At the stuck crossroads: a wobbly road network and weak railways could kill Brazil's export boom. Then there's the shipping mess.

One deficiency limits the development of Brazil's fledgling logistics industry: infrastructure. Despite what should be a promising environment--booming Brazilian exports and the prospect of economic growth--logistics companies in Latin America's biggest market are held back by the constraint of an aged and underdeveloped infrastructure network.

Consider Brazil's trucking companies. Though they are responsible for transporting the bulk of the country's goods to distribution centers, cities and ports, the sector lacks investment because of the high cost of maintaining trucks. Bumpy and inefficient roads mean companies are reluctant to upgrade their vehicles.

The result: an old and inefficient trucking fleet. "Inadequate infrastructure means you have no money to invest in new trucks," says Urubatan Helou, president of Braspress, a Sao Paulo transport company, and of the Transport Cargo Syndicate of Sao Paulo. "It limits the ability of the sector to grow."

Demand from Brazilian exporters--among them fast-growing agriculture, steel and minerals industries--have helped logistics providers evolve in recent years. From a fragmented group of transport and storage companies, a full-fledged logistics industry is now beginning to emerge. Numbers are hard to come by, but nascent industry groups say at least 200 companies now operate in the sector.

"The demand for logistics services exists," says Marcio Dias, president of MGD Desenvolvimento Profissional e Consultoria em Logistica, a Sao Paulo logistics advisor. "But further investment is necessary to really get the industry off the ground."

Brazil should be a logistics heaven. The country--tens of millions of consumers in a land area bigger than the continental United States--offers a market with potential like few else in the world.

Its promise, in fact, in recent years has lured a few of the world's biggest logistics operators to Brazil. Britain's Exel, for example, launched a Brazilian business five years ago in order to serve the needs of consumer-goods giant Unilever, a company it has long worked with in the United Kingdom and other parts of the world.

A one-person Exel office it founded near Campinas--the giant air transport hub outside Sao Paulo--has since grown into an operation that employs more than 2,000 people in major distribution centers throughout the country. The company's relationship with other multinationals has helped it expand its client list in Brazil to include Ford Motor, French retailer Carrefour and Finland's cellular phone maker Nokia.

"Many of these companies have had local providers and they often come to the conclusion that they want the same thing that we do for them in other markets," says Randy Rogers, Exel's vice president of contract logistics for South America.

Limitations. But while growth has exceeded its initial expectations, Exel says it could have evolved even faster. "Infrastructure is an issue," Rogers says. "We work as best as we can and we hope it will improve."

The company's success offers some hope to smaller logistics operators in Brazil. But few have immediate access to such a lucrative list of clients. And until domestic companies are confident enough in their ability to work around the physical limitations of the sector, few will have incentive to dream of operating on a bigger scale.

"Productivity is low because of the inefficiencies," says Paulo Fleury, director of the Center for Logistical Studies at Rio de Janeiro's Federal University. "And without investment there will be increasing bottlenecks that will further impede the growth of the sector."

Highways convey 62% of the total goods transported on the ground in Brazil, according to the National Agency for Ground Transport. The country's small rail system carries 21% of the goods, while river traffic handles most of the rest. But, of the country's entire road network 1.74 million kilometers of it--less than 10% is paved.

The problem dates back to the 1960s, when the Brazilian government, then on a costly modernization spree, decided to bet on the construction of an ambitious highway system instead of developing railways. But economic turmoil since then has meant that the network was never fully developed. And the roads that did get built have suffered from a lack of upkeep.

Increasing demand for transport is difficult for companies to meet. Transport companies, warehouse operators, and delivery services say the limitations cause them to miss deadlines and lose perishable stock. "We constantly lose money because the country's infrastructure does not meet the needs of the sector," says Altamiro Borges, president of the Brazilian Logistics Association. "We're heading for a logistical blackout."

One of the difficulties that blocks infrastructure improvements is a lack of private investment in public works. Because of the country's erratic economic past, and its reputation for political volatility, private investors have been wary of committing to major projects in Brazil, especially since many past projects have faltered midway or failed to get off the ground altogether.

But the government says proposed legislation on public-private partnerships will allay those concerns. President Luiz Inacio Lula da Silva, in a June speech to builders and infrastructure operators, pitched the potential benefits of the bill, which is now winding its way through Congress. "We can't continue to start public works projects only when an election rolls around," the president said. "The sector needs clear rules to know what will happen at the beginning, middle and end of a project."

The Brazilian government plans to invest US$250.5 million in three ports under the proposed Public-Private Partnership (PPP) program, currently organized by the Budget and Planning Ministry. Out of the total sum, $123.6 million is projected to come from the private sector. Or so the government hopes.

The Lula administration has been touting the program as the only way to get private firms to invest in logistics, but political opposition to the new legislation is strong in Brasilia due to fears that the project would break fiscal responsibility and licensing laws.

If, and when, the program sees the light of day, the Itaqui Port in the northern state of Maranhao, Sepetiba in Rio de Janeiro, and the Port of Santos in Silo Paulo are first in line.

"We haven't had significant investment in this port since 1986," says Arnaldo de Oliveira Barreto, director of infrastructure and services at the Port of Santos. "With or without PPR this government has to invest in Santos or five years out we're looking at a total collapse. That's what the most important port in the country is facing."

Roughly 28% of all foreign trade gets shipped out or delivered through Santos, a city on the Silo Paulo coast. The government's $164.8 million proposal for the port is dependent on environmental studies and a $72.5 million commitment from private companies to construct 16 kilometers of road to decrease the traffic flow of some 5,000 trucks delivering daily. The project is also designed to separate the flow of trucks from railway compositions, solving one of the most chronic problems in the Port of Santos.

The port is breaking records despite these well known obstacles. The port closed 2003 with 60 million tons under its belt, and it expects to close 2004 with at least 64 million tons, according to the Port Authority of Sao Paulo state.

"Everyone knows that access to these ports is the biggest problem, yet what is being done about it?" asks Fleury, at the Federal University of Rio de Janeiro. He pointed out that the Transportation Ministry called for emergency investments in eight of its ports before the end of 2004. "You don't have the roads to get into these ports. Rail access is problematic. Trucks have nowhere to park. Paranagua Port has enormous lines with traffic backed up for miles. Inside Santos is a mess. Every terminal is packed to capacity," he says. "It's a serious problem. PPP can help."

Barreto is also hopeful. "Once PPP is approved, we'll have a meeting with the companies that have already invested in our 62 terminals to discuss what needs to be done," he says. "Until the rules are known, no one is talking about investing in anything other than their own terminals."

Further north, in Rio, the government has proposed a $33.6 million logistics support zone at the Sepetiba Port, counting on a 50% contribution from a private partner. The support zone is intended to operate as an integrated center of logistical infrastructure, with an industrial sector for high added value and service space including a truck center, banks, shops and restaurants.

That doesn't top Antonio Carlos Lima's list, however. Lima is the president of the Rio Port Authority. "I need rail to link northern Paranfi to Sepetiba and pavement in the port of Rio would be nice," he says. Rids ports have seen anywhere from 20% to 25% increases in shipping volume. In 2002, 22 million tons left Rio compared to 27 million tons in 2003, Lima says.

The $52.7 million project being designed for the small Maranhao port of Itaqui is still in its early stages, with its chief aim to extend the quay 300 meters and extend the width of Pier II, currently being leased to metals giant Companhia Vale do Rio Doce, by eight meters. The region is a major mineral and agriculture exporter.

A study commissioned by Brazil's Trade and Development Ministry shows that exporters need to increase the frequency in which their cargo leaves the docks. As it stands, companies end up waiting as long as three weeks for their products to leave town due to total port saturation.

Brazil wished for greater exports. They got it. Is more investment all that is needed? Ricardo Duboes, a researcher at Trevisan, the Sao Paulo consulting company contracted by the Trade Ministry, says cutting some of the bureaucracy will help in the short term, while Congress dukes it out over the legislation. "For a ship to dock, it needs three different authorities--military police, customs, the port authority. Then to leave it's the same thing, and they all provide the same function," Duboes says. "We suggest they have one entry and exit authority so the boat isn't sitting at the dock waiting for three people to do the same thing. Until investment money comes into the system, administration cuts will save the government money and give the private sector more incentives to invest."

Waiting. The Inter-American Development Bank's president, Enrique Iglesias, likes the idea and said the bank would create a maximum $75 million fund to help kick off the initiative, whenever the Brazilian Congress decides what to do with the proposal.

Meanwhile, far off the coast of Copacabana Beach, behind the old military fort near the Sofitel Rio Palace Hotel where Avenida Atlantica meets Arpoador Rock, a container carrier sits in a calm, cool winter sea, waiting for hours before it finally heads to port. Other ships move in and out.

"PPP can help the government overcome the massive deficit our ports face," says Lima. "We are going to need the private sector. Public resources won't do it."

The contracts aren't going to be very lucrative, says Duboes. "Maybe 2% to 3% return on investment. I don't see a lot of cases where PPP can improve the port system, with the exception of a need to build more terminals that are opened to the public," he says. "I don't see someone like Vale facilitating terminals for other companies to use. Maybe some trading companies like Cotia Trading, maybe America Latina Logistica could be interested. The ports have improved under privatization plans. There's still a lot more to be done if Brazil is going to remain competitive, price wise, in international trade."

Foreign logistics companies say improvements to Brazilian infrastructure could go a long way toward helping solve other problems that hinder the sector. Because of the difficulty in getting goods moved, observers say, many potential exporters don't bother trying to sell their wares beyond the local market. As a result, only the biggest Brazilian companies can afford to export, and they aren't getting the return they might.

"It's the typical story of the homeless person sleeping on a golden bench," says Pablo Magallanes, country manager for U.S. courier UPS in Brazil. "There are companies with good products and competitive prices, but they see too many difficulties in their path to market and they end up not bothering with the hassle."

Despite the industry's limitations, UPS is upbeat on the Brazilian market. The projected growth for 2004--the government expects Brazil's gross domestic product to increase by at least 3% by the end of the year--has already led to a surge in business.

"Hopefully the growth will lead to further investment in the sector," says Magallanes. "This will be a big opportunity for the entire industry."

Road Weary

Brazil's national highways--more than 92,000 kilometers--could use
some asphalt.

percent paved

paved two-lane    4%
paved one-lane   58%
planned          23%
not paved        15%

SOURCE: PNV

Note: Table made from pie chart.

years since last resurfacing

up to 5 years         5%
5 to 10 years        15%
more than 10 years   80%

SOURCE: DNIT

Note: Table made from pie chart.

PAULO PRADA * RO DE JANEIRO KENNETH RAPOZA * RIO DE JANEIRO