Finance & economics | Infrastructure in Brazil

Not many aboard

The sale of transport concessions is unlikely to pep up the economy

Not really the way forward
|São Paulo

WITH Brazil’s economy set to shrink by 1.5% this year, and Brazilian bosses more concerned with survival than expansion, Dilma Rousseff, the country’s president, is keen to drum up foreign investment. “I have turned into something of a travelling saleswoman,” she said recently, between trips to the United States and Italy. She is peddling concessions to upgrade and run important bits of infrastructure, including airports, ports, railways and roads. Ms Rousseff hopes to attract 198 billion reais ($69 billion) in total, including 70 billion reais before she leaves office in 2018.

Brazil’s infrastructure is scant and shabby. The World Economic Forum ranks it 120th out of 144 countries for overall quality. Roads and airports are especially ramshackle. The rail network is barely one-eighth as big as that of the United States, a country of comparable size. With a big budget deficit and high borrowing costs, the government is in no position to boost its own investments. So Ms Rousseff has set aside her left-wing instincts to court private investment.

The scepticism among moneymen, foreign and domestic alike, is palpable. Outsiders’ appetite for Brazilian assets is waning: foreign direct investment is down from $39.3 billion in the first five months of 2014 to $25.5 billion this year. That is despite a weakening currency, down by a fifth against the dollar since January, which makes Brazilian assets cheaper for foreigners. Alberto Ramos of Goldman Sachs, an investment bank, expects just $55 billion for the whole of this year, little more than half last year’s tally.

Overall investment in the economy has been falling for seven straight quarters. It amounts to just 19.7% of GDP, well below the level in other big emerging economies. Carlos Rocca of Ibmec, a business school, has found that between 2010 and 2014 non-financial firms’ profits collapsed from around 5.4% of GDP to just 1.4%, weighed down chiefly by rising labour costs. Add the growth-sapping effect of higher taxes and slashed public spending—needed to balance the budget and fend off a painful ratings downgrade—and “it is hard to see how investments are going to pick up”, says Daniel Leichsenring of Verde, a hedge fund in São Paulo.

The last time the government sought to lure the private sector with concessions, in 2012, it attracted one-fifth of the hoped-for 210 billion reais, and only after Ms Rousseff gave up trying to micromanage rates of return. Worse, the most alluring opportunities, such as running the international airports in São Paulo and Rio de Janeiro, were sold off then.

The government should have little trouble finding buyers for motorways and airports in mid-sized cities. Most of these are already built and generating cash, but need to be expanded and run more efficiently. After nearly two years of deliberations, the national comptroller, an accountability watchdog, has finally approved the sale of cargo terminals in state-owned ports. The first auctions are expected this year.

Waxing and waning: Brazil's economic woes, in charts

But as before, half the hoped-for investment is in railways. The plans look suspect—especially a 40-billion-reais scheme to link Brazil to the Pacific via Peru, to be financed partly with Chinese money. It does not help that many big Brazilian construction firms are part of conglomerates mired in a corruption scandal surrounding Petrobras, the state-controlled oil giant.

Moreover, better infrastructure is no panacea for Brazil. As Dani Rodrik of Harvard University points out, a country where services make up more than 70% of GDP should not count on as big a boost to growth from improved transport as more industrialised places. To increase flagging productivity and promote future growth, Brazil needs better schools, simpler taxes, and less red tape, not just more roads. Ms Rousseff has not tackled any of these. Until she does, Brazil will remain a tough sell—both at home and abroad.

This article appeared in the Finance & economics section of the print edition under the headline "Not many aboard"

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