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Fixing Brazil's transportation woes

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Fixing Brazil's transportation woes

September 30, 2012 - 18:43
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Brasília, Brazil, Oct. 1, 2012 (RISI) -Brazil announced one the country's largest stimulus programs to date in August 2012. The R$133 billion package, equivalent to $66 billion, is publicly aimed at fixing long-standing deficiencies in the country's infrastructure and transportation sector. But many analysts are quick to also point out the need to bolster investor confidence as growth in Brazil shows signs of slowing. A stimulus of this size should benefit the overall economy as well.

The transportation stimulus package is the first of many announcements expected from the Brazilian government under president Dilma Rousseff, with other efforts targeting tax breaks for consumers. The larger expectation for these actions would be to help jumpstart an economy that has slowed to 2.7% this year and is expected to grow at 2% or less in 2013. This forecast coming as the largest Latin American country prepares to host the FIFA World Cup in 2014 and the Summer Olympics in 2016.

Rousseff, speaking at conference in Brasília, said the first part of the stimulus would include concessions to sell road and railway rights to private companies, amounting to 7,500 km of highways and 10,000 km of railways. According to Paulo Passos, transport minister, the move would double the capacity of the country's highways.

This first economic measure would consist of R$79 billion spent within the next five years, and the remaining $54 billion distributed over 25 years. Funding for the stimulus would be provided by Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Brazil's state-owned development bank.

"Brazil will finally get an infrastructure compatible with its size," said Rousseff at the conference, as reported by The Financial Times. "We are starting with the railways and the roads, but obviously we will take care of the airports, ports and waterways."

President Dilma Rousseff has often talked about ways to encourage more private investment in the Brazilian economy

New kind of stimulus

The forest products logistics industry has been well aware of Brazil's shortcomings on its roads, rails and ports in the face of the country's strong economic growth. At the Second IFPTA South American Regional Seminar, held in São Paulo in 2010, speakers and attendees alike noted the urgent need for Brazil to upgrade its infrastructure if it hoped to meet the demands forecasted for the next five to ten years.

At the seminar, Wilen Manteli, president of ABTP, the Brazilian Association of Port Terminals, said that Brazilian ports could expect to see more than one billion tons per year of total tonnage by 2013. The only way to manage this increase, said Manteli, was to improve all aspects of the ports, including the terminals and infrastructure. Rail presented a different problem, said Miguel Andrade with Transnordestina Logistica. Forest products cargo by rail in Brazil ranks near the bottom and poor infrastructure is only one of the reasons the industry still relies heavily on roads. If the stimulus action addresses these problems, the forest products logistics industry would stand to benefit.

However, a burning question is whether this action will actually spur economic growth, which is the larger assumed goal. Many financial analysts comment that this action by Rousseff's government does not meet the traditional definition of stimulus. In a report by MarketMinder, part of Fisher Investments, the firm remarked that these measures do not include government spending. Instead, this stimulus is only the sale of rights to private companies to operate the roads and railways, along with a move to raise the minimum retirement ages for men and women.

"The program's $66 billion figure is the anticipated amount of private sector investment the program likely attracts over the next couple years," reports MarketMinder. "And that's just the start - there's speculation of more reforms are to come, including possibly selling rights to private companies to upgrade and modernize Brazil's ports, which are so outdated they're actually hurting overall productive capacity."

Not all of Brazil's ports are in such a deplorable state. The Port of Portocel, a joint venture between pulp producers Fibria and Cenibra, is the only specialized pulp shipping port in the country and it is in the middle of a multi-phase expansion in an effort to meet Brazil's export demands. But Portocel suffers from the limitations of the rails and roads leading to the port, which is perhaps one reason why Rousseff has selected to address those infrastructure aspects first.

Brazilian bottlenecks

Brazil's infrastructure challenges are not out of line with other emerging economies. China's chronic problems with its roads are equally well known. However, Brazil lags significantly behind other emerging markets in the time required to move goods around the country. Shippers often refer to this problem as the "Brazil Cost," the extra expense associated with the country's logistics problems. The success of this stimulus will depend first on reducing that factor.

Dean Newman, head of emerging markets with Investco Perpetual, agrees with Rousseff 's approach to working with the private sector in order to improve the nation's roads, ports and airports. In an opinion written for The Global Trader, Newman spells out how this approach to a stimulus could help Brazil focus on shorter-term goals, such as the World Cup and the Olympics, to reach long-term success.

"There is a healthy appetite from both infrastructure companies and investors who are keen to get involved in Brazilian infrastructure," write Newman. "In the long run, there is no question about the need for more investment."

Newman points out that only 14% of Brazil's roads are paved and traffic congestion in the large cities are a serious problem. Long queues of trucks outside the ports cause delays for imports and exports. In a recent study by the World Economic Forum, Brazil ranked 119th out of 142 countries in terms of road quality and 130th in terms of quality of its ports.

It is possible that the new stimulus measures will do more than simply improve infrastructure. "More spending on infrastructure could provide a much-needed boost to the economy in the near-term," says Newman. "Beyond that improvements in infrastructure can improve productivity within Brazil as a whole, lift the sustainable growth rate of the economy and make the country a more attractive place to invest."

Critics respond that the bottlenecks on the roads are not the only ones. As one analyst commented, the stimulus will only work "if the new roads and railways actually get built." Bureaucracy and corruption at the federal, state and local levels could dampen the larger expectations.

Finally, analysts say, this stimulus by itself is not enough to bring Brazilian investment the levels they need to be. Over the first five years, this stimulus package equates to only 0.5 percent of Brazil's GDP. To meet the investment rate of other Latin American markets, such as Mexico and Peru, Brazil needs to invest 5% of GDP more every year.

In the end, the consensus analysis is that this stimulus is the right move to make, if not long overdue. Whether the long-term results will be achieved is now largely in the hands of the private companies tasked with doing the actual work.

This article appeared in the 2012 Q3 issue of the IFPTA Journal, the professional journal of the International Forest Products Transport Association. The IFPTA Journal is published by RISI. For more information about the IFPTA,click here.