Brazilian roads and ports may be even worse than you think

26 Nov 2012 by Jim Fickett.

Everyone who has taken even a cursory look at Brazil knows that the infrastructure is a problem. But a newcomer may be impressed by the latest government initiatives to improve things. Unfortunately many government initiatives have come and gone, and the roads and ports, in particular, remain extraordinarily bad. The bottom line for investors in any sector depending on the transportation infrastructure is that, while further rapid growth certainly could be in the future, it would be dangerous to count on it.

This post is about the transportation infrastructure. There are also interesting things to say about the power grid, telephone network, and water distribution, but I am particularly interested in agriculture, and the big complaints among farmers are about transportation. I already touched on this topic in an earlier post (Risks to Brazilian agriculture), but will go into a bit more depth here.

In many countries trains play a major role in transporting farm products to market. Steel-on-steel rolling resistance is small compared to that of rubber on asphalt, and every train car after the first encounters relatively little wind resistance, while each truck wastes its own energy on air turbulence. So trains move goods at much lower cost than trucks. But trains play a small role in Brazil, moving less than a third of all freight (PDF in Portuguese), and they play an even smaller role for agriculture; the great majority of train cargo is iron ore and coal (PDF in Portuguese). The two pieces of the transportation infrastructure that matter to farming are the roads and ports.

To set the stage, the Global Competitiveness Report 2012-2013 (based on national/international data and a survey of business executives) ranks Brazil's infrastructure 70th out of 144 countries. This is about the same or perhaps down a little from 62nd out of 139 in the 2010-2011 report. Roads were ranked 105th in the 2010 report, but fell to 123rd in the 2012 report. Ports dropped from 123rd to 135th.

The first problem with the roads is that only a small fraction of them are paved. Reports differ, but somewhere in the neighborhood of 10% of all the country's roads are paved. The US, which is roughly the same physical size as Brazil, has about 20 times more miles of paved roads (article in Portuguese). Even India, one third the size of Brazil, and infamous for poor infrastructure, has seven times more paved roads than Brazil.

A further problem with the roads is poor maintenance. A 2011 survey of logistics professionals reported that poor road maintenance was the number one complaint (article in Portuguese).

Probably the biggest problem at the ports is inefficiency. Efficient ports operate 24/7, but Brazil's ports do not, and there are often delays of days or weeks in loading or unloading cargo. This always at least increases costs, and can be disastrous for perishable goods. And shippers often fill out over a hundred forms for 20 different institutions. A second contender for the worst problem is access roads and tracks that are overloaded by the growth in traffic.

Some feeling for the chokehold of incompetence and sloth at the ports is given by information from Wilen Manteli, president of the Brazilian Association of Port Terminals (ABTP), a non-profit representing more than 100 private terminals or those leased in public ports:

There's an estimated excess of 26,000 port labourers, according to ABTP, many of which are eligible to retire based on age or health issues.

“We have a labour excess at the ports, and worse, an aging workforce that's unprepared to operate with the newest methods of cargo storage and handling,” Mr Manteli says. “Some terminals can operate with their own staff, but end up having to also pay unionised staff (with limited work). It's a bottleneck that must be resolved by government, employers and workers, with retirement required of those eligible, or relocation assigned to other activities.”

Private terminals outside ports could eventually face skilled labour shortages because of Brazil's record-low unemployment nationwide, but the migration of redundant labourers at public ports to private terminals won't happen naturally, because the demand lies in new technical jobs, which few veteran workers are retraining for, Mr Manteli says.

The government has had a large number of initiatives in the past to try to improve the transport infrastructure. Although there have, indeed, been some improvements, progress seems very slow. The Global Competitiveness Report 2010-2011 had an interesting sidebar in which they went into more depth on the situation in Brazil. The history of the main initiative at that time, PAC, was not encouraging:

Upgrading infrastructure has been a key element of the Lula administration’s ambitious Growth Acceleration Program (PAC), launched in 2007, earmarking a total of R$504 billion in investment for the 2007–10 period …

Yet, three years after the launch of PAC, fewer than half of its targets have been met, with much of the financing going to housing (notably to first-time home owners) rather than to the improvement of physical infrastructure.

In the government's current initiatives to improve infrastructure, there is a major emphasis on concessions to private sector operators. Although many people are optimistic, the Economist notes that there are several reasons to worry about whether the plans are workable in practice:

there are plenty of reasons to think that private capital will not rush to fill the gap. Infrastructure projects require lots of debt, but long-term financing in reais is extremely expensive. Loans are available from BNDES, Brazil’s giant national development bank, at a more affordable rate, but its activities have the effect of crowding out other lenders. The Brazilian government is trying to encourage projects to use tax-free infrastructure bonds, but so far there has not been a successful issuance. Exactly who will buy these bonds is unclear since Brazilian investors can get a comparable yield without taking on so much risk.

There is a lot of risk to go round. Getting hold of environmental licences to undertake big projects is a huge hassle. They have been known to delay a project’s start by as much as five years. One aggrieved investor recounts how his firm had to wait months to get approval to take over a port terminal, because it needed 21 separate entities to sign off. Dilma Rousseff, Brazil’s president, has at least made it possible to fast-track approval for certain infrastructure projects. Yet it is not unheard of for a project to be halted when it is nearly finished, as happened earlier this year to a São Paulo mall because of a missing licence.

It is probably not possible to predict whether current initiatives will indeed bring about significant improvements. We can certainly hope so. But realistic investors will not depend on the transport infrastructure improving any time soon. And since it is already severely overloaded, it would be foolish to bet on trade continuing to grow rapidly.