Brazil moves towards 2014 – some current context

Economists are expecting growth of Brazil’s GDP to slow to 2.1% next year after expanding 2.5% in 2013, according to a central bank survey published in recent days. And Gol Linhas-Aereas, a major Brazilian Airline which has been forced to cut its network by 14% since 2011, expressed concerns about the unpredictability of GDP.

While the country has plenty of oil, it is deficient in refining capacity. The government has long had price controls on fuels and is under fiscal pressure to raise prices. Meantime, Petrobras has been forced to import growing volumes of fuels and refined products leading to estimated losses of well over US$10 billion because of the mismatch between import fuel costs and domestic revenue.

Nearly all major projects tend to run over budget and well over time. There are are examples such as the  new arts centre, the City of Music in Barra da Tijuca in Rio that is costing twice the $250 million budget and still incomplete. Leave aside the questions of relevance, benefit and value. As we've noted before, the budgets for the World Cup and the Olympics are far from adequate or conclusive. And more widely, the cost estimating / budgeting of major infrastructure projects leaves much to be desired. In relation to the World Cup, the cost of Brazil’s 12 World Cup stadiums has increased by US$435 million to an estimated $3.5 billion. Much is due to construction delays and cost overruns.  In 2010 the stadiums budget was set at US$2.3 billion.

Nevertheless, stop and think, for minute, while there is news-talk about the ‘favela gangs’ of young boys having returned to Rio’s beaches, delays and related problems with the World Cup venues, concerns in Rio about the over-riding of local interests and the primacy of real estate development over more socially valuable projects, there are big moves underway to further open Brazil and create an ultimately more efficient and reliable economy. Brazilian construction giant Odebrecht has been awarded a 30-year concession to operate and maintain a stretch of the BR-163 federal highway, a major road in the western state of Mato Grosso, also known as 'soy road' because of the millions of tons of grains and oilseeds that are transported annually.

Odebrecht offered a toll of $1.14 per 100 kilometres, or less than half the maximum of $2.50 per 100 kilometres established by the government. The winning bidder also pledged to invest 3.6 billion Reais (US$1.64 billion) in the 850.9-kilometre highway. The stretch of road begins at the border between the states of Mato Grosso and Mato Grosso do Sul and ends at the intersection with the MT-220 regional highway in the city of Sinop. About 20 million tons of grains and 25 million of soy are transported on the BR-163 annually, according to land transport regulator ANTT.

This was almost simultaneous with an auction last week of two major airports, in which one winning group bid nearly four times the minimum. Contracts are worth 20.8 billion Reais, that’s over US$9 billion dollars.  The concessions are in Rio de Janeiro and Belo Horizonte, both World Cup host cities, and while there is little time to make changes for the World Cup, things should be improved noticeably by the time of the Olympics.

The private sector concessionaires are a mix of local contractors and foreign airport operators.  Brazil’s conglomerate Odebrecht and Singapore's Changi Airport Group have two years to expand Rio's Galeão airport before the 2016 Olympics, while CCR SA and the operators of airports in Zurich and Munich out-bid Queiroz Galvão and Spain's Ferrovial for rights to Confins airport in Belo Horizonte.

Eric Winton

Director, New Millennium Business

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