“Money is not a panacea”
The need for infrastructure investment exceeds the available resources of all the multilateral banks, warns Martin Raiser, World Bank director for Brazil; to leverage the sector, the country needs a better planning and resources management, good projects and attractive regulatory frameworksJuly-September | 2017
By the end of the year, the International Finance Corporation (IFC), a World Bank arm for the private sector, will apply 35% of its $ 1.7 billion budget in Brazil for infrastructure investments. The bank includes opportunities in the transportation, logistics, water, sanitation, solar and wind power, and natural gas sectors.
The need for infrastructure investments exceeds the available resources of all the multilateral development banks, warns the German economist Martin Raiser, World Bank director for Brazil. However, he points out that the existence or not of money from these multilateral sources is not the main issue.
On the one hand, well designed projects and robust regulatory framework can attract additional private investments and reactivate the economy. If Brazil wants to leverage the current limited funding available, it needs private partnerships to transform “billion in trillion”.
Economist graduated in Germany with postgraduate studies at the London School of Economics, Martin Raiser, 49 years old, is at the World Bank since 2003 and has been the institution’s director in Ukraine, Belarus, Moldova and Turkey, before Brazil. Author of several books and articles on development, he speaks fluently English and French and has knowledge of Russian, Portuguese and Spanish.
From this cosmopolitan experience, he extracted the certainty that “money is not a panacea” – in the sense that more spending doesn’t necessarily solve the problem without a well-structured management – and that “the regulatory framework’s quality and credibility” are crucial to attract private and foreign investments – as he explains in this interview to Mundo Corporativo.
Brazil invests 2.2% of GDP in infrastructure, but would need to invest 5.5%, in two decades, to modernize sanitation, transportation, energy, telecommunications, housing etc. How does the World Bank assess this challenge?
We believe that there is space to increase the investment, both public and private, in infrastructure. However, money is not a panacea. The frustrating experience of past flagship infrastructure programs is an example. More spending does not result in better services if underlying management problems are not covered. Recently, we published a study about Brazil in which we showed that losses in efficiency in infrastructure investments in transport, water and sanitation areas amount to 2.1% of GDP, almost as much as the total annual investments. If these losses could be reduced through better planning, governance and investment choices, there would be better returns for investors and better services for the beneficiaries, without the need for more resources. This in turn would encourage more private investments and also help the Government to justify the fiscal adjustment to make room for a minimum public investment level.
Until 2013, the Brazilian economy grew with the increase in public spending of state-owned companies and with the credit expansion from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES), but the model seems to have exhausted, don’t you agree? With the Avançar program, the Government intends to complete some select works from the Programa de Aceleração do Crescimento (PAC). However, how to unlock investments and bring private companies into the game?
In fact, Brazil’s growth model based on the increase of public spending ran aground. There is a considerable private sector interest in investing in infrastructure and thus help revive the economy. But that will depend, first of all, on a credible long-term regulatory framework, which offers balance of risks to all parties involved. It is important to remember that the private sector does not pay for infrastructure services – users and taxpayers do. If investors cannot be sure of a financial return, they will stay away or find a way to pass the burden to the Government. A good regulatory framework is critical to decide which risks the private sector will support and what will continue to be the Government’s responsibility. Secondly, for the Avançar Program to be more successful than PAC, it is essential that effective governance mechanisms are in place to choose projects based on economic and social viability and reject the unjustified ones. A more robust pipeline of viable projects is critical to reduce inefficiencies and attract private investments.
Infrastructure investments can reignite the economy?
International evidence shows that a 1% increase in infrastructure investments can generate a GDP growth of between 0.1 and 0.17% per year. The logistics, sanitation, housing and urban infrastructure problems are critical obstacles to the country’s economic growth. We analyze this in detail in our report “Country’s Systematic Diagnosis – Brazil”, released in 2016.
At the 2017 Global Infrastructure Forum in Washington, the multilateral banks agreed to extend the collaboration to encourage investments by stimulating public-private partnerships. Is that the way?
The infrastructure investment needs widely exceed the resources available from all multilateral development banks. It is therefore a matter of necessity to look at private partnerships to leverage the limited funding available. This is the agenda to transform “billion in trillion”. Beyond the purely financial aspects, the private sector can bring a lot in terms of better management, technological innovation and efficiency. It can offer enhanced services at lower costs. This would make it possible to mobilize additional private funding to complement public resources and close the infrastructure gap more quickly. But nothing will happen automatically. What is needed is better regulation, improved Government capacity to prepare and monitor good infrastructure projects and make the private sector compliance works.
With the problems by which large Brazilian construction companies passed, investment funds and foreign investors are taking up space. In the 4 airports, 31 transmission lines and 5 port terminals recently auctioned, foreigners took 37.5% of the interest, compared with 26.5% of local multinational subsidiaries and 36% of Brazilian companies. Does the crisis make Brazilian assets cheaper?
Foreigners have always had great interest in the Brazilian market, but conditions were placed so as to leave them at disadvantage against local construction companies. That is now changing. Hence the success, for example, of the Airport concessions completed earlier this year. Of course, there are other factors – such as the assets’ price and the macroeconomic and political risks – but, above all, the important thing is that Brazil is opening up to foreign infrastructure investments, something we find positive.
IFC announced it will apply approximately 35% of its $ 1.7 billion budget for infrastructure in Brazil and offer new forms of financing, such as buying government bonds of projects that did not encounter returns in the market. What are the most relevant World Bank’s projects in Brazil?
We see opportunities in several sectors, such as energy, transportation and logistics, water and sanitation, in addition to urban infrastructures in which Public-Private Partnerships can play an important role in the modernization and leverage private investments to close Brazil’s large infrastructure gap. The market is clearly more developed in the energy sector, especially solar and wind power renewable energy. However, with the changes in the regulatory framework, new opportunities may open up in other places, such as in the natural gas area, for example.
According to the World Economic Forum, only 1.6% of the $ 106 trillion in funds available managed by private institutional investors are invested in infrastructure. How to deal with bottlenecks such as the projects’ long maturation terms, the political unpredictability due to election results, the change of concession rates and the delay in environmental licensing?
The regulatory framework’s quality and credibility are crucial to attract private investments and foreign investors unfamiliar with the institutional context. In this sense, the Bill 6,621/2016 (which addresses the management, organization, decision-making process and the social control of regulatory agencies) is a step in the right direction, because it strengthens the independence and professionalism of the agencies, reducing the risk of changes in pricing policies and other, such as the election cycle. The adoption of a revised procurement law is also critical, allowing the hiring of engineering and financial consulting services in a qualitative manner, increasing the government’s capacity for the projects’ preparation and evaluation. I believe that it is possible to improve the environmental licensing framework, but any reform in this sense should be strictly oriented towards international best practices, once a gap between the Brazilian and global standards would discourage international capital markets to invest. I would like to emphasize that one of the most important and least appreciated ways to reduce risks for investors is to have well prepared project proposals. This enormously facilitates the assessments of environmental, social and construction risks, and helps investors to adopt mitigation strategies. They can also speed up the licensing process and reduce uncertainty because they reduce the need for renegotiation as new information comes to light.
The Regions of Climate Action network estimates that $7 trillion will be displaced from the traditional economy in five years, into decarbonization projects. Some Brazilian companies have already issued “green bonds” to attract investments in “green” projects validated by external evaluations. How does the Bank see these initiatives?
We look favorably to the potential driver of multiple objective funds. However, the reality is that, unless the financial return is there, investors will not come. To attract money to areas such as environment or that generate significant social externalities, usually public incentives are needed, either through the purchase of emission reductions, subsidies or regulatory measures that encourage the reallocation of resources, for example, to greener investments. The World Bank has been making efforts to create such incentives and find ways to leverage public resources with private funding for social and environmental goals. In Brazil, this market still has a lot to advance. With or without social and environmental objectives and associated incentives, there’s plenty of room to increase the role of capital markets in financing investments here.
Agribusiness expanded the agricultural frontier in northern Brazil, which is lacking in infrastructure. However, according to the National Confederation of Agriculture, the transport costs between the production site and the ports can prevent the Country to assume the global agribusiness leadership until 2020. Does the Bank have some action in the area?
We have provided consulting on highway concessions at national and state levels and also did some work to increase railroads and ports efficiency, reducing export costs. It is important that these transport routes are properly planned and discussed with the parties affected, since some ambitious projects, particularly those that traverse forests or protected areas, face resistance. We’re happy to help in these discussions with international experience, as IFC did, for example, in the development of principles for the sustainable investment in the Amazon region, together with Fundação Getúlio Vargas (FGV) and BNDES.
Only 40% of the Brazilian population have access to sanitation and only 60% have treated water. Can the Bank assist in project design trainings?
We certainly can, although our resources are limited. Our IFC colleagues already have a project preparation unit with BNDES. The IFC team has already been involved, for example, on the SABESP’s advisory. The World Bank is working with Caixa Economica Federal to develop a new funding model combined with technical assistance to municipalities. We have also selected some projects at state and municipal levels for sanitation infrastructure investments, which include a technical assistance component.
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