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Brazil’s PAC 2: Energy Benefits

Although Brazil's PAC II was launched to coincide with presidential elections, it will benefit the energy sector, experts say.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue  

Brazilian President Luiz Inácio Lula da Silva recently announced an $886 billion second phase of the country's Growth Acceleration Plan, called PAC II, which will include $612 billion in energy-sector investments. How much of that $612 billion covers projects already in the pipeline, and how much is new spending? Does the plan, which focuses largely on oil and gas projects, devote enough attention to Brazil's power sector? How did Brazil's presidential race, which officially launched this month, affect the timing of the announcement? Will the Growth Acceleration Plan continue even if Lula's party does not win in October?

Mark Langevin, director of BrazilWorks and associate researcher at the Centro Universitário de Brasília: The second phase of the Brazilian government's Growth Acceleration Plan, or PAC II, features two strategic pillars. First, PAC II plans for nearly $890 billion in spending between 2011 and 2014 of which 70 percent will be invested in the energy sector, including pre-salt hydrocarbon exploration, production and logistics, innovative hydroelectric projects aimed at developing low-impact electrical generation in the Amazon region, renewable fuels production and logistics and energy efficiency. More than $100 billion is allocated for oil and gas production while only $36.2 billion will be invested in electrical generation. However, PAC II aims at developing innovative hydroelectric 'platforms' for sustainable electrical generation in the Amazon region. This investment in power plant capacity may not satisfy rising demand, but it could lead to significant innovations in the way Brazil harnesses the water resources of the Amazon for power. The second pillar of PAC II features a well-defined political project that budgets the remaining 30 percent of overall spending for a range of locally administered projects, from housing construction to sanitation. PAC II seeks to reproduce President Lula's winning electoral coalition on behalf of the government's presidential candidate Dilma Rousseff, who was Lula's chief of staff and chair of Petrobras' board of directors. The announcement of the PAC II in late March allowed Minister Rousseff to take public credit for its development and planning, cementing her electoral strategy of continuing Lula's legacy for the duration of this massive government investment program. Moreover, as she hits the campaign trail, the government will be negotiating the terms of PAC II spending with local political officials who could give Dilma a boost in the pre-election polls, a strategic advantage over her rival, José Serra. In this sense, the PAC II may prove to be the deciding factor in the presidential election in October of this year.

Claudio Frischtak, president of Inter.B Consultoria Inter-nacional de Negócios in Rio de Janeiro: The new edition of the PAC and its timing has caught most observers by surprise insofar as the original or first plan is still in the implementation phase, and by and large it is an open question how effective it has been as an investment planning and programming device. Arguably, it has become a positive focal point for government efforts—in policy, regulation and finance—around some major projects. In the energy sector, the two Madeira hydroelectric dams under construction epitomize its successful face, while Petrobras investments are more questionable, as they would likely have been undertaken with or without PAC. Unquestionably, the new PAC has an important political dimension, being the brainchild of the anointed candidate of President Lula, former Minister Dilma Rousseff, and launched as she was ready to leave the government and prepare her candidacy. Moreover, the plan has the obvious corollary of constraining other candidates to position themselves regarding their willingness to carry it out if elected. Who will stand in the way of a new development plan of a popular and far from lame duck president? Still, its energy chapter has a number of ideas and projects which should be taken seriously. One relevant aspect is that electricity generation revolves around renewable and so-called clean sources (nuclear and gas), leaving coal and oil out. Second, the plan places a significant and welcome emphasis on energy efficiency, with a special focus on the greening of buildings and the use of solar energy for government-sponsored or subsidized housing.

Ricardo Verdum, researcher with the Instituto de Estudos Socioeconómicos in Brasília: I wouldn't say that electoral intentions are purely driving the PAC II, but that component is strong because it sends a clear signal of the path forward to various sectors invested in these projects—contractors, financiers (public and private banks, pension funds, etc.), insurance companies, service and equipment providers, workers from different sectors and unions. Beyond that, it should be noted that the launch of the plan now is justified, given that it signals priorities for next year's budget (the Budget Guidelines Law and the Annual Budget Law) and positioning for the next Pluriannual Plan 2012-2015, which must be approved by the end of 2011. Since the majority of the PAC involves public works, some of which can take years to carry out, announcing a medium-term plan that takes into account the growing demand for natural resources and energy (associated with events like the World Cup and the Olympics, for example) needs to be well thought-out and planned beginning now. So even though it will clearly have an effect on the elections, there are more factors in play than just the October contest. I think a large part of these projects will be carried out regardless of the election result, since if the Workers' Party (PT) and its allies don't win, they will apply an intense amount of pressure for the plan to be implemented. That is, to have the PT in the opposition after eight years of sharing a pragmatic economic agenda in the region would be problematic for the new government. That aside, there is also the question of joint venture contracts that have already been signed this year or are in negotiation.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

 

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