FOREIGN DIRECT INVESTMENTS IN BRAZIL IN INFRASTRUCTURE

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2 FOREIGN DIRECT INVESTMENTS IN BRAZIL IN INFRASTRUCTURE CLIENT RESPONSIBLE PARTNER DATE RICARDO SENNES 10 TH JULY 2013

3 Financial Crisis Recovery (2010) Deceleration, Risk Aversion and Regulatory Change risco 2H/2011 investment recovery (2013) THE BRAZILIAN PARADOX: THE CASE OF INFRASTRUCTURE WHY INVESTMENT RATE IN BRAZIL DOES NOT CROSS THE 20% LINE? IS THERE A SPECIFIC FACTOR THAT BLOCKS INVESTMENTS? WHY SOME SECTORS ARE MUCH MORE AFFECTED THAN OTHERS? illustrates the tension between political system and economic goals 25 Investment rate in Brazil (%GDP) ,3 16,4 17,7 16,6 18,7 19,1 18, Investment Cycle ( ) Source : BNDES (May ) 2

4 INVESTMENT RATE- COMPARATIVE 60 Gross capital formation (% of GDP) 50 China 40 India Mexico Brazil Source: World Bank 3

5 USD billions BRAZILIAN FOREIGN DIRECT INVESTMENT Foreign direct investment flow , , ,7 22,4 16,5 10,1 18, ,8 34,5 25,9 0 Source: UNCTAD Source to 2013e: Credit Suisse 4

6 FOREIGN DIRECT INVESTMENT GLOBAL RANKING Foreign Direct Investment (US$ Billions) USA 198 USA 227 USA 147 China 115 China 124 China 120 Belgium 86 Belgium 103 Hong Kong 73 Hong Kong 83 Hong Kong 96 Brazil 65 UK 51 Brazil 67 UK 63 Singapore 49 Australia 66 France 59 Brazil 49 Singapore 64 Singapore 54 Germany 47 Russia 53 Australia 49 Russia 43 UK 51 Canada 47 Ireland 43 Canada 41 Russia 44 Spain 41 France 41 Ireland 40 Source: UNCTAD 5

7 % of GDP INVESTMENT IN INFRASTRUCTURE Brazil s infrastructure requirements for the coming years totals USD 1 Trillion. but historically Brazilian infrastructure investment rate is very low 3,5 3,32 Investment in Infrastructure in Brazil (% of the GDP) 3 Lula s cycle 2,5 2 1,5 2,2 1,62 1,85 2,06 2,11 2,03 2,1 2,45 2,05 2, , Sources: for 2002 to 2007 see IPEA (2009.) O investimento em infraestrutura no Brasil: História recente e perspectivas. For see Sobratema 2012 report. 6

8 STRONG PUBLIC POLICIES: NEW MARKET AHEAD PAC (federal infrastructure program) and Sao Paulo State plan: Ports / Airports Road and rail roads Energy and Oil & gas Urban mobility Expected new infrastructure projects by type of contract (a sample) ( ) 75% of the total private company driven Source: Prospectiva using several different sources. 7

9 PARADOXIN INFRASTRUCTURE: SOME TOPICS Brazil offers reasonable regulatory standards and good legal security Gaps exist and laws can be contradictory. Regulatory risks exist (due to political cycles and generally immaturity of models) There is a low risk of contracts being broken, but regulatory and legal transaction costs are still high There is no lack of resources public, private or international. problem: expected project long-term return doesn t yet match investors requirements Collision of interests delay new infrastructure projects: Indigenous issues, Environment, Social inclusion, etc. Brazil exhibits more favorable conditions for FDI in infrastructure than its main competitors: Russia, India, Turkey, South Africa and Mexico. 8

10 WHAT CAN WE EXPECT? It is very unlikely that all investments planned on infrastructure will be implemented (50-60% of the total?) Infrastructure spending that does take place will share the following characteristics: The express participation of public entities (state companies, state guaranties, state credits) Strongly backed by domestic resources, complemented in part by foreign investment Contracts will carry mid-level risk (regulatory, contractual and political risk) Key presence of foreign companies in partnership with domestic counterparts. Important role of state banks in structure of deals (BNDES, CEF, BB) 9

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12 UNCTAD REPORT 2012 The global financial crisis has accelerated the shift towards industrial policy in Brazil: Brazil has been implementing policies to support industries not only by fostering investment, innovation and foreign trade, but also by protecting the domestic market and local manufacturing. Some measures: - Higher tariff barriers; - More stringent criteria for licenses; - Increase preference margins for domestic production in public procurement; - Tax increase on manufactured products levied on certain national and imported vehicles by 30 percentage points; Brazil unveiled a new policy in August 2011: - Replacement of the corporate payroll contribution to social security (20 per cent) by a 1.5 per cent tax on gross revenues for firms in labor-intensive sectors starting in December 2012, and the - Expansion of Banco Nacional do Desenvolvimento loan programmes. Brazil pursue more active policies for promoting industrialization and broader development goals, and these protectionist measures are likely to have an impact on both FDI policy and FDI strategy. However, this change does not seem to be deterring FDI flows, which have boomed in Brazil in recent years. 11

13 COMPOSITION OF FDI IN BRAZIL 80 Composition of FDI (US$ bilhões) Projeção ,9 12, , ,4 15 8,5 54,8 52, ,2 6 40,1 0,1 2,7 26,1 30,1 19, , e 2014e Participação no Capital (líquido) Empréstimos intercompanhias (líquido) Espera-se a manutenção do nível de IED (estabilidade). Source: Credit Suisse 12

14 DISTROBUTION OF FDI BY VALUE (%TOTAL) 120 Distribution of FDI by value (%total) T2013 Operações inferiores a US$ 100mi Operações entreus$ 500mi e US$ 1bi Operações entreus$ 100mi e US$ 500mi Operações superiores a US$ 1bi Operações concentradas em operações cujo valor é inferior a US$ 0,5 milhão. Source: Credit Suisse 13

15 FOREIGN INVESTMENT BY SECTOR 120 FDI by sector (%) Setores voltados para o mercado doméstico concentraram o IED Extrativa Mineral Indústria de Transformação Serviços Agricultura e Peduária Source: Credit Suisse 14

16 FDI BY SECTOR FDI by sector (US$ bi) Comércio, exceto veículos 6,5 Metalurgia 5,9 Produtos alimentícios e bebidas 5,2 Serviços financeiros Seguros, previdência complementar e planos de saúde Telecomunicações Extração de petróleo e gás natural 4,8 4,7 4,5 4,5 Extração de minerais metálicos 2,9 Atividades imobiliárias Produtos químicos 2,1 2,3 Source: Credit Suisse 15

17 FDI BY COUNTY OF ORIGIN M&A by country of origin (US$bi) Reino Unido Luxemburgo EUA Japão Espanha França Alemanha Canadá Noruega Suíça Itália Chile México Índia África do Suk ,3 China 8,1 EUA 6,5 Espanha 3,8 3,5 França Japão 9,8 9,5 3,5 2,8 Reino Unido Noruega 6,9 6,7 2,5 Portugal 5,9 1,9 Chile 7,4 1,8 Luxemburgo 3,6 1,7 Suíça 3,3 1,1 Bermuda 2,5 1,1 EAU 2,3 1 Singapura 2 0,7 Alemanha 1,9 14,2 21,5 20,8 Source: Credit Suisse 16

18 KEY INVETORS OPERATIONS BY SECTOR China by sector (2009 a 2012) US$ 21,5bi Other Metals 1% 10% 10% Energy Petroleum 79% Source: Credit Suisse 17

19 KEY INVESTORS OPERATIONS BY SECTOR EUA by sector (2009 a 2012) US$ 20,8bi Insurance Other 21% 19% 4% Pharmo-chemical Energy 16% 13% 8% 7% 6% 6% Misc. Commercial Finance Source: Credit Suisse Petroleum Foodstuffs 18

20 KEY INVESTORS OPERATIONS BY SECTOR Espanha by sector (2009 a 2012) US$ 14,2 bi Finance Other Energy 5% 2% 92% Telecom Source: Credit Suisse 19