The
reality behind Brazil’s infrastructure WONDER plans and stimulus
Brazil was again In VOGUE last week
when the government announced the new stimulus plan. Reactions were mixed: Enthusiasm and optimism
from some and skepticism and a wait and see stance from others.
The initiative is good and the plan
makes sense. Improving infra-structure is
essential for the further growth and expansion on industrial sectors. It would improve Brazil’s competitiveness and
provide great relief to exporters. However, in my opinion, these plans are
again promises that most likely will remain unfulfilled.
I don’t want to be labeled a
pessimist. I wish I could come here and be able to talk about plans that were
implemented and dutifully revised and maintained. That doesn’t happen often in
Brazil. We don’t have to look deep nor have to dig for facts to see that plans –
in the majority of cases – remains plans.
Unless there is the heavily
participation and support from the private sector (without Excessive
CORRUPTION) this time around, these plans are once again noting more than media
and PR plays to boost morale and improve/ polish the country’s image. It sounds
good, looks good, but in fact they are nothing more than drafts that remain on
the draw board. They are plans that will
never have continuity.
One needs not to look too far behind
in time to be confronted with reality and question the government’s ability to
deliver. It doesn’t take a genius: It
takes only asking serious questions regarding plans that sound great and find
out that they failed. Case in question: the AIRPORTS! In less than 12 months what
once sounded like the solution for a below par, very chaotic infrastructure and
logistic in airports has completely stalled. It has been delayed, forgotten, or
ignored. The real reason doesn’t really matter; what it matters is that the
M.O. hasn’t changed.
Ok, Let’s look at the some recent news
and articles regarding Brazil’s Airports to better evaluate the situation:
- - Lula’s
administration promised to invest 5,5 billions Reais in airports in the 12 world
cup hosting cities where there will be World Cup matches in 2014.
Untill the end of his admnistration
roughly 300 millions Reais were allocated and around 154 milllion Reais
executed.
A recent article on published by the
BBC news expressed the international community concerns. Here is an extract of
the article:
- " According to a
recent report published by Brazil's audit office (TCU), just 4% of the $3.1bn
of funding set aside for transport has been invested to date.In 2011, 179
million passengers travelled through the 67 airports run by the government
aviation body, Infraero - 108 million more than in 2003. The result has been
queues, delays, poor services and overcrowding: at São Paulo's international
airport, it can take up to two hours to pass through immigration.
Carlos
Campos, a senior researcher at the Institute for Applied Economic Research
(Ipea) in Brazil, says most of the scheduled improvements will not be ready for
the World Cup."
Eight
airports where improvements are planned in the terminals are still in the
initial phase, he says.
"That
means that the government might have to build temporary structures to meet the
additional demand."
Final dream
Costs will rise as the government spends more
to meet the deadline requirements, says Prof Rezende: "We will end up
paying a high price for hosting the World Cup."
Official reports don’t bring any
relief to the situation. It is definitely not news for travelers in Brazil, but
an official report by Brazilian IPEA reveals that 17 out of the 20 main
Brazilian airports are either on a “worrying” or “critical” situation: Maior parte dos aeroportos brasileiros está em situação
crítica, diz Ipea. The study quotes the economic growth of the last decade
and the lack of investment on the field.
The report quotes the examples of Guarulhos
international airport in São Paulo, operating at 121% of its capacity or Congonhas
domestic airport, also in São Paulo, operating at 141% (does anybody recall the
promises made after the tragic accident of Tam’s Airbus at Congonhas airport?).
The Investment Opportunity
In February the government awarded concessions to 3
investment concerns. They paid premium for the concessions and did so expecting
to yield returns from the venture. The consortia are largely Brazilian owned by
Brazilian capital, with some international participation.
At 16.2 billion reais ($9.4 billion),
it was nearly 4 billion reais more than the second-highest bid, and 12.8
billion reais above the government-specified minimum. On offer was 51% of a
public-private partnership with Infraero, Brazil's lumbering state-owned
operator. The partnership will have to pay the sum in inflation-linked
instalments over 20 years, and also give the government 10% of its turnover.
From what is left, money will have to be found for investment of more than 4.5
billion reais fixing up decrepit, overcrowded terminals. A third of that sum
must be spent before crowds of football fans arrive for the 2014 World Cup.
Controlling stakes in two more of
Infraero's 66 airports were also on offer. Viracopos, 100km from São Paulo,
needs huge investment to cope with overflow from Guarulhos, which has no room
to grow. Brasília's airport is to be expanded as a hub for domestic flights.
All told, the government pocketed 24.5 billion reais.
Some 30% of the country's air
passengers and 57% of its air cargo pass through the three airports. The firms
bidding are well aware of that and realize that if all goes with a certain
degree of normality, They should be gold mines.
Passenger numbers in Brazil have
doubled in a decade and hectic growth is expected to continue. Since Infraero
is heavily overstaffed and travellers have few opportunities to spend money,
costs can be slashed and revenues rose. With all that said, one has to wonder why they
paid such a high premium for the venture. Indeed, it leaves us normal mortals
wondering what kind of plan these consortia have in mind…
Questions that remains unanswered:
- Why companies
with more expertise in the sector where unwilling to raise bids?
- What kind of future
cash flows they expected?
- Are they planning
to create new cash flows from diversified operations within airports?
And, we should not forget that if all
else fails, they could still resort to the same old strategy of pleading Poverty
and ask for relief when plans fail and situation turns out different than expected.
It such common practice in Brazil to renegotiate terms and re-restructure
contracts and terms to find a leeway to sort out problems, that firms have the
luxury to be wrong and still come out ahead. Of course, someone will profit and
lobbyists must do their best. All in
all, nothing new here; actually, this is Business as usual.
Brazilians have learn how to Swallow – like it or not – problems including endemic corruption, red tape, insufficient funds and -- above all -- a glaring lack of leadership and know-how.
Government representatives keep on reassuring the world that all will be fine and that all is going according plans. Off Course they take the opportunity to express clearly that they might need SOME help in order to get there!. Now, that is really comforting!
I think that only fools could believe that. It is really absurd to try to convince the world that all is under control when single visits prove the contrary. By some independent estimates, fewer than half of the major projects planned nationwide will be done on time.
If Stadiums, the central focus of the world cup, are suffering from rampant delays, costs inflation and logistics problems, what could we expect from Infrastructure and facilities? Not Much! So, contrary to what we are being told, things are not going well.
Infrastructure in Brazil
Airports, Roads, Railroads in Brazil are nothing more than SHAMEFUL! It is a Disgrace! For those who doesn’t agree here are the figures:
ROADS:
6% of roads in Brazil are paved.
The Other BRICS nations have the following percentages: India 63% of roads
paved, Russia 67% and China 87%.
PORTS:
According to the Containerisation International Yearbook, average
time of permanence of containers before leaving port gives a good idea of where
we stand in terms of efficiency in Brazil.
Our largest Port in SANTOS takes 17 days handle a container while
the world average is 5 days. These are incomprehensible facts. An exporting
nation with impressive outputs suffering from outdated logistics and absurd
costs.
Cost of Handling is ranks among the most expensive in the world,
with services lagging in quality and efficiency.
ELECTRICITY:
Brazil has some the most expensive Electricity costs in the
planet. It stays only behind a few countries in developed economies: Namely
Denmark, Italy and Slovakia in developed countries. So in that ranking we rank number 4! Not bad, isn’t
it?! Jokes aside, it is astonishing the overall scenario. Electricity costs in
countries such as Germany and The Netherlands are 20% cheaper than Brazil’s
current rates.
AIRPORTS:
I guess the few paragraphs above summarized the state of affairs…No
need to elaborate any further!
RAILROADS:
The average speed of cargo trains worldwide is 55km/h. In Brazil
the speed is 20 km/h. Another problem is railroad’s coverage. In a country
where GDP has grown consistently a fractional of revenues was reinvested in
infrastructure and in the particular case of Railroads, the percentages where
dismal.
I honestly would like someone to come up with sound arguments to convince us that the situation is somewhat manageable. A country that has grown exponentially the last decade, has left its infrastructure on Shambles, to put it very mild.
Some firms have resorted to intelligent solutions to remain competitive. They have built their own ports and cargo facilities. Such infrastructure and operations are expensive; they are exceptions not the norm. The majority of firms must rely on the public services and networks and in a raw material/commodity exporting economy; they are without a shadow of doubt integral part of company’s competitiveness.
What casts shadows and doubts on the latest developments are a combination of timing and the approach.
ROAD & RAILWAY REVIVAL
This week Brazil's president Dilma Rousseff announced a $66.0 billion stimulus plan intended to revive the country's road and railway systems and to help bolster the economy. It is the fourth time that the country has tried to revive and stimulate private investments on its Road and Railway networks.
The announcement’s timing gave the impression that the government came swinging in order to reassure the world that it can deliver on commitments.
Our Economy is facing some significant adjustments. The continuous growth is receding and the pace of expansion slowing considerably. The latest economic figures reflect the reality.
GDP showed a very shy recovery (0.20%q/q in Q1 2012 and Q4 2011) after a small contraction of 0.15%q/q in Q3 2011. GDP data for the second quarter of the year has not yet been released, but high-frequency indicators are suggesting further weakness. The latest round of companies’ earnings reinforces the trend. It would be a surprise to see a very strong shift in trend. It is possible, but unlike.
The government can always try to justify and adjust as it see fit. However, the reality comes when the private sector present results and they come far below expectation. Can we blame only Europe and China for our problems? I don’t think is fair. It would not be fair to say that when things go well that we are doing fantastic and when they don’t we blame everybody else in the planet. Now, I don’t think that it is fair to put things that way.
They had to find an alternative way to finance these projects in time for the world magnitude events that will take place in Brazil. The current model is slowing considerably and with the current world economic situation, we can’t rely on revenues from export as we once did.
THE AUCTION RULES
The government announced the rules
under which it intends to auction a proposed 511 km high-speed rail link
between São Paulo and Rio de Janeiro next year.
It has tried, and failed, to find
bidders three times in the recent past. Most companies with experience in
high-speed rail say that that the current cost estimate for the line—34 billion reais ($17 billion)—is
far too low, and that ridership predictions—33m journeys in the first year of
operation rising to 100m by 2050—are out of contest. They are far too
optimistic.
The cheapest tickets will cost 200 reais
one-way and assuming that the railway intends to entice the low/middle classes
to travel, the fares are far too high for those earing low wages to effort.
Business travelers fly between
São Paulo and Rio in large numbers, and would presumably be willing
to spend the money to travel by railroad. The savings would be considerable,
the question remaining is: would they be able to sacrifice the time and accept
a Downgrade? Tickets between Rio and SP
are the most expensive in the world for city to city flights. They can reach 700 dollars when booked short
term; but with all that said, being a Brazilian, it seems hard to believe there
are enough travelers willing to make the sacrifice and generate the desired
passenger turnover.
The auction may go ahead this time,
because the government has changed the rules since the previous failed
attempts. Earlier this year it accepted that taxpayers, not contractors, would
have to bear a good chunk of the risk of cost over-runs, low demand and sharp
currency movements. For those who aren’t
very aware, current exposure hedging isn’t really a widespread practice in
Brazil; only look at the current exposure of several stock listed companies and
their quarter results to get a crash course on currency exposure in Brazil.
For the Railroads project, Brazil must
rely on international players. Simply put, Brazil has never developed a single
High Speed railway project. It known
factor in Railway projects is that they always EXCEED estimations and budgets. It happened in Korea, in Japan, Taiwan and
Europe. In many cases costs were double
the estimates. Given the challenges in Brazilian topography, one can assume
that it won’t be different here. The Mountains and Valleys between Rio and São
Paulo will be certainly a challenge to overcome and costs will exceed
forecasts.
NEW CRITERIA
On August 23rd, in order to
attract investors, it implemented new criteria in the efforts to attract the
best candidate: Those with the lowest estimates are most likely to win the
concession. This change implies, at the very least, that the government has
finally accepted that its own cost estimates are perhaps not the last word.
Also new, is the fact that Brazilian
taxpayers will have to participate on the venture. They will have to carry some
of the burden.
Most of Brazil's roads are
unpaved. Some important routes—including some interstate highways—are
single-lane and extremely dangerous. They are dark and poorly signaled.
Half the population is not connected
to the sewage system. There are few (ordinary) commuters or freight rail lines,
and they are mostly in very poor condition. Urban mass transport is grossly
deficient: São Paulo, a metropolis with almost 20million inhabitants, has
a mere 71km (44 miles) of metro/ underground transport, plus a few overland
urban rail lines, which at peak hours are all overcrowded.
The Government is planning to start take measures to tackle this backlog, but even if it goes full speed ahead, catching up will
take years, maybe decades. It is so easy to think of a long list of more
worthwhile infrastructure projects in Brazil (i.e. Sewage systems) that it is
hard to understand why this one is not dismissed out of hand.
The only plausible reason one can
think of is that of providing some relief to the international community reassuring
them that we will be ready for the events ahead. Is that Pride? is that Vanity?or maybe, Despair? Maybe
it’s a combination of all elements.
It may seem outrageous to many what I am
about to say, but from Brazilian’s perspective at that stage, the need to show
that we can deliver gives us hope that these projects may somehow be completed.
Even if they come at high costs, they will fall in the hands of international
players doing business with the intent to generate profits (not bleed funds
into private bank accounts) and commited to the completion of tasks at hand.
Politicians have a license to abuse
and steal whenever it pleases. That dictates the mentality in brazil. Schemes
are the norm not the exception. With all due respect, when Brazil was nominated
to hold the World Cup 2014 and the RIO Olympics, several well placed people were wildly
celebrating the inflow of cash that would be coming their way. (Here read
Bribery: favors, licenses, votes and nominations for projects all have a price
and the highest bidders get those projects).
So, with all sincerity, the only thing that could be relevant and make a difference this time around would be the participation of international firms, willing to do business
with an intent to generate real profit. That would be a start.That could be a stone in the right direction. Only time will tell though.
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