Brazil Prepares to Host the 2014 World Cup

Goooooooals! for Infrastructure Development

Brazil, host of the 2014 World Cup, has embarked on a $40 billion spending spree to build and improve infrastructure in – and between – the 12 cities where matches will be played. For years, critics have questioned whether Brazil could successfully host the tournament, citing inadequate infrastructure, particularly in transportation, and high levels of crime and corruption. But with plans already in place to construct or refurbish 12 stadiums, build the largest commercial airport in Latin America, connect the 12 host cities by high speed rail, and lay 11,700 miles of railroad, the tournament organizers seem poised to disprove the naysayers.

Insights from the Ergo Network

Ergo asked four experts to provide insights into the state of Brazil’s infrastructure development in the run-up to the World Cup, the challenges yet to be addressed, and the potential for foreign investors to take part.

• Expert 1: Former Chief Economist at Brazil-focused investment firm

  “Many of the cities chosen to host games will be far from the major cities and they will have to improve infrastructure at a very fast pace. It’s safer [as a foreign investor] to be in the bigger states because the smaller states will have more local politics and more local regulations. Those willing to take risks will have more opportunities in the smaller cities, but if you want something with more visibility and more accountability, then the bigger states are better.”

• Expert 2: Director of infrastructure and logistics program at a leading Brazilian university

  “I think railroads are the big [opportunities] in Brazil. And when I say railroads, I mean for cargo and for passengers. Urban mobility is reaching a point where whoever invests in metro lines is going to be fine despite everything. Investment in hotels is a nice thing because they depend less on regulatory marks. [Another opportunity] would be private terminals at the major Brazilian ports. Also related to that, there is coastal navigation for tourism and also for cargo – that is not explored today. I think that’s a big opportunity because everything is fine and everything is ready and they are just waiting for major investors.”

• Expert 3: Brazilian attorney focusing on securitization and public-private partnerships related to infrastructure projects

  “At the same time that the government needs to attract investors, the government itself has serious problems about investing through the constructing of public indebtedness. We have fiscal responsibility that is a federal law and is very strict. Most of the states and municipalities have great problems in terms of constructing [because of it]. Having said that, I think we have pretty much two models here. I think that securitization would be a key. [For example, if] the government has a public stadium, it could securitize all of the future flow for a certain period of time in order to do construction and [the stadium] would continue to be operated after the World Cup. The other structure that you might see is the public-private partnership, especially for subways or airports.”

• Expert 4: Senior public-private partnership official in the Brazilian Ministry of Planning

  “There are some investment opportunities related not only to the World Cup, but also to the Olympic Games. Rio is a candidate city for the [2016] Games and one of the problems pointed to by the IOC is the lack of accommodations in the city. In fact, hotels could be a good opportunity and you don't have to depend too much on the authorities to make this kind of investment.”

Looking Ahead

Brazil’s investments in infrastructure will not only enable it to successfully host the World Cup in five years, but will also have a lasting impact on its rapidly growing economy. Many of the opportunities are directly tied to the event (e.g., stadium construction), but a number of sectors stand to gain from the investments. The agribusiness sector, which made up 25% of Brazil’s GDP and 36% of exports last year, is likely to benefit from improved nationwide infrastructure. Investments in roads, railways, and ports will facilitate the domestic transport of crops and livestock and will boost exports, thereby attracting increased foreign agricultural investment. Tourism – which is expected to grow 4.5% annually for the next 10 years – will reap the benefits from the World Cup-driven improvements to air and rail transport, and to hotels.

These opportunities are not, however, without risk:

• Brazil must build stronger regulatory frameworks to effectively protect the interests of foreign investors. Its cumbersome bureaucracy, coupled with heightened media scrutiny and political meddling surrounding the World Cup, have the potential to scare away foreign capital.

• Next year’s general elections could also complicate foreign investment, particularly for highly politicized major infrastructure projects.

The World Cup is a test case for Brazil. If it can pull off hosting an international event of this magnitude, it will greatly strengthen its bid to host the 2016 Olympics. And the money being spent to prepare for the World Cup is only a fraction of the $236 billion that President Luiz Inacio Lula da Silva has pledged to spend on infrastructure as part of a his “Program to Accelerate Growth.” The next five years will be critical in determining how fast Brazil continues to climb the ranks of the world’s largest economies. The world will be watching intently what happens in Brazil – and not just on the soccer field.

With access to Brazil’s leading experts on infrastructure growth and having conducted extensive research on investment in Brazil for a wide range of clients, Ergo can help identify the best opportunities for investors as well as suggest strategies for navigating the challenging regulatory environment.