Holiday Perspective (Infrastructure, part n)

Lining up in Paradise

The nice thing about going on holidays is that it gives a fresh perspective on many things. In this singular case, it is the same old topic which I believe will most likely keep Brazil from growing: The lack of infrastructure investment.

Spending my holidays with my family in the south of Brazil, we did a few fun things, which strangely enough, brought the infrastructure topic right back up to the front line.

We are currently on Ilha do Mel in the Paraná state. The island is a small gem, to over 90% an ecological reserve without a single car, comprised mainly of wooden huts. The island is also just off the coast from Paranaguá, one of the most import ports of Brazil. From any point off the seaside coast of the island, I can see at least 30 ships lined up single file to move into the port. In addition, I have just read that this is the average number of ships lined up to enter the Santos Port, Brazil's most important one. Considering each ship is roughly 200m long and 500m away from the next one, we are talking about a 30km queue... on average. 

In November, I had met with a supplier and he told me that while he was awaiting urgent cargo, his ship's captain decided, while in queue, to continue the journey onwards to Buenos Aires first, to unload a part of his cargo, as Santos had informed him he was 55th in line and would take roughly 2 weeks to enter the harbor.

The second story is also about Paranaguá, in this case the access to the port. There is a lovely historical railway from Curitiba down to the port, built 1883 which crawls through the mata atlantica at an excruciating slow speed over very narrow bridges with spectacular views. It is well worth the journey.

Anyway, while we were heading down the track, I was also surprised at the amount of workers on the line conducting maintenance work, most from América Latina Logística S.A., which is the operator of the track. We also passed several freight trains parked next to the single track, the longest of which had 88 (!!!) freight wagons. I have seen longer ones, mainly in the west of Canada, but considering the ones here run along a track that was originally built over 130 years ago, this is quite a feat. I then asked a few people and yes... this is the MAIN route to transport cargo via rail to Paranaguá... It is hardly a surprise then that large corporations in  Brazil, such as Vale, are investing massive amounts of money to provide for their own private railroads.

Scenic cargo route

In parallel, once again I read a critical (Brazilian) article, in this case one about sustainability and growth in Brazil, and here, once again, infrastructure investment was put as key to SUSTAINABLE development. To ensure the country will not collapse in the next years, infrastructure investment must grow from the current 2% of GDP (China has 6%) to at least 4% immediately - starting with basic sanitation, ports, airports, roads... Oh boy, a long way to go.

Bullet Train Delayed

High-Speed Train Route Proposal (From Wolters Kluwer)

A very typically Brazilian story - the bullet train Brazil wanted to partially build in time for the Olympics in 2016, and be completely finished by 2017 (see the entry from Wolters Kluwer above), has been delayed.

The 20bn USD project was supposed to have all bids in by Nov 20 and the decision by Dec 16 has now been postponed to April 29 to allow "all interested companies to participate". Also, according to the auctioning body, this delay will not delay construction... really? So they will just work 6 months faster?

I do not want to sound negative, but

a) The project will never be finished on time, Brazil has a great history of announcing and then not delivering - especially this bullet train has been a company fantasy for decades (just like the maglev in Germany)

b) The project will cost a fortune - 20bn will never be enough

c) The route will run a completely different route

If Brazil is lucky, the project will be completed by the 2020 Expo... for which a site also still has to be found.

Minimum Required Wage

Another blog on Brazil has this interesting post on the necessary minimum wage in Brazil. According to the blog, the minimum wage, today at 510BRL is thus only a quarter of what it would have to be...

You can also load the table directly: Here.

Currency War: The Next Battle

In Brazil, the hot topic continues to be the strong BRL vs the USD - even after a formula one weekend, a new president and creaking infrastructure.

Prior to the G20 Summit, The Exchange War has become a commonplace buzzword in the economic and business press, and is creeping into the common news.

In Exame, a business magazine, "weapons" in the currency war are being prepared by the Brazilian government including even higher duty rates for capital inflows (today at 6%) and charging capital gains taxes from foreign investors (a ghost of the past). But all these weapons are currently on hold until after the G20 meeting in Seoul. Keep your eyes open...

We do not want your money

The Economist, Oct 14, 2010

Last week's The Economist claimed, in its Big Max Index, that the BRL is overvalued by over 40% vs the USD. While this is only one of many indexes, many in Brazil (as elsewhere) are talking about a new currency war.

Fact is, that the Real has gained much value against the USD and EUR over the past years, and is approaching (or is at) the all-time high of 2008 (before it plummeted and made holidays in Brazil a bargain for foreigners... for a while).

The Brazilian government has now responded, afraid that a further appreciation will hurt Brazilian competitiveness, and has raised the IOF (Financial Operations Tax) for foreign capital inflows for fixed capital investments for the second time this month to a staggering 6%. This is to keep "predatory investors" out of the Brazilian market, which has some of the highest interest rates in the world.

In fact, the rates are very attractive: A short-term fixed capital investment will easily give a post-tax return of over 6% p.a. - with local inflation around 5% this is still pretty attractive... if you assume FX-rates will remain stable.

Guido Mantega, the finance minister is afraid of this currency bubble... he should also start looking at a few other bubbles, most notably the housing market in São Paulo...

A Small Dictatorship in a Democracy

The first time I saw the above flag, I thought of Cuba - but, no: This is the flag of the state of Maranhão (located in the Northeast Region), one of the poorest states in Brazil and with an HDI on par with sub-Saharan Africa. If this were not enough, the state has been under uninterrupted rulership of the Sarney clan for 44 years. José Sarney is a classical old-school "coronel" (in the "traditional" style of politics, the local coronel in alliance with other large farmers, controlled the votes of mostly rural inhabitants. The local political chiefs in turn exchanged votes with state politicians in return for political favors) - in other words, a political situation rife for corruption.

Sarney has been active in the Maranhão state politics since the 1950s as member of the parliament, senator and governor - after leaving office, to become running mate for president of the late Tancredo Neves in 1984, he made sure the state remained under family control and pushed his daughter, Roseana, into government.

He assumed the presidency after the Tancredo Neves passed away on the eve before assuming office in 1985 (surely a great topic for conspiracy theorists). Ms Sarney has just been reelected governor, which does not mean much hope for the Maranhão state and it's people - but at least she states it will be her last time in office.

When the highly polemical (but very enjoyable) biography, "Honorable Bandits" (available in Portuguese) was presented in Maranhão last year, a student group allied to Sarney stormed the building where the book was presented, and attacked the authors. Fortunately nobody was seriously injured. For a more neutral external view, please refer to The Economist article "Where Dinosaurs Still Roam".

Whatband?

Now this is an interesting fact, retrieved from speedtest.net - I am pretty sure that it is not representative, because it only tallies speedgeeks - but if we compare speedgeeks to speedgeeks around the globe, Brazil, which is the 9th largest economy by GDP by PPP (right behind France, Russia and the UK), is still far behind in terms of technology.

Especially if I consider, that today it is possible to get 50mbit broadband in São Paulo (albeit for a fortune), this shows the level of technological inequality in the country. In Latin America, Brazil remains in second, behind Chile (which fits to the GDP/head picture) but on a global scale, 65th place is pretty nasty...

Run-Off between Serra and Dilma...

Lower House Candidate Tirirca with his Slogan: "It can't get worse than it already is."

With 99.99% of all votes counted, Dilma is at roughly 46% of votes and Serra has 32%. This puts Dilma worse off and Serra better off than expected.

The run-off will be on October 31 between the two. Dilma, who had been soaring in the polls, has recently lost some ground due to a(nother) corruption scandal in the PT government.

Schocking has been the final result for the lower house, where the former circus clown Tiririca (mentioned here and depicted above) managed to get roughly 1.4m votes in the São Paulo state. The second-most voted candidate received less than 600k. Or as a comment of g1.globo.com.br mentioned yesterday:

"This is so typically Brazilian: We vote for a fool as our representative who will then make a fool of the people of Brazil."

BTW: The above photo is the official campaign photo from the mediaset on his website...

Brazilian Elections: "She's the Man"

It still is unclear if Brazil is in for a run-off in the presidential election, where voters line up to (basically) decide, whether they will vote for Dilma Rousseff (depicted on the left), former chief of staff of the immensely popular president Lula from the PT (Worker's Party), or her rival José Serra, former governor of SP state and member of PSDB (Social Democrats). This week's The Economist has an editorial on the election an rightfully states that, unless disaster strikes, Brazil is in for a further four years of PT, albeit without the charm, charisma and popularity of Lula. According to the latest poll, Ms Rousseff, who has never held elected office and has risen through the ranks as a career civil servant, would receive roughly 50% of the vote - an absolute majority would carry her to a victory.

The stellar popularity of Lula, now to be transferred to Dilma, as she is popularly called, is due the reduction of poverty through social measures, but also inheriting and not reversing macroeconomic stabilizing measures from the previous government - or, as The Economist puts it:

"...Lula deserves praise for bringing into the Brazilian mainstream the once-novel idea that reducing poverty is a proper aim of government (though others sneer snobbishly). But when asked what Lula has done for his country, such people also point to the policies he inherited from his predecessor, Fernando Henrique Cardoso." (The Economist, Sep 30, 2010)

But on the sidelines, there are much more interesting things going on. In these elections, not only the future president will be elected, but the upper and lower chambers of the parliament and governor seats are also up for grabs, as are the offices of the state parliaments. On the lower levels, there are the examples of one candidate who appears to qualify for office, because his daughter was brutally murdered a few months ago and has the catchphrase: "Through suffering I have learned to fight - now I am fighting for your vote." 

But there are also two further examples that are at least curious, not to say frightening: The "Mulher Pera" (clicking the link may infringe your corporate IT policy), a starlet with... let's say physical attributes and the circus clown Tiririca (Slogan: "It ain't gonna get worse, than it is") are both running for the lower house of congress in Brasília. Both are candidates for small parties and are so called "Puxadores" (pullers), who are popularly known and thus do not need much marketing. As these candidates will most likely get more votes than they need, the Brazilian electoral system deems that excess votes be passed on to further candidates in their parties - in the case of Tiririca three most likely "pulled candidates" will be career politicians, currently up to their neck in campaign financing scandals and thus would most likely never be elected by popular vote.


These candidates and others are most likely in for their last term in any case - the Lei Ficha Limpa or "Clean Record Act" allows electoral courts to refuse registration of candidates already found guilty by a higher court. However, as this law on recently was pushed through congress and some of the wording is open to interpretation, thousands of appeals will be upheld. Still, today's Estado de Sao Paulo newspaper lists a total of 1248 candidates will not be able to be elected, although they are on the ballot. Of the total of 172 candidates for governor of Brazilian states a total of 15 (!) are in limbo due to pending court decisions.

All in all, even having a clear tally tomorrow evening will not mean that clarity will prevail once once these candidates are supposed to take their elected seats.

Special Economist Cover in Brazil Only?

This is what I got in my mail - and the cover shows up nowhere on the internet. This is not the North American, not the UK, not the Europe and not the APAC cover - is Brazil in for it's own special cover for the election? (Please excuse the poor scan)

P.S. The Economist seems to be pretty sure of itself... and note the title - not "election", but "handover"...

Logistics Backlog

For those of you who can read Portuguese, here is the article on the backlog in Santos.

As mentioned several times already, infrastructure is a massive problem in Brazil. Especially with the economy hot as it is (growing at 7-8% in 2010), infrastructure is starting to crack at the edges.

The delay of 15 days or more for ships to get into Santos, the main Brazilian port, has been commonplace since the beginning of the year. Once ships do arrive, it takes another 10 days to get the container out of the port and to your warehouse (if this is in the São Paulo metro area). The view is pretty spectacular (not to say frightening for logistics managers) looking out from an airplane flying over Santos to São Paulo - you can see ships lined up for dozens of kilometers, waiting to be let in.

I see it at my company and several of my suppliers, as we import a fair amount of raw materials from Europe, NAFTA and China. We have already also tried alternative ports, but the major ones in the south, such as Paranaguá and Itajaí are not much better and similarly clogged.

The situation is very similar at airports. It has become fairly common for cargo to get lost at Guarulhos (São Paulo) airport. Recently returning from Argentina, our plane had to park at an outside position (Guarulhos passenger load is at 120% of capacity, another problem...) and we took the bus, driving by the cargo terminal - containers, boxes, crates and drums all over the place - I am surprised that we are getting anything by air at all... Leadtimes for airfreight have also gone up - it takes, on average, 10 days to get a slot for an airshipment to Brazil, and as most of the freight goes through São Paulo (some goes through Campinas-Viracopos), there are few alternatives.

Picture of a country that may stop

The Estado de São Paulo, a major newspaper in São Paulo recently ran an impressively critical article about the infrastructure problem in Brazil. Renée Pereira, the author, highlighted six major points which may lead to what in Brazil is called the apagão, or blackout, highlighted by last Novembers Black-Out which left all of what has economic importance in Brazil without energy for two hours.

This black-out today is mainly pointed at logistics: With Ports, Airports, Roads and Rail at maximum capacity (in many cases over it), any further growth will lead to a gridlock which may then lead to a spiral downwards. Until 2008 this was a problem, but not so much - a combination of the Brazil faith in that "tomorrow" things will improve, a global crisis that took off some strain off the infrastructure for a few months and much slower growth prior to the crisis - made many believe, that things would somehow work out.

1. With Brazil barely dipping into the crisis and now speeding out, infrastructure is the big problem. Investments in ports are long-overdue and some problems are ridiculous: Take that several terminals at the main Santos Port cannot operate during rain, which makes them pretty useless during the heavy rainy season which lasts from end of November to March. 
2. Railways are a further problem - the railway network is at 28.000km - tiny, especially if you compare it to the (albeit well-developed) German network of 34.000km. In addition a large portion of the railway network in operation today is fully privately owned - a large portion belonging to the mining giant Vale, which exclusively uses it to ship iron ore to the (clogged) ports.
3. This puts a great strain on the roads, which transport 60% of all goods in the country today. Many roads, especially outside of the São Paulo area, are in a poor state of conservation and publicly funded - meaning that their state usually deteriorates over time. The poor state of the roads increases the costs of transport by 28% - in some cases the cost of kg/km is higher than in high income countries. Benchmarks I have done between my local logistics suppliers and German examples make it appear as if I were massively overspending on freight.
4. Airports fare not much better. São Paulo Guarulhos airport, the major hub in Brazil has been basically unchanged since the 1990s - but today operates at way over 100% of capacity - over the past 8 years, passengers have gone from 11m to expected 22m this year. With more freight being shipped back and forth and more Brazilians moving into the middle class and thus able to buy a ticket, will probably triple demand in less than 20 years (from todays clogged levels!). Guarulhos is not alone. This interesting statistics on wikipedia show 18 of the 20 major Brazilian near or over their capacity in 2009 (the first post-crisis year!) - in 2010 the situation is much worse. The Rio city airport Santos Dumont has surpassed the total 2009 passanger volume after the first 8 months of operation of this year. If you try to imagine further growth and then throw in a 2014 World Cup and 2016 Olympics, imagine the mayhem...
5. (and 6.) Finally access to energy (each citizen is average of 18h without power per year, 20min per week), water (only 85% have access to clean water) and basic sewage systems (only 58% have access to sewage systems) are also behind necessity, most of this access provided in the major metro areas. Especially the North-East of Brazil often seems like sub-saharan Africa...

Sadly, the author does not propose any solutions - although a mix of the following would surely be of great help: Privatize airports, roads and ports, support PPP in basic infrastructure and plan, plan, plan. Allowing uncontrolled growth, as is still common in São Paulo, ensures that private investors build residential and commercial buildings, factories and other industrial installations, but leave the roads, electricity and water supply to the state, without any form of coordination. In addition, strong public investment in basic infrastructure and the decentralization of all logistics needs from the São Paulo-Santos-Guarulhos triangle would surely give the country some room to breath...

Brazilian Burgers, anyone?

Brazil is famous for it's meat, but usually we do not think about hamburgers...

Burger King is being flipped, again (no pun intended) and this time Bain, TPG and Goldman are flipping to the Brazilian funded 3G Capital for $3.3bn. 3G is owned by Jorge Paulo Lemann, the richest man in Brazil, who made his money with Banco Garantia and InBev... oh yeah, did you know that Budweiser Beer (the horrible American stuff, not the good Czech) is also Brazilian?

I got the story off BBC, but it should be in most places in the news.

Brazil, Country of the Future?

Interesting what the internet archives for you. Here is a BBC Article from April 2000 - so much has happened in the past 10 years... and yet there is so much to do.

"Generations of Brazilians have long been taught that they lived in 'the country of the future'.
With its vast territory, natural resources and economic potential, its people were led to believe that Brazil had a guaranteed place as one of the world's leading countries." (bbc.co.uk)

Continue reading here.

Brazil, to be or not to be.

What I like about the Pearson Publishers, is that they actually manage to have clear, critical and sometimes even contradicting opinions if you look at their two flagship publications, the FT and The Economist.

If we look at a recent The Economist article first, called "Four Reasons to Believe in Brazil", from July, the outlook is outright positive. The highlights are commodities and the global commodity hunger, the second oil (actually also a commodity, but the focus here is on self-subsistency and strategic importance in an increasingly energy-hungry world), demography (i.e. a major amount of people joining the work force and slower birth rates kicking in meaning infrastructure is set for the kids there and more people there to pay for it), and urbanisation, where wages usually are higher and access to education, infrastructure, etc. are much better.

Mr. Wolf from the FT takes on a much more pessimistic view in his June article "Why Brazil must try harder". Commodities also plays a significant role here, but with a highlight that while exports in Brazil have increased, the share of manufactured goods still remains low. This is similar to what I recently heard from a presentation of the Trade Ministry at the São Paulo Chamber of Business. The share of commodities in exports has actually increased. All of this still leaves Brazil at a lower development level, as industry development is not significantly challenged if all you have to do is dig out the stuff and ship it to China.

Most interesting, however, is Mr. Wolf's comparison of Brazil to two other BRICs, China and India. Brazil has lower ratios of trade, savings, exchange-rate ratios and population, and lower growth, meaning that while Brazil may have gained in the world, it has fallen behind China and India in world power over the past decades.

I believe it is exagerated to say, that this means that Brazil will not be of any significance in the future, but Mr. Wolf does have a point - especially if we consider the massive infrastructure needs the country has and the low level of savings, there is something Brazil must do, to catch up.

No World Cup in Sao Paulo?

In the middle of the world cup of South Africa, the Fifa has announced (rather quietly) that the Morumbi stadium in Sao Paulo and surrounding infrastructure is not suited for a world cup game...

This does not really come as a surprise - during a game I recently saw in the stadium, I was afraid parts of the ceiling would come down and I walked for 10 minutes to find food that went beyond dry popcorn.

But I am sure there will be some "jeitinho" to find an alternative - maybe they can build a new stadium?

The picture above shows a (poor) design that was planned to "pimp" the stadium for the world cup...

Invest in Infrastructure

Ok, it's more an advertisement than news, and it is German, but the main two points are:

1. Invest in Infrastructure in Brazil

2. The government in Brasilia has noticed this too - there will be a World Cup and Olympics... or so they hope.

But read my lips: There will be no bullet train by 2014 and none by 2016 between SP and Rio... the bullet train is the oldest promise of wanting to be the country of the future - I had heard it when I still lived here in the early 90s...

Read more here.

For Brazil, It's Finally Tomorrow

The Wall Street Journal has written a mostly positive article about Brazil - and the catchphrase, Brazil Country of the Future still hangs in there...

For the past century, Brazil has been a land of great potential—but few results. With runaway inflation and stratospheric national debt, the country was too much of a mess for anyone to take it seriously on the world stage.

How things have changed [more] (Source: WSJ Online)

Basically, Mr. Prada highlights the three major points I always have to complain about Brazil: Lack of adequate public infrastructure, still rampant corruption and horrible education. If Brazil wants to "leapfrog" into fourth place, then these are the things that need to be addressed. Especially if we consider, that Education usually takes a generation to kick into the economy with full force, the time to invest is now, to be able to get where the country would like to be by 2050.

New Consumer Capital of the World

Ok, I am exagerating a bit, but I dug up this great  NY Times article which highlights the ascent of millions of poor in Brazil into the middle class. It is from 2008, but things have just gone uphill since then...

You can call the Brazilian president Lula a populist, but his assistance programs have changed the lives for millions, indeed. By some estimates, over 30m have moved from the poor classes into the so-called "C-Class", which is the Brazilian middle class, where people have access to FMG, holiday trips, cars and their first own home.

And if I look at the last part, depending on how well policy is maintained, we may be looking at a serious real estate bubble in some parts of Brazil (São Paulo is probably a good bet) in the near future...