Brazil’s infrastructure sector to enter ‘historical growth cycle’

Brazil's infrastructure sector is undergoing a major transformation, with the expected growing participation of the private sector in main projects.

This transformation is facilitated by the low benchmark interest rate expected to stay at record low levels, which will allow companies and investors to raise cash at low costs.

In addition, the Brazilian government is advancing its privatizations and concessions agenda, reducing the role of the public sector in the economy. In 2019, concessions for 27 infrastructure assets were offered and for 2020 the federal government intends to offer 44 projects.  

Frederico Araujo Turolla (pictured), an infrastructure expert at consultancy PEZCO Economics, talked with BNamericas about this scenario and why the infrastructure sector is entering an “historical growth cycle.”

BNamericas: What do expect for infrastructure investments in Brazil in 2020?

Turolla: In my view, the level of investment will grow in line with the pace of GDP expansion. In fact, this growth is already taking place and the main fact now is that investments are coming from the private sector rather than the public sector.

We are at the beginning of a very important cycle in the infrastructure sector in Brazil, and in my view it is the start of a historical growth cycle.

BNamericas: Why do you consider this cycle historical?

Turolla: We have a combination of some factors currently that never happened at the same time in Brazil.

In previous cycles, we had stability on some fronts, such as economic growth, foreign exchange stability, but past cycles never occurred under an interest rate as low as the one now.

BNamericas: Is it possible to quantify the effects of this low interest rate over an extended period?

Turolla: International experience shows that when we have a low interest environment there is a rush for long-term assets, such as infrastructure.

Moreover, this money will come at a time when the pipeline of projects in Brazil is in a mature phase. There is also a maturity of projects in regulatory terms, contracts elaboration, we have never seen before.

Another important point is that this government currently seems engaged in attracting private sector investors and is working to make contracts safer.

BNamericas: Should the effects of Lava Jato, which hit large construction companies and infrastructure projects in Brazil, still be present in the next year?

Turolla: The Lava Jato factor hurt the infrastructure sector badly, generating a sector-wide mess. I would say that players are still under reconstruction and now there is a growth avenue for new players.

Many barriers of entrance in the infrastructure sector were created by major construction companies that had the connivance of past governments, with these barriers now removed, the trend is to see more and more new players coming in.

BNamericas: Which sectors should also see more new entrants?

Turolla: We are already seeing interesting movement in the sanitation sector. In addition, with an incredible agenda of reform, sectors such as telecommunications, transportation, along with sanitation, will likely get a large volume of investment and more activity of these new players.

In addition, after several years of Lava Jato, there is a better scenario for corporate governance and compliance and this tends to generate a better environment for the competition.

Also, it is important to note that I don't think there will be multiple players in all sectors. Companies that enter into the infrastructure sector are major companies, infrastructure is not a business for small players, because it requires large capex.

BNamericas: Doing a risk and return analysis, which sectors are the most attractive in Brazil?

Turolla: In terms of regulation the most advanced currently are electricity and telecommunications, but considering the return too, I see more opportunities in the area of sanitation, logistics and street lighting.

BNamericas: You are optimistic about the participation of private sector players, but has this scenario not happened before, in past governments, through programs with other names, for example PAC?

Turolla: This is a question I usually answer for investors.

The major difference from PAC for now, is that today the intention to attract the private sector is real. PAC was a program that had a face that suggested more private sector participation, but in fact the intention was really to use public investment behind it.

Now the private sector is really the protagonist.

This is not just a question of ideology, but also of necessity. The room for BNDES to act from a fiscal point of view is very limited. If you asked me, 'Can a populist government return to the past approach, in the next few years?' I would say, yes, it can, but if we look at what Brazilians are demanding now - it is not more government intervention.