China Funds to Boost Brazil Infrastructure

By Andrew Willis

The Brazilian government has received several applications for money held in a new development fund, as the struggling South American country seeks to kick-start a series of infrastructure projects in a move that could aid project cargo shippers.

The US$20 billion China-Brazil Cooperation Fund for the Expansion of Production Capacity opened for applications in June 2017 and is largely being financed by China. Better Brazilian ports, roads and railways will help the Asian powerhouse economy secure the raw materials it needs at home at a lower cost, as well as facilitating the return of manufactured goods.

By November, officials had already received four applications for financing from the China-Brazil fund, with a further 21 “on the way,” according to the Brazilian Planning Ministry Foreign Affairs Secretary Jorge Arbache.

“There is a lot happening,” Arbache said to Breakbulk. “And it’s going to have a positive influence” on many sectors throughout Brazil and further afield.

The China-LAC Industrial Cooperation Investment Fund will provide US$15 billion to the new fund, with the rest mainly coming from the Brazilian Development Bank and the state-owned Caixa Economica Federal. Private banks in Brazil are not excluded from also providing some of the funding for projects

 

Timeline For Funding

Civil servants and banks in both countries will evaluate the project applications in the coming months, meaning disbursements to the more developed projects could start as soon as next year. Loans to less mature projects will take longer.

“We are accepting applications from projects that have already been developed,” Arbache said. “If a given project in these circumstances gets funding it will start borrowing very soon; depending on their circumstances, perhaps the second semester of 2018.”

A recent job for Martin Bencher involved the transportation of presses to mold car aluminum from Brazil to the U.S. Credit: Martin Bencher Group

The system of financing and decision-making by both sides distinguishes the new fund from many others involving China. Winning projects are likely to focus on upgrading Brazil’s ports, airports, roads and railways.

As well as these infrastructure projects, officials expect some funding applications from manufacturers and agribusinesses, especially as China is keen to ensure the food security of its citizens, and is a key buyer of Brazilian agricultural commodities including soy and corn.

Corn production in Brazil is forecast to reach a record 97.7 million tons in the 2016-17 growing season, up 46 percent from 2015-16. The increase stems from an expanded area and improved yields for the crop, according to the Foreign Agricultural Service of the U.S. Department of Agriculture, or USDA.

The bumper output is expected to lead to record exports, placing a strain on Brazil’s network of railways and ports, in need of expansion and modernization.

On top of this, greater soybean supplies available for export and a weaker local currency, coupled with strong demand from China, mean soybean exports are also on track to hit a record for the growing year 2016-17, according to the USDA.

While logistics companies may benefit from transporting these bumper crops, they stand to gain more if new infrastructure building goes ahead and closer ties develop between Brazil and China, both members of the BRICS association of emerging economies that also includes Russia, India and South Africa.


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Political Ties

For Arbache, the new cooperation fund’s benefits certainly go beyond the first list of projects that are ultimately successful in securing funding.

“This fund will, above all, improve the Brazil-China relationship from the business, but also from the political perspective,” he said. “It will create the environment for Brazil and China to get together and develop projects in different sectors.”

Many will be hoping the former World Bank economist is correct.

Brazil’s unemployment rate hit a record high 13.7 percent in the first quarter of 2017, as the nation reeled from its deepest recession in more than a century. Since then, growth and jobs have gradually returned, although many industries remain fragile and accusations of corruption continue to swirl around President Michel Temer.

A series of national problems have added to global economic weakness to make matters worse for Brazilian businesses.

State oil company Petroleo Brasileiro SA, or Petrobras, became the center of a large corruption scandal that saw executives go to jail and contributed to the downfall of former President Dilma Rousseff in 2016. Another scandal erupted the same year, this time at Brazilian construction firm Odebrecht, which subsequently admitted in a U.S. court that it had paid at least US$785 million in bribes in more than a dozen countries to win construction contracts.

“Nothing is happening in the Brazilian economy with all the scandals and corruption. Petrobras is broken,” said Roberto Lovesio, managing director in Brazil for shipper and freight forwarder Martin Bencher. “I really hope this fund will come soon.”

China’s willingness to be the chief financier in bilateral and regional funds of this nature is driven by its desire to extend its zone of influence beyond Southeast Asia, said Livio Ribeiro, a researcher at the Brazilian Institute of Economics at the Fundação Getulio Vargas.

China’s Belt and Road initiative was unveiled in 2013, a development strategy that focuses on connectivity and cooperation among Eurasian countries, creating a trading network with China at the center.

The new China-Brazil fund should be seen as an extension of this, Ribeiro said, and is not without risks.

Brazilian Planning Ministry’s Foreign Affairs Secretary, Jorge Arbache (center left) discusses the new fund with business representatives earlier this year.
Brazilian Planning Ministry’s Foreign Affairs Secretary, Jorge Arbache (center left) discusses the new fund with business representatives earlier this year. Credit: Brazilian Planning Ministry

“There are a lot of prejudices against not only Chinese, but all foreigners entering our business here,” Ribeiro said. “It’s something that people do have in mind in Brazil. It will be a very big challenge for many foreigners getting into infrastructure, energy and transportation here.”

Rather than projects failing to get off the ground, this uneasiness in dealing with foreigners could see some of the infrastructure and agribusiness projects develop more slowly than government officials and business executives initially planned.

 

Lost in Translation?

“The money came to Brazil. It will be used. The big risk is that it could take more time,” Ribeiro said. “The Chinese are used to doing things their way, but Brazilians are also very stubborn. So, you need someone to do the translation.”

It remains to be seen who will perform this interpretative role. Chinese companies have earned a reputation for completing large infrastructure projects in parts of Africa in very short periods of time, frequently using Chinese labor and materials. Some charities, however, have been critical of environmental and human rights standards on China-coordinated projects there.

“Brazil is not the same as a small African country,” Ribeiro said. “Here in Brazil you have labor market conditions, you have the legislature. In every single municipality you have to work with the local board, you have to understand which are the needs, which are the compensations. So, Brazil is much harder than going to a small country.”

Despite these potential hiccups, the China-Brazil fund is a welcome development, filling a budgetary shortfall that could potentially support Brazil’s nascent economic revival after several tough years that many of its citizens are keen to leave behind them.

Embattled Brazilian President Temer, who has announced a wave of sweeping privatizations back home, urged greater investment in his country during a visit to Beijing in September.

“I am quite sure that having more money will help us,” Ribeiro said. “Obviously we understand what are the costs, because this money is not coming for free. But Brazil lacks internal savings, so any big infrastructure project needs money coming from abroad so it’s totally welcome.”

China is undoubtedly aware of this leverage and keen to take advantage, especially when U.S. President Donald Trump has alienated many in Latin America.

 

Andrew Willis has worked as a journalist for more than a decade in countries including Argentina, Belgium and Colombia.

Image credit: Joédson Alves/EFE/Newscom

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