Talking Points

Brazil in the run-up to the 2016 Olympics

By Cicero Alencar, ACAL Consultoria e Auditoria, Brazil

Introduction

On 2 October 2009, the International Olympic Committee (IOC) announced the awarding of the XXXI Olympiad to Rio de Janeiro, defeating finalists Chicago, Madrid and Tokyo. The selection of Rio as the host city for the 2016 Olympics constitutes a seminal development in Brazilian history, inviting comparisons with prior Games (e.g. Seoul 1988 and Beijing 2008) that showcased newly ascendant emerging markets as global players.

Following decades of underperformance, Brazil registered solid, if unspectacular, growth in the 2000s and staged an impressive rebound from the global downturn (7.5 percent real GDP growth in 2010). During this period, Brazilian authorities reduced inflation to low single digits and arrested the financial instability that had long hindered the country’s development path. As a result, Brazil has become one of the world’s top destinations for foreign direct investment (FDI) and is now a global leader in biofuels, aviation and other industries.

The Rio Olympic Games present an important opportunity for Brazil to build on these successes and hasten the country’s rise to international prominence. This article examines efforts underway to prepare for the 2016 Olympics and considers the impact of the Games on the Brazilian economy.

Preparations for 2016 Olympics

The pre-planning for the Olympic Games in Rio de Janeiro raised a number of infrastructural issues for Brazilian authorities including construction of new stadiums and sports arenas, hosting facilities, public transportation, telecommunications and power generation. The planning process involved close collaboration between federal, state and municipal authorities and the active involvement of citizens groups in the city of Rio. These efforts laid the foundation for the intensive planning now underway for the FIFA Confederations Cup (2013), FIFA World Cup (2014), and XXXI Olympiad (2016).

Brazil has formed a Governing Council to guide preparations for the 2016 Games and coordinate the activities of private and governmental entities. The Council’s agenda includes the following items:

• Transportation infrastructure, including public transportation in the Rio municipal area and facilities to receive and transport foreign tourists throughout the country

• Energy generation to support anticipated increases in peak demand during the Games

• Public security to build Rio de Janeiro’s standing as a safe and secure city

• Hosting facilities including construction of new hotels and refurbishing of existing ones

• Qualification and training of individuals employed in hospitality and hosting services, including the expansion of foreign language skills

The Brazilian Congress is exploring ways to cut bureaucratic red tape and accelerate bidding and contracting procedures for the 2016 Olympics. These legislative initiatives aim to strike a balance between speed, transparency and governmental control of public investments in the Rio Games. To that end, Brazilian officials are closely observing the United Kingdom’s planning for the 2012 London Games.

Potential Impact of the Rio Games

Rio’s selection as the host of the XXXI Olympiad comes after a decade of economic success unprecedented in modern Brazilian history.

With over US$400 billion of stock foreign direct investment, Brazil trails only mainland China and Hong Kong among emerging market destinations of FDI. Brazil ranks fourth behind

Brazil in the run-up to the 2016 Olympics

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July 2011

China, the United States, and India in A.T. Kearney’s 2010 FDI Confidence Index. Brazil’s rise as a favoured FDI locale reflects several factors:

• Achievement of sustained GDP growth

• Increasing economic stability

• Growth in middle class purchasing power

• Major international business opportunities in agriculture, minerals, hydrocarbons, renewable energy, pharmaceuticals and other industries

As a major global event, the Rio Olympics offers significant potential for Brazil to augment its recent economic successes. The Games also creates the possibility for important changes in Brazilian business culture.

The economic repercussions of the Rio Olympics are obvious. The Games require large investments in infrastructure that will boost demand for skilled local labour as well as foreign expertise. Brazilian authorities are developing a financial model for these investments, which includes provisions for Public Private Partnerships (PPP). In preparation for the forthcoming FIFA World Cup, Brazilian officials have formalised tax incentives for site construction and related services.

Planned investments in Olympics-related infrastructure are budgeted at US$45 billion over five years. In addition to their local economic spillover, these infrastructural investments are likely to boost Brazil’s gross domestic product in coming years.

The Rio Games also promise to burnish Brazil’s standing as a “planet resort”. The country’s natural endowment has long attracted foreign tourists who enjoy the 300 sunny days per year, the large coastal line and unparalleled bio diversity. But inadequate public security and poor infrastructure have prevented Brazil from fully exploiting these assets. Distances within the country are very large, and the general air transportation system is well behind developed country standards. Many tourist accommodations in Brazil continue to charge very high prices without a commensurate quality of services.

Regarding public security, Brazilian authorities enacted a national coordinated public security plan in 2007 that is producing visible results, with a material decrease in all major crime indicators. Rio municipal officials are treating public security as a top priority for the 2016 Games to create a favourable image of the country among attendees and global viewers.

The anticipated improvements in Brazilian infrastructure and public security promise to strengthen the country’s allure to foreign investors. The country’s energy sector is forecast to receive some US$270 billion in investments over the next ten years. Brazilian diplomatic representations worldwide are experiencing a large volume of requests about the country, and local and international business advisors are providing guidance to foreigners seeking businesses opportunities.

The Rio Games also promise intangible but important changes in Brazil’s business culture, which has traditionally emphasised

governmental initiatives. Private sector agents are actively engaged in planning for the Games, including formal participation in PPPs. Brazil’s private sector also stands to reap significant benefits from the economic spillover of the Olympics i.e. increased skilled workforce, increased consumer purchasing power, heightened foreign investment, modernised infrastructure and improvement in the general security environment.

Conclusion

Recent Olympic Games present an uneven record for host cities. Some Olympiads e.g., Mexico City 1968 did not deliver the anticipated economic benefits. Others have produced large cost overruns, leaving Olympic-caliber athletic facilities misaligned with subsequent user needs. The city of Montreal incurred a 12-fold cost overrun hosting the 1976 Games. Already, Russian authorities are investigating reports of construction cost overruns related to the 2014 Winter Games in Sochi.

Olympics planners in Rio de Janeiro enjoy certain advantages that bode favourably for the 2016 Games. The well-documented experiences of previous host cities offer valuable lessons that Brazilian planners can incorporate in their preparations for the Rio Games. Moreover, their commitment to public-private partnerships and active engagement of local stakeholders facilitate the alignment of Olympics-related investments with Brazil’s broader developmental objectives.

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About Cicero Alencar

Cicero Alencar is the founding partner of ACAL Consultoria & Auditoria S/S. He is currently the head of the firm’s tax practice and the international liaison partner for the RSM International network. He took the lead on relevant services related to tax structuring and tax planning in connection with the privatisation of the Brazilian telecommunication system and also with some of the major M&A transactions in country. Serving foreign investors for the last two decades, Cicero has worked and advised both sides of the transactions for the foreign parent company and on the side of the Brazilian venture.

E: cicero.alencar@acal.com.br

About ACAL Consultoria & Auditoria S/S

ACAL Consultoria & Auditoria is 27 years old, has seven partners and some 160 professionals operating in three offices in Rio de Janeiro, São Paulo and Curitiba. The firm offers a wide range of services from its four major divisions of Assurance, Tax Consulting, BPO and Corporate Finance. More than 90% of its clients are international companies operating in Brazil and among them a large majority started their Brazilian operations guided by ACAL advice and support. The firm is client driven, with a very aggressive client care policy and fully customised approach to exceed the client satisfaction. The average client retention rate exceeds ten years, which is solid evidence of the firm’s commitment to be a true business partner to its clients.

www.acal.com.br