2006 is the last year of the current Brazilian President Luiz Inacio “Lula” da Silva’s administration and a fierce electoral campaign has already begun. Each group has pointed out foes with suspect practices of using illegal resources during former political campaigns. Ethics may be the main issue in the election, but what about economic results and investments? Was Brazilian President Lula’s administration a success or a failure? With regard to infrastructure investments, the results are ambiguous.

Lula’s administration has done well in certain sectors such as oil and gas. However, it has not built on state restructuring and deregulation initiated under former President Fernando Henrique Cardoso’s administration. Private investments in infrastructure projects through public private partnerships (PPP) have not been significant and as a result certain sectors such as sanitation and roads construction have been neglected.

During the April assembly in Belo Horizonte, the Inter-American Development Bank (IADB), a regional multilateral agency, estimates that Latin America’s GDP grew by about five percent in 2005 and Brazil will require about US$40 billion annually in new infrastructure investments just to maintain this level of growth. Half of this amount must come from the private sector, which demands financial engineering where the public investments could be made by the private sector under concession or in a public-private-partnership. This private investment requires credibility in structured finance operations.

Credibility comes with stability when the players know the rules. Brazil has transformed since 2003, moving from former President Cardoso’s social democratic policies that were unable to provide expected growth and jobs to President Lula’s promise to enhance state interventionism by passing legislation and pushing for greenfield investments to make private sector investors’ decision-making less risky. Subsequent growth and jobs in the next few years would be a consequence of a more stable and credible overall scenario.

Financial investors worldwide are eager to lend money to Brazil and forget the public debt collapse of the 1980s. Brazil will repurchase its twenty-year-old debt in 2006 with the surplus obtained from commodities exports gained primarily from favorable terms of trade with China, the European Union, and the United States during the last few years. Consequently, the public debt problem is now almost a domestic one.

A highway leads into Sao Paolo, the largest city in Brazil. Despite President Lula's investment in initiatives such as public-private partnerships (PPP), infrastructure in sectors such as transportation and highways has failed to improve

A more serious concern about Brazilian economic growth, which has been below regional and global averages in the past, is how it can avoid the risk represented by the weakness of its infrastructure, an element crucial to supporting expansion in domestic production. After years of insufficient investments, roads, railroads, ports, airports, warehouses, and electrical energy systems are functioning close to their capacity. The basic elements of social infrastructure, such as sanitation, property, and public transportation, are also in similar or worse situations.

Despite President Lula’s ambition to enhance the public sector in a private-based corporate framework, changes in policy and Brazilian infrastructure have been unimpressive. Focusing on the important infrastructure sectors of roads, railroads, oil, and gas helps to explain some of these dubious results.

One of the central concerns of the Lula administration was the proposal to implement a new public services transference model through public-private partnerships (PPP) that respected market rules in order to attract private sector investment in infrastructure projects. This model was inspired by the English model of private finance initiatives (PFI) ranging from roads to hospitals to prisons. In PFI, administration is transferred to some extent to private entrepreneurs while maintaining state risk support. The Brazilian legislature established PPP as a leasing program of infrastructure that makes logistics, especially roads and railroads, a priority, regardless of prior construction. The new legislation transfers specific business construction risks to the private sector, and the government would be obliged to pay for or complement the commercial risk if the covenants of the concession contract are achieved. This agreement would be under the supervision of an independent regulatory agency similar to former President Cardoso’s administration’s model or under a ministry, the preferred model of President Lula’s administration.

Privatizations of the 1990s transferred control from infrastructure corporations to private shareholders and allowed financing of self-supported projects—those which were sustained by their receipts through means such as road tolls. This new PPP legal model, in contracting private corporations or consortia to sell services to the state, has created a new institutional option for unprofitable infrastructure enterprises.

The PPP December 2004 legislation established a series of fiscal responsibility measures including restrictions in assuming new liabilities without proper funding. These measures were intended to improve the public sector’s payment credibility, which has been compromised by broken contracts in the recent past. The new legislation also extended the time period of payments and committed receipts through bond issuing (cash flow securitization). It also allows the use of market tools such as guarantee funds or multi-sourcing (financing through several banks or consortia) and creditor takeovers against borrower’s special-purpose-companies (step-in-rights). Some of those legal tools were imported from Anglo-Saxon, private-oriented common law despite the Roman-Germanic, state-oriented civil law existent in Latin America.

The Lula administration created a great expectation of PPP as a panacea, although investors and financiers were aware of the long time-span needed for infrastructure projects to mature. Even the length of time for actual planning will exceed the terms of present Brazilian governors and the president of the republic. At the beginning of 2006, the last year of the current federal and state executive administrations, only four projects—all initiated by the president’s opposition parties at the state level—had begun PPP procurements for public services concessions: a Minas Gerais state road recovery project, a new São Paulo city subway line, and two sanitation projects, one in Bahia state and the other in São Paulo state. However, all four projects may be disrupted by legal hurdles.

A strong state needs strong income growth. The creation of strong investment funds to invest in infrastructure equity and debt is good news because entrepreneurial projects will replace domestic treasury-bond investments. Investments funds as joint-ventures have been mostly created by private banks and pension funds, sponsored by State-Owned Enterprises (SOEs). A similar idea is to reduce domestic treasury bond interest rates, which are higher than those of all other countries in the Americas. These treasury-bonds were used to finance the one trillion reais worth of internal public debt (US$475 billion).