Brazil's Growing Regional Influence

by Glenn Switkes
Tuesday, June 30, 2009

Over the past decade, Brazil's rapid economic growth has generated huge cash reserves for the country. Brazil has been transformed from a debt-laden borrowing country to a financier of domestic and international infrastructure projects, with dramatic implications both within Brazil and in Latin America more generally.

Much of this economic might is wielded through Brazil's National Bank for Social and Economic Development, or BNDES, which uses state pension and unemployment funds to channel billions of dollars annually to large infrastructure projects. The bank now finances up to 70% of the cost of dams, roads, and other infrastructure projects under the Lula government's Growth Acceleration Plan, or PAC.

BNDES approved about US$70 billion in loans in 2008, an amount exceeded among public development banks only by the China Development Bank and the European Investment Bank. Ten billion dollars was loaned for electricity and gas projects, including the Santo Antonio Dam on the Madeira River, for which a $3 billion loan was approved last December. In January 2009, BNDES approved its largest loan ever - just over $3 billion for the Jirau Dam upstream. Yet BNDES has no environmental or social policies, other than a general statement of purpose.

Brazil has also become a dominant force in South America, using its economic might to promote large infrastructure projects to gain contracts for Brazilian construction companies in other countries. This has caused tensions with other Latin American governments and the citizens that are resisting these projects.

BNDES' international arm, its Export-Import Bank, approved $7.5 billion in loans in 2008, making it only slightly smaller than the Inter-American Development Bank. Among the most highly publicized controversies involving BNDES has been their $302 million loan to Ecuador for Brazilian construction giant Odebrecht to build the San Francisco Dam. San Francisco has now been shut down because of serious problems with its turbines and tunnels. An investigation uncovered fraud, overpricing, and technical flaws in the dam. Ecuador repaid the loan, but expelled Odebrecht from the country, and has since filed a complaint with the International Court of Arbitration.

Brazil is also using BNDES as a political tool to force other, less powerful governments to do what it wants. One example is its reaction to the crusade by the new Paraguayan President, Fernando Lugo, to get Brazil to pay larger royalties to his country for the electricity it buys from the bi-national Itaipu dam. Lugo says Brazil owes as much as $4.2 billion in royalties to Paraguay for electricity from Itaipu, and has demanded an audit of the dam's accounts, which could uncover massive corruption. Brazil has countered by offering to loan Paraguay $2 billion via BNDES for infrastructure and social programs, but refuses to renegotiate the Itaipu treaty.

With Brazil stepping onto the global stage as a major regional power, there is an urgent need for BNDES to adopt clear and binding social and environmental standards. With international investment comes international responsibility, and BNDES will increasingly be held up to international scrutiny.