Brazil freezes US$800mn in funding for PAC infrastructure program

The Brazilian government froze 4.5bn reais (US$800mn) of infrastructure initiatives under the PAC federal investment program for this year, generating mixed feelings among stakeholders.

That amount is part of a total 15bn reais frozen by the administration of President Luiz Inácio Lula da Silva in an effort to trim spending and reduce the national debt.

The government launched the PAC in mid 2023 with the expectation of spending 1.7tn reais in long-term investments, with 1.4tn reais due to be spent by 2026, when Lula's term ends.

The PAC is an update of similar programs carried out under previous Workers Party (PT) governments and is one of the cornerstones of Lula's administration, as he will probably seek reelection in 2026.

PRESSURE

The pressure on the administration to cut budgeted spending has grown in recent months, as the real has lost ground against foreign currencies and Brazilian companies' shares have fallen amid the perception among investors that there is a rapid deterioration in public finances.

Even Lula, who has backed increased government spending and investment since taking office for his third term in January 2023, now seems more convinced that expenses need to be reined in, but that has generated mixed feelings among infrastructure stakeholders.

"The measure to cut expenses to maintain fiscal balance is positive, which always should and needs to be sought. But the measure to cut investment is negative. We can't repeat what happened with the previous spending ceiling law, when fiscal adjustments were made exclusively with investments, deteriorating public assets," Roberto Guimarães, a former national treasury secretary and now planning and economics director of Brazilian industry and infrastructure association Abdib, told BNamericas. 

"It's necessary to create the conditions to reduce current spending and not investment. Furthermore, it's essential to look at the nominal result of the public accounts and not just the primary result. If interest rates were lower, we would be better able to achieve stability in the debt-GDP ratio. If the economy grows in the second half of the year and revenue too, it will be possible to review these budget cuts," added Guimarães.

POLITICAL IMPACTS 

Freezing the PAC investments has revealed an internal dispute within the government.

The PAC is coordinated by presidential chief of staff Rui Costa, who is a close adviser to Lula and an advocate of greater public investment, like the president.

On the other hand, finance minister Fernando Haddad and planning minister Simone Tebet have called for a bigger government commitment to contain spending to shore up public finances.

"There is a clear dispute within the government, with antagonistic views, some defending greater fiscal responsibility, others wanting increased investments and spending. At the moment, Haddad and Tebet have emerged victorious, but it could be a very temporary victory because if Lula's budget-cutting measures affect his approval ratings too much, new spending could be resumed," André Pereira César, a political analyst at Hold Consultoria, told BNamericas.

In terms of the ministries whose budgets will be impacted by the cuts, the cities ministry, which is responsible for urban mobility, drainage and sanitation projects, will have 2.1bn reais frozen, while the transport ministry, which oversees highway and rail developments, will have 1.5bn reais frozen. The ports and airports ministry will also have 168mn reais suspended.

The complete list with details of all areas affected by the budgetary restrictions can be seen here.

REGULATORS

Even the regulators, which have been suffering from severe lack of funding in recent years, will be impacted by the budget limitations.

The 2024 budget of mining regulator ANM will have 6.3mn reais frozen, while electric power regulator Aneel will suffer a cut of 6.8mn reais and oil and gas regulator ANP will have 11.4mn reais suspended.

Workers at regulators have called strikes for July 31 and August 1, partly in response to a lack of funding.

Brazil has 11 regulatory agencies that employ over 11,300 civil servants. On average, these agencies are only staffed at 65% of the legally required levels.

"In recent years, Brazil has experienced a generalized reduction in public services. We haven’t conducted public hiring, a mandatory process to contract new civil servants, undertaken any career restructuring or implemented salary increases. This has been driven by a persistent belief that public servants are merely an expense for the government. Consequently, efforts to strengthen regulatory agencies have been undermined, leading to increased costs for companies and a deterioration in regulatory services," Fabio Rosa, president of labor union Sinagências, which represents workers at all regulators, told BNamericas in a recent interview.