The world economic forum ranks Brazil's infrastructure 104th out of 142 countries, behind China and India. The fact that only 14% of the country's roads are paved, tells a lot about the precarious infrastructure outlook for the country. There is a lot of room for improvement in the sector, but the Brazilian government, until recently, had been delaying the required stimulus. Inadequate spending by the government seems particularly alarming, as it gears up to host the 2014 Football World Cup and the 2016 Olympics. Recently, the government has shown some progress to address long standing issues, and the recently announced plan will try to mobilize private investment to pave the way for an infrastructure overhaul in the economy. With a worldwide demand for profitable projects in the developing world, as the developed world fails to jump start its engine, the initiative provides ample opportunities for investors.
Lately, Brazilian President Dilma Rousseff has announced a $66 billion plan to improve and build the insufficient transport network, which is a huge barrier to sustainable growth. The licenses, which will be sold to private companies, will allow them to operate 7,500 km of roads and 10,000 km of railways. Brazil's sheer size and the current infrastructure situation make the transport of commodities from one place to another burdensome and costly. The recent policy initiative by the president (although some doubt the adequacy of the amount spent) at least provides the right signal from the authorities to revamp an area that should have started improving a long time ago.
Investors have grumbled about the regulation bottlenecks that hamper the speed at which projects get approvals and reach their final stages. Costs eventually go up as the projects proceed at a snail's pace, and some have had to be shelved just before their completion. Securing environmental licenses, for example, for major projects has particularly been a pain. However, the incumbent government has made efforts to overcome the difficulties arising from an inefficient bureaucracy. The initiative announced by the president calls for a public-private alliance, where in the case of railways, a government company will stand ready to buy railway capacity from contractors to ensure demand. This will help mitigate risks for investors.
Possible Avenues for Investing
Investors can take part in the infrastructure boom in Brazil through ETFs and companies, which are positioned to benefit from increased infrastructure spending. For example, investors will find EG Shares INDXX Brazil Infrastructure Index (BRXX) well poised to take advantage of the proposed infrastructure spending. The ETF, incorporated in the U.S., seeks to generate return that imitates the INDXX Brazil Infrastructure Index. The largest holdings in the fund include Cia Siderurgcia, CCR SA, BR Malls Participacoes and Vale SA.
Aecom (ACM) is another company that has positioned itself well to take advantage of the upcoming infrastructure spending spree, by inking deal for the Rio de Janeiro Olympic and Paralympic Games. ACM had won the General Urban Plan of the RIO 2016 Olympic Park Competition, which nominated ACM to master plan the park. Aecom provides professional technical and management support services for commercial and government clients worldwide.
Companies in the power sector, such as CPFL Energia SA (CPL), will stand to benefit from the new airports, ports and railways to be built over time. CPL generates and distributes electricity in Brazil. It also provides an attractive dividend yield of 5.8%
iShares MSCI Brazil Index Fund (EWZ) is an ETF that seeks to provide results that imitate the performance of listed companies in Brazil, and is concentrated in the commodity focused companies. EWZ largely tracks the broad market in Brazil, and some of the largest holdings include Petroleo Brasileiro SA, Itau Unibanco Holding SA and BRF-Brasil Foods SA. The ETF has provided a one year return of iShares MSCI Brazil Index Fund
Note: Company descriptions have been sourced from Bloomberg.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.