After the road to Rio - where now for infrastructure in Brazil?

With the Rio Olympics just days away, Adam Patterson reports from Brazil on the latest trends and key drivers in the Brazilian infrastructure market. 

Adam Patterson
26 July 2016

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Infrastructure investment plays a key role in the Olympic Games, the host city and the quest for sustainable urban legacies. And so, as the greatest - and most expensive - sporting event in the world gets ready to kick off in Rio de Janeiro next month and the world’s attention turns to Brazil, the Olympics can be used as a lens to map current trends and key drivers in the Brazilian infrastructure market. 

When the country bid for the games in 2008, it was a different economic reality. At the height of BRIC-mania, the country was being awarded investment grade rating (since removed) and GDP was growing at an average real rate of 4% (hitting 7.5% in 2010). The Olympics - and 2014’s World Cup - seemed like an ideal way of solving the country's historic infrastructure gap - currently estimated at $52bn a year, against total investment of $40bn - and showcase its economic development. 

Now, almost a decade later, costs have escalated and the country is facing its worst economic (and political) crisis for decades with negative growth and a lack of funds to cover investment requirements. At a total cost of almost $12bn (at current exchange rates), including investment of $2.1bn in stadiums and $7.6bn in legacy infrastructure, the Rio Games although 30% more expensive than the 2014 World Cup are less than two thirds of the expenditure of London 2012 (if converted to US dollars). 

However, with the state government of Rio recently declaring a state of “financial emergency”, concerns have been raised about not only delivering the Olympic infrastructure on time but also about broader priorities for construction investment in the country - the seventh largest economy in the world - going forward beyond the Games. 

This was not meant to be the script. The (previous) government’s large scale and ambitious growth acceleration program (PAC em Portuguese) in its two phases had forecast infrastructure investment of around $750bn between 2007 and 2015 with key focus on the housing, transport and energy sectors. 

Nonetheless, by 2015 a large amount of these projects had not been completed whilst the total economic impact of the program has also been questioned. With the country entering a recession last year (when GDP contracted by 4%) the construction industry was heavily hit, with total activity falling by almost 8% with a further downtick of up to 4% expected throughout 2016 as tenders are delayed, the cost of capital remains elevated and a government committed to shoring up the country’s finances pulls back public investment. 

Overall then, the sector remains in a state of flux, and still recovering from widespread industry corruption charges being investigated under operation “Car Wash”. The launch of a recent $120bn programme focused on leveraging private sector logistics investment therefore presents a key test for both national and international confidence in the sector, and Brazil in general. The first concessions in rail and airport are set to be launched this year. 

Without major structural changes, Brazil's construction industry should continue to underperform below long-term potential. Analysts expect growth to average between 1.8% between 2017 and 2025 (BMI Research) with potential downside risk led by a cyclical post-Olympic investment downturn, a rollback in the public residential building programme and broader aggregate demand constraints.  

Brazil was ranked 76 out of 144 countries in the Global Competitiveness Report 2014/2015 and only invests around 2% of GDP in infrastructure, almost half of the global average. There is then a lot of built up demand for investment in productive capacity. 

Indeed, a key priority for the new government is to attract international private investment to help fund, operate and maintain local infrastructure assets (ports, roads and airports), via privatisations, PPP’s and concessions (for instance the program “Crescer”) to stimulate growth, increase industrial productivity and reduce extensive transport bottlenecks as well as the famous “custo do Brasil”. 

The Rio Games are only days away, but Brazil´s infrastructure sector should continue in focus for much longer. 

Adam Patterson is an economist with a key focus on the UK and global infrastructure sectors, having previously worked for the Association for Consultancy and Engineering. He currently lives in Brazil where he is a partner in a corporate finance and capital budgeting practice and is a founder of financial technology start-up, ALFA Valuation.