazil complete infrastructure projects? ing with our highways and long-term projects commission will continue to move into these Well, I don’t think that this inef- our airports. in infrastructure that would other energy pathways? ficiency is happening with the protect society from the changes Definitely. Brazil today is really PAC-II funds, simply because How does Brazil overcome this? in electoral or political agendas. one of the few countries in the PAC-II has a strong tendency to Brazilian society must mature You could call it the Infrastruc- world really prepared in terms direct investments on housing, and protect long-term projects, ture Strategic Group, or, if you of culture to renew its energy and I believe that housing is and insure that these projects prefer, Strategic Committee, or matrix. And I think we should going well, mainly because are not interrupted just because Infrastructure Strategic Board. take advantage of that. housing does not depend a new manager comes along. We too much on environmen- need to declare that some long- And it would be important In the United States, there is often tal licenses. Not to say there term projects are off limits to to empower them to be the a diametrically opposed relation- aren’t problems — especially managerial intervention — that guardians of the long-term infra- ship between the sector, with projects related to urban structure planning in for instance, and the renewable they belong to society. I think mobility, in which there are Brazil. The Infrastructure sector. Why shouldn’t that also that the way to do this is to bring significant issues involving Strategic Board would be a happen in Brazil? Or why would together elements of the judicial payments to people and busi- federal program that would you not expect that to happen? system, the legislative system, nesses that are displaced by the executive system, and also transcend the local politics, and Well, firstly, because Petrobras large transportation projects. representatives from society into having this kind of authority — is very interested in sources of That process is very complex in a single governing body that at the federal level — would energy other than petroleum. Brazil. The same projects can be directs long-term projects. This help prevent the kind of delays Look at their projects with natu- contested and re-adjudicated, is not a new idea. that have happened to metro ral gas and ethanol. And when and the costs for those projects projects in most of the Brazilian you mention ethanol, you’re go up. But if you added up PAC For electricity in the United States, metropolitan areas, for instance. talking about agribusiness — I and PAC II, I don’t think that there are long-term power plan- The Via Quatro in São Paulo, and that is a really strong more than 60 percent of all the ning commissions composed of a much-delayed subway line, sector with considerable politi- proposed projects will actually some of those very same stakehold- is an example of this. They cal power. So, I think that we be completed by 2012 — even if ers that you mentioned — people would hold public hearings and have a power equilibrium of you consider housing. from industry and citizens. They develop a list of “golden” proj- players in Brazil. We don’t have have the power to delegate long- ects — untouchable a conflict to reshape the energy But this is still a problem term planning and the monies to projects — and their job would matrix the way that might because most of the projects commit to those needs. be to maintain the pace of the happen elsewhere. from PAC are projects that were That’s exactly what I’m talking projects, according to what has created to fulfill a historical about. Another example would been defined by society.¡ demand. They are not projects

Brazil needs a federal commission on long-term infrastructure projects to protect them from the changes in electoral or political agendas.

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Solution #1: The North-South line

The railway network in Brazil was be established, according to a World Bank tural region and source of over half of all privatized in the mid-90’s, and while study. And to insure the safety of estab- Brazilian grain, before ending in the south this step helped reduce operation costs, lished lines, clear-cut maintenance and at Senador Canedas, a major inland rail the significant sunk costs of building or operations targets should be written into hub and petrochemical refining center that improving a railroad seem to have deterred concession contracts.30 connects to the great southern ports of Rio more private investment. In its place, the de Janeiro and to the Port of Santos. To date, the mining company Vale is federal government has filled the gap and probably the biggest private operator of And because it will not follow the Brazilian most observers feel that continued govern- freight rail in the country, and one of Vale’s shoulder of the continent that juts into the ment investment in railroads is needed most important new concessions is the Atlantic, (as most current rail lines do), the in the long term. Nevertheless, several North-South Line, one of three PAC North-South line will create a new freight steps could improve private investment in priority freight rail projects of more than corridor that will be 30 percent shorter railroads, according to the World Bank, 1000 kilometers — the other two are the than the existing central eastern corridor, among them enhancing interconnectiv- East-West line, and the Trans-Northeastern through less congested areas. It will con- ity between railroads. On a physical level, Line. Of these, the North-South Line stands nect with major east-west routes such as some railways in Brazil operate on different out as the most strategically significant. the existing Carajas railroad in the north- track gauges, and the sheer lack of physical Its completion will mark a historic east, which is used to haul iron ore to the interconnectivity between the lines slows moment — the first straight-shot of a highly port of São Louis, and the East-West Rail- return on investment.29 On the level of efficient mode of transport through Brazil’s road, and offering quicker access to major paperwork — or usage of track by multiple rich interior, and, like the transcontinental commodities markets in Europe, the United concessionaires, an increasing likelihood as railroad in the United States, it will provide States, and China, via the Panama Canal. the rail system expands — a better system interconnection between distant coasts, “The construction of the North-South line,” of compulsory interconnection fees or joint running 1237 miles from the port of Belem says Paulo Resende, “will change the entire transport agreements between conces- in the North, then bisecting the Brazilian transport matrix of Brazil.” sionaires of different railroads needs to cerrado, the great savannah-like agricul-

29 This, too, is changing, however. Logistics companies And Brado Logistics has signed an agreement with another http://www.railjournal.com/index.php/central-south-america/ like Latin American Logistics (ALL) and Standard Logistics, logistics company, LTI, to cooperate on a corridor between brado-expands-as-brazilian-intermodal-market-flourishes. for instance, have recently entered into partnerships with Brazil and Argentina, anticipating a 40 percent increase in html?channel=536&utm_source=BenchmarkEmail&utm_ Santos Brazil, one of South America’s largest port infra- intermodal rail volumes on the route through the partner- campaign=Jul_19_2012_Email&utm_medium=email#. structure and logistics service providers, for the movement ship. “Container transport by rail is becoming a reality in UBFcN2HbBrp of nearly 8000 containers per year from São Paulo state to Brazil,” says Linda Machado, business director of Brado 30 “Promoting Infrastructure Development in Brazil,” Working the Santos Brazil’s maritime terminal in the port of Santos. Logistics, “and it is unthinkable for us not to be a part of Paper No. 898., OECD, 2011, pg 23. this scenario.” International Railway Journal, July 6, 2012,

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Solution #2: Ports, reimagined

The strategic importance of a billion tons of cargo for the first time, ac- Eike Batista. LLX’s plan is to build a new Brazil’s ports is almost impossible cording to ANTAQ, Brazil’s National Agency port 250 miles north of Rio de Janeiro on to overstate, as Richard Klein, Chairman for Waterways Transport — but many logis- a colossal scale, a facility, if it comes to full and Vice-President of the Board for tical challenges remain.31 Yet even as PAC fruition, that will be best measured not Multiterminais and Santos Brazil, two of II investment has been deployed to dredge in acres but in square miles — 34 square the largest port operations in Brazil, made ports, to reduce paperwork, and to improve miles, with plans that include two steel clear earlier this year. “Brazilian social general efficiencies, a new, long-range stra- mills, two cement factories, an automobile and economic development depends upon tegic revolution in how ports themselves factory, a factory for structural steel, a fac- the growth of international trade,” said are conceived may also be under way. tory for auto parts, terminals for oil storage Klein, “and that relies on modern ports That’s the idea behind the Açu Superport and refining, and more than ten miles of expansion.” And port capacity is, in fact, and Industrial Complex, currently under shipping quays. expanding, as Brazil’s 34 public sea and development by LLX Logistica Sat, a river ports are expected this year to handle company controlled by Brazilian billionaire Açu follows the model set elsewhere begin- ning in the 1960s and now evident at some of the world’s biggest ports — Rotterdam, Antwerp, and Hamburg, and elsewhere in Europe, according to Olaf Merk, a ports analyst at the Organization for Economic Cooperation and Development. “At these ports, you can drive around quite awhile before you actually see anything that looks like a ship,” says Merk. Instead, “you’ll see Super-ports like Açu represent the true meaning of Brazil’s refineries, pipes, storage tanks, factories. In “long game” strategy, signaling an entirely new phase Hamburg, you’ll see the big Airbus facility. for the Brazilian economy — the long-sought shift from In LaHavre, France, you’ll find a factory commodities export to value-added export. where Renault automobiles are made.” Co-locating manufacturing centers with transport hubs will reduce transport and logistics costs, but it may also clash with current Brazilian law, which does not grant private port facilities

11 | Gridlines | PwC the right to ship products other than those For now, Açu consists of one cement cause- instance, with factories that receive iron for which the private port was built. Mining way (that will have a four-lane highway, ore, and transform it into sheet metal, companies, for instance, have built private pipelines, and conveyor belts, among other structural steel, auto parts, eventually ports, and they are permitted to ship ore things) and stretches more than a mile entire automobiles — all in the very ports from those ports — but Brazilian law, with and a half into the Atlantic. A Chinese where these products will be shipped. At few exceptions, does not allow those same company has pledged $5 billion to con- its widest circumference, Ports like Açu, companies to use their private ports to ship struct a steel company, and the Norwegian according to Resende, represent the true automobile parts, for instance, or anything pipeline company Subsea 7 signed a $10.5 meaning of Brazil’s “long game” strategy, else for that matter, other than ore. That million-per-year lease to use the port to signaling the beginning of an entirely new kind of shipping — so-called third party, build subsea equipment including pipes for phase for the Brazilian economy — the mixed-use shipping, the kind we normally transporting oil and gas.33 long-sought shift from commodities export associate with ports — is reserved under to value-added export. But so far current investment in Açu is Brazilian law for the government-regulated geared toward Brazil’s primary focus in public ports. License to handle third-party 31 “Rio as Top Shipping Port State in 2012,” Rio Times, the commodities market. Plans are in the January 3, 2012, http://riotimesonline.com/brazil-news/rio- shipping is granted to port operators by works that would allow competing mining business/rio-as-top-shipping-port-state-in-2012/. Brazil has government concession. 34 public ports, five of which are waterways ports, in addition companies to load 400,000 ton China Max to 42 private terminals and three industrial ports, Paulo Resende, 1-4-2013. Private ports, however, if they begin han- cargo ships, and potentially double the 32 Açu currently complies with the existing laws and regula- dling third-party products, circumvent all current iron-ore capacity — two iron- tions, provided that Açu has enough ‘own cargo’ to justify the creation and operation of the port terminal. It is allowed to use of this, as would the kind of shipping envi- ore loading berths, with 40 million to 50 its idle capacity to provide services to third parties, according sioned by the Açu Superport and Industrial million tons a year — to 100 million tons. to Cesar A. Guimarães Pereira, Partner, Justen, Pereira, Olivera & Talamini. Complex — many different companies, And that, apparently, is just for starters. 33 “Subsea 7 Plant Moves to Rio State,” The Rio Times, July making many different products and Eventually, when all the industrial facili- 24, 2012, http://riotimesonline.com/brazil-news/rio-business/ shipping them from a single port. Moving ties are complete, the Açu Superport will subsea-7-plant-moves-to-rio-superporto-do-acu/ 34 Dow Jones Newswires, March 23, 2012, http://gcaptain. forward, some form of regulatory modifica- represent investment of more than $40 com/1-33-billion-investment-superport/, and interview with tion would seem to be required, eventually, billion, 50,000 new jobs regionally, and Paulo Resende. to accommodate superports like Açu, which shipping an estimated 350 million tons per are premised upon multiple and mixed year.34 The “superport” idea, according to third-party use on a colossal scale. The Paulo Resende, will reduce logistics costs beginning of such a framework may already by co-locating commodities terminals for be under way in Brazil’s supreme court.32 ore, petroleum, agricultural products, for

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Solution #3: Soft Solutions: Governance, regulation, and tax reform

São Paulo’s Number 4 subway line projects from changes in electoral or politi- the National Council for Transport Policy could be seen as an emblem of cal agendas,” says Resende, who suggests Integration (CONIT), though neither go far what needs to be done in the realm of that such a body would comprise represen- enough in terms of the independence and governance to further the infrastructure tatives from the key areas of governance autonomy recommended by Resende or goals of the country. A staggering 42 years — the legislative, the executive branch, the envisioned by the World Bank and has elapsed since the subway line’s initial judiciary, and also include representatives other studies.35 conception, in 1969 — and still the line re- from industry and the unions. “Something The main goals of the World Bank’s mains unfinished. In between times, Brazil like an Infrastructure Strategic Group or National Logistics Strategy would be to has passed through harrowing historical Board,” Resende adds, “would have as its address the many bugbears that create the periods of hyper-inflation lasting until 1994 main task the custodianship of long-term “Gusto Brazil,” the high cost of doing busi- when the real was introduced and other infrastructure planning in Brazil.” Such an ness in Brazil. These include the overhaul reforms took place to help set Brazil back ideal agency would receive “bottom-up” in- and simplification of the often conflict- on its economic feet. The vagaries of put from all stakeholders but then provide ing and overlapping regulatory systems, local politics and changes in leadership “top-down” independence and bureaucratic “improving competition and privatization, and project oversight have led to further muscle to push strategic plans through to addressing the problems of transport and deferments. And while Subway Line 4 may their completion. storage tariffs, pilferage loses, administra- be a spectacular counter-example, the Many recent studies of Brazilian tion costs, customs and other clearances, phenomenon of delay is a common element infrastructure agree with Resende, bribes and malicious delays and social and that Subway Line 4 shares with so many though they differ in how this might be environmental costs.”36 This last feature other large public infrastructure works, achieved. An exhaustive study of Brazilian — overlapping environmental regulation including most of the construction projects infrastructure by the World Bank recom- between federal, state and municipal juris- under way for the World Cup and Olympic mends the formation of a National Logistics dictions — has been an often-cited reason tournaments, according to Paulo Resende Council, a board operating independently, that infrastructure projects in Brazil have and many others. outside the Ministry of Transportation, and been delayed. What is needed, according to Resende, is comprising stakeholders, private sector The decision-making cycle, moreover, is an independent governing body that would industry leaders, and public officials whose slowed by the risk of criminal liability that see such projects through to completion — role would be to advise the government on decision-makers can sometimes face in no matter what. “Brazilian society needs developing a National Logistics Strategy. projects that run afoul of environmental an independent governing mechanism Something like this exists with the National law. Civil servants, hesitant to assume such that will protect long-term infrastructure Logistics and Transport Plan (PNLT) and

13 | Gridlines | PwC risks, add to delays — just one example of the ministry overseeing the dredging and ing plans — the National Transportation the many ways that cost of infrastructure clearing of inland waterways, overseen by Logistics (PNLT) and the National Plan for projects have been difficult to control, and National Agency of Waterborne Transporta- Port Logistics (NPAP). As a single agency, why private financing has been wary of tion, ANTAQ. Better coordination between the newly formed PNLI will analyze and entering more aggressively into the infra- these ministries, for instance, may avoid coordinate the infrastructure projects of structure sector. the costly scenarios that have emerged the two separate agencies — nearly $325 in recent years in which the same river is billion in investment projects planned for Key to it all is autonomy at the highest level both dammed for hydroelectric power and ports, highways, railways and waterways of governance, in order to avoid “policy dredged for waterways transport.37 between now and 2030.38 This recent capture” — the way that projects can initiative, while falling short of creating an fall under the sway of the ministries that The effort to coordinate ministries autonomous agency and guardian of “gold- oversee them, sometimes working at cross toward a common strategic and logistical en projects,” is nevertheless a move that purposes with other agencies. A perfect vision made headway in April this year Resende and others applaud — its goal: to example of this is the conflict that has when the Ministry of Transport and the rebalance the transportation matrix and, in sometimes emerged between the Ministry Ministry of Ports announced the launch of so doing, present a strategic vision that will of Energy and Mines, MME, which oversees the National Plan of Integrated Logistics meet the growth of Brazilian foreign trade the construction of hydropower dams, and (PNLI), which will bring together two exist- in the years to come.

35 “The PNLT stops short of being a complete strategy since long-term plan.” World Bank Report No. 46885-BR, “How to 36 World Bank Report No. 46885, February, 2010, pg 100. it does not continuously evaluate projects in a systemic Decrease Freight Logistics Costs in Brazil,” February 8, 2010, 37 “One major concern in developing waterway transport is fashion, which is a fundamental component of any initiative pg 54, http://siteresources.worldbank.org/INTTRANSPORT/ the conflict between hydropower development and navigation to improve a logistics system. This is also the case with some Resources/336291-1227561426235/5611053-1229359963828/ in existing and potential waterways, especially in the Amazon. other potentially innovative and positive initiatives such as TP39-Final.pdf Due to lack of coordination and overall vision of the multiple the Study of Axes (Estudos dos Eixos) and Brazil in Action The OECD strongly recommends the presence of independent waterway uses, hydropower projects are often developed with- (Brazil em Ação) undertaken under a previous administration sectoral regulators. “A growing body of evidence suggests that out considering river navigation. There is a consensus that the but which were interrupted with the change of government. having independent regulators results in better industry per- National Water Agency (ANA), as the overall water regulatory Compounding the lack of continuity between administrations formance and may help foster private investment. . .the lack of agency in the country, needs to be closely engaged in river is the lack of a centralized and updated database, and severe a complete framework [such as a National Logistics Strategy, basin planning and multi-sector resource allocation decisions.” shortages of training for logistics specialists. These factors, as recommended by Resende and the World Bank] makes World Bank Report 46885-BR, February, 2010, pg 48. and the absence of a specific unit that could plan and evaluate some federal regulatory agencies vulnerable to policy capture projects, such as the now defunct National Transport Planning 38 “Government Prepares National Logistics,” Revista Grandes in areas such as transport and water sanitation.” “Promoting Agency (Empresa Brasileira de Planejamento de Transportes, Construcoes, April 11, 2012, http://www.grandesconstrucoes. Infrastructure Development in Brazil,” Mourougane, Annabelle, GEIPOT), have meant that previously good ideas have been com.br/br/index.php?option=com_conteudo&task=viewNotic OECD Economics Department Working Paper No 898, 2011, interrupted or discontinued, only to start anew with another ia&id=10682 pg 15, http://www.oecd-ilibrary.org/economics/promoting- administration. In fact, this “stop and go” posture has contrib- infrastructure-development-in-brazil_5kg3krfnclr4-en. uted to the lack of a serious and implementable medium and

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Brazilian law requires river pilots to navi- Solution #4: gate vessels on the tricky waters from the mouth of the Amazon in the state of Amapa Developing Brazil’s to Manaus, for example, roughly 900 nauti- inland waterways and cal miles, yet river pilots are in short supply coastal shipping trade — and this has caused logistical logjams downstream.42 Still, four companies oper- ate a total of 19 ships making weekly trips from Manaus to Rio Grande. Container freight cabotage in Brazil, as opposed to raw ore and soya, for instance, is roughly 600,000 tons per year, which could be much more, most observers agree. To that end, public spending from PAC funds amounts to $US 17 billion being invested in port improvement projects, or more than 21 percent of all current transport spending and averaging at least 7 percent of all transport infrastructure spending per year earmarked for ports and waterways between now and 2020.43 And private infrastructure companies are also moving into the cabotage market. Triunfo, Brazil has eight major hydrological basins But, along with port improvements, a small to medium-range construction with a staggering 17,000 miles of navigable PAC II spending shows medium to company that operates road concessions water. The biggest and longest, the route long-term commitment toward making in Brazil and is part of a consortium now from Amazonas to Madeira, runs more than waterways navigable. building an airport in , is bolster- 2600 miles. These great rivers translate to a Cabotage — Brazil’s Emergent ing its vibrant port facility, Portonave, and powerful potential cost advantage of ship- Merchant Marine has also invested $1 billion in multi-pur- ping anything in bulk by water — 1000 tons With 35 sea ports along one of the longest pose terminal improvements at the Port of transported one kilometer by waterway is coastlines in the world, another powerful Santos — improvements that are strategi- 39 estimated to cost $12 and by road $US 45. waterborne transport mode comes into cally designed not to compete with Santos’s The main challenge for the deployment of view — coastal shipping, or “cabotage,” major export traffic but instead to fit into inland waterways, however, is that most the transport of goods between two points the emergent niche market of coastal are in the country’s less developed northern in the same country. Especially for Brazil, maritime cabotage. with its huge and vibrant domestic market, region with several challenges — regional 39 In the United States, this difference is estimated to be even economies haven’t yet developed the the ninth largest market in the world, a larger, at five dollars for waterways and 56 for road. World Bank Report No. 46885-BR, February 8, 2010, pg 47 capacity for generating high-volume cargo; maritime cabotage could become an impor- 40 World Bank Report No. 46885-BR, pg 46. there are few harbor facilities for handling tant, efficient, cost-effective way of moving 41 41 “Brazil Among the 50 Most Competitive Nations in the such cargo; many existing waterways need products to different domestic markets. World,” Merco Press, Thursday, September 6th 2012, http:// And, in fact, the market is growing, with en.mercopress.com/2012/09/06/brazil-among-the-50-most- dredging; and conflicts exists between competitive-nations-according-to-wef-report total cabotage freight growing nearly 2 government agencies with diverging 42 “Coasting vessels waiting more than four days to meet interests — between using Brazil’s rivers percent between 2010 and 2011, according a practical Manaus,” Revista Grandes Construcios, July 27, 2012, http://www.grandesconstrucoes.com.br/br/index. as freight waterways or using them for to the National Agency for Waterway Trans- php?option=com_conteudo&task=viewNoticia&id=12711. hydroelectric power. As a result, only 1 portation (ANTAQ). Yet leveraging this 43 “New and Ongoing Projects, Transport, current as of August 9, 2011, Brazil Infrastructure Report Q3, 2012. percent of Brazil’s total freight volume is strength to its greatest advantage remains shipped by inland waterway.40 a key strategic challenge and opportunity.

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Solution #5: Efficient development of Brazilian oilfields

In mid-June 2012, Brazil’s national oil of 30 percent) has continued with dozens company, Petrobras, announced a new oil of similar discoveries leading to current discovery more than a hundred miles off proven reserves of 16.8 billion barrels in an the coast of Rio de Janeiro, under a mile area more than 57,000 square miles that of water and more than three miles into a is thought to contain between 50 and 110 geological formation known as the Santos billion barrels of oil.44 Basin, beneath deep layers of salt, the so- Oil and natural gas are just called ‘pre-salt’ fields, where ‘good quality one facet of Brazil’s commodities- oil’ was found. A second discovery, a hun- rich economy, which carries its own dred miles off the coastline of São Paulo significant currency risks — exchange and at similar depths of water and rock, rate appreciation, higher incomes, and a was also announced. The two discoveries squeeze in manufacturing output, employ- are part of an on-going oil bonanza that ment and net exports. It is an effect known began with the announcement in Novem- as “Dutch disease,” when revenues from ber, 2007, of the discovery of the Tupi field, natural resources like oil, gas or other com- five miles below the sea level containing modities make a given currency stronger five to eight billion barrels of high com- mercial value light oil, sweet crude. At the 44 Susana Moreira, “Dilma Rousseff and Brazil’s Oil Sector,” Council of the Americas, March, 2011, Executive Summary, time it was the biggest discovery of oil in pg 9, http://www.as-coa.org/articles/3093/Issue_Brief:_Dilma_ the Americas since 1976, and the good Rousseff_and_Brazils_Oil_Sector/ and “Brazil Local Content Policy Inhibits Oil Development,” July 18, 2012, Dow Jones luck (the region’s drilling success rate is 85 Newswires, http://www.foxbusiness.com/news/2012/07/18/ brazil-local-content-policy-inhibits-oil-development/ percent, compared to the industry average print#ixzz21l0KWZR2.

Pre-salt proven reserves are estimated at 16.8 billion barrels in an area more than 57,000 square miles that is thought to contain between 50 and 110 billion barrels of oil.

PwC | Gridlines | 16 compared to that of other nations.45 Monetary policy aside, Brazil is (and the risks therein), on the one hand, And, in fact, Brazilian manufacturing is trying other strategies to fend off and the need to open the sector up to the still battling the effects of a strong real — Dutch disease: R & D centers are being built efficiencies and expertise of the global mar- between 2009 and 2001 Brazil’s currency from which new Brazilian technology and ketplace. It’s an issue, of course, that goes strengthened by almost 40 percent against expertise may also emerge; the Rousseff beyond the role of National Oil Companies the dollar.46 Developing the pre-salt fields, government is using its purchasing power (NOCs) to ask, in effect, how much room according to economist Kenneth Rogoff of to help some manufacturers, especially should be given to non-national companies Harvard University, could do more. “Oil,” those in the construction and infrastructure and under what circumstances. says Rogoff, “could bring the problem to a sectors; and a new sovereign wealth fund is “The worst case scenario is that local whole new level.”47 But so far, adroit moves being used to make long-term investments content requirements create a privileged, in monetary policy and other stimulus mea- in education. Then there is the mandate inefficient industry at the expense of Petro- sures by the Rousseff administration have for “local content” in the oil industry. Just bras and Brazil, says economist Adilson helped forestall some of this, and the real, as a rising tide lifts all boats, it’s hoped Oliveira of the Federal University of Rio de which traded near 1.70 to the dollar earlier that local content rules will harness the oil Janeiro. “But that doesn’t have to be the in the year, has now weakened to just over industry’s growth — projected from about case.”51 There’s a difference, according to 2.00 per dollar.48 10 per cent of GDP to up to 25 per cent in Oliveira, between local content policies that help local companies compete with in- ternational companies and policies that are simply protectionist. That difference can be seen in the way that Brazil is investing Brazil is walking a fine line between the exercise of in worker training programs and providing monopoly interest in oil and gas development and the 75,000 scholarships over the next ten years for Brazilians to study abroad through the need to open the sector up to the efficiencies and expertise Science Without Borders program.52 of the global marketplace. Initiatives like this, according to Harvard’s Kenneth Rogoff, manifest the long view of Brazilian economy and are the best way to move forward.53 the coming decades — and help lift some of the Brazilian economy along with it.49 45“Managing the resource boom,” Mourougane, Annabelle. Organization for Economic Cooperation and Development. The But there are challenges. For starters, OECD Observer 287 (Fourth Quarter 2011): 34-35. 46 “Brazil, Platform for growth,” Joe Leahy, The Financial according to the Brazilian fuels regulatory Times, March 15, 2011, http://www.ft.com/intl/cms/s/0/ agency chief Magda Chambriard, Brazil fa11320c-4f48-11e0-9038-00144feab49a.html#axzz1yutYABcf needs to invest $ 400 billion into its 47 “Brazil, Platform for growth,” Joe Leahy, The Financial Times, March 15, 2011, http://www.ft.com/intl/cms/s/0/ oil and gas industry in order to meet its fa11320c-4f48-11e0-9038-00144feab49a.html#axzz1yutYABcf production goals by 2020, a huge sum 48 “Update 1-Brazilian stimulus should bear fruit,” Reuters, July 4, 2012, http://www.reuters.com/article/2012/07/04/ that will require significant foreign invest- brazil-mantega-economy-idUSL2E8I41XX20120704 50 ment. Those investments, however, are 49 “Brazil, Platform for growth,” Joe Leahy, The Financial also being delayed by Brazil’s local content Times, March 15, 2011, http://www.ft.com/intl/cms/s/0/ fa11320c-4f48-11e0-9038-00144feab49a.html#axzz1yutYABcf laws. Local skilled labor and technology in 50 “All eyes on Brazil’s oil,” Global Post, June 25, 2012, http:// high-tech deep water oil is scarce. And this www.globalpost.com/dispatch/news/regions/americas/bra- has brought about delays in the develop- zil/120621/all-eyes-brazils-oil 51 “Brazil Local Content Policy Inhibits Oil Development,” ment of the pre-salt fields, including an Dow Jones Newswires, July 18, 2012, http://www.foxbusiness. expensive delay in the construction of com/news/2012/07/18/brazil-local-content-policy-inhibits-oil- development/print#ixzz21l0KWZR2 a refinery. In the on-going debate about 52 “Brazil Local Content Policy Inhibits Oil Development,” the development of the country’s rich oil Dow Jones Newswires, July 18, 2012, http://www.foxbusiness. com/news/2012/07/18/brazil-local-content-policy-inhibits-oil- and gas reserves, Brazil is walking a fine development/print#ixzz21l0KWZR2 line between the exercise of monopoly 53 “Brazil, Platform for growth,” Joe Leahy, The Financial interest in oil and gas development Times, March 15, 2011, http://www.ft.com/intl/cms/s/0/ fa11320c-4f48-11e0-9038-00144feab49a.html#axzz1yutYABcf

17 | Gridlines | PwC 6

Solution #6: The anti-corruption campaign in Brazil

The effects of a too complex bureaucratic apparatus are Non-reported economic activity has decreased from harmful, especially for infrastructure, a sector that is sensitive to bureaucratic 21 percent of GDP in 2003 to 16.8 percent of GDP in 2011. slowdowns. Complex and inefficient bureaucracy creates delays in construc- tion, for instance, and that, according to Paulo Resende, creates the environment for corruption. “The more complex and the less transparent the bureaucracy, the more corruption you’ll have.” The good news is that Brazil has assumed a leadership role in anti-corruption best-practices. President Rousseff’s zero tolerance policy the arrest of the chief of staff of the State freedom of information law that obliges towards corruption has led recently to of São Paulo and two officials from the officials to publish requests from citizens the resignation of six ministers. In July of National Water Agency and the National for information on spending. Taken last year, President Rousseff signed a new Civil Aviation Agency for, among other together, such anti-corruption initiatives anti-money laundering law with teeth to it things, allegedly falsifying documents and legal frameworks have had measure- — one which broadens police and pros- and arranging meetings between politi- able effects. According to a survey from the ecutorial powers and increases penalties.54 cians and businessmen in return for cash, Brazilian Institute for Ethical Competition, But perhaps Exhibit A of this new reform suggests that the Rousseff administration’s for instance, anti-corruption measures have movement could be the “mensalão” trials commitment to anti-corruption remains 56 54 “New Anti-Money Laundering Law in Brazil,” Rio Times, which in October found ten politicians and undiminished. Matthew Taylor, an expert July 10, 2012, http://riotimesonline.com/brazil-news/front- members of the business community guilty on Brazil at American University’s School page/new-anti-money-laundering-law-signed/ of International Service in Washington, 55 “Guilty Verdicts for Forming the Mensalão,” The Rio Times, of a “cash-for-votes” scheme and which Oct 23, 2012, http://riotimesonline.com/brazil-news/front- was widely viewed as the biggest and most suggested that the mensalão conviction page/guilty-verdicts-for-forming-mensalão-scheme-in-brazil/ significant criminal trial in the history was a watershed moment for Rousseff and 56 “Operation Safe Harbor Shows Details of the Finances of Gang,” Lara Walace, Journal Da Globo, 11-30-12, http:// 55 of Brazilian politics. for Brazil. “Progress is being made,” said g1.globo.com/jornal-da-globo/noticia/2012/12/operacao- Taylor. “Mensalão demonstrates there is porto-seguro-aponta-detalhes-das-financas-de-quadrilha. The Supreme Court found html, and Brazil Weekly, November, 2012, http://brazil-weekly. congressional leaders, bankers and both public support for anti-corruption com/2012/11/ individuals connected to the administra- efforts and the institutional wherewithal to 57 “Brazil Supreme Court Convicts Lula Aides of Corrup- effectively combat corruption.”57 tion,” Reuters, October 9, 2012, http://www.reuters.com/ tion of Luiz Inacio Lula da Silva’s Worker’s article/2012/10/10/us-brazil-lula-idUSBRE8981ID20121010 Party (PT) guilty of buying and selling That work continues. Brazil’s votes in congress in 2005. More recently, congress in October of 2011 passed a

PwC | Gridlines | 18 helped reduce the underground economy American Corruption Survey of more than and most (75 percent) of those respon- from 21 percent of GDP in 2003 to 16.8 400 executives throughout the region. dents believe the offenders were likely to percent of GDP in 2011.58 Nearly all (88 percent) of respondents said be prosecuted.59 Changes in transparency they were aware of a Brazilian company, will not happen overnight, but appropriate The popular mood for reform in Brazil and individual, or government official being measures are clearly trending in the Latin America is reflected, moreover, in prosecuted for making or receiving an right direction. a growing awareness of bribery laws and improper payment, gift or other benefit, prosecutions, according to the 2012 Latin

58 Non-reported economic activity, as a percentage of GDP, 59 The survey also reveals the on-going challenge: only 17 compared to Chile where about 1 percent of respondents decreased since 2003, the date of the first survey, when it rep- percent of respondents think that anti-corruption laws are say that corruption is significant, about 19 percent say it is resented about 21 percent of GDP ($R 357.3 billion). In 2010, effective in Brazil, compared to Chile (76 percent), Costa occasionally an obstacle, and 80 percent say that corruption it was 17.7 percent of GDP ($R 668.6 billion). In 2011, the Rica (50 percent), United States (70 percent), Uruguay (57 is not a significant obstacle to business. Overall, “Seventy- amount decreased to 16.8 percent of GDP ($R 695.7 billion). percent) and Mexico, (16 percent). Brazil ranks with Mexico, five percent of all respondents said they were aware of an “Underground Economy Index,” Getúlio Vargas Columbia, Bolivia, Argentina, Ecuador, Guatemala and offender being prosecuted in the country in which they work Foundation – FGV — and The Brazilian Institute for Ethical Venezuela as having the highest amount of governmental for making or receiving illicit payments, up from 69% in 2008,” Competition – ETCO, July 4, 2012, http://www.etco.org.br/ corruption. Nearly a third of respondents say that corruption FCPA Americas, http://mattesonellislaw.com/fcpamericas/ user_file/Economia_Subterranea_Junho-2011.pdf in Brazil is a significant obstacle for business, while more growing-awareness-of-anti-corruption-laws-in-latin-america- than half said that corruption is an occasional obstacle, the-fcpa-compliance-officers-job-might-be-getting-a-bit-easier

“The mensalão conviction demonstrates there is both public support for anti-corruption efforts and the institutional wherewithal to effectively combat the corruption.”

19 | Gridlines | PwC 7

Solution #7: Simplifying the tax structure

The tax burden in Brazil (36.02 percent GDP amounts to a systemic embed- Many corporate taxes are percent in 2011) is greater than dedness or dependency upon tax proceeds developed countries such as Japan, the that will be very hard to change, and yet, being shifted, delayed, United States, and Canada.60 One-third of according to Amaral, there are many sorts lowered or forgiven to Brazil’s gross domestic product, in other of corporate taxes that are being shifted, incentivize long-term words, is made up of taxes. The complexity delayed, lowered or forgiven to incentivize of the tax structure, moreover, creates an long-term infrastructure construction.64 infrastructure construction. overwhelming impetus for underground, One is the Special Incentives for the Devel- “off book” economic activity, which still opment of Infrastructure (REIDI), which comes in at just under 17 percent GDP, suspends several taxes for five years on and onerous disincentives for companies companies that rent machinery and other trying to do business “by the book.”61 Yet equipment used in infrastructure. the climate for reforming these challenges Another program, REPORTO, creates tax has never been better, according to Carlos abatements and other incentives for port Langoni, director of the World Economy operators who purchase equipment to Center of the FGV Foundation. “The Brazil- improve shipping and handle port cargo. ian electorate wants reform,” says Langoni, And the Infrastructure Debenture Program “and the country’s president, Dilma Rous- offers companies relief from several of the seff, who is leading such reforms, is very taxes imposed on corporate profits over a popular as a result.”62 four-year horizon. These are just the first of Short-to-medium term reforms many incremental steps that should be tak- that will help reduce corruption and help en in order to truly “shift the tax structure jumpstart outside private investment in away from regressive taxes on consumption infrastructure include streamlining and and toward progressive taxes on income simplifying Brazil’s tax structure. In addi- and wealth,” says Amaral.65 tion to regulatory complexity, especially at the municipal level, the country’s complex 60 Current (2011) tax burden figures are from the Brazilian Institute for Tax Planning (IBPT); Other country data (from tax structure is one of the most frequently 2008) from Pereira, Carlos, “Tax Policy in Brazil: The Reform that Never Was,” The Brookings Institution, September 8, cited barriers to doing business in Brazil. 2010, http://www.brookings.edu/opinions/2010/0908_tax_pol- “The current tax system contains exces- icy_pereira.aspx. sive obligations and a burden of multiple 61 Selvanayagam, Ruban, “High Taxes and Exces- sive Red Tape Fuel Brazil’s Thriving Underground taxation with a cascading effect that Economy,” September 5, 2010, htt;://www.brazzil.com/ articles/224-september-2010/104-high-taxes-and-excessive- makes local and foreign companies less red-tape-fuel-brazils-thriving-underground-economy.html and less interested in making productive 62 Professor Carlos Langoni, speaking at the Brazilian- investments in Brazil,” says Leticia M. F. American Chamber of Commerce/ FGV Projetos event: “World Economy Scenarios: Implications for Brazil,” University Club, do Amaral, vice-president of the Brazil- New York City. May 15, 2012. ian Institute for Tax Planning and partner 63 Interview, Leticia M. do Amaral, August 21, 2012. at Amaral & Associates, a tax law firm.63 64 Brazilian Institute for Tax Planning, Leticia M.F. do Amaral, Indeed, Brazil’s overall tax burden of 36 Amaral & Associates, email correspondence, June 11, 2012. 65 Interview, Leticia M. do Amaral, August 21, 2012.

PwC | Gridlines | 20 8

Solution #8: Private investment and financing

The sheer scale of the infrastructure Abal. “The financing authorities are very other features, have strong tax incentives. investment needed in Brazil between business friendly,” says Abal. “When the Other instruments like the “letras finacei- 2010 and 2013 — a whopping $639 bil- public sector is not on board, delays occur ras” and the BNDES-sponsored Liquidity lion — will require participation by the in infrastructure construction — but this Enhancement Fund are designed to provide private sector, according to Patricio Abal, is not the case in Brazil. The private sector “a safe environment for individuals and editor of Latin Infrastructure Quarterly.66 invested $2.5 billion in container terminals foreign investors, increasing trading “Long term private sector investment is alone, and promises to invest another $5 volumes for corporate debt, especially in needed both because of the size of the billion until 2015, according to Multiter- the secondary market,” says Abal. There is, investments required but also to provide a minais and Santos Brazil’s Richard Klein. moreover, a mature environment for PPP balance between private and public sector Indeed, Brazil is showing other countries and concessions contracts, according to investment, the hallmark of a healthy, in the region a leadership role in terms of Cesar Pereira, partner at Justen, Pereira, sustainable economy. And when it comes financing its infrastructure.” Abal points Oliveira & Talamini.67 “Especially in road to fostering private sector investment in to Infrastructure Debentures (IDs), “the concessions,” says Periera, “there is a high infrastructure — how private and public first type of securities in Brazil designed degree of comfort for the participation of sectors are working together — Brazil specifically to raise long-term private funds Brazilian companies and foreign companies is clearly leading the way,” according to for infrastructure projects,” which, among — and the new airport concessions that are

“Pension funds and infrastructure investment represent a strategic alignment between a country’s national needs for growth and the fiduciary interests of voluntary pension funds to optimize long-term portfolio planning.”

Construction continues apace on stadiums for the World Cup.

21 | Gridlines | PwC Despite gloomy economic reports elsewhere, foreign direct investment in Brazil rose last year

$7.7 billion FDI investment in October was estimated to exceed $63 billion in 2012 the product of agreements between consor- tia of domestic and foreign partners also $5.8 billion demonstrates this.” in June Mechanisms vary for boosting pri- vate investment, but many have been paying attention to harnessing voluntary pension funds to help finance infrastruc- $3.7 billion ture projects. It’s an idea born in England in May during the 1980s, under the government of Margaret Thatcher, according to David Tuesta, chief economist for the pension’s unit at BBVA Research, and the practice has matured and spread elsewhere in the UK and in Australia. “Pension funds and infra- Source: Agencia Brasil (http://agenciabrasil.ebc.com.br/) structure investment represent a strategic alignment between a country’s national needs for growth, which are facilitated by than most standard PPP contracts, which Hardly a week passes without a improved infrastructure, and the fiduciary remain between 4 and 5 percent. Although new report indicating Brazil’s interests of voluntary pension funds to opti- the practice is still in the nascent stages in commitment to private investment, mize long-term portfolio planning.” Brazil — Tuesta estimates that in 2010 pen- to the government’s continued commit- By diversifying their portfolios in areas sion funds in Brazil invested roughly $62 ment to fund infrastructure investment, that have a direct connection to public billion in infrastructure projects — more or to the private market’s continued, works, Tuesta adds, “the needs of social pension fund participation is expected, long-term faith in the Brazilian economy. development are matched and facilitated especially when combined with the attrac- Foreign direct investment (FDI) came in by the financial needs and objectives of tions of the new infrastructure debentures just under $60 billion from January to the funds.” The risk profile for pension program. In fact, Moody’s projects that lo- November of 2012 and was projected by the fund investment in infrastructure, accord- cal pension funds and private investors will central bank to reach $63 billion by year’s ing to Tuesta, is competitive with those of invest R$ 124 billion, potentially financing end. While less than the record high $66.7 stocks and bonds, offering expected rates up to 42 percent of Brazilian infrastructure billion in 2011, FDI inflow for Brazil still 69 of return of 9.3 percent, significantly higher needs from 2012 until 2014.68 remains impressive. Business Monitor

66 “Brazilian Fostering of Private Financing of Infrastructure 69 According to the Central Bank in December, 2012, China’s foreign direct investment for the same period was Projects,” Ricardo Somoes Russo, Enrico Bentivegna, Joao FDI should reach $63 billion for the year. From January $47.1 billion. “China January-May FDI down, but May a Fernando A. Nascimento, Latin Infrastructure Quarterly, No 4, through November, net FDI inflow reached $59.9 billion. bright spot,” Reuters – Fri 15 Jun, 2012, http://in.news. June, 2012, pg 18, http://www.liquarterly.com/issue4.pdf. In November, 2012, Brazil saw $4.6 billion worth of FDI. “Cen- yahoo.com/china-january-may-fdi-down-may-bright-spot- tral Bank Revises FDI Forecast Up,” Brazil-Arab News Agency, 111528664--business.html 67 Gridlines Interview, Cesar Pereira, October 19, 2012 December 18, 2012, http://www2.anba.com.br/noticia_finan- 68 “Brazil’s new infrastructure debentures are credit positive cas.kmf?cod=19452383 for the sector,” Moody’s August 13, 2012.

PwC | Gridlines | 22 International’s downgrading of Brazil’s tion and overcome the difficulties of the 70 Brazil Business Forecast Report, October 29, 2012, http:// 2012 GDP growth forecast to 1.8 in October international scenario.”72 These stimulus store.businessmonitor.com/brazil-business-forecast-report. html, As of January 11th, 2013, a weekly survey of economists was offset by its forecast for Brazil’s average measures, combined with interest rate cuts, conducted by the central bank forecast GDP growth at 3.26 real GDP growth of 3.6 percent between will likely lead to a better second half of percent, Brazil Weekly, January 11, 2013, Brazilweekly.com. 70 71 “What Next for Two-Speed Brazil?” Jonathan Wheatley, 2012 and 2017. The private equity group 2012, according to central bank president Financial Times blog, June 25, 2012. 73 Kohlberg Kravis Roberts and Russia’s big- Alexandre Tombini. 72 “PAC Equipamentos,” June 27, 2012, http://www.fazenda. gest investment bank, VTB Capital, have gov.br/portugues/documentos/2012/Medidas%20JUN%20 All of this is very encouraging 2012%20v13.pdf, found in “Brazil’s Answer: Spend, Spend, both entered into investment agreements Spend,” Jonathan Wheatley, “Beyond Brics,” Financial according to Abal and others, despite the with Brazilian banks, and PepsiCo has re- Times blog, June 27, 2012, http://blogs.ft.com/beyond- current economic slowdown, which, as brics/2012/06/27/brazils-answer-spend-spend-spend/. newed investment in Brazil’s northeast.71 In recent reports of a slight jump in economic 73“Update 3-Brazil economy to rebound, inflation no threat- June, the Brazilian government announced cenbanker,” Reuters, July 23, 2012, http://www.reuters.com/ growth for June seem to suggest, may article/2012/07/23/brazil-economy-cenbank-idUSL2E8IN- “PAC Equipamentos,” a R$ 8.4 billion (US$ be finally leveling off.74 Abal and others 8HI20120723 4.19 billion) addition to the PAC II acceler- 74 “Indicators. . . are pointing to an improvement in June, count Brazil’s performance a success, one ated growth initiative. PAC Equipamentos which means that gross domestic product could grow around that benefits the whole region. “Private 0.5 percent in the second quarter,” according to Santander essentially targets specific industries in analysts. “Update 2 — Brazil’s economy stalls, but tops Brazilian infrastructure companies are forecasts in May,” Reuters, July 12, 2012, http://www.reuters. Brazil to procure, among other things, developing projects across the region. com/article/2012/07/12/brazil-economy-activity-idUSL2E8I- 8,000 trucks, 8,500 buses, 3,000 tractors, C1U520120712 Even in the most volatile of markets — along with subway cars, cranes and earth- Argentina, Bolivia, Venezuela — Brazilian moving equipment, and 3 million desks infrastructure companies are there,” says and chairs for schools — all of it, according Abal, “so Brazil’s success will continue to to a government announcement, designed create a ‘waterfall effect’ for everyone.” to “strengthen Brazil’s [economic] condi-

“Brazil’s success will continue to create a ‘waterfall effect’ for everyone.”

23 | Gridlines | PwC To discuss the issues

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Contributors Strategic direction Marketing + outreach Editor Richard Abadie Lee Ann Ritzman William Sand Tony Poulter Jenni Chance Design Peter Raymond Becky Weaver Odgis + Company Writer Janet Odgis Mark Svenvold Rhian Swierat

Photography: Cover: Nacho Doce / Reuters