GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - PWC

 
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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
GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - PWC
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,
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GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - 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

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GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - PWC
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

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GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - 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.

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GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - PWC
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.”

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GRIDLINES CRUNCH TIME FOR BRAZILIAN INFRASTRUCTURE - 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.

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Rebalancing 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 | PwC
A 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 | 8
a 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 | PwC
1

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 | 10
2

   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 | PwC
the 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 | 12
3

   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

13 | Gridlines | PwC
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