Brazil already has the sixth-largest GDP in the world and is one of the fastest-growing major economies. Last year, the volume of foreign direct investment into the country stood at US$48.4 billion, an increase of 59.1% over 2010.
With the development of foreign investment in recent years, relations between China and Brazil have strengthened significantly. In fact, since 2009 China is Brazil’s main commercial partner, ahead of Argentina and the US. According to the Brazil-China Entrepreneurial Council, in 2010 China was Brazil’s main investor, with US$12.9 billion, making up 62.7% of Chinese direct investment in Latin America.
In the past, most Chinese investment projects in Brazil were geared towards primary sectors, such as the exploitation of raw materials. However, the quick development of the country, as well as the scheduling of major international events in coming years, mean investment opportunities will be springing up in new sectors.
Brazilian infrastructure demands will rise sharply in coming years as a consequence of investments arranged for the second phase of the Accelerated Growth Plan (PAC 2) and the organisation of the 2014 World Cup and the 2016 Olympic Games.
PAC 2 is the second phase of a strategic investment programme that combines management initiatives and public works. In the first phase, launched in 2007, the programme called for investments of US$349 billion. For the second phase, the government announced estimated investments of US$872.3 billion for 2011-2014 and post-2014. PAC 2 focuses on investments in urban infrastructure, long-distance transportation (highways, railways and airports) and housing.
According to federal government predictions, the 2014 World Cup will demand investments of about US$16.46 billion for the improvement and construction of stadiums, urban transport systems, ports and airports, telecoms and energy. As a result, the government reckons that hosting this tournament will inject more than US$100 billion into the domestic economy between 2010 and 2019. For the 2016 Olympic Games, the budgeted expenditure is about US$14.4 billion, which will inject US$51.1 billion into the Brazilian economy by 2027.
China’s latest investments have demonstrated its special interests in natural resources. In this context, the energy sector will offer several opportunities for foreign investors, with planned investments of US$529 million. To sustain Brazil’s economic growth, energy generation capacity is growing at 7,000MW per year and regular energy auctions for supplies to the regulated market have begun.
The abundance of natural resources assures the country’s great potential to explore the renewable energy sector, which already represents 45% of the energy matrix. The expectation for the next 10 years is that production from alternative energy sources will increase by 18,000MW. In the wind power sector Brazil is the most promising country in the world, according to the Global Wind Energy Council, and its growth potential offers several opportunities for foreign investors. The government seems keen for investment in this sector to diversify the energy matrix, having commissioned the construction of 141 new projects to be delivered between 2012 and 2013, representing a total investment of US$7.85 billion. The region that stands out is the northeast, with high, steady wind speed and low turbulence.
Within the government’s Light for All Programme, several projects for generating alternative energy from clean, renewable sources are being developed to bring electricity to inhabitants of remote regions. Up until last September, the programme had received US$9.31 billion in investment and reached 2.8 million families, or an estimated 14.2 million people.
Another investment destination is petroleum research and exploration. 2008 was marked by the discovery of offshore reserves that should increase daily production of oil and gas from 2.6 million to 3.9 million barrels per day by 2014 and 5.4 million bpd by 2020.
Brazil’s legal framework for foreign investment is rather complex. One of the most relevant rules concerning the investment opportunities described above is Law 8666\93, which settles the general rules on government procurement that shall be observed by all levels of government (federal, state and local). Specific rules shall be settled by the special announcement that places the public offer. In particular, the announcement may indicate whether foreign firms are allowed to participate in the procedure and whether firms can form a consortium, in which case it shall be led by a Brazilian firm.
To participate in the procedure, bidders must face the lengthy process of gathering several documents required by the public administration to attest, among other aspects, to their economic and financial strength, as well as their technical capacity to carry out the contract, which shall be demonstrated by proving the bidder’s association with all the professional associations required for its line of trade.
In addition, Brazilian law foresees two business models for the operation of public facilities and services: concessions and public-private partnerships (PPP). Under concessions contracts, investors shall operate at their own risk and must recoup their investment exclusively from the revenues collected from the users, within the term of the concession. It usually works very well for projects with low risk. The PPP may be agreed as a ‘sponsored concession’, in which case the investor provides long-term services to the state – not to the end users – coupled with the private construction of necessary facilities for the rendering of the services.
Apart from a sharp increase in the volume of investments, an evolution of the investment trends of Chinese companies in Brazil is also expected in the coming years. As demand develops, secondary activities and even the services industry will become an increasing share of Chinese investment in Brazil. However, Chinese investors should be aware of Brazil’s complex legal and administrative system in order to be successful with their projects.
Manuel Torres Salazar is the managing partner at Garrigues’ Shanghai office, with extensive knowledge of cross-border foreign investment. He may be contacted on +86 21 52281122 or by email at [email protected]