Article: The moment is positive. For now.


The moment is positive. For now.

After going through the biggest recession in its history and struggling with very weak economic activity, the moment is positive for Brazil to start recording faster growth. The structural reform agenda is practically a consensus, including the administrative (reduction of government spending and the government structure), property (privatization and sale of real estate), social security, tax and fiscal reforms. Investments in infrastructure are a priority. The significant renewal in the National Congress was also a good omen for the necessary changes and reforms.

We do not expect any major surprises in the international market in the short term. U.S. interest rates should not be raised any time soon. This helps maintain a stable capital flow in Brazil. Once the reforms have been implemented, we expect to see fiscal comfort, with interest and inflation rates under control. In this ideal scenario, even an external turmoil would find a country with a more robust arsenal for fiscal and monetary management.

During the electoral process and in the transition period, Abdib had the opportunity to discuss the needs and proposals for resuming economic growth and recovering investments in infrastructure in Brazil. The 2018 Agenda of Proposals for Infrastructure, prepared by Abdib, lists measures for this purpose.

Fortunately, the current government has chosen to invest in infrastructure to drive economic activity. Strengthening the Investment Partnership Program (PPI) was a wise decision to make progress on this front without wasting time, since there is a backlog of projects in the pipeline for short-term bidding across all sectors, totaling R$ 186 billion in investment. In the transport area alone, for example, studies are being conducted for 59 projects, totaling R$ 111 billion in investment.

In addition, the early renewal of railway concessions and the successful development of new railroad projects may change the country’s transport matrix and productivity levels. However, the issue of unbalanced federal concessions in the transportation areas, especially airports and highways, is yet to be solved. An alternative is the friendly return, introduced by Law 13,448/2017, which is still ineffective due to lack of regulation. Without a solution, there is a significant risk of transferring to the Judiciary the responsibility for defining investments in some of the country’s main transportation assets.

One of the main aspects of the business agenda for the infrastructure sector is the legal certainty required for investment, a fundamental principle that mostly emanates from laws, rules and government decisions, acts and intentions (ratified or not) over time. The role of oversight and control agencies is currently a critical factor. Controlling and overseeing government programs, projects and spending, focusing on legality or efficiency, cannot be confused with the role of developing guidelines and characteristics of public policies applicable to executive branch agencies.

Another crucial point is the strengthening of the long-term financing system, boosting the capital market and extending infrastructure debentures to overseas investors and pension funds – all supported by a secure guarantee system for foreign exchange risk.

In the oil sector, higher oil prices and lower pre-salt exploration costs allowed the resumption of the virtuous cycle of investment interrupted by the Petrobras crisis. With the regulatory changes and the auctions held in recent years, there are potential investments of R$845 billion by 2027, considering contracted projects already under development. There is a schedule of auctions, which will attract global investors to the opportunities available in Brazil. Similar adjustments need to be made to the model and regulation of the power sector, which has structural imperfections and requires improvements in order to give investors more security.

But there is still a lot to be done. A simple comparison between two figures calculated by Abdib leaves no room for doubt. The first shows how much investment in infrastructure Brazil needs every year (4.31% of GDP, corresponding to R$ 284.4 billion). The second reveals how much is actually being invested (1.7% of GDP, on average, between 2016 and 2018, corresponding to R$ 110.0 billion). The gap is huge.

Part of these investments will depend on the approval of the infrastructure legislative agenda, composed of bills and executive orders that have gone through several stages of the legislative process, having received favorable evaluations, or been revised by rapporteurs – having thus been the subject of many discussions by members of Congress, government and productive sectors. It would be important not to waste the progress made and vote on them quickly.

There are regulatory review processes in the areas of basic sanitation (Executive Order 868/2018 – increased private participation and improved regulatory quality), natural gas (Bill 6,407/2013 – sector reorganization by reducing Petrobras’ share in the entire production chain), electricity (Bill 1,917/2015 – correction of structural and cyclical imbalances, planning and reorganization of the model) and telecommunications (Supplementary Bill 79/2016 – change in the fix telephony regime from concession to authorization in order to increase investments in broadband, among other issues).

There are also initiatives to review and improve transversal procedures, such as environmental licensing (Bill 3,729/2004 – planning, process simplification and legal modernization), regulatory agencies (Bill 6,621/2016 – institutional strengthening, uniform procedures and transparency) and public procurement (Bill 1,292/1995 – new law for the procurement of goods and services by government, focusing on infrastructure and guarantee insurance).

It is also worth mentioning the trade opening process being planned by the central government: it needs to be thorough and carefully thought out so that industry sector – which currently accounts for a little more than 10% of GDP, but absorbs more than 30% of tax collection – can drive wealth generation, technology advances and job creation.

Brazil has one of the world’s lowest public investment-to-GDP ratios, and investments account for a small share of public spending; the private sector already accounts for the lion’s share of investments in infrastructure, contrary to what happens in emerging and developed countries with healthy economic growth indicators.

The path to stronger recovery in investment and economic activity begins in 2019. The result will depend on the success of the structural reform agenda – which makes room in the government budget for investments in infrastructure – and the adoption of the infrastructure legislative agenda, which has the potential to accelerate private investment, implement better regulations and improve the business environment. This is the agenda.