Brazil in Focus

A cautionary tale from the new Brazil

by Vander Giordano & Eduardo Gomide

 In November 2009, The Economist produced a cautiously glowing report on Brazil. "If current trends hold,(which is a big if)," they write, "Brazil, with a population of 192 million and growing fast, could be one of the world's five biggest economies by the middle of this century, along with China, America, India and Japan." Predictably, Brazilians have embraced the optimistic scenario.

Brazilians have concluded that it is their time to shine. The media has reported extensively on how Brazil is finally tapping into opportunities in a changing world economy and fulfilling all the potential of its large population, fertile lands, vast mineral resources, and now huge deepwater oil reserves discovered in the last decade.

However, economic growth and prosperity - Brazil's GDP grew 7.5% in 2010 - also bring the risks associated with excessive optimism and a gold-rush mentality. On top of the "big if" listed above, investors and companies need to pay careful attention to details when it comes to where they put their money. A consideration of just two areas - the potential pitfalls of Brazil's rapidly growing infrastructure sector and compliance issues arising from new environmental legislation - show that a lack of such care can be costly.

Playing the game cleanly
Brazil is about to host two major international sporting events. In 2014, the World Cup will be played in Rio de Janeiro and 12 other major cities. Two years later, Rio will welcome the Olympic Games. Analysts are predicting an enormous impact on the economy, with infrastructure investment as the driving force. A study by Brazil's Sports Ministry estimates the potential economic impact from the World Cup to be nearly $100 billion between 2010 and 2014 and cites an expected $5.1 billion in incremental tourism, $9.2 billion in tax collection and the creation of 330,000 permanent jobs.

The vast opportunities related to the rebuilding and expansion of Brazilian infrastructure are attracting foreign investors. Some estimates put the likely cost of the planning and construction of Olympic sports venues at $15 billion. The building of new stadiums and the refurbishing of existing ones for the World Cup, along with improvements to ports, upgrading of public transport and roads, and the expansion of airports necessary for both events will involve at least another $18 billion. These figures may even be underestimated.

Taking part in the infrastructure boom in Brazil will almost always involve a public bid. The major infrastructure projects, such as hydroelectric plants and enhanced power grids, as well as new ports, highways, and airports are largely backed by agencies with full or partial government ownership, including BNDES, Brazil's National Development Bank.

The second phase of the national Growth Acceleration Program (PAC), the largest public sector investment program of the past 20 years, will open up US$220 billion in opportunities for foreign investment in Brazil from 2011 to 2014. The federal government has also established the Olympic Public Authority to coordinate the construction projects for the Olympic and Paralympic Games. Companies must be aware of the risk of getting caught up in bribery or corruption schemes in violation of Brazil's own laws, as well as the US Foreign Corrupt Practices Act and the UK Bribery Act.

One cautionary tale involves a European company, which came under scrutiny by both European and Brazilian authorities in 2009. The company had subcontracted a European engineering firm for its infrastructure projects. Authorities began to suspect that a $6.8 million expense the subcontractor had on its books was, in fact, a payment made to local public officials in order to win a $45 million subway project in Brazil.

Further investigation revealed that this same company made close to $200 million in suspicious payments in connection with a hydroelectric project in Brazil. The scheme allegedly involved a consultancy contract with a Panamanian company. The consultant was hired to provide information to help in the bidding process for the hydroelectric power plant.

But both Brazilian and European investigators are convinced that the Panamanian company never provided any consulting services and that its sole purpose was to act as a go-between to deliver bribes to secure the contract. Meanwhile, the European engineering firm is prohibited from participating in contract bids in Brazil until the investigation concludes, effectively barring it from the infrastructure boom.