August 18, 2013 12:25 pm

Brazil tries to fill the potholes in its path to growth

By Joe Leahy in São Paulo

Traffic is backed up during rush hour on the Avenida 23 de Maio highway in Sao Paulo, Brazil

Heavy traffic in Sao Paulo

Fernando Atisto has one of the most dangerous jobs in Brazil. He delivers fresh produce to São Paulo’s central market.

“The roads getting here are terrible and, aside from that, dangerous. There are a lot of potholes even on the privately run ones,” said the truck driver, who has just delivered a haul of apples to the Ceagesp market from São Joaquim in Santa Catarina state, more than 800km away.

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When people in South America’s biggest city shop at the supermarket, they rarely spare a thought for the sacrifice required to ensure there is food on the shelves.

In a country with some of the world’s poorest infrastructure and most congested cities, every apple or piece of meat that reaches a supermarket must undergo a journey that is as perilous for truck drivers as it is tedious.

Ranked 101st out of 144 countries for its infrastructure by the World Economic Forum, the parlous state of its logistics and urban transportation networks has emerged as one of the most critical challenges facing Brazil’s economy.

So critical has the problem become, it has also emerged as an issue in next year’s presidential elections following mass protests in June that were sparked by a proposed modest increase in bus and metro fares.

In response, the government is proposing an investment programme that if realised would be the country’s biggest and most rapidly implemented in history. In logistics alone – ports, airports, railways and roads – the government is looking to invest R$100bn (US$42bn) next year and the same again in 2015.

“We will only be able to think: ‘Ah, now we have contracted all of the infrastructure projects we need’, when we have invested R$100bn a year for five years, or R$500bn, which is what we estimate is the deficit in [logistics] infrastructure,” said Bernardo Figueiredo, president of the federal government’s Logistics and Planning Company.

For the time being, the cost of this deficit is borne by producers. Brazil relies on trucks for 58 per cent of its transport needs, including most of its agricultural produce, in comparison with the US, which moves just 32 per cent of its cargo through roads, with 42 per cent travelling by rail and 25 per cent by waterways, according to a report by Credit Suisse.

The situation is worse for soya, one of Brazil`s fastest growing exports to China. Brazil moves 82 per cent of its soya by road, compared with only 25 per cent in the US. This means Brazilian soyabean costs $145 per tonne to move from farm to port, nearly six times what it might cost for a US producer.

“If you think of how important Brazilian agricultural production is for the world, that means unfortunately more expensive food for the rest of the world than it should be,” said Fernando Martins of Bain & Company. “That’s the way the situation is going to be for the foreseeable future.”

The reliance on trucks, combined with under-investment in roads, has made driving the second-most dangerous activity in Brazil after being a gangster. Traffic accidents are the second highest cause of death by injury in Brazil, second only to homicides and ahead of suicides. Accidents are the second most costly health problem after malnutrition.

The inefficiency does not stop at the roads. Maersk, the shipping company and port operator, says it takes a container an average of 21 days to clear Brazil’s main port, Santos, compared with only two days for Rotterdam. In Brazil’s cities, the metro system of São Paulo, a city with nearly 1.5 times the population of London, is just one-sixth the size of that of the British capital.

To fix these problems, the government is auctioning R$133bn of roads and railways as well as ports and main airports. In addition, there are R$81bn in metro, bus and other urban mobility projects being opened for private sector investment, according to Credit Suisse.

The June protests have given new urgency to the overall infrastructure drive, which had become stalled in bureaucracy and bickering over returns, with the government keen to minimise perceived price gouging by private investors.

The government had been offering real returns of just 5.5 per cent on toll road projects, for example, an amount that has been adjusted up to 7.2 per cent following a lack of interest from the market. This has led many to argue the government would be better off leaving the whole issue of returns to the market to decide through a competitive process.

“If auctions are well designed, you don’t have to worry about pegging returns at a ‘right’ level,” said Arminio Fraga of Gávea, a fund, and a former head of the Brazilian central bank. “It’s not just about execution, it’s also about ideology.”

After all, while users do not like high prices, worse is the present state of affairs, in which only 16 per cent of Brazilian roads are paved.

Pablo Sanches, who does the 750km drive carrying meat between Tapejara in Paraná state to São Paulo two times a week, says the trip would take eight instead of 10 hours without the potholes.

“We are seeing everywhere people saying Brazil needs to progress and end corruption and improve our roads but we are seeing no improvements on the roads, they are all equal or worse,” Mr Sanches said.

Additional reporting by John Paul Rathbone and Thalita Carrico in São Paulo

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ReportSpeculator | August 19 9:28am | Permalink
Why this fantasy? I have been a private sector investor and player all my life. But we just saw people on strike cause bus ticket prices were going higher and without blinking the write states that all we need is to let the market decide and it will be all ok. Guess this this is part of the ideological argument that markets always work best.

The historical reality is that poor countries coming up have always (other than probably 19th century USA) relied on public expenditure to build affordable infrastructure and were only able to do otherwise following reaching at least middle income status as the income levels could withstand the profit margins demanded by private investors.

Anthing else will lead to social agitation. So we have two problems

(1) Government corruption and inefficiency opposed by all save officials and the section of private sector beneficaries
(2) Resitance to the high prices charged by private investors by the middle to poorer sections of society but supported by the better off who are prepared to pay as can afford and just want the services

Getting that balance cannot be simply about auctioning licenses as firstly unclear that the same corruption that upended direct government investment will not be found when selling licenses and regulating what are monoplies. So one way or another either through direct government investment or the supervision of auctions and subsequent regulation you cannot get away from the need to improve governance. So the issue is not so much private or public ownership as such but whether they (and many other countries) are able to improve accountability of government. The idea that you can resolve it just by privitazing is not emperically borne out. When it works it is still because governance is superior and that is usually the outcome rather than the cause of development
ReportProclone | August 18 8:57pm | Permalink
Where is the oversight to reassure Brazilian taxpayers all this money will actually be spent honestly?