GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - PWC
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Inside The long game A few words with Ports, reimagined Soft solutions
Paulo Resende
Crunch Time for Brazilian
Infrastructure
Spring, 2013
As South America’s biggest
economy races to meet World Cup
and Olympic deadlines, Brazil’s
long game also comes into view
By Carlos Biedermann and Hazem Galal It’s nearly impossible to overstate Brazil’s structure program that includes, among
commitment to developing its infra- other things, $US 1 billion dedicated to 64
structure. Last year, Dilma Rousseff’s regional airports in the country’s remote
government awarded concessions to northeast and nearly billion to 67 airports
redevelop and operate three major airports. in the north, with an overall goal of having
On cover: Laborers work at night on the construction of the
new Corinthians stadium, which is being prepared to host Between six and seven more airport conces- 96 percent of the country living within 100
matches during the 2014 World Cup, in the São Paulo district sions are anticipated. This “second wave,” kilometers of an airport.1 In mid-August
of Itaquera.
with a bolstered and improved concessions 2012, the Brazilian government announced
Above: Rio de Janeiro, Airport
© 2013 PwC. All rights reserved. PwC refers to the PwC
bidding process, is expected to boost a new round of transport concessions,
network and/or one or more of its member firms, each of which private investment confidence in the air including $US 45 billion for 10,000km of
is a separate legal entity. Please see http://www.pwc.com/
structure for further details. passenger and air freight sectors. In Decem- railway expansion slated to begin early this
PwC firms help organisations and individuals create the ber of 2012, the administration announced year.2 It’s all part of an attempt to make up
value they’re looking for. We’re a network of firms in 158
countries with close to 169,000 people who are committed to a $US 3.5 billion regional airport infra- for lost time — a decades-old pattern of
delivering quality in assurance, tax and advisory services.
Tell us what matters to you and find out more by visiting us
1 “Brazil Announces Regional Aviation Expansion,” Center for 2 “Company Returns Assured by Government in Rail Expan-
at http://www.pwc.com.
Aviation, December 21, 2012, http://centreforaviation.com/ sion,” Christiana Sciaudone, January 11, 2013, Bloomberg,
This content is for general information purposes only, and news/brazil-announces-regional-airport-infrastructure-invest- http://www.bloomberg.com/news/2013-01-11/all-vale-break-
should not be used as a substitute for consultation with ment-plans-196166?utm_source=BenchmarkEmail&utm_ up-amid-assured-returns-corporate-brazil.html
professional advisors. campaign=Jan_03_2013_Email&utm_medium=email.
1 | Gridlines | PwC
The country’s great hope may rest upon a vision of Brazil’s
long game — the long-term bet that hinges upon harnessing
the country’s astonishing assets.
infrastructure under-investment, which has Brazil is staggeringly rich in natural ten places in 2010 and 2011 in the World
also combined with an astonishing rise of resources — a country completely energy Economic Forum’s overall country competi-
millions of Brazilians into the middle class. independent, with vast hydro-electric tiveness report, last year breaking into the
This has created more demand for basic capacity, burgeoning wind and solar world’s top 50 economies (to 48th out of
infrastructure — electricity, air travel, road generation, mature ethanol production, 142). Now ranked higher than Russia and
use, freight and passenger travel, the whole and newfound oil discoveries, the so-called India, Brazil was the only BRIC country, in
gamut of activity associated with rapidly “pre-salt” fields, that are thought to rival fact, to see its ranking rise last year — and
expanding purchasing power and those found beneath the North Sea. Brazil it is closing upon Italy and Spain as the
discretionary income. is the world’s biggest producer of iron ore; Euro-zone financial troubles linger.4
Indeed, every week, it seems, a it is the largest exporter of beef, sugar,
With Europe struggling, a recent analysis
new announcement is made to coffee, and orange juice; and is the second
of the outlook for the Brazilian economy
enable further expansion of the largest exporter of soybeans.3 These and
by International Monetary Fund suggests
infrastructure sector. Much of this, other resources have made Brazil a global
that Brazil’s economy will likely overtake
of course, is targeting the up-coming 2014 commodities powerhouse strategically
France’s by 2015, putting Brazil 5th in the
World Cup and 2016 Olympic games. And located between major trading partners
world after Germany.5 Brazil’s sustained
while there are many reasons for Brazil in Asia, Europe, the United States, and the
commitment to strategic public spending,
to celebrate these tournaments — Middle East.
moreover, a rarity in these austere times,
nearly a quarter million jobs will be
Such assets are bolstered, moreover, by has brought about one of the lowest unem-
generated along with more than $US 116
other competitive strengths: Brazil lands ployment rates in the world, helping to fuel
billion in direct and indirect economic
solidly in the first or second quartile of one of the world’s largest internal markets,
benefit for the World Cup alone — the
the 142 countries measured in the World which, in last year’s survey by the World
realities for Brazil, the great promise and
Economic Forum’s Global Competitiveness Economic Forum, broke into the top ten
the big challenges, transcend these two
Report, with a sophisticated business domestic markets, ranking 9th globally,
near-term events. The country’s great hope
environment, efficient financial markets, with a newly emergent middle class of
may rest upon a vision of Brazil’s long
and high rates of technological adoption. 46 million consumers. That kind of buying
game — the long-term bet that hinges upon
(Brazil has the 6th largest IT market in the power and demand for products, some say,
harnessing the country’s astonishing assets.
world, representing 8 percent of Brazil’s has helped buffer the Brazilian economy
GDP). All of this has allowed Brazil to jump from global economic woes.
3 “Brazil: Platform for growth,” The Financial Times, March 15, 15 and 32, http://www.weforum.org/reports/global-competi- of-global-economy-argentina-and-venezuela-most-vulnerable.
2011, http://www.ft.com/intl/cms/s/0/fa11320c-4f48-11e0- tiveness-report-2011-2012. Spain and Italy, which are at the “Europe Dodges a Bank Crisis in Spain, but Perils Lurk,”
9038-00144feab49a.html#axzz1yutYABcf top of the second quartile of WEF 142 ranked countries, are Jack Ewing, The New York Times, June 10, 2012, http://
widely viewed as vulnerable in the Euro-crisis, while Chile, www.nytimes.com/2012/06/11/business/global/as-focus-
4 IT stats are from Antonio Gil, president of the Brazilian As-
Peru, Mexico and Brazil are the countries in Latin America shifts-to-rescuing-spanish-banks-worries-grow-over-greece.
sociation for IT and Communication Companies (BRASSCOM),
most insulated from the Euro-zone crisis. “Fitch: Chile, Peru html?pagewanted=all
presentation at the 2012 Brazil Summit, April 23, 2012.
best prepared for downturn of global economy; Argentina
Brazil’s business environment is 31st out of 142 countries; 5 “Brazil is expected to pass France by 2015, says Mantega,”
and Venezuela most vulnerable,” June 4th 2012 , Merco
financial markets are 40th and technological adoption is 47th. Folha de São Paulo, 12, 28, 2011, http://www1.folha.uol.com.
Press, South Atlantic News Agency, http://en.mercopress.
“1.1 The Global Competitiveness Index, 2011-2012,” Global br/internacional/en/national/1027086-brazil-is-expected-to-
com/2012/06/04/fitch-chile-peru-best-prepared-for-downturn-
Competitiveness Report, 2011, World Economic Forum, pg pass-france-by-2015-says-mantega.shtml
PwC | Gridlines | 2
Not that Brazil is by any means immune to recent economic forecasts put GDP growth priorities — with the lion’s share going to
macro-economic shifts.6 Last November’s at just under 1 percent in 2012 — look investments in housing (US$ 151.4 billion),
Economic Outlook from the OECD, for positively sunny compared to projections transportation (US$ 104.5 billion) and
instance, underscores both the struggle elsewhere for Germany (0.6 percent), everything else that Brazil needs following
and the vitality of the Brazilian economy. France, (0.5) and for the United States thereafter — a massive build out in basic
On the one hand, Brazil’s GDP growth has (2.1 percent).8 But whatever challenges one sanitation, in the electricity grid, and in
been revised downward to 1.5 percent, might point to in the near term, one com- telecommunications systems. News of the
the lowest of all the BRICs, yet the same mon feature stands out in every forecast or cooling of Brazil’s principal commodities
report projects that Brazil’s GDP growth projection: the need to build and improve trading partner, China, and the subsequent
will bounce back to 4 percent and more in Brazil’s infrastructure is so clear, that, slowing of the Brazilian economy seems to
the next two years.7 Indeed, the debate is as Filipe Jens, director of finance for the have only increased the resolve of Brazilian
not if, but when Brazil will come booming Brazilian construction giant Odebrecht put President Dilma Rousseff’s government
back again. And even gloomier assessments it recently, “For Brazil, not building infra- to leverage the beneficial economic multi-
of Brazil’s US 2.5 trillion economy — some structure is not an option.”9 plying effects of continued and sustained
infrastructure stimulus while at the
same time lowering interest rates to attract
foreign investment.11
The environment for private, long-term
“For Brazil, not building infrastructure is investment in infrastructure is improving,
not an option.” with estimates for foreign direct investment
in Brazil raised to $US 63 billion, according
to the Brazilian central bank, $US 13 billion
above the bank’s prior estimate — with new
Brazil has been making news for incentives like infrastructure bonds offer-
the size and scope of its infrastruc- ing tax relief and other financing strategies
ture ambitions ever since they were becoming part of a mixture of ideas for
jump-started in 2007 by the government’s addressing the question of private invest-
Growth Acceleration Program of Invest- ment. The search for mechanisms that
ment — PAC I — followed by a second will attract private financing in Brazilian
program that began in 2010 — PAC II — infrastructure has led to a conversation that
that has led to more than twelve thousand sometimes turns to global infrastructure
private and public infrastructure projects in funds, on the one hand, or to ideas about
the works.10 Oil, gas, and biofuels account privatizing the country’s pension funds, as
for about half of the nearly trillion dollars Chile has done successfully, in order to cap-
($US 885.9 billion) of PAC II’s planned italize large infrastructure works. Either of
infrastructure investments by 2016 and these methods, some say, could be applied
beyond, according to Business Monitor to infrastructure projects in Brazil —
International. The other half will be offering more attractive returns of between
divided between many other pressing 9 and 10 percent rather than what the
6 The Bank of International Settlements recently cited the Eu- to grow only about 1 percent in 2012,” wrote Simon Romero, maintaining economic sustainability is infrastructure: “Despite
ro-crisis as a notable reason for Brazil’s economy growing just in “Brazil Registers Anemic Growth, Surprising Economists,” being a painful process, the shift away from a consumption-
0.2 percent in the first quarter and showing seasonally adjust- the New York Times, December 1, 2012, http://www.nytimes. based growth model towards greater fixed investment is
ed growth over 12 months of under 2 percent. “Harder Times com/2012/12/01/world/americas/brazil-registers-slow-eco- what Brazil needs to put the economy on a more sustainable
Coming For Brazil, Says Bank For International Settlements.” nomic-growth-in-3rd-quarter-shocking-economists.html. long-term trajectory.” “The Party’s Over,” Latin American
Kenneth Rapoza, Forbes Investing, June 24, 2012, http://www. Monitor: Brazil, Vol. 29, Issue 7, July 2012, Business Monitor
The slowdown in GDP growth is largely because of “the
forbes.com/sites/kenrapoza/2012/06/24/harder-times-coming- International, italics added.
country’s consumption-based growth model,” according to
for-brazil-says-bank-for-international-settlements/
Business Monitor International. To this add Brazil’s top-heavy 9 Filipe Jens, Brazil Summit presentation, Brazil-American
7 “General Assessment of the Macro-Economic Situa- commodities economy, which has brought about a classic rise Chamber of Commerce, New York City, April 23, 2012.
tion,” OECD Economic Outlook, Vol 2012/2, November in the exchange rate of the real, which in turn has been a factor
10 “Principle Brazilian Infrastructure Investments Until 2016,”
27, 2012, pg 31 and pg 222. http://www.keepeek.com/ in driving consumption — compounded by easy access to
Sobratema.org, April, 2012.
Digital-Asset-Management/oecd/economics/oecd-economic- credit, and this has resulted “in the Brazilian consumer becom-
outlook-volume-2012-issue-2_eco_outlook-v2012-2-en. ing one of the most leveraged globally.” Now factor in that the 11 “As Growth Ebbs, Brazil Powers Up Its Bulldozers,” Simon
high rate of exchange for the real limits export competitive- Romero, New York Times, June, 21, 2012, http://www.nytimes.
8 “Brazil Analysts Cut 2013 GDP Forecast, Raise Inflation
ness. Something has to give eventually, according to BMI, and com/2012/06/22/world/americas/brazil-combats-slowdown-
Call,” Bloomberg, Jan 7, 2013, http://www.bloomberg.com/
the likely scenario involves currency depreciation and a further with-even-more-stimulus.html?pagewanted=all
news/2013-01-07/brazil-analysts-cut-2013-gdp-forecast-
slow-down of economic growth. In all of this, a key element to
raise-inflation-call-1-.html “Brazil’s economy is now expected
3 | Gridlines | PwC
In perspective: Five-year plans for infrastructure
China
$US 1 trillion Brazil
$US 885.9
billion
India
$US 1 trillion
current PPP models of roughly 6 percent of- its pre-salt oil fields, in inflation-adjusted of overall infrastructure quality, Brazil sits
fer. So far, however, the primary engine for terms, than NASA did in the great, can-do near the bottom — 104th out of 148 coun-
the country’s infrastructure build-out has technological boom of the 1960s and 70s tries surveyed, and this creates a significant
been Brazil’s Development Bank (BNDES), to put a man on the moon. In the United drag on the economy. Paulo Resende, of the
which, despite the gloomy economic States, the phrase “Apollo-like” is mostly Center for Studies in Infrastructure and Lo-
forecasts, lent a total of $US 21.8 billion a rhetorical device used occasionally to gistics in Belo Horizonte, Brazil, estimates
for infrastructure projects from January invoke the need for big thinking, especially that the logistics costs of poor infrastruc-
to May last year, up 1 percent for the same when it comes to things like rebuilding ture amount to an average economic drag
period a year earlier.12 The development America’s aging infrastructure, but in Brazil on the Brazilian economy of 12 percent of
bank, moreover, whose loan book is nearly rhetoric has been replaced by a visionary GDP, compared to 8 percent for the United
four times bigger than the World Bank’s, commitment to build — hammered out in States, and 6 percent for Europe.14 When
was committed to $US 77 billion in infra- steel and concrete — with a big-thinking, asked at a recent meeting in New York City
structure last year alone — just part of the breath-taking, Apollo-surpassing inten- to prioritize Brazil’s infrastructure needs,
estimated $US 639 billion needed, accord- sity that even now is reaching a fever-like Filipe Jens of Odebrecht put transportation
ing to BNDES, for infrastructure between pitch, as the deadlines for the World Cup infrastructure at the top of his list. But as
2010 and 2013.13 games in 2014 and the Olympics in 2016 with any other challenge, the infrastructure
approach.
Other countries are spending more on 12 “Brazil’s BNDES loan disbursements unexpectedly rise
infrastructure. India’s new five-year plan, The reason for Brazil’s resolve to bet this year,” Reuters, July 19, 2012, http://www.reuters.com/
article/2012/07/19/brazil-economy-bndes-idUSL2E8I-
which began in April 2012, announced big on infrastructure becomes clear JL3Q20120719
$US 1 trillion in infrastructure spending. the more one sees how the growth of any 13 “Brazilian Fostering of Private Financing of Infrastructure
China’s current five-year plan also amounts economy can be slowed because of poor Projects,” Ricardo Somoes Russo, Enrico Bentivegna, Joao
Fernando A. Nascimento, Latin Infrastructure Quarterly, No 4,
to a $US 1 trillion for infrastructure invest- infrastructure — and, in fact, the Brazilian June, 2012, pg 18, http://www.liquarterly.com/issue4.pdf.
ment, including a 19,000 mile high-speed “infrastructure gap” plays a big role in 14 A World Bank report puts the logistics costs in Brazil at
between 15 and 18 percent of GDP, (“How to Decrease Freight
rail system, the largest transport infrastruc- slowing growth that would be much Logistics Costs in Brazil,” World Bank Report No. 46885-BR,
ture project in history. But Brazil offers greater, given Brazil’s resources, but for February 8, 2010, pg 96), but this figure has changed since
the report was published two years ago, according to Paulo
many similar head-spinning indicators. shortfalls, especially in transportation Resende. “Logistics costs to Brazil are now 12 percent of
GDP due to the decreases in transportation costs in the last
Brazil’s state-run oil company, Petrobras, infrastructure and logistics. According to two years, mainly in the State of São Paulo due to highway
for instance, will invest more to produce the World Economic Forum’s assessment improvements and port costs reductions due to private
investments in terminals.” Paulo Resende, 6-6-12.
PwC | Gridlines | 4
gap offers great investment opportuni- government bureaucracy.”17 Overlapping the truly strategic infrastructure build-out
ties as well, and Brazil has been making regulatory regimes at the federal, state lies in the humbler areas of the transpor-
great strides in attracting such investment, and municipal level have helped delay big tation sector — roads, ports, waterways,
especially in the transportation sector. infrastructure projects for many years. It’s and rail. Inefficiencies in this sector have
That priority is well-founded, according to a challenge that is not unique to Brazil, of become emblematic of the kind of burden
Resende. “Transportation,” he says, “must course. In the United States, for instance, that continues to slow Brazil’s economic
become one of the highest priorities if Bra- large electricity transmission lines can be growth, while strategic improvements in
zil is to achieve true competitiveness with delayed for decades because of regulatory freight rail, seaports, costal shipping, and
other countries.” hurdles imposed by eleven separate federal the development of intermodal facilities
Two other priorities are in the area agencies, but for those wondering how between rail, trucking, and sea cargo offer
of governance. While Brazil’s solid Brazil’s tremendous promise will be fully so much economic promise. We also look
institutions and established democratic realized, many observers suggest two main at important areas of governance, as these
governments have brought forth consistent areas of governance — “bureaucracy, and have long been identified as pivotal parts
economic policies that have enabled the the tax structure,” says Resende. “These of a puzzle that will enable Brazil to meet
Brazilian economy to hit inflation targets, are the huge, huge barriers — the bottle- its challenges. Brazil’s attempt to reform
to establish exchange rate flexibility, and necks — that Brazil has to overcome.” its governance systems could be the true
to move toward concessions and privatiza- legacy, in fact, the thing that most will
Against the sweeping backdrop of the
tion in the infrastructure sector,15 these remember, long after the events of the
Brazilian economy, the World Cup and
same institutions are also some of the most World Cup and Olympics have passed.
Olympics seem like flourishes in a much
bureaucratically complex in the world.16 grander movement. It’s this larger move- 15 Carlos Langoni, director of the World Economy Center,
FGV Foundation, speech and panel discussion, “The World
Reform of Brazilian governance systems ment — Brazil’s long game, the role that Economy and Brazil,” New York, May 15, 2012.
has long been viewed as pivotal, if Brazil infrastructure plays in all of it, and the 16 Filipe Jens, director of finance, speaking at The Brazil
is going to fully flower. The tax structure, challenges and opportunities for infra- Summit, New York City, April 23, 2012.
for example, is complex, as is its regulatory structure in the coming years — that is 17 “2.1: Country/Economy Profiles, Brazil, Key Indicators,”
Global Competitiveness Report 2011-2012, World Economic
regime. The World Economic Forum’s 2012 the focus of this issue of Gridlines. The Forum, pg 126, http://www.weforum.org/reports/global-com-
petitiveness-report-2011-2012.
Executive Opinion Survey found that “tax challenges of air transport are apparent to
rates” and “tax regulations” were the top anyone visiting Brazil, and while much is
two most problematic factors for doing changing in this realm, with concessions
business in Brazil, followed closely by granted to renovate three major airports,
“inadequate supply of infrastructure,” (see the interview with Paulo Resende),
“labor regulations,” and “inefficient
“Transportation must become one of the highest
priorities if Brazil is to achieve true competitiveness
with other countries.”
5 | Gridlines | PwC
Bridging the infrastructure gap begins
with a strategic focus on transport —
freight rail, seaports, and
intermodal facilities
The causes of the transportation infrastruc-
ture gap in Brazil can be summed up in two
words: pace and balance. The infrastruc-
ture gap exists in the first place because the
slow pace of infrastructure investment over
the last three decades has not kept up
with demand. Up until the 1980s, Latin
American infrastructure investment aver-
aged about 4 percent of GDP, and this
dropped by half after 1985, yet according
to the World Bank, major economies spend
5 to 7 percent of their GDP each year on
infrastructure.18 According to Odebrecht’s
Filipe Jens, even though Brazil’s infrastruc- Brazil maritime and rail freight is projected intermodal mix has been out of balance,
ture investment has grown at a rate of 13 to grow at or near double digits annual leaning heavily upon road transport. Even
percent (CAGR) between 2003 and 2011 to 2016.20 And Brazil’s electric generating today, 58 percent of all transport in Brazil
(from $60 billion to $160 billion, for an capacity will need to nearly double, rising is through the country’s crumbling road
average of 4 percent of GDP), the problem 47 percent from 107,000 MW in 2010 to system, the third largest in the world, of
remains that the “level of investment is only 223,000 MW by 2030, to keep pace with which, however, just 12 percent is paved —
replacing the existing infrastructure in the power demand. “In Brazil,” says Paulo and only half of that in good condition.22
country. We’re not growing infrastructure. Resende, “we have not been building out Water transport — the most efficient way
We’re conserving and maintaining it.”19 ahead of future demand.21 We have always to move anything in bulk — accounts for
Demand, on the other hand, has risen, been just catching up to past demand.” only 17 percent of Brazilian transport, and
especially in urban centers. In the Brazilian freight rail, the next-most efficient mode of
airport sector, for instance, where passen- But a key challenge, as many
observers have noted, lies in what’s transport, is just 25 percent.23 Developed
ger terminals are already saturated at 13 countries, by contrast, show a much greater
known as the “intermodal matrix,”
of the country’s 20 largest airports, air deployment of freight rail — the United
the mixture and makeup of investment
passenger traffic is estimated to grow 35 States with 43 percent, Canada with 46
between roadways, railways, water and
percent per year, from 111 million pas- percent, and Australia with 43 percent of
other transport. For decades Brazil’s
sengers in 2009 to 312 million in 2030.
18 “It is estimated that Brazil has invested, on average, ap- 20 “Brazil Infrastructure Report: Transport Q3, 2012,” Business 21 “Emerging Markets Strategy,” September 28, 2011, Royal
proximately 2 percent of its GDP in infrastructure since 1985.” Monitor International, Industry Forecast Scenario, May 1, 2012. Bank of Scotland, pg 12.
“Brazilian Fostering of Private Financing of Infrastructure Proj- Total tonnage growth of 12.2 percent is projected for Brazil’s
22 12 percent of Brazil’s road system is paved, compared to
ects,” Latin Infrastructure Quarterly, No. 4, June, 2012, http:// largest port, at Santos, which is responsible for more than a
China, 54 percent; Russia, 80 percent; and the United States,
www.liquarterly.com/issue4.pdf. Other figures from World Bank quarter of Brazil’s trade. Annual growth of over 10 percent
which weighs in at just 67 percent of its roads paved. Filipe
Report No. 46885-BR, How to Decrease Freight Logistics is expected at the port of Itajai, and rail freight is projected
Jens, Brazil Summit presentation, Brazil-American Chamber
Costs in Brazil, February 8, 2010, pg 14. to grow by more than 10 percent in 2012 and continue at an
of Commerce, New York City, April 23, 2012.
average of 8.3 percent annual growth to 2016. “Brazil Freight
19 Filipe Jens, Brazil Summit presentation, Brazil-American
Transport Report Q1 2012, Business Monitor International, 23 “Rail network Expansions Program” Francisco Luiz Baptista
Chamber of Commerce, New York City, April 23, 2012.
Industry Forecast Scenario, December 12, 2011. de Costa, Ministry of Transport, Nov 10, 2009.
PwC | Gridlines | 6Rebalancing Brazil’s intermodal mix: A vast nation needs freight rail to ease dependency on crumbling roads
(percent of national transport)
25% 43% 43% 46%
Brazil United States Australia Canada
all transport carried by rail; and a much costs for bulk products and distances above speed rail) accounting for nearly half —
better balance with road transport — US, 550 miles are approximately 40 percent or just over $US 39 billion — of all proj-
32 percent, Canada, 43, and Australia 53 lower than road costs, yet two-thirds of the ects currently underway in the transport
percent.24 The poor condition of Brazil’s soybean grain production in Brazil is still sector, according to a Business Monitor
roads, moreover, raises transport costs 28 carried by road. Despite the advantages of International report this past May, with
percent on average, but that cost can be rail, the total length of the railway network an average of more than 12 percent of all
much higher, depending upon the product in Brazil has actually shrunk by nearly a transport investment each year going into
and the region in question.25 third between 1930 and 2009, and rail projects between now and 2020.28 What
intermodal connectivity at the city level follows are eight solutions suggesting the
Two-thirds of the cost of finished paper
remains inefficient.27 contours of mid-to-long-term planning that
products in the state of São Paulo, for
All of this is changing dramatically, are currently under way in Brazil beyond
instance, is attributable to truck transport
however. And while it’s true that the the World Cup and Olympics.
and logistics costs of hauling products by
road between pulp and paper factories and World Cup and Olympics preparations have
added a spike to airport and urban rail About the authors
the Port of Santos. For some products like
auto parts, for instance, over half of the construction, (and have taken most of the Carlos Biedermann, based in Porto Alegre,
cost of production is attributable to road media spotlight), when it comes to Brazil’s is the leader of PwC’s Brazil infrastructure
long game, freight rail and water freight practice (carlos.biedermann@br.pwc.com,
transport and logistics costs — even though +55 51 378 1708). Hazem Galal, formerly based
those same factories in the São Paulo Met- have taken center stage in Brazil’s trans- in Rio de Janeiro and now in Doha, Qatar, leads
ropolitan Region are, on average, within 52 port investment programs, with new and PwC’s global state and local government sector
(hazem.galal@qa.pwc.com, +974 4419 2852).
miles of the port.26 By comparison, railroad on-going projects in rail (not including high
24 “Investment Opportunities In Brazil,” Francisco Louiz Resende, Paulo (2006), “Notes on the Current Conditions of transport costs illustrate Brazil’s and São Paulo’s heavy reli-
Baptista Da Costa, Ministry of Transport, November, 2009. The the Brazilian Logistics Infrastructure,” Funacao Dom Cabral, ance on trucks instead of more efficient modes such as rail.”
transport mixture has hardly changed since this report was Nova Lima; found in, “Promoting Infrastructure Development World Bank Report No. 46885-BR , How to Decrease Freight
given, according to Paulo Resende, director of Logistics and in Brazil,” OECD Working Paper No 898, pg 24, http://www. Logistics Costs in Brazil, February 8, 2010, pg 73.
Planning. oecd-ilibrary.org/economics/promoting-infrastructure-develop-
27 OECD Working Paper No. 898, “Promoting Infrastructure
ment-in-brazil_5kg3krfnclr4-en.
25 The World Bank gives a range of costs due to poor road Development in Brazil, Annabelle Mourougane, Mauro Pisu,
conditions of between 10 to 30 percent. World Bank Report 26 “The pattern that emerges is that transport costs account October, 2011, pg 22, http://www.oecd-ilibrary.org/economics/
No. 46885-BR , How to Decrease Freight Logistics Costs in for the largest share of transport and logistics costs (TLC) for promoting-infrastructure-development-in-brazil_5kg3krfnclr4-
Brazil, February 8, 2010, pg 34, http://siteresources.worldbank. five of eight sectors: Foodstuff (56.3 percent), Automotives en.
org/BRAZILINPOREXTN/Resources/3817166-1323121030855/ (45.1 percent), Chemicals (48.7 percent). . .Automotive Parts
28 “Brazil Infrastructure Report, Q3, 2012,” BMI, Industry
FreightLogistics.pdf?resourceurlname=FreightLogistics.pdf (51.3 percent). . . .[In] the aggregate, transport is the main
Forecast Scenario, May 1, 2012, Key Projects Database
Paulo Resende suggests an average figure of 28 percent. contributor to the TLC. . . . These flows, to a large extent, use
figures are correct from August 9, 2011.
trucks to get to the Port [of Santos]. These products with high
7 | Gridlines | PwCA few words with Paulo Resende
Paulo Resende, PH.D and MSC in transportation planning and
logistics, is the head of the Center for Infrastructure and Logistics
at Fundação Dom Cabral, Brazil, where he has worked for thirteen
years. During that time he has been a main source of infrastructure
analyses for global media agencies such as Financial Times and
Reuters. Professor Resende is also consultant of logistics, trans-
portation planning and supply chain in Latin America, and is the
author of several studies and logistics reports for the World Bank,
InterAmerican Development Bank, and multinationals operating
in Latin America.
In 2011 you were quoted as saying long-term infrastructure needs and also the airport in Porto for infrastructure — may actu-
that fewer than half of the World with short-term projects that Alegre, in the south of Brazil, in ally be the most important thing
Cup construction works will be are mostly to satisfy the needs of Salvador, Bahia, and also at of all. Then there’s just the sheer
done on time. How do you feel the World Cup. Current airport the airport in Manaus — these fact of the infrastructure gap
about the infrastructure for the construction is an important temporary terminals will even- in the first place — I’d put that
World Cup, a year later? example. We have made tually have to be pulled down third. Logistics — warehouses,
I still feel that way, mainly when concessions to private compa- in order to guarantee access to inventory, transportation,
we talk about urban mobility nies at three important airports the terminals that should have infrastructure inefficiency —
projects and the airports. These in Brazil — airports that are been built in the first place. cost an average of 12 percent of
have not advanced much in the already congested. So there is Brazil’s GDP, according to the
no question about the long-term How would you prioritize the risks yearly report from the Federal
last year. One big project — to
need for new terminals, but to the Brazilian economy now? University of Rio de Janeiro’s
build a new runway at São
Paulo-Guarulhos airport, which what we are getting, just in Well, there are several things, no logistics department. These are
was a worry last year — looks as time for 2014, are not the single one more important than the bottlenecks that Brazil has
though it will not be completed new terminals we need but the other but taken together to overcome.
in time for 2014, mostly because temporary terminals. they pose risk. There’s the
problem of attracting foreign What about Brazil’s infrastruc-
of legal and environmental
The second issue is this: private ture investments in energy?
problems. On the other hand, investment in infrastructure.
companies with private manag- At least half of the nearly $US
work is going well with the There’s the bureaucracy, which
ers are pressured by short-term 1 trillion investment is going
stadiums, which will probably includes the regulatory system,
priorities, as opposed to the towards the Pre-salt development,
be completed by 2014. But when the legal system, the complex- and nobody’s saying that this is
we talk about urban mobility, needs of Brazilian citizens. In ity of the bidding process for
Brazil, moreover, we are not a bad idea. Do you have a
there are significant challenges. infrastructure projects, and the different opinion?
The subway lines, for instance, used to private management like — which in Brazil is very,
are not moving along as fast as at airports. We’re in a time of very heavy. Then there is the No, no. I think this is a good
we need them to. Some of the transition for these two types tax structure. idea. Pre-salt development is
so-called BRTs, the bus rapid of management organizations very important, as is natural gas.
trains, will not be done in to learn to live together — but If I were to prioritize the risks, But I think that we should invest
time — except for the projects unfortunately, from the point they would be, first of all, in a more sustainable energy
in Belo Horizonte, which are of view of the Brazilian govern- bureaucracy, because the more matrix in Brazil. I think that we
on schedule. ment, what counts the most is complex and the less transpar- are too dependent on petro-
image in 2014. The needs of the ent the bureaucracy, the more leum. I think that we should
What’s causing the slowdown short-term horizon take priority, likely you’ll have corruption. work on some other sources of
with infrastructure projects? and this is a mistake. Thirdly, Next would be the tax struc- energy, like the solar, wind, even
the “new” temporary termi- ture second — nobody really biofuel energy, ethanol. I think
First, I think that Brazil has
nals, which is happening at the understands it, so simplification that Brazil has a good chance
made a big mistake in mixing
Confins, Belo Horizonte airport, — and providing tax incentives to build for the future and build
together, on the one hand,
PwC | Gridlines | 8a different supporting energy Getting back to the issue of that will fulfill future demand. be how London implements its
matrix so we can guarantee inefficient bureaucracy and So, there is an accumulation of urban toll, a tariff that you have
stable energy without too much over-regulation. Critics like you demand. And the longer these to pay when you go in certain
cost to the environment. have pointed to inefficiencies in projects take to get built, the rings downtown. That was a
the spending of the BNDES in- more inadequate they become societal decision. But public
Would you say that, since Brazil frastructure funds. What are the to that future demand. This sort managers won’t tend to take
has a history of making early numbers you are seeing in terms of thing — not running after the these difficult actions, because
decisions to move ahead in bio- of the government being able future but constantly catching it’s politically risky. Yet this is
fuels, for instance, that there’s a to actually disperse funds and up to past demand — is happen- what Brazil needs. Some sort of
cultural expectation that Brazil complete infrastructure projects? ing with our highways and long-term projects commission
will continue to move into these
Well, I don’t think that this inef- our airports. in infrastructure that would
other energy pathways?
ficiency is happening with the protect society from the changes
Definitely. Brazil today is really PAC-II funds, simply because How does Brazil overcome this? in electoral or political agendas.
one of the few countries in the PAC-II has a strong tendency to Brazilian society must mature You could call it the Infrastruc-
world really prepared in terms direct investments on housing, and protect long-term projects, ture Strategic Group, or, if you
of culture to renew its energy and I believe that housing is and insure that these projects prefer, Strategic Committee, or
matrix. And I think we should going well, mainly because are not interrupted just because Infrastructure Strategic Board.
take advantage of that. housing does not depend a new manager comes along. We
too much on environmen- need to declare that some long- And it would be important
In the United States, there is often tal licenses. Not to say there to empower them to be the
term projects are off limits to
a diametrically opposed relation- aren’t problems — especially guardians of the long-term infra-
managerial intervention — that
ship between the petroleum sector, with projects related to urban structure planning in
for instance, and the renewable they belong to society. I think
mobility, in which there are that the way to do this is to bring Brazil. The Infrastructure
sector. Why shouldn’t that also Strategic Board would be a
significant issues involving together elements of the judicial
happen in Brazil? Or why would federal program that would
payments to people and busi- system, the legislative system,
you not expect that to happen? transcend the local politics, and
nesses that are displaced by the executive system, and also
Well, firstly, because Petrobras large transportation projects. representatives from society into having this kind of authority —
is very interested in sources of That process is very complex in a single governing body that at the federal level — would
energy other than petroleum. Brazil. The same projects can be directs long-term projects. This help prevent the kind of delays
Look at their projects with natu- contested and re-adjudicated, is not a new idea. that have happened to metro
ral gas and ethanol. And when and the costs for those projects projects in most of the Brazilian
you mention ethanol, you’re go up. But if you added up PAC For electricity in the United States, metropolitan areas, for instance.
talking about agribusiness — I and PAC II, I don’t think that there are long-term power plan- The Via Quatro in São Paulo,
and that is a really strong more than 60 percent of all the ning commissions composed of a much-delayed subway line,
sector with considerable politi- proposed projects will actually some of those very same stakehold- is an example of this. They
cal power. So, I think that we be completed by 2012 — even if ers that you mentioned — people would hold public hearings and
have a power equilibrium of you consider housing. from industry and citizens. They develop a list of “golden” proj-
players in Brazil. We don’t have have the power to delegate long- ects — untouchable
a conflict to reshape the energy But this is still a problem term planning and the monies to projects — and their job would
matrix the way that might because most of the projects commit to those needs. be to maintain the pace of the
happen elsewhere. from PAC are projects that were That’s exactly what I’m talking projects, according to what has
created to fulfill a historical about. Another example would been defined by society. ¡
demand. They are not projects
Brazil needs a federal commission on long-term infrastructure
projects to protect them from the changes in electoral or
political agendas.
9 | Gridlines | PwC1
Solution #1:
The North-South line
The railway network in Brazil was be established, according to a World Bank tural region and source of over half of all
privatized in the mid-90’s, and while study. And to insure the safety of estab- Brazilian grain, before ending in the south
this step helped reduce operation costs, lished lines, clear-cut maintenance and at Senador Canedas, a major inland rail
the significant sunk costs of building or operations targets should be written into hub and petrochemical refining center that
improving a railroad seem to have deterred concession contracts.30 connects to the great southern ports of Rio
more private investment. In its place, the de Janeiro and to the Port of Santos.
To date, the mining company Vale is
federal government has filled the gap and
probably the biggest private operator of And because it will not follow the Brazilian
most observers feel that continued govern-
freight rail in the country, and one of Vale’s shoulder of the continent that juts into the
ment investment in railroads is needed
most important new concessions is the Atlantic, (as most current rail lines do), the
in the long term. Nevertheless, several
North-South Line, one of three PAC North-South line will create a new freight
steps could improve private investment in
priority freight rail projects of more than corridor that will be 30 percent shorter
railroads, according to the World Bank,
1000 kilometers — the other two are the than the existing central eastern corridor,
among them enhancing interconnectiv-
East-West line, and the Trans-Northeastern through less congested areas. It will con-
ity between railroads. On a physical level,
Line. Of these, the North-South Line stands nect with major east-west routes such as
some railways in Brazil operate on different
out as the most strategically significant. the existing Carajas railroad in the north-
track gauges, and the sheer lack of physical
Its completion will mark a historic east, which is used to haul iron ore to the
interconnectivity between the lines slows
moment — the first straight-shot of a highly port of São Louis, and the East-West Rail-
return on investment.29 On the level of
efficient mode of transport through Brazil’s road, and offering quicker access to major
paperwork — or usage of track by multiple
rich interior, and, like the transcontinental commodities markets in Europe, the United
concessionaires, an increasing likelihood as
railroad in the United States, it will provide States, and China, via the Panama Canal.
the rail system expands — a better system
interconnection between distant coasts, “The construction of the North-South line,”
of compulsory interconnection fees or joint
running 1237 miles from the port of Belem says Paulo Resende, “will change the entire
transport agreements between conces-
in the North, then bisecting the Brazilian transport matrix of Brazil.”
sionaires of different railroads needs to
cerrado, the great savannah-like agricul-
29 This, too, is changing, however. Logistics companies And Brado Logistics has signed an agreement with another http://www.railjournal.com/index.php/central-south-america/
like Latin American Logistics (ALL) and Standard Logistics, logistics company, LTI, to cooperate on a corridor between brado-expands-as-brazilian-intermodal-market-flourishes.
for instance, have recently entered into partnerships with Brazil and Argentina, anticipating a 40 percent increase in html?channel=536&utm_source=BenchmarkEmail&utm_
Santos Brazil, one of South America’s largest port infra- intermodal rail volumes on the route through the partner- campaign=Jul_19_2012_Email&utm_medium=email#.
structure and logistics service providers, for the movement ship. “Container transport by rail is becoming a reality in UBFcN2HbBrp
of nearly 8000 containers per year from São Paulo state to Brazil,” says Linda Machado, business director of Brado
30 “Promoting Infrastructure Development in Brazil,” Working
the Santos Brazil’s maritime terminal in the port of Santos. Logistics, “and it is unthinkable for us not to be a part of
Paper No. 898., OECD, 2011, pg 23.
this scenario.” International Railway Journal, July 6, 2012,
PwC | Gridlines | 102
Solution #2:
Ports, reimagined
The strategic importance of a billion tons of cargo for the first time, ac- Eike Batista. LLX’s plan is to build a new
Brazil’s ports is almost impossible cording to ANTAQ, Brazil’s National Agency port 250 miles north of Rio de Janeiro on
to overstate, as Richard Klein, Chairman for Waterways Transport — but many logis- a colossal scale, a facility, if it comes to full
and Vice-President of the Board for tical challenges remain.31 Yet even as PAC fruition, that will be best measured not
Multiterminais and Santos Brazil, two of II investment has been deployed to dredge in acres but in square miles — 34 square
the largest port operations in Brazil, made ports, to reduce paperwork, and to improve miles, with plans that include two steel
clear earlier this year. “Brazilian social general efficiencies, a new, long-range stra- mills, two cement factories, an automobile
and economic development depends upon tegic revolution in how ports themselves factory, a factory for structural steel, a fac-
the growth of international trade,” said are conceived may also be under way. tory for auto parts, terminals for oil storage
Klein, “and that relies on modern ports That’s the idea behind the Açu Superport and refining, and more than ten miles of
expansion.” And port capacity is, in fact, and Industrial Complex, currently under shipping quays.
expanding, as Brazil’s 34 public sea and development by LLX Logistica Sat, a
river ports are expected this year to handle company controlled by Brazilian billionaire Açu follows the model set elsewhere begin-
ning in the 1960s and now evident at some
of the world’s biggest ports — Rotterdam,
Antwerp, and Hamburg, and elsewhere in
Europe, according to Olaf Merk, a ports
analyst at the Organization for Economic
Cooperation and Development. “At these
ports, you can drive around quite awhile
before you actually see anything that looks
like a ship,” says Merk. Instead, “you’ll see
Super-ports like Açu represent the true meaning of Brazil’s refineries, pipes, storage tanks, factories. In
“long game” strategy, signaling an entirely new phase Hamburg, you’ll see the big Airbus facility.
for the Brazilian economy — the long-sought shift from In LaHavre, France, you’ll find a factory
where Renault automobiles are made.”
commodities export to value-added export.
Co-locating manufacturing centers
with transport hubs will reduce
transport and logistics costs, but it
may also clash with current Brazilian law,
which does not grant private port facilities
11 | Gridlines | PwCthe right to ship products other than those For now, Açu consists of one cement cause- instance, with factories that receive iron
for which the private port was built. Mining way (that will have a four-lane highway, ore, and transform it into sheet metal,
companies, for instance, have built private pipelines, and conveyor belts, among other structural steel, auto parts, eventually
ports, and they are permitted to ship ore things) and stretches more than a mile entire automobiles — all in the very ports
from those ports — but Brazilian law, with and a half into the Atlantic. A Chinese where these products will be shipped. At
few exceptions, does not allow those same company has pledged $5 billion to con- its widest circumference, Ports like Açu,
companies to use their private ports to ship struct a steel company, and the Norwegian according to Resende, represent the true
automobile parts, for instance, or anything pipeline company Subsea 7 signed a $10.5 meaning of Brazil’s “long game” strategy,
else for that matter, other than ore. That million-per-year lease to use the port to signaling the beginning of an entirely new
kind of shipping — so-called third party, build subsea equipment including pipes for phase for the Brazilian economy — the
mixed-use shipping, the kind we normally transporting oil and gas.33 long-sought shift from commodities export
associate with ports — is reserved under to value-added export.
But so far current investment in Açu is
Brazilian law for the government-regulated
geared toward Brazil’s primary focus in
public ports. License to handle third-party 31 “Rio as Top Shipping Port State in 2012,” Rio Times,
the commodities market. Plans are in the January 3, 2012, http://riotimesonline.com/brazil-news/rio-
shipping is granted to port operators by business/rio-as-top-shipping-port-state-in-2012/. Brazil has
works that would allow competing mining 34 public ports, five of which are waterways ports, in addition
government concession.
companies to load 400,000 ton China Max to 42 private terminals and three industrial ports, Paulo
Resende, 1-4-2013.
Private ports, however, if they begin han- cargo ships, and potentially double the
32 Açu currently complies with the existing laws and regula-
dling third-party products, circumvent all current iron-ore capacity — two iron- tions, provided that Açu has enough ‘own cargo’ to justify the
creation and operation of the port terminal. It is allowed to use
of this, as would the kind of shipping envi- ore loading berths, with 40 million to 50 its idle capacity to provide services to third parties, according
sioned by the Açu Superport and Industrial million tons a year — to 100 million tons. to Cesar A. Guimarães Pereira, Partner, Justen, Pereira,
Olivera & Talamini.
Complex — many different companies, And that, apparently, is just for starters.
33 “Subsea 7 Plant Moves to Rio State,” The Rio Times, July
making many different products and Eventually, when all the industrial facili- 24, 2012, http://riotimesonline.com/brazil-news/rio-business/
subsea-7-plant-moves-to-rio-superporto-do-acu/
shipping them from a single port. Moving ties are complete, the Açu Superport will
34 Dow Jones Newswires, March 23, 2012, http://gcaptain.
forward, some form of regulatory modifica- represent investment of more than $40 com/1-33-billion-investment-superport/, and interview with
tion would seem to be required, eventually, billion, 50,000 new jobs regionally, and Paulo Resende.
to accommodate superports like Açu, which shipping an estimated 350 million tons per
are premised upon multiple and mixed year.34 The “superport” idea, according to
third-party use on a colossal scale. The Paulo Resende, will reduce logistics costs
beginning of such a framework may already by co-locating commodities terminals for
be under way in Brazil’s supreme court.32 ore, petroleum, agricultural products, for
PwC | Gridlines | 123
Solution #3:
Soft Solutions: Governance, regulation, and tax reform
São Paulo’s Number 4 subway line projects from changes in electoral or politi- the National Council for Transport Policy
could be seen as an emblem of cal agendas,” says Resende, who suggests Integration (CONIT), though neither go far
what needs to be done in the realm of that such a body would comprise represen- enough in terms of the independence and
governance to further the infrastructure tatives from the key areas of governance autonomy recommended by Resende or
goals of the country. A staggering 42 years — the legislative, the executive branch, the envisioned by the World Bank and
has elapsed since the subway line’s initial judiciary, and also include representatives other studies.35
conception, in 1969 — and still the line re- from industry and the unions. “Something
The main goals of the World Bank’s
mains unfinished. In between times, Brazil like an Infrastructure Strategic Group or
National Logistics Strategy would be to
has passed through harrowing historical Board,” Resende adds, “would have as its
address the many bugbears that create the
periods of hyper-inflation lasting until 1994 main task the custodianship of long-term
“Gusto Brazil,” the high cost of doing busi-
when the real was introduced and other infrastructure planning in Brazil.” Such an
ness in Brazil. These include the overhaul
reforms took place to help set Brazil back ideal agency would receive “bottom-up” in-
and simplification of the often conflict-
on its economic feet. The vagaries of put from all stakeholders but then provide
ing and overlapping regulatory systems,
local politics and changes in leadership “top-down” independence and bureaucratic
“improving competition and privatization,
and project oversight have led to further muscle to push strategic plans through to
addressing the problems of transport and
deferments. And while Subway Line 4 may their completion.
storage tariffs, pilferage loses, administra-
be a spectacular counter-example, the
Many recent studies of Brazilian tion costs, customs and other clearances,
phenomenon of delay is a common element
infrastructure agree with Resende, bribes and malicious delays and social and
that Subway Line 4 shares with so many
though they differ in how this might be environmental costs.”36 This last feature
other large public infrastructure works,
achieved. An exhaustive study of Brazilian — overlapping environmental regulation
including most of the construction projects
infrastructure by the World Bank recom- between federal, state and municipal juris-
under way for the World Cup and Olympic
mends the formation of a National Logistics dictions — has been an often-cited reason
tournaments, according to Paulo Resende
Council, a board operating independently, that infrastructure projects in Brazil have
and many others.
outside the Ministry of Transportation, and been delayed.
What is needed, according to Resende, is comprising stakeholders, private sector
The decision-making cycle, moreover, is
an independent governing body that would industry leaders, and public officials whose
slowed by the risk of criminal liability that
see such projects through to completion — role would be to advise the government on
decision-makers can sometimes face in
no matter what. “Brazilian society needs developing a National Logistics Strategy.
projects that run afoul of environmental
an independent governing mechanism Something like this exists with the National
law. Civil servants, hesitant to assume such
that will protect long-term infrastructure Logistics and Transport Plan (PNLT) and
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