Public Sector Investments and Industrial Policy in Brazil: Recent Developments and Business Opportunities for Finnish Companies
Key takeaways
The Brazilian economy has been presenting low levels of investment in the last decades. Low investment levels in Brazil have been responsible for substantial investment gaps, low infrastructure quality and relatively low economic growth rates.
Brazil has also been seeing a reduction of high value-added goods in economic output and a lower share of the industrial sector in the country’s overall production.
In order to promote growth and added value in the country, governments in Brazil at national and subnational levels have recently launched a series of initiatives to foster investments and support industrial development.
These initiatives represent relevant opportunities for Finnish companies to engage with Brazilian partners, as most initiatives will require solutions in which the Finnish industry has a great deal of expertise.
Areas with opportunities for Finnish companies include digitalisation and connectivity, decarbonisation, environmental solutions and circular economy, defence, healthcare and machinery and industrial equipment.
Introduction
This report aims to provide Finnish companies with information on the main opportunities resulting from recent investment initiatives and industrial policy measures in Brazil. Firstly, in the introduction, the report will discuss the context in which policies to promote investments and added value in the country have been implemented, highlighting the difficulties that the Brazilian economy has been showing to present high growth rates. Secondly, the report will present information about two major initiatives recently launched by the Brazilian government at federal level to promote investments and foster the country’s industry. Before presenting the main conclusions, the report will provide information on investment initiatives developed by subnational governments, which in Brazil play a key role in structuring and implementing investment projects.
The Brazilian economy has been presenting low levels of investment in the last decades. Since the mid-1990s, the gross fixed capital formation (GFCF) as a percentage of gross domestic product (GDP) in the country has stood mostly between 15% and 20%, as shown in the chart below.
The investment levels presented by the Brazilian economy in the last years is significantly lower in comparison to the levels achieved by countries with similar economy sizes and development levels. The following chart presents data on GFCF as a percentage of GDP for large emerging economies during the last ten years with information available.
As shown in the chart, China presents annual investment rates significantly higher in relation to other large developing countries, with an annual average of over 40%. Indonesia, India and Turkiye form a second group with annual averages around 30%. For Mexico and Russia, the rate stood at a little over 20% in the last ten years. And Brazil is the only country in the group with an average annual investment rate below 20%. Low investment levels in Brazil result in substantial investment gaps, particularly in transport and logistics, as shown on the next table.
Low investment levels have particularly impacted the quality of infrastructure in Brazil. Among the largest developing countries in the world, Brazil's infrastructure quality is higher only than those of India and Indonesia. In the case of India, it is worth noting that the country’s income per capita level is significantly lower in relation to Brazil’s. The next chart presents information on infrastructure quality for large emerging markets.
Low investment rates in Brazil have been impacting the country’s capacity to grow and future economic prospects. Economic growth in Brazil in recent years has been lower compared to other large developing countries, and the potential growth for Brazil in the coming years is higher only than Russia's, by a low margin. The table below compares recent growth rates and the potential growth for the next years for the largest developing countries in the world.
Brazil needs to spur investments to increase the capacity of its economy to grow at higher rates, particularly in infrastructure. Poor infrastructure in Brazil, notably in transport and logistics, substantially impacts both households and businesses, resulting in negative results for the economy’s productivity.
Due to fiscal constraints, in the coming years the government is bound to increasingly partner with the private sector to develop the infrastructure Brazil needs to attain more accelerated economic growth. Initiatives to promote investments in partnership with the private sector will be carried out not only by the central government but also by subnational entities. In order to reduce risks associated with subnational public-private partnerships (PPPs), in April 2023 measures were announced to broaden guarantees provided by the central government to projects developed by states and municipalities.
Brazilian policies to increase investments in the economy led by the central government and subnational entities present plenty of opportunities for companies from Finland, inasmuch as several of the initiatives are in areas in which the Finnish industry has developed great expertise. The next sections of the report will provide information about opportunities in Brazil derived from initiatives to increase investments and competitiveness.
The New Growth Acceleration Programme
In August 2023, the federal government launched a new Growth Acceleration Programme (known as PAC), an initiative to promote investments totalling R$ 1.7 trillion (around US$ 350 billion). More than 80% of the investments are planned to be made until 2026. Resources to fund investments planned by the programme will be provided by both the public and the private sectors, and public-private partnerships and concessions are also included in the new PAC portfolio. The chart below presents information on the breakdown of funding by source.
Economic and social infrastructure investments are the focus of the programme, and the following sectors have been contemplated: sustainable cities (includes housing and urban mobility), energy, transport, defence, science and education, water, health and connectivity. The following chart presents the breakdown of investments by segment.
Most of the investments planned will be allocated to the Sustainable and Resilient Cities segment. The programme Minha Casa, Minha Vida (My House, My Life), an initiative to foster the supply of affordable housing, will receive over 50% of the resources to be directed to this segment. Other areas in this category include urban mobility and waste management.
The segment with the second largest volume of planned investments is Energy Transition and Security, which encompasses the Luz Para Todos (Light for All) programme, an initiative that aims at expanding electricity distribution to areas that are currently underserved, including the Northeast and the Amazon regions. The new PAC also includes substantial investments in energy transmission and energy generation, including from renewable sources, with 186 solar energy projects and 120 wind energy projects in the programme’s portfolio.
As part of investments planned for the Energy Transition and Security category, substantial expenditures are also planned for oil and gas projects aiming at exploration and production, to be carried out mainly by state-owned company Petrobras.
The Efficient and Sustainable Transport axis includes investments in motorways, railways, ports, airports and waterways. Also concerning transports, investments in urban mobility are planned under the Sustainable and Resilient Cities axis. The table below presents information about areas of investment for each segment of the new PAC.
In order to promote public and private investments in Brazil, initiatives to be implemented by the new PAC also include the adoption of institutional measures covering the following subjects: improvement of the regulatory environment and of environmental licensing, expansion of credit and economic incentives, improvement of concession and PPP mechanisms, alignment of the programme with the ecological transition plan and improvement of planning, management and public procurement processes.
New Industry Brazil
The reduction of high value-added goods in Brazil’s economic output and a lower share of the industrial sector in the country’s production are also matters that concern Brazil’s current administration. The next chart shows information about economic complexity since the mid-1990s for Brazil vis-à-vis other major emerging economies.
With the aim of boosting the Brazilian industrial sector by 2033, the Brazilian Federal Government launched the New Industry Brazil programme in January. The programme will make use of instruments such as subsidies, low-interest loans, public investments and special funds to stimulate certain sectors of the economy.
The New Industry Brazil programme aims to stimulate the domestic production from the industrial sector. The programme's objectives include increasing the competitiveness of the Brazilian industry, fostering technological development, promoting exports, attracting investments and improving the business environment. The New Industry Brazil programme will also use public procurement as a means to stimulate the development of sectors of the Brazilian industry considered to be strategic.
The policy has six missions, and the following areas were covered: agribusiness, health, infrastructure, information and communication technology, green economy and defence. Information on the missions and main objectives can be found on the table below.
The New Industry Brazil programme includes the More Production Plan (Plano Mais Produção), a set of measures to facilitate financing of the government's new industrial policy. The More Production Plan will provide R$ 300 billion (around US$ 55 billion) in resources between 2024 and 2026. Of this total, R$ 250 billion (around US$ 46 billion) will be provided by the Brazilian Development Bank (BNDES). In addition to the BNDES, the Brazilian Innovation Agency (Finep) and the Brazilian Company of Research and Industrial Innovation (Embrapii) will also provide resources for the plan.
Companies of all sizes and science and technology institutes will be able to access the resources, which will be made available through credit lines, non-refundable financing and capital market instruments. Information on the breakdown of resources by type can be found on the following chart.
The More Production Plan is comprised of four pillars which reflect the government’s expectations for the Brazilian industrial sector for the next years. Current trends such as industry digitalisation and decarbonisation are major priorities of the programme, as shown on the table below.
Investment Plans at Subnational Level
In addition to initiatives carried out by Brazil’s federal government, subnational governments in the country have been actively promoting investments to foster economic growth. Investment projects planned by state and municipal governments in Brazil total high volumes and they also represent major opportunities for companies willing to partner with the public sector.
The south-eastern states of São Paulo, Rio de Janeiro and Minas Gerais, the most important regions in terms of GDP, are the locations with most sizeable investment opportunities in Brazil. However, as shown on the next table, plenty of opportunities may be found in projects developed by subnational governments across all regions of the country.
Major opportunities at subnational level may be found in sectors that have a strong impact on local economies and in services which often state and municipal governments are responsible for. Examples of main sectors with projects developed by subnational authorities include transport (especially roads, railways and metro lines) and sanitation. In the latter sector, a major initiative recently concluded was the privatisation of Sabesp, a company that was controlled by the State of São Paulo that serves more than 25 million people. The next table presents information on other major recent projects developed by subnational governments in Brazil.
Conclusion and Summary of Opportunities
Low investment levels have been compromising Brazil’s capacity to grow at rates that are necessary to make the country progress towards higher development levels. In response to Brazil’s need to promote investments and accelerate growth, major initiatives by the federal, state and municipal governments have been launched recently. Another area that has received strong attention from the government is the need to strengthen the country’s industrial sector to tackle lower levels of added value in Brazil’s production profile.
These initiatives represent relevant opportunities for Finnish companies to engage with Brazilian partners, as most of them will require solutions in which the Finnish industry has a great deal of expertise. The table below presents information on some of the opportunities that investment initiatives and industrial policy measures in Brazil may offer to Finnish companies.
In sum, Finnish companies can profit from their focus on high-technology, innovation and sustainability to engage with Brazilian partners in PPPs and concessions projects developed by the national and subnational governments and in initiatives aiming at promoting Brazil’s industrial sector. Engaging with local partners and understanding regulatory frameworks will be key for Finnish companies to benefit from these opportunities.
For additional information on current developments in economic policy making in Brazil and main opportunities offered by the market, please do not hesitate to contact Team Finland Brazil. For information on the network in the country, please access https://finlandabroad.fi/web/bra/team-finland-verkosto.
Text: Rafael Murgi (Rafael.Murgi (a) gov.fi)
Coordinator, Trade and Economic Affairs at the Consulate of Finland in São Paulo.
