Investments in infrastructure to cure the economy’s "hangover"

Personalities in the construction business chain are unanimous in stating that, besides investments, Brazil needs strategic planning for the medium and long terms and consistent engineering projects to boost the pace of growth

Year 2012 has come to a close without enabling anyone to draw a very clear picture of what the results have been for Brazil’s construction business chain. Opinions are divided according to the segment of industry that represents analysts and representatives of sector associations who attempt to analyze the year’s outcomes. Optimists look at the levels of formal employment; at stimulus measures to boost productivity and competitiveness; at federal government-enacted packages for investment in infrastructure; or at indicators of growth in sales of building materials which rose 3.5% compared to 2011. With a focus on these outcomes, we can say that was 2012 was not so bad since some of the essential foundations for more vigorous growth in 2013 have been laid.

Pessimists, on the other hand, huddle around indicators of activity that show a decline of some 19% in the sales of construction equipment; or around the sharp drop in the pace of implementation of public works, pondering especially those included in the government’s ‘Program for Acceleration of Growth - 2’ (PAC 2); or dwell on the lag in government price lists for public works and its negative impacts on the net profit margins of the sector’s companies. Based on these parameters, the period may go down in history with the mark of frustration; of results that were far below expectations.

But 2012 is over and the time has come to lay the groundwork for the new year. In an attempt to anticipate the main trends, the staff of Grandes Construções magazine listened to some of the main representatives of the construction business chain, collecting their statements. Some of their views are not gloomier than others, but, in general, everyone agrees that in order to continue growing to the point of becoming one of the mainsprings of the nation’s development, the construction business chain needs investments, planning, consistent projects and a legal environment that encourages private sector participation in infrastructure development.

We give you, our guests:

Aluizio de Barros Fagundes, President - Instituto de Engenharia (Institute of Engineering)

The main positive point of 2012, I believe, is the awareness that engineering is crucial to leveraging the progress and economic development of the country. Engineering is not a commodity. Planning is necessary! Among the negative points, I would underscore the exasperating inertia of government agencies in the implementation of programs and projects, and the unjustifiable distrust in private enterprise as an actual promoter of improvements in public works and services.

Brazil needs nearly US$ 2 trillion in order to put its public services in order over the next 30 years. That means more than 6% of the country’s GDP every year. With a meager 1% of growth in GDP in 2012, prospects are that it will be impossible to advance in the country’s development.

Today’s globalized world works with fake, virtual currencies that exist on paper alone. There is no monetary ballast or ‘gold standard’ to back it up, neither tangible nor durable goods, for that matter, capable of honoring the currency. The valuation of companies or even of a country’s GDP stems from a subversive principle which involves calculation based on fanciful, wishful revenues. With all this overindulgence, this ‘binging’, monumental hangovers are already occurring in Europe, and will soon arrive here.

The highest priority is in the logistics ventures to give move the production of what is now our economy’s most important sector: agribusiness. May God keep the government from dismantling the sector as the “political party bias” of Brazil’s Embrapa (Brazilian Agricultural Research Corporation) seems to indicate.

The world, as Brazil knows it, will not end with the end of the FIFA World Cup in 2014. However, major events such as the World Cup Soccer Championship and the Summer Olympics, besides being excellent showcases for Brazil in the world, also have the power to raise the self-esteem of the population - a fundamental for the resumption of development. Perhaps the stadiums will be ready. But the legacy of improvements in our infrastructure are simply not being taken care of in time and in a timely manner. Moreover, global capacity to undertake exogenous investments does not seem actual to me.

Cristiano Kok, Director of Engevix

2012 was a year that began with high hopes, but that ends with frustrations. The housing market suffered a downturn, the works of the Program for Acceleration of Growth (PAC) were not carried out at the expected pace, major investments in the sectors of oil, gas and energy suffered important postponements on account of structural, environmental and financial issues, and the final outcome was growth below expectations. As positive aspects for the year, this same deceleration provided time for training of staff and structuring of companies that sought to qualify their teams for the challenges to come in the following years.

Year 2013 begins with an optimistic outlook due to news regarding measures to relieve the tax burden on payroll in the sector construction by replacing the employer contribution of 20% levied on the payroll with an increase of two percentage points in the rate of the ‘social contribution’ tax on revenues. This measure alone will enable a much more rational organization of companies, formalization of the labor market and increased investment in training of more permanent staffs. Furthermore, the need for investment in infrastructure in the country is likely to be addressed through greater private sector participation and investment in facilities and urban mobility for the FIFA World Cup and the Summer Olympics, combined with housing and sanitation plans that will generate higher demand in 2013 than existed in 2012.

The difficulties in engaging and implementing infrastructure projects stem from the lack of consistent engineering projects that can enable reliable estimates of cost for the works. Brazil needs to invest in the transformation of plans into engineering projects and engineering projects into investments in infrastructure. The absence of projects hinders the implementation of these ventures since the lack of studies precludes obtaining of environmental licenses, arrangements for financing and obtaining of reliable cost estimates thereby significantly increasing the degree of risk for investors. And the elaboration of projects requires time, but will reduce the costs and amount of time required for completion of the works.

The Engevix Group has traditionally been in the business of Engineering, Procurement and Construction (EPC) in the areas of electrical energy, oil and gas and urban infrastructure and transports. As investors, the focus has been on the generation of renewable energy through Desenvix; offshore and shipyard construction through Ecovix, and road and airport concessions through Infravix.

In 2013, the performance of the group, as an investor, will be heavily concentrated in these areas with the expectation of growth in the construction industry linked to off-shore exploration of pre-salt layer petroleum, the expansion of services in the area of airport concessions and in the implementation of new hydroelectric power plants (HPPs) such as the ‘São Roque HPP’. As a service provider, Engevix sees good prospects in the area of urban mobility, in transport infrastructure in the area of power generation with the continuation of large projects such as ‘Belo Monte’.

Brazil has exceptional opportunities for attracting investment and foreign capital, and mobilizing domestic savings through greater private sector participation in the area of infrastructure. Regulatory frameworks exist, but it is essential that signals go out indicating that the rules will be maintained. The BNDES (Brazil’s Development Bank) has been an exceptional lever in this process, with competitive terms of financing and interest rates for the sector. The way to go is open, and the experience in recent years has shown that the model is feasible and can be attractive to domestic and foreign private capital. What is still lacking are consistent engineering projects so that these ventures can become reality.

Fabio Barione, President of Teckma Engineering

In the area of electromechanical construction, our Brazil is still attractive, with a high volume of investments in production to be implemented and, with that, we have had a good level of demand, with new opportunities in works related to infrastructure and in certain sectors of the economy. But outstanding among weaknesses, we see low productivity, delays in issuing of permits and licenses, and strong pressure for adjustments in labor force salaries above any index of inflation.

As for prospects that are shaping up for next year, we still have 2013 with much uncertainty but which may be a very good year although that depends on factors that have not yet mastered, especially actions related to the speed of reaction of the economy and the impact of governmental incentive measures that were recently announced for the area of construction. Unemployment is expected to continue low, which on the one hand keeps confidence in growth in domestic consumption rising, but on the other, will maintain the pressure for high adjustments in pay without a corresponding increase in productivity capable of offsetting this imbalance. So I see a difficult scenario with rising project costs and difficulties in finding skilled labor.

We are running a serious risk of seeing our projects channeled to other parts of the world due to the lack of competitiveness of our country. We need to address this problem with the required seriousness. We cannot waste any more time trying to implement palliative measures to tackle big problems. We have to face issues such as a complete review of our labor laws, changing the bias of a law that favors “welfare-ism” to a new law focused on “merit”. We must create mechanisms for fast and safe approvals of permits and licenses in general.

We have to quickly define a project for the country, clearly and objectively, as we do in our businesses. We are losing competitiveness on the global scenario and, therefore, a part of the world’s investments is going elsewhere. We cannot allow that to happen, because the consequences we will have to face will be dear. We need to raise our competitiveness, and that is not done without a clear project for the country and strong investment in domestic bottlenecks linked basically to improving public management, investments in infrastructure and strengthening of education.

Íria Lícia Oliva Doniak, President of the Brazilian Association for Industrialized Concrete Construction (Abcic)

The tax issue was one of the barriers to the development of civil construction in our country, especially because it prevents greater advancement of industrialization through the adoption of construction systems produced in the industry. Recent measures taken under the framework of the ‘Plano Brasil Maior’ of the Brazilian Ministry of Development, Industry and Commerce such as the unburdening of payroll from taxation, which will reduce the cost of labor, was undoubtedly a good thing. However, much remains to be done on the issue of tax relief. The international crisis that places concerns as to the development of the global economy is undoubtedly one of the points that interfered negatively upon further development of civil construction this year. Another important aspect are the possible bottlenecks derived from the fact that we still need to identify new sources of funding, since what we now have is not yet sufficient to meet the needs of all the challenges that lie ahead of Brazil.

The outlook for 2013, and I believe for the coming years, is positive. The control of inflation and growth in the incomes of the population associated with the events that will take place in Brazil (the 2014 FIFA World Cup, and the Summer Olympics in 2016), and with government incentives in the ‘Minha Casa Minha Vida’ and ‘PAC’ programs should continue driving growth in the civil construction industry. In particular, the possibilities of establishing new concessions and opening investment to private enterprise are expected to catalyze investments in infrastructure.

What we have is a set of actions. In 2010, the Federation of Industries of the State of São Paulo (Fiesp), within the association’s ConstruBusiness Congress, launched a publication entitled “Brazil 2022: Planning, Building and Growing” - an excellent material in which a diagnosis and suggestions for the development of Construction in Brazil was presented. During the 10th ConstruBusiness Congress in early December 2012, there was the launch, within this same scope, of a second publication entitled “2012 Competitividade Sustentável da Construção Civil” (2012 Sustainable Competitiveness of Civil Construction). The six topics listed therein that make up the program called ‘Compete Brasil’, as delivered to the government in the hands of the Vice-President Michel Temer, are constituted in a manner so as to make the projects advance. Abcic is one of 110 associations of civil construction firms represented by Fiesp and is also a part of this work.

Mauro Viegas Filho, President of Concremat

As positive points in 2012, we can point out the necessary advancement of infrastructure works and the construction of arenas for the FIFA World Cup and the Olympic Games, which got a boost in 2012. Many works will also continue in 2013, especially those related to infrastructure. On the downside, the fact that the government has failed to date to spend even half of the R$ 90 billion (US$ 45 Bn) of investments planned in its 2012 budget.

For 2013, we have a scenario of uncertainty in view of certain definitions which are still pending, such as what will happen with regard to the distribution of royalties from the exploration of petroleum. While this issue is not resolved, there will be no ‘atmosphere’ for bidding on new areas of exploration and production. Moreover, the insecurity of investments in the sector of electrical energy can cause delays in the next generations of electricity. In contrast, the measures announced by the government in the second half of 2012 forecasting the establishment of Public-Private Partnerships (PPPs) and concessions for various infrastructure projects can help warm up activity in these niches as of the second half of 2013.

To make these projects get going and advance it is necessary to invest in the development of basic and executive projects for all the country’s major investments and streamline and speed up the approval of environmental permits. All niches of infrastructure and transportation, energy, oil and gas are expected to grow. But there will have to be greater agility and objectivity in the contracting of new niches of infrastructure and of PPPs.

Moacyr Servilha Duarte, President of the ‘Associação Brasileira de Concessionárias de Rodovias’ (ABCR - Brazilian Association of Highway Concessionaires)

The survey conducted annually by the ‘Confederação Nacional dos Transportes’ (CNT - National Confederation of Transports) (more information at: www.cnt.org.br) pointed out that the roads that were awarded to private companies received better scores in evaluations in 2012 than in 2011, which confirms the success of the program of concessions: the new survey shows that the 21 best roads in the country are those under concession.

Another point that has to go on record, and that reinforces what independent surveys have indicated, is that the federal government announced this year that it would continue auctions of federal highways to private management. That will mean another 7,500 kilometers of highways. The new lots are located in Brazil’s Center-West, Northeast and Southeast Regions and calls for tenders should be made as of 2013.

It is always important to note the improvement in the quality of roads and thus the greater safety and comfort they provide for users. From the beginning of concessions until August 2012, 3,381 km of new highways were paved. Construction included 694,000 m² of new bridges and viaducts, and the recovery of approximately 3.9 million m² of these structures. As for achievements in safety, concessionaires have deployed 1.8 million feet of new concrete barriers, in addition to 3.7 million meters of metal road railing (guard rails). Until September of this year, 2,272 cameras and 6,501 call boxes were also installed on highways under concession, besides 3,337 fixed and mobile radars.

Seeking to afford comfort and service to users, the highway concessionaires built 320 customer service bases or ‘SAUs’ and have made available 503 light and heavy duty tow trucks, and 378 ambulances. The downside for the year was that the concession of the segment of the BR-101 road in the State of Espirito Santo, which was tendered in January, was only honored in late September. The delay creates a feeling of uncertainty and causes investors to feel insecure.

Considering the need to improve the country’s highway infrastructure, and the good results achieved so far by the 55 concessionaires that presently operate in Brazil’s  South, Southeast and Northeast Regions, ABCR sees the Federal Government's decision to grant another 7,500 km of highways to private initiative, which it announced in August, as highly positive.

The questions that are being raised are primarily related to the criteria that were announced for bidding - which do not include the pre-qualification of interested parties or the technical and the commercial proposals. The idea presented is to use the so-called ‘inversion of phases’, which establishes that only the bidder who submits the lowest toll will have its documentation opened for examination, observing the ceiling or ‘cap’ on toll set by the government.

This procedure requires that the Government carry out a very high quality feasibility study, with an adequate estimate of traffic and costs of investment and of operation. Feasibility studies that have already been presented for the first two lots that were put up for concession, involving stretches of the BR-040 and BR-116 highways in the state of Minas Gerais, do not correspond to this level of quality and have been the target of significant inquiries by economic groups that are potentially interested in participating in the bidding. This situation is aggravated by the information that the presentation of a “Business Plan” would no longer be required, eliminating the possibility of verifying the practicability of the bidder’s proposal.

The problem in the area of energy concessions was caused by the proximity of the deadline for termination of certain contracts and discussions regarding their renewal or not and under what conditions. Since the government needs to increase the country's competitiveness, this measure was adopted in order to reduce the cost of industrial inputs. In the case of highway concessions, renewals are not planned. What is being discussed is the possibility that the grantor of the concession can require concessionaires to make unforeseen investments, as occurred with ViaLagos and Ecovias. Under such cases, the ‘rebalancing’ of contracts was done by extending the terms or length of the contract, considering the current economic and financial conditions. In the case of federal highways, what is under discussion, for example, is the building of a new bridge over the Guaiba RIver, a viaduct connecting the Rio-Niterói Bridge to Rio’s ‘Linha Vermelha’ expressway, works in the ‘Serra das Araras’ and the uphill segment to Petrópolis. There is no indication, however, that discussions are advancing. The ABCR does not make any statement regarding the position of investors from member companies

Remo Cimino, Engineer and Consultant

According to a World Economic Forum report, released in September 2012, Brazil was the only member in the group of emerging countries, a.k.a. the BRICs (Brazil, Russia, India, China and South Africa), to rise in the ranking on global competitiveness, and now ranks 48th versus 53rd in 2011. The quality parameters and their ratings are: infrastructure (107th ), airports (134th ), highways (123rd ), energy (68th ), seaports (135th ), training and higher education (116th ), extent and effects of taxation (144th ), efficiency in the market for goods, efficiency in the labor market, financial market development, technological readiness, market size, business sophistication and innovation. In the rate of government regulation, Brazil occupies the 144th position. Of course this is not a pleasant position, but we have to take into consideration how much we are advancing and the position we occupied a few years ago.

The World Economic Forum report emphasizes that the positive result, from 53rd place to 48th, comes as a result of the macroeconomic conditions that have been established in the country, besides a strong domestic market that is already among the ten largest in the world. The increasing use of technology and communication, and, in addition, the increasing access to loans for investment projects are also mentioned as reasons for this increase in competitiveness.

The rules for financing of long term investment projects have been improved upon by Law 12.715 of September 2012. The changes made provide greater security to this market and are an incentive for the private sector to capture funding to finance long-term investments. The forecast for the year is R$ 150 billion (US$ 75 Bn).

In 2012, 15 sectors were granted payroll tax relief and, as of 2013, 40 sectors will be benefitted. The savings for these sectors will be R$ 3 billion (US$ 1.5 Bn) in 2012 and R$ 12.83 billion (US$ 6.415 Bn) in 2013. But variations in the cost of works are cause for extreme concern.

Brazil has given clear demonstrations that it has a secure legal and institutional environment and the measures that are being taken by the country’s government show there is a direction toward solving structural problems, which has brought confidence and optimism in the business community regarding the competitiveness of the Brazilian economy.

But we understand that the Federal, State and Municipal governments, Regulatory Agencies, and other entities require serious planning of investments in the area of infrastructure, starting with a systemic view of the country as such, and a homogenization of the objectives among the main government agencies.

Competent management, based on a systemic vision, strategic planning and operational planning must take into account the following phases: intention, evaluation, consolidation, implementation and operation, maintenance and conservation of a project. The public manager must have knowledge and the competence to make establish dialogue with the political sector. There are very good plans which need to be developed in advance and without the interference of election years.

Presently, Brazil is acting in several directions, with a large amount of financial resources in the sector of infrastructure but, without a systemic vision and integrated planning, we run the risk of providing ad hoc responses instead of having an actual and effective project.

To achieve these goals, the Brazilian construction industry will have to find solutions to bottlenecks that currently undermine its competitiveness, including the need for skilled labor and technological resources that provide greater speed, consistency and quality for the execution of its projects.

Siegbert Zanettini, Full Professor at FAU-USP (College of Architecture and Urbanism of the University of São Paulo)

On the 13th of November, we received the most outstanding international award for sustainability in San Francisco, California, USA. We won the rank of ‘Top 1’ in the world with the “David Gottfried Global Green Building Entrepreneurship Award 2012”, delivered personally by the David Gottfried, who said: “We value and acknowledge all the work done by a leading Brazilian architect who contributes to the development of global sustainable architecture.” This laurel of entrepreneurship, received as one of the world's most important awards on the contemporary scene, puts us at the pioneering and innovative forefront as the architect who has been developing new technologies and quality systems with optimal environmental conditions. We also received, on Nov. 26, the ‘Chico Mendes Environmental Award 2012’ granted by the Chico Mendes International Institute for Research and Socio-environmental Responsibility. The cycle of awards is completed by the ‘ABCEM Personality 2012 Award’ (ABCEM - Brazilian Association of Steel Construction).

As for negative points, I can say that the speculative business chain of civil construction continues to engage traditional architectural solutions, without technological innovations and is positioning eco-efficiency and sustainability erroneously as marketing issues. Despite the current economic scenario that is not helping sales due to the high cost of realty, the real estate sector still posts a reasonable number of launches. But I think the number of launches will ‘shrink’ in  2013, mainly in São Paulo. Major cities in the state are expected to benefit from this situation.

There are difficulties that appear in certain sectors, such as industry, for example, which is going through a difficult period due to low investment in technology and the high labor costs, with products suffering competition from imports. Our products are between 40% and 50% more expensive than imported products and are subject to  a very great tax burden.

The niches in which we operate show continued expansion in the medical care segment (hospitals, clinics, doctors’ offices, buildings in the health sector) and residential segment (apartments for the more affluent classes and the rising middle class). The corporate area continues to expand conditioned also by foreign companies which are present in the country. Due to fiercer global competition, Brazil, mainly in government housing works, schools and infrastructure, plus airports, subways, stations, and hotels need great technological advances and major investments. Shortcomings in Brazil’s development, on the eve of the major events that are scheduled to take place in the country, are very great compared to first-world countries and even compared to emerging nations.

SindusCon-SP estimates growth of 4% in 2013

The GDP (Gross Domestic Product) of the Brazilian construction industry will grow about 4% in 2012 and continue to grow between 3.5% and 4% in 2013, according to the projections of SindusCon-SP (Union of the Civil Construction Industry of the State São Paulo). The figure, however, is lower than the growth reported in 2011, which was 4.8%. The estimate for the country's GDP in 2012 is an increase of 1.6%, with a rate of investment of around 17.5% of GDP. Formal employment in construction is expected to rise 5.9% compared to 2011, the organization's president, Sergio Watanabe, pointed out.

In 2013, there may be a recovery in the rate of investment, which is expected to be 19% of GDP. In conjunction with this, SindusCon-SP estimates that Brazil's GDP will evolve to the same extent as the gross domestic product of construction: between 3.5% and 4%. For 2012, SindusCon-SP and the Getúlio Vargas Foundation (FGV) had predicted growth for construction well above the growth in the country's GDP, based on the pace of construction of both the government’s ‘Minha Casa, Minha Vida’ program and infrastructure. However, the performance of the sector was slightly affected by problems such as:

a reduction in corporate investment;

a drop in public sector investment in infrastructure;

a slowdown in the contracting of housing for ‘bracket 1’ of the government’s ‘Minha Casa, Minha Vida’ Program (for an average of 1.2 million homes in this bracket, only 340 thousand had been commissioned until October 31st);

paralyzation, for a few months, of the highway services rendered by Dnit (Departamento Nacional de Infraestrutura de Transportes - National Department of Transport Infrastructure);

delays in the issuing of realty construction permits, which negatively affected the beginning of works.

However, construction companies continued hiring, which supports the predictions of growth for the sector above the national GDP. Cement sales reported an expressive high for the year. Despite a drop of 0.22% in formal employment in Brazil’s construction sector in October, accumulated growth was still 6.57% for the year, compared to the same period in 2011. In October, the sector provided employment for 3.415 million workers. The state of São Paulo in that month had 859,000 registered workers - an accumulated high of 4.6%.