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Cablegate: Embassy Brasilia

VZCZCXRO3586
RR RUEHRG
DE RUEHBR #0196/01 0391907
ZNR UUUUU ZZH
R 081907Z FEB 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0980
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5762
RUEHSO/AMCONSUL SAO PAULO 1574
RUEHRG/AMCONSUL RECIFE 7666
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000196

SIPDIS

DEPT PASS USTR FOR KATE DUCKWORTH
DEPT PASS DOC/ITA/MAC/WH/OLAC ANNE DRISCOLL
DEPT PASS TREASURY IA LUYEN TRAN

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: EINV EFIN ECON BR
SUBJECT:Brazil: Explaining the PAC (the Growth Acceleration
Program)

REF: Brasilia 36

1. (SBU) INTRODUCTION AND SUMMARY: The Growth Acceleration Program
(PAC), a principal initiative of President Lula's second mandate,
marked its one-year anniversary on January 22. Its stated objective
is to increase Brazil's low level of investment spending (about
17-18 percent of GDP in 2007 compared to 28 percent in India and
more than 40 percent in China) that many people believe is partly
responsible for Brazil's low rate of growth relative to many other
emerging market countries. The PAC is actually aimed at catalyzing
private and parastatal investment. About 85% of the "PAC" program
is intended to come from PAC-incentivized private and parastatal
investment. While actual private sector disbursement figures under
the PAC are not publicly available, the private sector does not
appear so far to be heavily engaged in PAC projects and no federal
government public-private partnership has yet been approved despite
the 1994 law enabling PPPs. Execution of PAC projects is
cumbersome, assumes private investment that may not come forward
easily given contracting, regulatory and other challenges, and
suffers from a dearth of project planning and execution expertise
that has dwindled over the last thirty years within the Brazilian
bureaucracy. For the PAC to succeed, Brazil needs to address these
structural problems affecting the investment climate and the
challenges associated with lack of technical expertise (reftel).
END INTRODUCTION AND SUMMARY.

----------------
WHAT IS THE PAC?
----------------

2. (U) The Growth Acceleration Program (PAC) is technically a set of
administrative measures aimed at fostering private investment with
leveraged public budget resources. Launched in January 2007, it
currently comprises 27 pieces of legislation, out of which 18 have
already been transformed into law. Significant examples include Law
11477/07, which creates the Infrastructure Investment Fund, as well
as Law 11491/07, which creates the Investment Fund based on
resources from the Labor Time Savings Fund (FGTS). Four other bills
have been approved by either the Senate or the Chamber of Deputies
only and 5 are not yet approved by either chamber. Amongst the
nine legislative proposals still pending final approval are the bill
that proposes changes to the government procurement law, measures to
clarify regulatory agencies' responsibilities, and anti-trust
legislation. The Executive also issued 9 Decrees related to the PAC
in the taxation, social security and Federal management fields.

3. (U) According to the GOB, the package of legislation covers
"credit incentives" such as establishing the FGTS Investment Fund;
"investment climate improvements" including the 2004 proposed law to
clarify inter-relationships and division of responsibilities between
regulatory agencies or the 2005 proposed anti-trust law; "tax
exemptions" totaling R$ 6.65 billion in 2007 and R$ 11.5 billion in
2008, which include exemptions on purchases of project-related
capital goods and on infrastructure investment funds; "fiscal
consistency," meaning the 2005 law raising government spending
limits; and "long term fiscal measures," including a bill that
proposes changes to the Brazilian bidding process, which has already
been approved by the Chamber and still needs to be approved by the
Senate, and a bill that set up limits for payroll expenditures,
which awaits a vote in the Chamber of Deputies.

------------------------------------------
HOW BIG IS THE PAC AND WHERE DOES THE MONEY COME FROM?
------------------------------------------

4. (U) The program was originally designed to invest R$ 503.9
billion (or US$ 280 billion) from both public and private funds, for
the period 2007-2010. R$ 67.8 billion (US$ 37.8 billion) is
projected to come from the federal budget (R$16.6bn for 2007) and
the remaining part, R$ 436.1 billion (US$ 242.3 billion) is
envisaged to come from the private sector and parastatal companies
(e.g. Petrobras and Eletrobras). The break down of the program's
estimated hoped-for endowment by its three major areas is shown in
the following table:

(R$ billion)

Federal Budget Parastatals/Private Sector Total

Logistics 33.0 25.3 58.3
Energy - 274.8 274.8
Social
Infrastructure 34.8 136.0 170.8


BRASILIA 00000196 002 OF 003


Total 67.8 436.1 503.9

As of end-2007, the federal budget had allocated R$ 16.6 billion to
the PAC, of which R$ 16.0 billion was actually committed toward
projects. Of that R$ 16 bn, R$ 4.5 billion (of the $16bn) has been
disbursed, short of the program's ambitious goals. In other words,
GOB has so far spent R$ 4.5 bn toward an intended R$503.9 bn
program. Although R$ 436.1 of the R$ 503.9 is supposed to come from
the private sector, little clarity exists regarding how much private
investment has actually come forward.

---------------------------------------
PAC PROJECT PLANNING AND EXECUTION CYCLE
---------------------------------------

5. (U) PAC projects follow a cycle of five steps: 1) "National
Planning," such as the National Plan of Logistics and Transportation
and the 10-year Energy Plan; 2) "Study," involving environmental
studies and the General Technical Description, e.g. Federal road
BR-242 - Mato Grosso state; 3) "Project," involving the
environmental licensing and the bidding processes, e.g., Guarulhos
airport passenger terminal; 4) "Works," involving the construction
itself, which additionally requires an "installation" license, e.g.
Tucurui dam enclosure, Belo Horizonte, Recife, Salvador and
Fortaleza metro systems; and 5) "Operation," (ie, the project is
actually up and running) e.g. parts of the North-South railroad and
the Santos Dumont airport (refurbishment and expansion completed);
an operation license is required at that stage.

--------------------------------------------- --
PROGRESS IN PAC "AXES" - LOGISTICS, ENERGY, AND SOCIAL AND URBAN
--------------------------------------------- --

7. (SBU) The GOB divides PAC projects into three conceptual baskets,
or "axes" - logistics, energy, and social and urban projects. As of
end-December 2007, GOB is monitoring 2,126 individual projects in
these three major "axes" (1,312 logistics projects, 602 energy
projects, and 212 social and urban projects). GOB "monitoring"
includes three possible classifications for a given project: as of
September, "green light" (projects that are on schedule and
disruptions are not expected) correspond to 86% of the current
public works; "yellow light" (prospective projects that are on
schedule but include potential disruption risks) are estimated as
equaling 12% of the total; and "red light" (due to either schedule
delays or high execution risks or both) accounts for 2% of the total
projects planned. "Risks" could be, for example, difficulties in
obtaining environmental licensing, an investigation by the Federal
Accounting Court on the financial execution of a given work, a
rejected property indemnization for a road, a discovery of an
archeological site in a road/railroad planned route, and other
problems. (NOTE: Because these government ratings are in fact
somewhat subjective, they may be more optimistic than a close
examination of individual project progress would warrant. END NOTE).
Overall, about 60% of planned projects are underway in some
fashion, while the other 40% are still in their initial phases of
the cycle, i.e., bidding process or waiting for environmental
licensing. Some examples of public works recently announced are the
Madeira river power plant Jirau, whose auction has been scheduled
for May 9, 2008; seven groups of roads concessions (five won by
Spanish bidders and two by Brazilians in October 2007, over 2000 km
of roads for 25 years); other sections of the North-South railroad;
and petroleum maritime platforms.

Logistics Infrastructure Axis

8. (U) In this category, the GOB monitors works in roads, railroads,
ports, dams, hydro ways, merchant marine and airports. This axis
will also include the brand new National Port Dredging Program (8
works) and 6 airport refurbishment works. According to the PAC
documentation, estimated total investment in logistics 2007-2010
will amount to R$ 58.3 billion, where it is expected R$ 33 billion
would come from federal public funds, and R$ 17 billion from BNDES
financing lines. Highways and other roads are projected to absorb
over 60% of the total.

Energy Infrastructure Axis

9. (U) This group consists of: hydroelectric power plants,
targeting power generation of nearly 17,000 MW by 2017; thermal
power plants, targeting 88 MW; nuclear power plant (Angra 3),
targeting 1,350 MW; survey of 16,000 MW in the Tapajss
(Amazonas/Par states) and Juruena (Amazonas/Mato Grosso states)
basins; transmission lines targeting a total of 8,108 km; oil
exploration (marine platforms) targeting 1.09 million more barrels

BRASILIA 00000196 003 OF 003


per day; and gas ducts targeting a total of 2,661 km. The estimated
projected investment totals 274.8 million in the 2007-2010 period.
There are no federal monies in this category; however, Petrobras and
Eletrobras are expected to play a major role in project investment.
Oil and Gas are expected to absorb nearly two thirds of total
investment in this category, and renewable fuels only 6.5%. The GOB
also expects an additional R$ 189.2 billion private sector
investment after 2010.

Social and Urban Infrastructure Axis

10. (U) This third category includes projects in sanitation and
habitation; underground systems (subway); environmental
conservation; water supply and sewage treatment; and land
irrigation. Total estimated projected social and urban investment
is R$ 170.8 billion for 2007-2010, with habitation and sanitation
together accounting for 86% of this amount. Federal funds, not
including the program "Light for All," are expected to add up to R$
34 billion, and BNDES financing lines are expected to cover R$ 65.5
billion.

-------
COMMENT
-------
11. (SBU) At the one-year anniversary mark, progress on actual
project execution has been slow under the PAC. Some major
difficulties identified by observers include bureaucracy, for
example, in the process of granting tax exemptions on capital goods,
as well as regulatory framework problems, e.g. delays in obtaining
environmental licenses. Another factor some cite is supply-demand
imbalances in leasing/buying needed capital equipment such as
cranes, heavy trucks, back-hoe loaders and tractors, where delivery
delays can be up to two years. A parallel problem is the scarcity
of experts qualified in planning and executing these projects. GOB
budget constraints may also eventually impact the PAC as well,
although this remains to be seen. Evaluation over the course of
2008 will show more clearly whether the PAC is able to get off the
ground successfully, but much will depend on GOB addressing
underlying challenges affecting the attractiveness of Brazil as a
destination for private sector investment. In 2008, Election Law
9,504, dated 9/30/1997, may further constrain progress to some
extent under the PAC. This law prohibits any new voluntary transfer
of public funds to states/municipalities in the three months before
an election (municipal elections are scheduled for October 2008).
However, disbursements under existing contracts are permitted. END
COMMENT
12. (U) NOTE: GOB issued a project update publication on Janaury
22, 2008 to mark the one-year anniversary of the PAC. This document
is also available on-line at http://www.planalto.gov.br/pac/ in
Portuguese only. For the convenience of Washington users,
translated details of illustrative projects from the GOB publication
have been e-mailed to Treasury, State, Commerce and TDA desk
officers. GOB intends to release PAC updates every four months
through PAC's envisioned 2010 end date. END NOTE

SOBEL

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