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Country Case Study—Brazil | | | | This case study shows the Bank's approach in the transport sector to poverty reduction in a large country that has huge potential but a skewed income distribution; Brazil also must recover from a national financial crisis.
Introduction
The transport sector represents about 2 percent of Brazil's gross domestic product (GDP). The economy is disproportionately dependent on road transportation; more than 60 percent of the country's freight in terms of ton-km moves by truck, 20 percent by rail, and 13 percent by coastal navigation and inland waterways. The paved federal highway network (58,000 km) is the cornerstone of the country's transport sector.
Brazil also has the largest railway system in Latin America (29,000 km). Trains are used primarily to carry goods—two-thirds of which are iron ore and coal. Intercity railway passenger traffic has virtually disappeared, but important developments have taken place in urban passenger transport. The privatization of the country's entire freight railway network between 1996 and 1999 resulted in substantial improvements in the rail infrastructure and rolling stock, as well as gains in efficiency, output, and the quality of services. Upgrades of the commuter rail systems in most of Brazil's metropolises have also laid the foundation for the further modernization of the sector. Nevertheless, some projects have important unfinished components because of financial (fiscal space) issues, and a few lack conditions for financial and operational sustainability.
The country has the two largest inland waterway systems in Latin America: the Amazon basin and the waterways in the south that feed into the Rio de la Plata. Brazil's 14,000 km of navigable rivers have a large but underdeveloped potential as carriers of products such as grains and minerals. The coastal shipping trade in bulk goods has increased, but its share of the cargo market is still marginal.
Given the size of the country, air travel plays an important role in long-distance passenger travel, transport of commodities with a high value-toweight ratio, and the conveyance of mail. Brazil has 26 principal airports (13 of which handle international flights). Regarding airlines, Brazil has six major international, 10 domestic passenger, and three all cargo.
Some Key Issues
- The high cost of long-distance road transport is a critical issue for a country such as Brazil, where most freight moves by road. The insufficiency and poor condition of the road network tends to undermine the physical integration of the country, and it adversely affects its long-term economic development.
- Brazil is an urban country (83 percent of its population is urban), and its dozen large metropolises, with populations of more than 1 million, face mounting urban transport problems. In some instances, the political, technical, and financial capacity of the federal and local governments is almost overwhelmed by the escalating problems of these cities.
• In Brazil's large metropolitan areas, motorized transportation harms the environment and has a high economic cost. The government has actively sought to reduce the air pollution caused by motor vehicles. It has integrated urban planning with air quality improvement strategies, improvements in commuter rail/bus systems, installation of centralized traffic management systems, development of vehicle fuels that pollute less (Brazil is the leading producer and exporter of sugar-based ethanol), and the promotion of nonmotorized transport. However, much remains to be done in all these fields.
- At least 38,000 people die each year in Brazil from traffic accidents; the mortality rate is among the highest in the world and three to four times higher than in developed countries. Accidents are currently the fourth leading cause of death in the country. The economic and social costs of traffic accidents are enormous (exceeding $3.3 billion per year).
- The government's austere fiscal policy over the past 10 years has been successful in keeping inflation in check and reducing the net debt of the public sector. Lack of fiscal space, however, has led to the postponement of basic maintenance and needed rehabilitation investments in the transport sector. Only onequarter of the federal paved highway network is now in good condition (down from more than 40 percent in 1996).2
- A major underlying cause of the problems facing highway and urban transport is the steady rise in private automobile use—a long-term pattern consistent with the worldwide trend. In urban areas, there has been a shift away from public transportation. According to a recent study by the Associação Nacional de Transportes Públicos, private cars use 12.7 times more fuel than buses (per number of passengers per kilometer transported), produce 17 times more pollutants, and occupy 6.4 times more space on roadways.
- Access by the poor to public transportation is an issue closely linked to their daily life. The bus-metro systems generally extend into the impoverished neighborhoods on the outskirts of metropolitan regions; they constitute the main channel for low-income workers to commute to and from work and to reach health centers and schools. However, a significant share of the poor population cannot afford the fares. Thus, equity concerns (providing access and affordable transportation to the urban poor) are at odds with sustainability considerations (reducing chronic government deficits and allowing private sector providers to make a reasonable profit).
Bank Involvement in Financing Brazil's Transport Projects
Brazil is one of the Bank's major clients. Cumulative lending to the country as of June 2005 was $36.7 billion, a total surpassed only by India and China (and equaled by Mexico). However, Bank lending to the country is marginal, relative to the size of its economy—the 14th largest in the world. Total Bank loans have averaged more than $1.5 billion per year since 1998, but they represent only 0.2 percent to 0.3 percent of the country's GDP. The Bank has approved 43 loans to Brazil for projects focused primarily on transportation and has financed 28 other projects with smaller transport components. But since 1970, total Bank transport sector loan commitments have fallen substantially in real terms (while Brazil's population has nearly doubled).
A number of factors have contributed to the downturn in Bank lending. The government's strict fiscal policy over the past 10 years has resulted in drastic cutbacks in budget allocations for investments in the transport sector and parallel reductions in expenditures provided by external loans. Moreover, in recent years, the Bank has shifted its focus to development policy lending in support of Brazil's fiscal and financial reforms. During 1999–2005, 14 large Development Policy Loans for a total of $10.5 billion were granted to Brazil, representing about 68 percent of total Bank lending to the country (and 94 percent in 2005). However, an underlying reason for the decline in Bank lending can perhaps be found in the fact that Brazil is now a middle-income country that is gradually becoming less dependent on development bank financing as its access to private capital markets improves. At the same time, the government still restricts the extent of public investment in infrastructure.
Main Areas of Bank Support to Brazil's Transport Sector
Bank lending to Brazil's transport sector has primarily targeted two sectors: highways and urban transport. Bank projects have focused on supporting the implementation and consolidation of ways to reduce logistics costs at the policy level (including measures in the customs, port, railway, and road areas). In the road sector they have aimed at transforming road administrations from executing to management entities, increasing private sector involvement, stabilizing funding for road maintenance and rehabilitation, improving efficiency and effectiveness of public spending, and strengthening the states' environmental capabilities to ensure the sustainability of economic development.
In addition, Bank-supported projects have financed rehabilitation and improvement of the state and federal road networks, as well as improvement of municipal road networks, with a view to fostering regional integration. A recently evaluated state highway program in Goias State was designed as an Adaptable Program Loan. It achieved its goals of increasing the efficiency of the state road transport system, transferred the maintenance of municipal roads to the municipal authorities, and strengthened the executing agencies. Funding for maintenance and rehabilitation of the federal paved network has increased during the present decade but has been insufficient to halt the deterioration in the network.
In the urban transport sector, much of Bank activity since 1990 has supported the government's decision to transfer the urban rail systems from the federal level to the states and municipalities. Bank projects have also focused on greater physical integration and institutional coordination in the delivery of urban transport services, including modal and fare integration. Moreover, the projects have targeted the benefits of the urban rail systems to the poor population. This has included the introduction of the vale transporte system (a compulsory requirement on employers to finance part of the commuting cost of their employees).
During the past decade, the Bank has been associated with all of Brazil's privatization programs in the transport sector through the provision of large loans and technical assistance.3 - The Bank supported the privatization of the federal railways through technical support underpinned by a Bank loan that financed staff retrenchment. The entire railway network, comprising more than 28,000 km of rail line, was concessioned to the private sector during 1996–99. Investments made by the concessionaires in the track and rolling stock during 1997–2005 totaled about $2.3 billion.
- In the road subsector, the federal government has concessioned about 5,000 km of state highways, and the São Paulo state about 2,500 km. However, the process was slower after the first wave of concessions in 1994–95.
- In urban transport, the Bank has supported a number of projects aimed at advancing the transfer of the commuter rail systems to the private sector as a way to improve their performance, attract new investment, and reduce the chronic fiscal burden that these operations represent. Although in some cases (such as Belo Horizonte and Recife), private sector control of the commuter rail systems has been delayed by the fiscal crisis, in general, progress in the urban arena has had very positive outcomes.
- Management of all major ports has now been transferred to the private sector, with the government retaining control of port infrastructure. This has improved their efficiency and reduced port fees.
- The Bank has also collaborated with the government in the formulation of relevant operational reform policies, including the separation of the policy formulation and regulatory functions.
Bank Performance in Supporting the Country's Transport Sector
The ratings for outcome, sustainability, and institutional development of Bank-supported projects were low for operations carried out during the late 1980s and early 1990s—years that were very difficult for Brazil, as they were for much of Latin America (the “lost decade”). With the upturn in the economy, project performance indicators improved during the second half of the 1990s and even more so in 2003–04. Examples of progress include the pioneering efforts to concession the suburban railways, the subway system, and the ferry boats in Rio de Janeiro, saving some $400 million. In São Paulo the suburban railway that only supported 400,000 riders per day before the Bank project in 1992 is now transporting 1.6 million people daily.
The relevance of transport sector projects has been high. The Bank's analytical and advisory assistance and financial support has been consistent with Brazil's current development priorities and with the Bank's country and sector strategies. The efficacy of Bank lending and policy advice programs has generally been substantial. A few urban transport projects were seriously affected by the fiscal space restrictions imposed after 2002, at least until the Pilot Investment Program was created in agreement with the International Monetary Fund (IMF). These developments could not reasonably have been anticipated at appraisal. An important lesson for countries affected by fiscal space problems is that it is essential that urban transport projects be included in any Pilot Investment Program–type arrangements, as they are likely to attract strong support because of their high social benefits.
Overall, groundbreaking achievements were made in passenger transport integration and in support of the decentralization of suburban railway services. The Bank also supported the first busway project supported by the private sector. The efficiency of Bank-supported projects completed since 1980 has been generally rated as substantial, although the economic rates of return (ERRs) have sometimes been lower than anticipated at appraisal, again because of the impact of delays in completing the infrastructure because of the financial crisis.
Since 1995, the Bank has produced 11 reports on Brazil's transport sector, six general reports that include transport sector issues, and a number of policy notes. As lending levels to Brazil's transport sector decrease, the relevance of Bank support to the country will become more dependent on the quality and effectiveness of its technical assistance.
In summary, the outcomes of the Bank's approach to assisting in the reduction of poverty in Brazil through the transport sector have been substantially achieved. Project investments were often a vehicle to support the government in more fundamental reforms associated with decentralization, privatization, and pro-poor urban transport measures. Maintenance issues, however, especially with regard to the federal road system, remain a serious concern. |
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