Brazil's poor infrastructure tops the challenge among local and foreign companies.
Economist Intelligence Unit
Car makers may rejoice, but it is the millions of drivers that have to negotiate the dangerously unpaved roads that prevail everywhere except the main routes – and even many of these are potholed or need resurfacing. Poor infrastructure is one major reason that Brazil scores low in the Economist Intelligence Unit’s business environment rankings (based on 12 key business operating criteria), which places Brazil 40th out of 82 countries despite the expectation of some mild improvements in coming years. The World Bank Doing Business report and other international rankings tell a similar story. High and complex taxation, excessive bureaucracy, complex customs rules, corruption, a sluggish judiciary, and rigid labor markets are further legitimate investor grievances.
But ask local businessmen with international ambitions about their greatest concern, and the parlous state of the infrastructure will almost certainly top the list. In our survey, nearly one half of respondents (49%) point to “low standard or costly infrastructure including telephones, transport networks and utilities” as the main operational obstacle, far more than selected corruption, poor governance (34 percent) or skills shortages (32 percent), the state of transport infrastructure is particularly dire. In spite of some improvement in logistics, freight depends on costly road haulage; there are few railroads; the potential for waterways remains largely unexplored; and ports and airports are congested. This can add one quarter or more to the cost of getting goods to market, say investors.
Investing in infrastructure has been at the heart of President Luiz Inácio Lula da Silva’s growth program (the so-called PAC, launched in 2007), but progress has been limited. Fewer than half of the targets for 2010 have been met (with much of the proposed financing going to first-time home owners, rather than into physical infrastructure). High public spending commitments are crowding out the paltry 1 percent of GDP that is proposed for investment in infrastructure, while limited private sector investment in transport will not make up the shortfall. Little more than 10 percent of Brazil’s road network is paved, and even these are poorly maintained. The exceptions are the main toll roads managed by private operators since the late 1990s, such as the main São Paulo-Rio de Janeiro motorway. As well as growing car usage (with 25 million vehicles now on the roads) more than 60% of cargo transportation is by truck, even though this method is slow and costly. Many fleets comprise owner drivers with ageing vehicles, and this makes it hard for a company to develop an overarching view of its logistics needs. According to Andrew Morgan, founding chairman of Supply Chain Europe, which is involved with freight logistics in Brazil’s food industry, drivers are more worried about “fiscal compliance” – that is, filling out the right tax invoice – than whether the goods arrive on time.
The fragmented nature of transportation is even more apparent in rail transport. The country’s 30,000-km rail network has grown by 20 percent since it was privatized and upgraded in the late 1990s. But despite government efforts to get more freight on trains, it remains underused (with rare exceptions such as lines operated by iron ore exporters) accounting for only 25 percent of total freight movement.
Meanwhile, Brazil’s great potential for river transport remains largely unexploited. Waterways currently account for only 13 percent of haulage, even though Brazil has a 48,000 km network of navigable rivers.
The logistical nightmare does not end when goods finally get to ports for export. Although ports such as at Santos near São Paulo, which handles around one quarter of the country’s foreign trade, have undergone some modernization over the past 15 years, they are congested and expensive, especially at harvest times when trucks laden with grain arrive for loading. It is a similar story with the country’s main airports, the result of soaring demand, and will surely become an important issue to be resolved before the flood of visitors pours in for the football World Cup and Olympics.
Aside from the need for continuing investment, Morgan sees problems in the lack of a big picture. Freight operators all along the supply chain tend to see “low cost” as the key performance indicator. No-one takes a strategic view of transport which would end up saving money. He believes that if logistics operators focused at each stage on time rather than cost, this would produce the greatest efficiencies. The problem is that no-one takes “end-to-end” responsibility for the whole logistics journey.
And this extends to the final export destination. He cites an example of one company’s grain exports to Russia that ran into trouble because the Brazilian logistics manager was unaware of the different rail container sizes used in Russia. Ultimately, the solution lies in better collaboration between private sector operators and the state at various levels. Where there is a big player, like Vale, it is possible to negotiate with the state over transport needs and investment. In a fragmented market, such as the food industry, substantial effort is required to get the right people around the table to discuss priorities, investment and responsibilities.
This is an excerpt of a new report from UK-based bank HSBC, Brazil unbound: How investors see Brazil and Brazil sees the World based on research from the Economist Intelligence Unit (EIU) among 536 senior executives worldwide. The report was commissioned by HSBC as part of Festival Brazil, its international celebration of Brazilian business and culture and the focus of the bank’s global Cultural Exchange program in 2010, which recognizes the understanding of different cultures as an essential part of building international business relationships. Republished with permission from EIU.