President Dilma Rousseff and her envoys have been on an international roadshow in the attempt to stimulate the interest of international investors in a growing number of infrastructure projects in Brazil. To date they have visited the United States, London, Russia, and China.
With Brazil preparing to host soccer’s World Cup in 2014 and the Olympics in 2016, Brazil has an urgent interest in upgrading its aging infrastructure. There are plans for a high-speed train linking São Paulo and Rio de Janeiro, a new subway line in São Paulo, and new railroads in the farm belt. Collectively, Rousseff is seeking R$500 billion over the next five years.
Unfortunately, in spite of all of Rousseff’s efforts, investors are still wary of the infrastructure projects the government is seeking bids for. Brazil’s plan for a new railroad system is an excellent example. Rousseff is seeking as much as R$90 billion to lay 10,000 kilometers of railroad tracks. Even agribusiness giants such as Cargill and Louis Dreyfus are still standing on the sidelines.
With foreign investment, the new freight railroad system would increase Brazil’s competitive advantage in its agriculture exports. Currently, Brazil is the largest exporter of soy and the second largest exporter of corn. The problem is that even though the cost to produce soy and corn is lower than most countries, the cost of transporting the products from the Amazon basin and across the savanna is high. Profit margins are slashed by the time the products reach the ports after traveling by truck for days over crumbling roads littered with potholes.
One of the major problems potential investors have with the infrastructure projects is the same as it has always been – too much government involvement. Traditionally, building roads, railways, seaports, and airports are investments that yield steady returns. Even though Rousseff has promised an 8.5% fixed rate of return on the new railroads and guaranteed cargo volumes, investors want the market to establish the rate of return.
Fixed returns and guaranteed volumes are just a few of the concerns. Foreign investors are also worried about the government being involved in planning and building the railroads, in addition to buying and selling cargo space. Even Brazilian lobbyists are urging the government to create an open-access system for freight trains similar to the market-based system used in the United States.
It appears that the government is listening to potential investors. But only time will tell how much the government is willing to reduce its role in the private sector.
