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Improving Brazil’s Agricultural Productivity by Targeting Infrastructure

Published: July, 2016

Leonardo Rezende is also an author of this report

Over the next few years, the Brazilian government will roll out a large spending package to address chronic problems in the nation’s infrastructure. A new Climate Policy Initiative / PUC-Rio report identifies a key solution that policymakers should consider: Addressing inefficiencies in road, railway, and port regulation could yield large gains in infrastructure improvements and agriculture productivity.

Since the late 1990s, the regulatory environment of Brazil’s infrastructure has been in continuous flux, creating uncertainty in the marketplace. While the regulations have changed in different ways, the general trend has been clear, with restrictions that have prevented existing infrastructure concessionaires from making long-term profits on their investments and provisions that have aimed to incentivize private investment through hidden subsidies.

This shifting mix of incentives for private infrastructure investors has had dramatic, and mainly detrimental, effects on the natural dynamics of the marketplace. It has diminished the viability of infrastructure investments and led to the erosion of the infrastructure’s overall quality. Brazil now ranks far behind geographically similar nations in infrastructure quality. This inefficiency costs the nation time, reduces returns on agricultural production, and slows overall growth.

Previous CPI/PUC-Rio analysis shows that carrying a ton of soybean from one of Brazil’s leading soybean production municipalities to its point of export is almost three times as expensive as it is to carry the same amount of soybean over a similar distance in the United States. In addition, a lack of adequate roads keeps much of Brazil’s production from being exported from its most cost-effective ports – in some cases, this represents a near twentyfold increase in costs.

This brief identifies key inefficiencies for the highway, rail and port sectors, and outlines solutions that can improve agricultural productivity in Brazil by way of improving these sectors.

KEY RESEARCH FINDINGS

 

  • The regulatory environment of Brazil’s roads, railways and ports has been continuously changing since the late 1990s, creating a mix of incentives and uncertainty in the marketplace. This has been detrimental to existing infrastructure investment and has discouraged new investment.
  • Overall, the trend of new regulation has been to prevent existing infrastructure concessionaires from making long-term profits from their investments. Regulators have initiated complex tariffs in the highway system and new rules that eliminate necessary monopolies in the rail sector. These actions have often led to taxpayer-funded subsidies to motivate the concessionaires instead of marketplace incentives, to inefficient use of the infrastructure, and to the promotion of inefficient firms.
  • In the highway sector, the combination of subsidies and complex and demanding regulations has begun to erode the participation and effectiveness of concession auctions.
  • In the rail sector, the 2011-2012 regulatory framework unbundled the highly specialized industry, snarling its efficiency and diminishing private companies’ interest and willingness to invest in railways. This scheme is expected to accrue significant deficits for the state-owned Valec, even though the projects may end up being lucrative.
  • In the port sector, deregulation of independent facilities has been a positive step forward, but the still highly regulated public port approach creates persistent inefficiencies.