Dec 15, 2017 | 09:00 GMT

7 mins read

Getting Brazil's Infrastructure Back on Track

Bolivia and Brazil have an agreement to build a rail line through Bolivia that would connect the Peruvian port of Ilo with Brazil's rail network.
(EVARISTO SA/AFP/Getty Images)
  • Inadequate transportation infrastructure connecting Brazil's grain-producing midwestern states with the country's northern ports adds logistical costs that hold back agricultural exports.
  • Financing and other issues inflicted by the corruption scandal that engulfed major Brazilian engineering firms derailed construction on previous infrastructure projects.
  • Over the next year, however, Brazil's government will auction construction rights for two major railways that would connect the country's grain-exporting regions with those ports.

Brazil's breadbasket is centered in its fertile midwestern highlands with their subtropical climate conducive to growing grain. But given the poor transportation infrastructure connecting those grain-producing regions with major ports on the northeastern coast, Brazilian corn and soybeans often do not follow the most efficient route to export destinations. Considering the importance of agriculture to both Brazil's gross domestic product and its total exports, improving the efficiency of road and railway networks has been a priority for the country. Action on infrastructure projects until now has been derailed, but that is changing.

Brazil's infrastructural bottleneck has meant that its grain exports for the most part follow a roundabout path on their way to Asian buyers. With northern ports generally out of reach due to the lack of major road and rail corridors, grain is sent south to ports on the southeastern coast before being shipped back north to pass through the Panama Canal on its way to Asia. The volume of agricultural exports moving through those ports has caused congestion there, posing a major impediment to increasing the sector's competitiveness. This, in turn, has implications for Brazil's economy: Agriculture, especially corn and soybean production, has been one of the main drivers of Brazilian economic recovery this year.

The Road Not Taken

Agriculture represents more than 23 percent of Brazil's total GDP and provides more than 45 percent of the country's total exports. Total Brazilian agricultural production grew by about 30 percent this year, reaching over 240 million metric tons. Soybean production, in particular, has grown at an average rate of 13.4 percent per year for the past 20 years. As production has climbed, both the government and private companies have planned railway and road projects that would connect farmers in the country's midwest to ports in the north. But progress on most of that infrastructure became entangled in the far-reaching corruption investigation that grew out of the scandal involving state-owned oil company Petroleo Brasileiro (Petrobras) and some of the country's biggest engineering firms. The engineering giants, including Odebrecht, were banned from signing contracts with the federal government and were barred from accessing credit through the national Brazilian Development Bank, which financed many of these infrastructure projects, because of their roles in the scandal.

The starts and stops on infrastructure development are exemplified in the project to expand federal highway BR-163, which runs from Mato Grosso state to the port terminal of Miritituba on the Tapajos River in the Amazon Basin. Construction was paralyzed for four months beginning in April. Improving the highway is considered key for many of Brazil's soybean and corn exporters. When complete, the government estimates, the expansion could reduce transportation costs for the crops by about 20 percent. As the economic importance of the region grows, additional infrastructure improvements will follow. Agricultural giants such as Bunge Ltd. and Cargill Inc., which trade corn and soybeans grown in the midwestern region, have begun to invest in major port and railway projects in northern Brazil. Bunge, for example, sank more than $300 million into the construction of two port terminals in the Amazon, which were inaugurated in 2015. Additionally, Cargill and the Chinese company Cofco Agri, which is backed by the China Development Bank, have expressed an interest in participating in the bidding to build three other major railway projects.

The Rail Option

By themselves, highway projects will not fulfill Brazil's goal of redirecting its soybean and corn exports to northern ports. Transportation by truck can be inefficient, especially when road conditions deteriorate, and more expensive on the whole than rail. Nevertheless, over 65 percent of the soybean crop that is destined for export moves via truck, according to Brazil's National Confederation of Transport. By comparison, truck transport carries about 16 percent of soybean production in Argentina and 20 percent in the United States, other major soybean exporters. This adds about 30 percent to the total transportation cost. The transportation group says that Brazil's grain producers could save about $1.2 billion annually if the country's main logistical problems were solved.

But after three years of political instability and economic recession, the Brazilian government, along with major companies, is planning to take on major railway projects next year. One of the most important rail projects, which likely will be opened to bidding in 2018, will be the construction of a line paralleling BR-163 and connecting Mato Grosso with Miritituba. This corridor has attracted interest both from Chinese investors and from agribusiness firms Cargill, Amaggi, Bunge and Archer Daniels Midland Co., which will decide next year whether to form a consortium to bid on the contract to build and operate the railway. The proposed 684-mile-long line would have the capacity to carry 42 million tons of grains annually, equivalent to about 40 percent of the country's total annual soybean production, and would ease the pressure on BR-163 as the main land route to the Amazon ports. Initial estimates put the cost of building the railway at $4.3 billion.

Two other major rail corridors in Brazil could benefit the agricultural sector: The North-South and the West-East (or Fiol) railways. The North-South project connecting the southeastern port of Santos with the northern port of Itaqui passes through major grain producing states, such as Goias, in the midwestern part of the country. All but about 6 percent of that railway has been completed, and sections of it are being used by mining company Vale to ferry iron ore to Itaqui. It is also in need of expansion to bring it up to modern standards. An auction for a 30-year concession to operate the railway will be held in the first half of 2018. The winning bidder would have to invest about $1 billion to expand and complete the line.

When the construction of the Fiol railway is complete, it will connect with the North-South railway, further increasing the capacity of Brazil's railway system. That 900-mile-long line, which will also carry iron ore and soybean cargoes, will connect the port of Ilheus, on the eastern coast, with the state of Tocantins. Construction on the Fiol line, which is being undertaken by the government, has suffered several delays as investment in it has been cut in the name of deficit reduction. That's why the Brazilian government plans to auction it next year to private investors. China Railway Construction Corp. has already expressed interest in assuming construction and taking it to completion in exchange for the concession of running it.

The Chinese company has also proposed building other railways in Brazil, but those projects may be more difficult to undertake and thus are less likely to materialize. One proposed railway would ultimately connect the Brazilian midwest with the port of Ilo on the southern Peruvian coast. Building it would cost an estimated $10 billion,  and feasibility studies in conjunction with Peru still must be undertaken. In addition, the facilities at Ilo would have to be further developed to provide enough capacity to handle the export of Brazilian grain, requiring major investment. A separate agreement between Brazil and Bolivia already has been signed to build a railway connecting with Ilo. Both of those projects, however, would be more costly than any of the rail projects that would connect Brazil's grain-producing regions with its northern ports.

After three years of domestic political instability and economic recession, Brazil has embarked on a series of economic and trade liberalization reforms, including teaming with other members of the Common Market of the South to seek new trade partners outside South America. Both the government and private investors have perceived this as an opportune time to invest in Brazilian infrastructure. While the agricultural sector is well-positioned to take advantage of new markets, it may not be able to fully exploit those opportunities if the country's inadequate transportation infrastructure continues to impose high logistical costs on its exporters. Thus, completion of the major infrastructure projects that are under construction would serve to mitigate one of the country's long-standing geographic constraints.

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