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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