China's role in Brazilian infrastructure projects not welcomed by everyone

While Brazil's federal and state governments are enthusiastic about Chinese investors' growing interest and participation in infrastructure projects across the nation, China's active role in the segment is not welcomed by all, particularly providers of services and machinery.

Over the last 15 years, China, which is already Brazil's largest trade partner, become an important player in infrastructure projects as an investor, including developments in the electric power and oil & gas segments, and more recently in the transportation sector.

“The problem is that when a Chinese company or a consortium wins a contract or a concession, they only contract other Chinese players to provide services, machinery and equipment for that specific project. That's a problem for the entire chain, mainly for Brazilian players, which can’t provide their services, even if they offer better conditions,” Vicente Abate, president of national rail equipment manufacturers' association Abifer, told BNamericas.

This effect was seen recently, when Chinese manufacturer BYD, through Consortium Skyrail Bahia, signed a public-private partnership contract with authorities in Bahia state to build and operate a 1.5bn-real (US$358mn) light rail service in state capital Salvador.

The light train will link Salvador's commercial zone to the island of São João in Simões Filho municipality. The 20km line will have 22 stations and capacity to transport 150,000 passengers a day.

“Technically speaking, this project is a monorail and the model for that requires a specific kind of tires made in China, so only Chinese companies will be able to supply them,” Peter Alouche, a consultant specialized in the railway segment, told BNamericas. “This project model is absurd and governments must be aware of this situation to avoid being hostage to Chinese companies for a long period,” he added.

The influence of Chinese players, including suppliers, is likely to expand in Brazil, as the federal and state governments seek to attract international investors to take part infrastructure projects amid severe restrictions in public finances.

A PROBLEM FOR THE LONG TERM 

As infrastructure projects are consolidated over the long term, any problems in the quality of these developments tend to emerge over the medium or in long term too. 

“Opting for providers and suppliers solely using cultural or language criteria instead of quality can be a problem for projects, particularly those that are more complex, and to correct this situation won't be easy as many problems can start to emerge only in the long term,” Carlos Daltozo, head of equity analysis at Eleven Financial Research, told BNamericas. 

According to Daltozo, who has covered the Brazilian banking industry as an equity analyst for the past decade, the cultural barrier created by Chinese players has also been seen in other segments, not just in infrastructure. 

“Chinese investors acquired some Brazilian financial institutions in previous years and the first steps taken were to appoint Chinese executives to the top posts. That caused major problems, due to the lack of expertise of those executives in Brazil and it caused losses for those institutions,” he said. 

CHINA BANKING

Amid the huge appetite of Chinese investors in Brazil, earlier this month, industrial bank XCMG announced that it was going to open a unit in Brazil, its first outside China.

The bank will work closely with Chinese companies operating in Brazil, financing their respective projects.

“The opening of this bank isn't a coincidence, as it's part of a mechanism adopted by Chinese players working to dominate the full chain of activities in long-term projects in Brazil and Latin America. I'm concerned about this situation because it will damage the future of our industries,” said Abifer leader Vicente Abate.

BRAZIL-CHINA RELATIONSHIP

After a few signs of disruption in the first few months of his tenure, Brazil’s President Jair Bolsonaro – who took office in January 2019 – has given friendly signals to Chinese players and highlighted the government's interest in forging more ties with China.

“China is our main trading partner and together with my entire team, as well as the Brazilian business community, we want to expand and diversify our business relations,” Bolsonaro said after a meeting with China’s President Xi Jinping at the BRICS forum in Brasília last November.

Chinese influence in the railway segment in Brazil is likely to grow even more in the coming years, as the government wants to offer concessions for two major initiatives in the railway segment, the Ferrogrão and Fiol projects, which are likely to attract the interest of players from the Asian nation.

Photo: Brazil's Jair Bolsonaro and China's Xi Jinping during a ceremony in Brasília in November.