Brazil tries to fill the potholes in its path to growth; Potholed roads among the worst in the world

August 18, 2013 12:25 pm

Brazil tries to fill the potholes in its path to growth

By Joe Leahy in São 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. 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.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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