June 19, 2015

New Infrastructure Program in Brazil hoping for Better Results

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The second phase of the Program for Investment in Logistics (PIL) 2015-2016 announced last week in Brazil by President Rousseff has the potential to change the way grain is exported out of Brazil. Even if all the proposed projects don't get built, the program could be a significant boost for Brazilian agriculture because much of the R$ 198 billion program is directed toward projects on the northern agricultural frontier.

In the 2015-2016 PIL program there is R$ 86 billion allocated for railroads and R$ 66 billion allocated for highways. These projects are public/private partnerships where the winning bidder is given the right to build and operate one of these projects for a set period of time in exchange for collecting the fees or tolls. In addition to railroads and highways, the new PIL program is proposing dozens of improvement and expansion projects at Brazil's ports.

Railroads are receiving the most investments in the 2015-2016 PIL program especially in the North and Center-West region. One of the most anticipated projects is a railroad linking Lucas do Rio Verde in central Mato Grosso with Miritituba on the Tapajos River in the state of Para where grain companies are building barging operations. The 1,140 kilometer railroad has a price tag of R$ 10 billion. This railroad along with other infrastructure projects in northern Brazil, would result in the majority of the grain exported out of Mato Grosso going north to ports on the Amazon River and in northeastern Brazil instead of south to the Ports of Santos and Paranagua in southern Brazil.

If these projects are actually completed, it would reduce the cost of transporting grain in Brazil and help to relieve the chronic bottlenecks at Brazil's southern ports in addition to making Brazil more competitive in world markets. According to the vice president of the Agriculture and Livestock Confederation of Brazil (CAN), Jose Mario Schreiner, every five years the cost of transporting the grain equals the receipts of the entire grain crop in Brazil.

These projects are still proposals and there is no guarantee that they will be built. The first phase of the PIL program occurred in 2012 and it was supposed to invest R$ 200 billion into infrastructure projects. None of the railroad or port projects proposed in the first PIL were actually built and the highway portion suffered various cuts.

Companies who bid on the first PIL projects stated that the fees and tolls proposed by the government were too low to justify the cost of building and operating the projects. Many of these same company officials now feel that the proper adjustments have been made in the new PIL program to justify their participation in the bidding process. Even if the second phase works better than the first phase, it will take years for these projects to be built and become operational.