Guilherme Afif

SAO PAULO–The government of Brazil’s wealthiest state will hit the road at the end of this month to find international investors to help build $21 billion of infrastructure projects, part of a nationwide effort to spur flagging growth dragged down by insufficient investments.

“Brazil isn’t growing because of a lack of investment in infrastructure,” Guilherme Afif Domingos, deputy governor of the state of Sao Paulo, said in an interview. “We don’t have sufficient domestic savings to pay for all of the infrastructure that’s needed.”

The government of Sao Paulo, responsible for about one-third of Brazil’s economic output, will meet with potential investors in London Jan. 28 and 29 to develop public-private partnerships to build railways, jails, hospitals and a system for recycling old cars.

A century ago, British and Canadian money helped build in Brazil one of the largest railroad networks in the region, as well as major hydroelectric power projects. But the railroads in particular fell into disuse and disrepair after the Second World War, when the emphasis switched to automobiles and construction of highways. Mr. Afif said the country needs to restart that partnership with international partners.

Brazil’s economic powerhouse is a clear example of infrastructure shortfalls slowing potential growth. Santos port, which handles about one-fourth of Brazil shipments, habitually sees kilometers-long lines of ships and trucks waiting to drop off or pick up cargo. A lack of adequate rail networks boosts transportation costs as well as putting more trucks on highways, leading to thousands of vehicle-related deaths each year. Airports, meanwhile, are already working above capacity ahead of global sporting events that are expected to bring even more visitors to the country.

Brazil’s federal government is keen to increase the country’s investment rate in response to weak growth, but it has been criticized for a heavy-handed approach to the economy that some say has scared off investors. It has strong-armed banks into lowering fees and interest rates, taken back underused stretches of railroad from operators and, at the end of last year, set onerous terms to renew electric power concessions as it sought hefty reductions in power prices for consumers.

Mr. Afif said that the country faces a delicate balancing act between ensuring that companies make sufficient profits from their investments while not exaggerating on returns. Private investors need to be certain they will make profits, he said. Sao Paulo’s experience in dealing with highway concessions should serve as a model for the federal government, according to Afif.

“For the country to grow at 4%, you need to invest 25% of [gross domestic product]. Brazil invests 18% of GDP, so our growth will always be below 2%, because of a lack of investments,” he said.

He acknowledged the state and the country face major obstacles, such as the heavy tax burden on infrastructure investments. President Dilma Rousseff is aware of the problem, he said, and has already moved to make some tax exemptions, which will benefit Sao Paulo’s plans.

He said the state, which on its own would be the 18th largest economy in the world, has stuck rigidly to the terms of contracts, pointing to heavy criticism of significant increases in tolls on highways run by private firms.

“The contracts were made at a time when interest rates were extremely high,” Mr. Afif said. “We maintained the contracts to be able to have the credibility to do what we’re planning now.”

The largest project to be launched later this year is a $9 billion passenger-rail link between the state capital, also called Sao Paulo, and four major cities, which it expects to be operational as soon as 2016. A further $10 billion would be directed toward building two new subway lines and a metropolitan rail line in the capital.

The government will likely chip in with 30% to 50% of the project costs, with the rest financed by private partners, Mr. Afif said. With private investors taking the lead, the projects can get off the ground quicker than if the government was spearheading them because of a cumbersome bureaucracy.

“Public-private partnerships take longer to put together, but once they’re formed they are much faster at executing than a public project,” Mr. Afif said. Private-sector projects can be ready about one year earlier than if they were carried out by the government, he said.

Mr. Afif is counting on a lot of idle money in Europe–where interest rates are at historic lows–and a healthy appetite for projects in one of the world’s biggest emerging markets. More than 100 investors have already confirmed their presence at government presentations in London, according to Mr. Afif.

“These are projects with high returns, whereas global savings are stashed at negative rates in the German Treasury or at zero rates in the U.S. Treasury, awaiting the opportunities for structured projects to invest,” he said.

Domestic investors, accustomed to parking their money in low-risk and high-yielding government bonds, will likely lag international investors in assuming more risk in their investments and taking a stake in these projects, Mr. Afif said.

“The drop in (domestic) interest rates is very recent, but I have no doubt they’ll come around,” he said. The benchmark Selic, which stood at more than 26% a decade ago, has been cut to a record low of 7.25% amid disappointing economic growth. Many believe interest rates won’t return to previous high levels.

(END) Dow Jones Newswires