BRAZIL: EXPLAINING THE PAC (THE GROWTH ACCELERATION PROGRAM)

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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
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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 
 

>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.



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

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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





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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.



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PAC PROJECT PLANNING AND EXECUTION CYCLE

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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.



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

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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



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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.



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COMMENT

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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