Expert Risk Articles

Brazil at a Turning Point

Brazil's current infrastructure is standing in the way of realizing the country's full economic potential. Solutions are needed fast to help this booming country continue to develop before the world's eyes turn to it for the 2014 World Cup. Allianz Global Corporate & Specialty is playing an active part in helping ensure Brazil is ready to face tomorrow's challenges with its involvement in a number of major construction projects.


Brazil at a Turning Point

Brazil’s infrastructure is threatening to slow its growth. In the run-up to the sporting megaevents, billions are being invested in the construction of power stations, roads, airports and railways. As an insurer, Allianz Global Corporate & Specialty (AGCS) is contributing to a new risk culture in mammoth building projects.

Power drives business, and business drives growth. The phenomenal rise of the Brazilian economy in recent years is threatened by a risk which, in the worst case, could significantly impact the country’s future growth plans. This scenario could include blackouts lasting several hours across whole regions, fuel station shutdowns in the north and south of the country and a lack of cooking gas in São Paolo.

In early 2013, such a worst-case scenario threatened parts of the vast country. As a result of a drought that had lasted for months, some regions of Brazil were at risk of energy blackouts due to a potential shortage of electricity, compounded by dwindling supplies of fuel and gas. This time, the scenario was not realized, but the risk highlighted the challenges that Brazil’s economic growth poses to the country’s infrastructure.

Brazil Highway

The reason for such shortages is years of underinvestment in energy production. In times of drought, this leads to supply shortfalls in energy production, as most of the storage dams for the hydroelectric power plants are nearly empty. These produce some 80 percent of Brazil’s electricity. The 37 oil- and gas-driven power plants that are on standby for emergencies and times of peak demand have already been operating at full capacity for months now.

Lack of distribution network

The operators lament that they simply cannot get enough fuel, the market has been swept clean. Of the total 73 gigawatt hours (GWh) of electricity, the thermal power plants produced one-sixth with their 12 GWh at the beginning of 2013. This, however, requires private and public sector operators to import fuel at high prices, exacerbating the already strained conditions in the fuel supply market. For, even if they do import, they are immediately faced with the next problem: Brazil doesn’t yet have the infrastructure it needs to import and distribute around the country what will soon be one-fifth of its total fuel. The ports, fuel depots and the distribution network are not geared to handle such quantities.

The strained situation in the power industry and the ripple effect it is having on other infrastructural weak spots show that Brazil’s infrastructure is inadequate. This is the result of past failure to invest in it: since the oil crises in the 1970s and the turn of the century, outlays in infrastructure investment have largely stagnated. At its lowest in 2003, investment was just 0.1 percent of gross domestic product.

Brazil Airport

At the same time, Brazil’s growth has picked up: to about four percent on average per annum between 2003 and 2010. And with every uptick in growth, the lack of good quality roads, overstrained ports and energy shortages turn into brakes on growth in the world’s sixth-largest economy. Last year, Brazil’s economy barely grew, following growth of just three percent in 2011.

Knock-on effects on agriculture

The Brazilian agricultural industry – one of the country's most competitive sectors – was painfully aware of the effect of Brazil's infrastructure on the economy. The farmers achieved record yields with their corn and soy crops in the last harvest season. While the drought in the US caused prices to soar, mountains of corn and soy piled up in the fields in western Brazil because they could not be transported elsewhere. The farmers were unable to ship their corn because of the overburdened highways and ports.

Outside each of the three largest ports in southern Brazil there are now several dozen container ships waiting to unload, with waiting times of up to two weeks. Thirty kilometer queues of trucks at the ports are an everyday occurrence. The mayor of Rio de Janeiro has now won court backing to ensure that the tankers and container ships waiting outside Copacabana and Ipanema no longer spoil the views from its beautiful beaches. A second shipping route to the port under Sugarloaf Mountain is now hastily being created to reduce the unloading times.

Brazil’s governments recognized that infrastructure would become the bottleneck to the country’s economic growth. In 2007, then president, Luiz Inácio Lula da Silva, presented a program to speed up growth (Programa de Aceleração do Crescimento, PAC for short). The total amount of PAC funding, which was earmarked largely for infrastructure projects, was €380 billion for the period to 2010. In 2010, the PAC was extended to 2014 and given a further sizable injection of funds.

The implementation of the PAC had strong political support in order to remove initial bureaucratic and legal obstructions. Although challenges remain, there have been significant improvements in planning and execution, but also in environmental licensing and in the private financing of long-term projects.

Active response

Overall, companies are expected to play a greater role in the future by contributing more to Brazil's infrastructure expansion. Therefore, President Dilma Rousseff has launched a concession program for the private sector. After all, the 2014 World Cup soccer tournament and the 2016 Olympic Games are just around the corner. Brazil definitely doesn’t want to see visitors in overcrowded airports or in permanent traffic jams on the roads, or see games being interrupted by blackouts.

In a first move Rousseff announced tenders to build over 50,000 kilometers of roads as well as 12,000 kilometers of railroad track at the end of last year. In addition, the details of concessions for five airports and five ports are expected to be released this year. The modernization of more than 100 small provincial airports may also make its way onto the agenda. Oil and gas fields are to be put up for tender again after a five-year break. Potentially, the plan for constructing the high-speed rail link between Rio de Janeiro and São Paulo will also be presented in 2013. Here, the Brazilian government is planning to divide the construction into sections and auction them off to ten different consortiums in order to speed up the construction of the line.

Brazil Plant

Competitive market

The planned infrastructure projects provide a promising outlook for insurers, including Allianz Global Corporate & Specialty (AGCS), which received a license in December 2012 to set up a local reinsurer named Allianz Global Corporate & Specialty Resseguros Brasil S.A. (AGCS Brazil, for more information see infobox). “Providing insurance for engineering and infrastructure projects accounts for a large part of our business. Our clients appreciate our technical expertise and financial strength,” says Angelo Colombo, who heads the new reinsurer AGCS Brazil.

With its construction all-risks insurance, AGCS Brazil is involved in the construction of dockyards, power plants, roads and railways. Policy holders are leading Brazilian construction and energy companies, as well as foreign suppliers of turbines or transport systems. Once the industrial plants start operations, AGCS Brazil offers property cover for plant and equipment as well as machinery breakdown insurance, for instance as lead reinsurer for one of the world’s largest energy generation plants.

New risk management culture

Those wanting to play a part in major projects need to react fast to requests for proposals despite the limited availability of information, says Andreas Hoelscher, in charge of underwriting AGCS Brazil’s engineering business. Local insurers as well as London-based reinsurers compete for the attractive projects. Nevertheless, Hoelscher notes that a new culture of risk management and technical underwriting based on technology know-how is establishing itself in the Brazilian construction business. “Just a few years ago, questions about soil samples or technical construction data would have been unusual.” Nowadays, however, Brazilian construction companies are more prepared to share information with brokers and insurers.

On-site inspections by Allianz’s risk engineers are also fully established now. AGCS civil engineer Jonas Rastelli doesn’t balk at tough travel schedules and has just returned from the building site of a power plant in the northeast of Brazil. The only way of getting there was a four-hour journey along gravel tracks from the nearest regional airport in São Luís (Maranhão).

Challenging soil conditions

Rastelli inspected the soil compaction, the concrete mix and the standard of the quality control for incoming materials and construction progress. However, he is also interested in the training and working conditions of the builders. “Every building site is dependent on its employees,” Rastelli stresses, “and that applies even more to the major projects that are so common here.” The building

sites, which are often located in remote corners of the country, far from civilization, sometimes employ up to 15,000 builders and technicians. So minimizing workforce-related challenges on a construction site can be an important part of a risk management program to ensure maximum productivity and effective maintenance of plant and machinery.

Rastelli pays particular attention to the excavations and foundation construction. Brazil faces almost no severe threat from natural disasters – there are no volcanic eruptions, typhoons or earthquakes – but torrential tropical rains can disrupt and delay building projects. Furthermore, sudden floods can cause Brazil’s highly absorbent sandy soil to swell, or lead to landslides – both with lethal consequences for foundations.