VZCZCXRO5834
RR RUEHRG
DE RUEHBR #0347/01 0791900
ZNR UUUUU ZZH
R 201900Z MAR 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 3847
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 7449
RUEHSO/AMCONSUL SAO PAULO 3738
RUEHRG/AMCONSUL RECIFE 9257

UNCLAS SECTION 01 OF 03 BRASILIA 000347 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC WHA/EPSC EEB/OIA 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DEPT OF TREASURY FOR LINDQUIST AND TRAN 
 
E.O. 12958: N/A 
TAGS: EINV ECON BR
SUBJECT: Brazil: PAC Investment Program Two Years Later: Mixed 
Results 
 
SENSITIVE BUT UNCLASSIFIED 
 
REF: A) State 4706 B) Brasilia 257 C) Brasilia 316 
 
¶1. (SBU) Summary: The Brazilian Growth Acceleration Program ("PAC"), 
a government run public works program funded with federal, 
parastatal, and private investment, celebrated its second 
anniversary in February.  In a recently released PAC executive 
summary report, the GOB highlighted past, present, and future 
projects while recommitting resources to the PAC despite slumping 
tax revenues and in view of decelerating GDP growth in Brazil.  The 
GOB reinforced the program's objectives of modernizing Brazil's 
infrastructure, improving Brazil's business environment, stimulating 
the flow of capital, expanding Brazil's public works management 
capacities, and enriching the quality of life of its citizens. 
Despite some success in implementing a few infrastructure projects 
and reinvigorating the debate on tax reform, the GOB has only 
completed 11 percent of its planned PAC projects and critics 
complain of mismanagement of resources.  The PAC remains a political 
and economic priority for Lula's Workers Party (PT) government, as 
well as an important deliverable for Chief of Staff Dilma Rousseff's 
potential presidential campaign in 2010.  End Summary. 
 
OVERVIEW 
-------- 
 
¶2. (U) The current consensus is for near zero percent Brazilian 
economic growth for 2009, and the GOB hopes that the PAC 
expenditures will play a key role in spurring economic growth in 
¶2009. According to the GOB PAC report, Brazilian federal investment 
represented 0.64 percent of the country's GDP in 2006 prior to the 
creation of the PAC. In the PAC's first year (2007), investments 
reached 0.73 percent of GDP, and then reached one percent of GDP in 
¶2008.  Moreover, Energy parastatal Petrobras, responsible for 35 
percent of PAC investments, increased the company's total 
investments from 0.76 percent of GDP in 2006 to 1.1 percent in 2008, 
with plans of reaching 1.4 percent of GDP this year. 
 
PAC BUDGET 
---------- 
 
¶3. (U) President Lula announced on February 4 a 28 percent increase 
in PAC spending to spur economic growth, bringing the new total 
government and private PAC funding to R$646 billion over the three 
years.  (NOTE: When launched in January 2007, the PAC projected an 
overall investment of R$ 503.9 billion through 2010 (or nearly US$ 
230 billion at that time).  The GOB plans to invest an additional R$ 
502 billion beyond 2010.  The combined PAC budget, including the 
three year initial budget and planned investment beyond 2010, has 
been allocated among the following three sectors: R$ 132.2 billion 
for transportation logistics, R$ 759 billion for energy, and R$ 257 
billion for urban and social investment.  The President of the 
Brazilian Chamber of the Construction Industry, Paulo Safady 
applauded the expansion of the program, but speculated that the GOB 
would ultimately reallocate PAC funds for other priorities. 
 
¶4. (U) However, GOB officials have asserted that PAC spending will 
not suffer cuts.  Chief of Staff to Finance Minister Guido Mantega, 
Luis Melin, told Econoff that Brazil had learned from past economic 
crises and would not reduce infrastructure investment during the 
global economic downturn. Dilma Rousseff echoed Melin's comments 
indicating that the GOB intended to use PAC spending as an 
anti-cyclical measure to mitigate the crisis.  Rousseff indicated in 
an interview with Brazil's national economic newspaper Valor that 
the crisis is tranforming the PAC into a mechanism to combat the 
turbulence.  Likewise, Planning Minister Paulo Bernardo stated that 
all PAC investment would be maintained, and, if budget cuts were 
needed, the PAC would not be affected. 
 
PAC BUDGET EXECUTION WEAK 
------------------------- 
 
¶5. (U)      According to the Federal Budget Secretariat of the 
Ministry of Planning, the GOB had actually programmed only R$ 68 
billion at the inception of the PAC, and then increased to R$ 73 
billion after the program was expanded in February 2009.  Although 
the GOB authorized R$ 33 billion in investments over the last two 
years, only R$ 18.7 billion was effectively disbursed, representing 
less than 30 percent of the total programmed budget amount (R$ 73 
billion) since 2007.  However, the GOB increased its disbursements 
in 2008; the amount disbursed in 2008, R$ 11.4 billion, was 55 
percent greater than in 2007.  In highlighting the challenges the 
GOB faces in effectively disbursing authorized PAC money, national 
 
BRASILIA 00000347  002 OF 003 
 
 
newspaper O Estado De Sao Paulo reported in a March 16 article that 
the year to date PAC expenditures amounted to only 5.2 percent of 
the annual authorized budget amount of R$ 20.7 billion, and that up 
to March 12, daily PAC expenditures in 2009 were 45 percent lower 
than in 2008. 
 
¶6. (U) A number of factors explain the slow disbursement of PAC 
funds, such as cumbersome environmental licensing and various 
Federal Accounting Court (TCU) investigations.  Of the 2,378 PAC 
projects that the PAC Management Committee (Planning Ministry, 
Finance Ministry and Planalto) currently monitors, only 190 have 
received environmental licenses from the Ministry of the 
Environment. The TCU, charged with ensuring contract transparency 
and financial oversight, has audited 124 works for potential 
contract irregularities, of which 69 have to date been "released" to 
proceed. 
 
PAC PERFORMANCE: RESULTS IN 2025? 
--------------------------------- 
 
¶7. (U)   Excluding sanitation and housing projects, the number of 
projects that the PAC Management Committee currently monitors has 
increased from 2,198 in September 2008 to 2,378 in December 2008. 
Of these works, 11 percent, or 270 projects, have been concluded, 
corresponding to an investment of R$ 48.3 billion or nearly 2 
percent of GDP.  The GOB lists the construction of 4,300 km of roads 
and 240 km of railroads, the refurbishment of airports, ports and 
waterways, subways, and the establishment of electrical, water, and 
sewage networks throughout the country as the main PAC achievements 
to date in the logistics and social-urban sectors.  In the energy 
sector, highlights include expanding generation capacity by 2,600 
MW, installing 4,100 km of transmission lines, building 1,400 km of 
pipelines, and refurbishing shipyards and merchant marine vessels. 
 
 
¶8.  (U) Despite these achievements, the GOB is far behind on its 
goals of project completion.  At the current pace, the remaining 89 
percent of ongoing projects would be concluded around 2025.  The 
President of the Union of Heavy Construction Industry (Sindicon), 
Luiz Fernando Reis, criticized the GOB bureaucracy for impeding 
budget execution of PAC funds and the GOB's poor project management 
skills.  In response, the GOB claims that 80 percent of the 
unfinished projects are being executed at an "adequate pace", while 
7 percent require "attention" and only 2 percent are "worrisome." 
Of the projects moving at an "adequate pace," 58 percent are 
currently under construction, 20 percent are in the bidding process, 
and 11 percent are in the analysis or licensing phase. 
 
PAC RELATED INSTITUTIONAL REFORMS 
--------------------------------- 
 
¶9. (U) The introduction of the PAC has facilitated several 
legislative initiatives designed to enhance the GOB's public works 
management capacities and improve Brazil's business and investment 
climate.  Examples include tax facilitation measures such as the 
2007 General Law of Small Business, tax exemptions for the civil 
construction sector, and the controversial Tax Reform bill that is 
currently under debate in Congress.  Congress has also proposed 
credit stimulus measures such as the expansion of Brazil's National 
Developmental Bank (BNDES) credit operations, the reduction in 
interest rates and the creation of an Investment Fund utilizing 
resources from the FGTS (a federal labor fund sourced by employers). 
 Measures to improve the investment climate include a new regulatory 
framework for the sanitation sector passed in 2007, and the Natural 
Gas Law approved last month.  In addition, there are two proposals 
for a new regulatory framework for inter-agency collaboration and a 
new Brazilian system for competition enforcement, both awaiting 
Congressional action.  Management measures include a new regime for 
public sector social security under debate in Congress, the 2007 
Decree that improves transparency of the management of parastatal 
companies, and the creation of career federal infrastructure 
analysts, of which, 516 analyst and 84 specialist positions have 
been filled.  Long-term fiscal measures pending Congressional 
approval include efforts to cap the expansion of the Federal payroll 
and enhanced facilitation and transparency of the project bidding 
process. 
 
COMMENT 
------- 
 
¶10. (SBU) Although the pace of project completion has been slow, due 
in some part to bureaucratic licensing obstacles and contracting 
oversight issues, the GOB continues to point to the program as an 
 
BRASILIA 00000347  003 OF 003 
 
 
important anti-cyclical fiscal stimulus that mitigates the effects 
of the global downturn.  The PAC program infrastructure investments 
are regarded as a key component in promoting President Lula's Chief 
of Staff, Dilma Rousseff, as his likely successor as the PT 
candidate for the 2010 elections.  Dilma is noticeably present at 
the inauguration ceremonies of most PAC projects.  Given the 
political imperatives of the PAC, the program (along with the Bolsa 
Familia welfare program and healthcare spending) is likely to remain 
a budget priority for the GOB. 
 
¶11. (SBU) 2007 and 2008 were the first years since the 1980s that 
Brazilian growth topped five percent in two consecutive years. 
While the GOB touts the PAC as one of the primary contributors to 
pushing GDP growth above five percent the last two years, and as an 
important stimulus to growth in light of the global crisis, its 
actual impact appears slight to date and could take years to 
measurably increase economic growth.  The slow pace of budget 
execution and disbursement of funds probably will continue to delay 
PAC project execution.  Despite the GOB's pledges to maintain PAC 
investments, if tax receipts continue to fall, Lula will be hard 
pressed to find the right balance between economic and political 
expediency. Furthermore, the PAC is likely to attract increased 
scrutiny and criticism if the program is perceived as failing to 
boost economic growth in 2009.  End Comment. 
 
¶12. (U) This cable has been coordinated with Consulate Sao Paulo. 
 
KUBISKE