Analysis of Business Environment in Brazil - Research Paper Example

? Infrastructure challenge in Latin America: The case of Brazil. Analysis of the business environment Introduction The scope of the essay is an analysis of the business environment of the Brazilian infrastructure sector of the construction industry. The Brazilian construction industry is dominated by the infrastructure sector which participates with 67% in the composition of the industry. Its high annual growth of 9,5% is forecasted to decrease to 8,3% in the forthcoming period. The industry generates around $60 billion annually (Datamonitor 2010a). There is a clear demand for the sector. Roads between major urban centres are good, but many other smaller roads are unpaved. Air transport suffered a serious crisis in 2007, the network is in bad condition and needs to restored. The shortages of energy supply may hold back Brazil in terms of its economic growth (Datamonitor 2010). The government is the main buyer in the sector, although some forms of public-private partnerships have been established from 2006 (LAM 2010). The sector is characterised with consolidation and large players, and it has seen an entry of foreign investments in past couple of years. The industry reflects a stable and health growth and opens many opportunities for external players as the business environment in Brazil is improving. At 58th position in the Global Competiveness Report (WEM 2010), Brazil is relatively stable, a result of its two decade long fight for macroeconomic stability, economical restructuring and reducing income inequality. Methodology The further analysis of the business environment is made through the use of the PESTEL forces which provide more insight into the challenges faced by the infrastructure sector of the construction industry. The PESTEL tool (political, economic, social, technological, environmental and legal environments) helps in identifying the factors that determine the external strategic opportunities and threats of the companies operating in a certain industry, or one of its sectors (Johnson et.al 2008:57). These factors are regarded as key drivers of change because they shape the strategic environment and are significant in the process of building scenarios of possible futures (Johnson et.al 2008:57). Political environment Although the quality of Brazilian institutions according to the Global Competitiveness Report (WEM 2010) is poorly assessed at 93rd position reflecting limited trust into the politicians, the political stability of the regime in the past decade, in particular the stability of the Brazil’s institutions, favours the growing economic development of the country (Lynn and Tang 2010:156). Economical environment Slightly affected by the global financial downturn, Brazil's economy recovered fast with expected annual GDP growth on 4-5% annually as in the pre-crisis period (Latin American Monitor 2010:6, IMF 2010:59). Brazil managed to weather the global crisis due to its small credit markets, a diversified economy, large domestic sector and a fiscally responsible administration (Lynn and Tang 2010:156). Other contributing factors were the high real prices of the commodity exports and the large private and public investments which continue to increase. In 2010 it is expected that the GDP will rebound to the pre-crisis 5,5%, led by a strong private consumption and investment (IMF 2010:59). The infrastructure segment of the construction industry across Brazil will benefit from large-scale corporate and public investment (Datamonitor 2010, 2010a). The political stability in combination with the macro stability and the relatively low public debt (48% of GDP and 84th rank in GCR (WEM 2010)) favour an increase in the public investments in infrastructure. However, high levels of burecruacy slow down the intensity of these investments (Economic Freedom Report 2010:40). It is expected that the activities in the infrastructure development will intensify in the following period due to the scheduled 2014 FIFA World Cup and the 2016 Olympics. As a result the Brazilian government has announced that it will be investing R$958.9 billion in infrastructure – the Growth Acceleration program “Pac 2” involving public and private companies (Datamonitor 2010a). The program covers activities as building airports and sea ports, highways, energy projects in the north, and housing, water and sewage systems to assist the poorer Brazilian communities (Datamonitor 2010). The highest risk from the economic environment for the foreign investors and investors using international capital to fund infrastructure project comes from the volatility of the exchange rate (PRS 2010:26, IMF 2010). The inflation is under control and the interest rates are low (IMF 2010: 10). As the economy remains in the virtues circle of lower interest rates, stronger currency and attractive macroeconomic prospects, it is expected that the investments in infrastructure will increase in the forthcoming period (LAM 2010:7). The high interest rate spread (35.4 percent, 136tth rank in GCR), implies that the access to finances might be problematic for the investors in infrastructure projects. Therefore, Finances still pertain to be a problem as in most emerging markets. The currency volatility contributes to the problem. Social Environment The economic developments favouring infrastructure development are strongly supported by the current demographic structure of the country. As the fifth largest country in the world in terms of area and population and with a population of 191 million people, out of which 86% live in the cities, “Brazil has the fourth largest urban population in the world” (Lynn and Tang, 2010 ). Two thirds of the population is in the age range of 15 and 64 years old, the median age in Brazil is 28 years (Lynn and Tang, 2010). Further urbanisation of the country through adequate infrastructure will ease the pressure on the cities, while government spending for developing a housing infrastructure for the poorest aims at reducing the poverty. Technological and Environmental analysis The rapid urbanisation of the country is a threat to the largest Rainforest in the world and its usurpation and destruction is a part of administrative contraventions and crimes against the environment (Datamonitor 2010). The legal frame consists of several laws in this area that limit the construction activities in the country (PRS 2011), and there is a need of licences, issued by State authorities, when the investor’s activities can cause environmental pollution. ‘Licenses are required for construction, installation, expansion and function of any establishment that uses environmental resources or is expected to cause pollution’ (Datamonitor 2010:87). Some of these issues cover the protection of the land of the indigenous people (Economist 2009). Legal and Regulatory Environment Although Brazil has made significant reforms in the area of contract enforceability, Brazil has a relatively weak legislation which results in uncertainty regarding the enforceability of contracts (IMF 2010). In addition, companies in the construction sector are facing many legal and administrative barriers which obstruct their operations. Brazil is ranked on the 124th position in the Doing Business report (IFC 2010), the main obstacles to the business environment in the country are identified in the long procedures for receiving a construction permit (444 days) and the enforceability of contracts (IFC 2010:29). These are the most important areas for a construction company. These barriers are a potential risk for the operations of a construction investor in the country. Apart from these obstacles, corruption as a long term problem of Brazil pertains all areas of the life and business in Brazil (Datamonitor 2010). In the past couple of years there have been a progress seen in the adoption of several laws regarding removing of immunity of high officials and the opportunity to pressing charges (Economist 2010). Other legal limitations to foreign investors in the infrastructure are the restricted land ownership rights for foreign investors of the rural land (Hyslop 2010). Furthermore, Brazil has made little progress in easing the regulation and legislating involving the privatisation of the infrastructure and the use of public/private partnerships (LAM 2010) Conclusion The opportunities in the infrastructure sector are identified in the increased demand for infrastructure projects given the hosting of the forthcoming international sport events, and the actual need of the country to urbanize the nation, provide energy resources, fight the poverty and enhance the rapid pace of its current economic growth. The largest challenges are identified in the accessibility to long-term financing, the long administrative procedures for obtaining construction and environmental licences and the weak enforceability of contracts. Cited References 1. Datamonitor, 2010. Brazil. (cover story). Brazil Country Profile, pp:1-93.  2. Datamonitor, 2010a. Construction & Engineering Industry Profile: Brazil, Construction & Engineering Industry Profile: Brazil, p. 1. 3. 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