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Brazil’s Infrastructure Challenge

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The most problematic areas are the quality of port infrastructure, roads and air transport infrastructure.


CHRONICLE SPECIAL

 

EDITOR’S NOTE: The World Economic Forum today released Global Competitiveness Report 2010-2011. Here is a subchapter in the report on Brazil’s infrastructure.

 

The Global Competitiveness Index highlights the key importance of well-developed and efficient infrastructure networks for countries’ long-term growth, placing infrastructure among the basic requirements of competitiveness. The quality of infrastructure appears to be a shared concern for Latin America and the Caribbean, with few exceptions. Public investment in infrastructure was the main victim of the stabilization programs implemented in the 1990s in most countries, because cutting this type of investment spending proved easier than cutting current expenditures to cover salaries and pensions, among others: according to the World Bank, public investment in infrastructure in the region fell from 3 percent of GDP in 1988 to 1 percent of GDP in 1998.

 

The adjustment was particularly dramatic because Brazil had increased its current expenditures, and therefore needed to make even deeper cuts in long-term investment. The idea that the private sector could step in and fill the financing gap did not fully materialize. Although Latin America was the recipient of half of the $786 billion infrastructure investment in the developing world through public-private partnerships (PPP) between 1990 and 2003, the private funds did not fully compensate for the shortfalls in public investment. Furthermore, these investments were concentrated in a few selected countries (Argentina, Brazil, Chile, Colombia, Peru, and Mexico) and sectors (telecommunications, energy, and transport).

 

As a consequence, infrastructure development in the region has lagged behind that of the East Asian tigers or even China over the last two decades, with severe implications in terms of economic growth and poverty reduction.  (…)

 

The rather large gap between the regional average (3.75) and top-ranked Hong Kong (6.77) or Korea (5.59, ranked 18th) confirms the magnitude of the challenge facing Latin America and the Caribbean in upgrading regional infrastructure to international best standards.

 

BRAZIL: HIGHER COSTS


This challenge is particularly relevant for large emerging markets such as
Brazil, which are increasingly playing a key role in the global economy and for which poor infrastructure quality results in higher logistics costs and inefficient patterns of interregional and international trade. (…)

Although the country has improved eight places since 2008 for the overall quality of its infrastructure, it still ranks a middling 62nd in this pillar, with a similar showing for its transport (67th) and electricity and telephony infrastructure (65th).

The most problematic areas, as highlighted by the
GCI, are the quality of port infrastructure (123rd), roads (105th), air transport infrastructure (93rd), and, to a lesser extent, railroad infrastructure (87th) and mobile telephony (76th).

 

This assessment reflects the appalling state of transport infrastructure in the country, its underdeveloped railroads, the unexploited potential of its 48,000 kilometers of navigable waterways, its congested ports and airports, and its costly and underdeveloped telephone infrastructure

 

MORE AWARENESS

 

Experiences over the past decade or so, such as the energy blackout of 2001, have raised awareness among both the public and the government of the importance of quality infrastructure for competitiveness, trade, and balanced development across Brazilian states. It was estimated that investment in infrastructure needed to reach 5 percent of GDP to keep it from becoming a bottleneck for the country’s capacity to achieve sustained growth rates going into the future.


Upgrading infrastructure has been a key element of the Lula administration’s ambitious Growth Acceleration Program (PAC), launched in 2007, earmarking a total of R$504 billion in investment for the 2007–10 period, distributed as follows: R$171 billion for social infrastructure, R$275 billion for energy-related projects, and R$58 billion for logistics.

PAC was conceived as an integrated approach to infrastructure improvement, aimed at increasing the coverage and quality of infrastructure networks together with better access to water, sanitation, housing, electricity, transport, and energy.

 

Yet, three years after the launch of PAC, fewer than half of its targets have been met, with much of the financing going to housing (notably to first-time home owners) rather than to the improvement of physical infrastructure.

LIMITED PRIVATE INVESTMENT

What is more, private investment in physical infrastructure has been limited and has failed to make up for scarce public resources and attention. Although PAC has been a significant step in the right direction, it has been said that better coordination of responsibilities among federal and state authorities is necessary to achieve higher investment in infrastructure.

Greater private investment in infrastructure should also be promoted in
Brazil, notably through friendlier and more predictable regulations, risk-mitigation mechanisms, and protected returns on investment. The Infrastructure Private Investment Attractiveness Index (IPIAI), developed by the World Economic Forum in 2007 and benchmarking 12 Latin American economies for their friendliness to private investment in infrastructure, ranked Brazil 2nd in the sample. Among Brazil’s notable competitive advantages underscored by the IPIAI in this regard were: a very low political risk, with little unrest or expropriation risk; a fairly well developed local capital market; a fairly good track record in private investment in infrastructure, with few projects cancelled or in distress; and a relatively high level of private investment in infrastructure projects over the 1994–2005 period (2.2 percent of GDP). (…)

This bodes well for the country’s capacity to increasingly involve the private sector in financing and managing infrastructure networks, thus complementing public funding and ensuring that infrastructure can truly support Brazil’s competitiveness in the years to come. Brazil’s experience in infrastructure development is an example of the challenges countries can face in enhancing this critical competitiveness driver.  

 

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