Brazil seeks recipe to attract investors at lower cost

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(Editor’s Note: This article was written by Luciana Magalhaes and was published by Dow Jones BusinessNews on February 6)

Brazil’s government is kicking off a global road show to attract close to $200 billion in investments to overhaul ports, roads, railroads and airports and energy concessions, even as it seeks to drive down the degree of profitability of those investments to benefit consumers.The private companies to which Brazil plans to hand over infrastructure operation “can’t have the same returns we had 10 or 15 years ago,” Gleisi Hoffmann, President Dilma Rousseff’s chief of staff, said in an interview. However, she added, “we are open to listening to suggestions and making adjustments.”

A lack of investment has been one of the key factors behind weak economic growth in recent years, and the government wants to reverse this trend to bolster output. Decaying infrastructure is a major bottleneck for faster development. Investment in Brazil fell below 19% of gross domestic product in 2012, despite efforts taken by President Dilma Rousseff’s administration to cut interest rates and taxes. If the government can secure the money it wants invested in infrastructure, investment levels as a percentage of GDP could surpass 20%, reaching 24% or more in coming years, Ms. Hoffmann said. “This is our goal,” she added.

But a debate over the costs and risks of doing business in Brazil has stymied the government’s efforts. The high cost, and the high risk, of Brazil meant that for decades investors demanded extremely high returns. But over the past 15 years, the country has achieved a degree of economic stability and, over the last year, it has also brought down interest rates to historic low levels. The government argues that these factors mean investors should no longer expect to receive huge returns on their investments. Yet on both counts, concerns persist.Investors have expressed concerns with level of “activism” of President Rousseff’s administration, which has sought to control the strengthening of Brazil’s real to protect local exporters, has used public banks to promote a reduction in bank spreads, and required utilities to accept lower revenue if they wished to renew operating licenses. But for Ms. Hoffmann there has been no “interventionism.” “If a CEO sees his company facing significant problems, he intervenes to make things better, to correct the direction,” Ms. Hoffmann said. “You can’t think differently with a country,” she said referring to decisions the government took in relation to the currency.

In the electric sector, she said that no contracts were broken because changes will only affect expiring contracts.The chief of staff says a lack of information may have led to the criticism, so Brazil’s government wants to use this road-show to present its projects and also to listen to investors opinion to make needed adjustments. “We want to get it right,” Ms. Hoffmann said. The government had to postpone the auction of two highway projects after three large construction companies pulled out. The firms laid out their concerns and Finance Minister Guido Mantega agreed, making changes to make the concessions “more attractive” and “more profitable,” as the minister himself explained this week.

The length of the concessions were extended, forecasts for demand growth were trimmed, and financing terms were sweetened. Today, Brazil’s economic “environment is adequate. This is a necessary condition but not enough” to attract investments, said billionaire Andre Esteves, founder of investment bank BTG Pactual, during the launch of the road show. While praising many advances, such as control of inflation and lowering of interest rates, Mr. Esteves said it is important that the government goes ahead with planned tax cuts. He also noted anothern favourable factor: the country’s size.

“Brazil offers investors what few countries can give: scale,” he said. According to him, many investors look at Brazil’s economy as a glass that is halfempty when there are good reasons to see the glass as half-full.

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