Infrastructure, Regulation and Development: Evidence from BrazilEdmund Amann & ThomasTrebat (Leiden University) (Columbia University)

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Infrastructure: at the heart of Brazil’s current problem (and solution)

•A legacy of under-investment in infrastructure creates capacity constraints•Poor and expensive to access infrastructure a source of social unrest •Disturbances in mid 2013 and early 2014•A barrier to exports and export diversification, perhaps particularly in agriculture

A long-term decline in infrastructure investment

Infrastructure spending: a long term decline

Source: Morgan Stanley 2010

Infra and Growth: Econometric Results•We examined state-level public spending on three items of infrastructure (communications, energy and transportation)•Luminosity data was considered as an alternative to national accounts at the sub-national level•Spending on communications yielded a high effect on GDP and GDP per capita growth rates•Spending on energy infrastructure reported the lowest effect •Spending on transportation reports the highest coefficient, which we identify as the driver of the general result. The estimated coefficient is 10.3% for GDP growth and 6.6% for GDP per capita

Infrastructure and social unrest

Brazil Infra in Perspective

A snapshot of the issues: highways•World’s 4th largest road network •Of 1.75 million kilometers of highways, only 18% are paved •60% of Brazil’s freight moves by road. •Relatively little set aside for highway maintenance•The South and South East are comparatively well served with divided multilane paved highways, •The same is not true in some of the less developed regions of the country, notably the North, the North East and the Centre West. •Transportation costs are notoriously high in Brazil

A snapshot of the issues: railways•The railway network is substantially smaller than that for paved roads in Brazil•Unlike in China and India for example – rail transportation is almost exclusively the preserve of freight, of which iron ore is 79% of total rail cargo). •The Brazilian rail network possesses significant narrow gauge as well as standard gauge element. Such a feature poses a major challenge to network inter-operability. •Unlike in Europe, or even the USA, no meaningful steps were taken to provide a publicly subsidized long distance service. •Partly as a result, today’s highway and airport infrastructure has come under acute pressure, especially in the heavily trafficked corridors

The Growth Acceleration Program (PAC)

Policy response: the Growth Acceleration Programme (PAC)

•The PAC was divided into two phases:•(PAC 1) running from 2007-10 and the second (PAC 2) from 2010 to 2014. •They consisted mainly of projects to increase infrastructure spending in critical, growth-sensitive areas, and also in housing•Both fell short of their targeted spending levels•Project design implementation were persistent problems

Post-PAC Initiatives under Temer

• More emphasis on PPPs• Further private sector concessions – e.g in

ports, airports, and highways• Water and sanitation as well• Renewed stress on foreign participation

•The state does not have the technical or managerial means to accomplish these projects by itself•Two models; the Public Private Partnership (PPP) and the longer-established model of concession contracts. •In the Brazilian context these structures – or modalities of PPP – have included Build Own-Operate, Build Operate Transfer and Build Own Operate Transfer formats. •However, PPP contracts, as established under a 2004 law, always envisage an injection of public sector resources to support the private sector’s investment activity

Policies for ramping up infrastructure spending

•Concession contracts, by contrast, under the terms of the law, require no such public funding and should be able to sustain themselves by the levying of (regulated) user charges alone•They have recently been used successfully in the airports sector •The PPP approach was pioneered in the highways sector in the 1990s and has continued to be applied in that area with 17,904 km of roads under private sector operation by late 2013, compared with 15365 km by the end of 2010 (O Globo, p.49 8.12.2013).

•In a savings constrained economy such as Brazil, need to draw in FDI to capital intense, long term projects•Regulatory arrangements thus need to strike a difficult balance:1.To set tariffs over the long term at sufficiently high levels to draw in foreign capital and to offer adequate compensation for exchange rate risk and a uncertainties about the trajectory of long run demand2.To address the social clamour for “affordable” infrastructure (especially acute in wake of protests)3.To extend the physical reach of infrastructure into disadvantaged communities whether or not through universal service provisions4.While balancing 1 through 3, not to do so on the basis that long term maintenance and upgrading are sacrificed

Regulatory issues

•The authorities have adopted a very cautious approach in running bidding competitions for PPP contracts and concessions•Presidents Lula and Rousseff, appealing to their political support base, changed the regulatory model for new highway concessions, selecting winning bidders on the basis of those able to offer the lowest tolls rather than on the basis of track record or capacity to deliver. •Correspondingly, the pace of private sector-driven upgrading of the highway network lagged behind schedule

Are regulatory issues holding back infra?

•Similarly, the need to rein in tariffs underpins at least in part, the failure of much needed additional power generation and distribution capacity to be put in place in the urbanized South and South East. •Stemming from this, power outages are by no means an infrequent occurrence in these economically critical regions. •Regulatory uncertainties and a State Oil Company (Petrobras) centric model for exploiting vast new pre-salt deposits have retarded foreign investment in the hydrocarbons sector

Regulatory issues: the role of environmental licensing

The Controversial Proposed Belo Monte Dam

•Perhaps the most glaring obstacle is the delayed issue of environmental permits by IBAMA and state-level bodies. •The delays here have largely concerned the slow operation of dispute resolution procedures•Brazil’s environmental licensing procedure involve a three stage process involving the issue of Preliminary, Installation and Operating licenses, each of which requires its own procedures and creates separate scope for the generation of disputes and appeals. •According to a recent World Bank study, no less than 15-20% of the budgets of hydroelectric projects in Brazil are accounted for by environmental licensing costs

Are environmental regulatory issues holding back Infra?

•The private sector has been expected to fill the breach left by the public sector•Base real interest rates have been maintained at among the highest levels in the emerging market world as part of the authorities’ counter inflationary strategy•The BNDES has played a very active role in supporting the provision of infrastructural provision through the extension of long term credit. •Foreign investors have, and will continue to play an important role.

Financing issues

•The role of technical capacity should not be underestimated •Brazil possesses world class technical expertise and home grown infrastructure project specialist multinationals such as Odebrecht and Camargo Corrêa. •However, a legacy of under-investment in human means that this expertise is now very thinly spread.•In the absence of increased foreign participation in Brazil’s infrastructural investment, these constraints will continue to bite in the short and medium term.

Infrastructural investment and technical capacity

• The multifaceted corruption probe surrounding Lava Jato has impacted on several of Brazil’s largest infra contractors (Odebrecht being an outstanding case)

• Scandal likely to impact on capacity of major contractors given senior management under investigation

• Will subject future contracts to much closer scrutiny• Corruption and diversion of resources will have impacted

adversely on projects in the past as is becoming clear. Would be a good focal point for future papers.

Lava Jato and Corruption

Learning from the Brazilian experience

•Infrastructure is vital for growth, competitiveness and trade. Under investment can severely retard progress•Increasingly in aspirational emerging market societies, access to good quality affordable infrastructural services is an issue of real political salience •Addressing a legacy of decades of under-investment is a huge challenge•The role of the foreign private sector is key given fiscal constraints and thin domestic capital markets•There will be regulatory conflicts between the need to incentivize investment and the need to address social objectives

Learning from the Brazilian experience

•Effective regulation is not just about balancing the interests of investors and consumers; it is about ensuring predictability of the de facto regulatory arrangements and rapidity in decision making•Efforts to ramp up infrastructural spending need to take account of the availability of domestic technical capacity. This can be spread very thinly once projects begin to multiply•The role of corruption is significant and requires addressing

Learning from the Brazilian experience (cont.)

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