Brazil is famous around the world for its lush Amazon rain forest, but the country is also home to the semi-arid region of the northeast. Because of the climate, the area was sparsely populated and economically underdeveloped until the mid-20th century, when a public irrigation program began. This involved the construction and operation of the irrigation infrastructure by the public sector, which was also responsible for the settlement of farmers through the distribution of irrigated lands. This public irrigation program followed three stages. Between 1960 and 1970, projects were intended for the local population. From the 1980s to the mid-1990s, irrigation projects incorporated participation of small agribusinesses in predefined percentages. Beginning in the mid-1990s, the objective was to reach financial emancipation of these perimeters and transfer irrigation to the private sector.
Pontal is a new initiative in which private infrastructure development companies can engage in a long-term concession to build and operate an irrigation infrastructure in Brazil’s fast-growing agribusiness sector. Pontal is a unique opportunity for agribusiness investors to position themselves in a region with advantageous conditions for fruit production—especially due to the country’s climate, water availability, and established logistical channels for export.
A sector in search of self-improvement
Pontal represents an evolution in the way Brazil’s government handles its irrigation business. Many believe the country’s current model is inefficient for two main reasons: (1) the occupation rate of the land in public irrigation projects is much lower than expected (generally less than 50 percent), undermining the potential development effects of these projects; and (2) political pressure. The water tariffs are initially set at a subsidized level to attract farmers to the projects, and they are supposed to grow over time to reach an adequate level that covers at least operation and maintenance costs. Unfortunately, most of the farmers attracted to these projects lack the ability to pay water tariffs, and for this reason delinquency rates are high. With high delinquency rates, irrigation projects need governmental financial support (i.e., subsidies) to cover operating expenses, and usually lack resources to cover maintenance expenses. Maintenance and construction work is frequently delayed, construction costs are high compared to private sector efforts, and the water supply is unreliable, since funds are not always available when maintenance is needed.
Despite all these issues, the promise of irrigation projects continues to attract investment. A World Bank study on the social and economic development impact of irrigation projects in Brazil’s semi-arid region clearly shows that irrigation projects, if developed under sustainable and entrepreneurial standards, can promote development. Positive impacts include the reduction of regional immigration, job creation, generation of income, and increase in GDP and urban development. Overall, Brazil’s government understands that project management and implementation by private partners combines efficiency gains inherent to the private sector and assures social and economic development.
The promise of Pontal
According to the existing technical studies, some of the crops likely to succeed in Pontal include banana, melon, papaya, pineapple, grape and mango; other crops, such as tomatoes, dendê, orange, and sugar cane could be adapted to the region with some restrictions related to scale. A separate study vouches for the feasibility of citrus production in the region, and counts on areas outside Pontal to achieve the scale required that would justify the expense of a crushing plant in the region. Regardless of the crop chosen, the agricultural risk will be assumed completely by the agribusiness company selected to be the concessionaire, and risk will not be shared with the government.
The Pontal region has an established logistics infrastructure for exports, including three port alternatives and highways in adequate condition. In addition, Petrolina’s airport, approximately 40 kilometers from Pontal, already handles cargo planes shipping fruit to other continents.
The project involves two activities:
- The operation and maintenance of the common irrigation infrastructure, in line with rational use of water resources.
- The occupation and development of irrigable land, in line with rational use of soil resources.
The concessionaire will also have the right to expand the provision of irrigation services.
With demonstrated soil fertility and the logistics in place, Pontal’s goal was to attract a private investor (or a consortia of private investors) with proven financial capacity. Prequalified investors were required to have minimum net worth of $54 million, which was deemed sufficient to guarantee the ability to capitalize the Pontal Special Purpose Company (SPC) with a minimum equity capital of $18 million.
While the government had already invested approximately $140 million in the development of the project infrastructure, an additional $54 million investment was required to complete the construction of the common infrastructure of the whole area. The government was prepared to pay a maximum of $150 million in periodic payments over the 25-year period of the contract.
The concession contract grants the Pontal SPC absolute freedom in the selection of crops. However, it requires the agribusiness company to initiate the agricultural development of the overall Pontal area. In fact, the government intends to allocate at least 25 percent of the irrigable land to small farmers, and the agribusiness company will be responsible for promoting a professional and entrepreneurial occupation of these lands by the selected small farmers.
The winning bidder
The bid for Pontal was held in September 2010 in a public session held at Bovespa (São Paulo Stock Exchange). Tetto SPE, a Brazilian company, was the winning bidder, requesting the integration of 51 percent of the total irrigable land and a total government payment of $119 million.
The agriculture company that will take part in Pontal’s efforts will be committed to exploring several sources of income: organic powder milk for export; bovine and cattle genetic material for milk production; pisciculture; and coconut. The company will provide all the necessary technical assistance and input, as well as the 50 initial milk-producing cows, to the selected small farmers. It will also guarantee the purchase of their production. As financial emancipation of the irrigation sector approaches, so does a better livelihood for farmers.