Friday, December 9, 2011

Brazil's High Speed Rail: Creating Shared Value in Emerging Markets

Brazil’s plan to build the first high-speed rail in Latin America exemplifies an opportunity for a public-private venture with a focus on creating shared value. As described in "Creating Shared Value,"(1) the project presents a merge between corporate and public interests. The high speed rail that would connect Rio de Janeiro and Sao Paulo has faced multiple delays but is scheduled to be completed in time for the 2016 Summer Olympics. According to one estimate, the rail would cover a corridor serving 40 million people that contribute a fifth of the country’s gross domestic product (2).

A high speed rail between Brazil’s two major cities has the potential to increase productivity, attract businesses to the area, and relieve the road notorious congestion in that region. A high speed rail would also considerably cut travel time, allow travelers to reach the city centers directly (as opposed to arriving through airports), and would be much more environmentally friendly than airplanes and automobiles.

Bidding for the contract to build the rail and manage it for 40 years was opened to the global market earlier this year. Some companies have expressed interest but the process has been delayed several times due to a lack of strong interest and competition for the contract. In addition to coordinating the bid for the project and throwing its weight behind a public-private venture in transportation (something that the U.S. Congress has been unable to make progress on), Brazil’s government could help this project be successful by assuming more of the riskier aspects. Since Brazil is not a country with huge reserves of capital, and therefore cannot front startup costs of the rail, it should write a more attractive contract for companies.

The plan to build a high speed rail with companies taking full responsibility of the initial investment is not without its difficulties. First, high speed rails require massive upfront costs that would make the project prohibitive for many companies. Second, the high speed rail may not be profitable until after it has been running for a significant amount of time. As the number of riders increase and the initial investment is covered, the cost of fares will lower and become more accessible, but the fares would be out of reach for many in the area at first. For these reasons, despite the interest in high speed rails in developed countries and parts of the developing world, few of these projects have been able to achieve profitability.

Still, the long term benefits of such projects make them extremely enticing. As a result, in other parts of the world (like in France, China and Russia), high speed rails have been highly subsidized with public funds in recognition that their upfront costs and risks may prevent robust private investment. As Khanna, Palepu, and Sinha pointed out in “Strategies That Fit Emerging Markets,”(3) companies looking to invest abroad need to be sensitive to the idiosyncrasies of the region of interest. In the case of Brazil, special attention should be paid to the needs of the existing (and largely inadequate) transportation system. Companies considering taking up the high speed rail, for example, would do well to make sure the contract negotiated gives them access to, or better yet, guarantees investments in other forms of complementary transportation projects.

Without proper competitive bidding, the high speed rail risks not being realized. This would not be a disastrous outcome for Brazil’s government, but does represent a lost opportunity. Was this to happen, Brazil’s infrastructure would still present many opportunities for creating shared value. Improving local bus transportation, conducting road maintenance and building new or revamping smaller-scale, commuter rails could do much to better connectivity in the region, even without a high speed rail. Infrastructure projects, especially in transportation are an important starting point for creating corporate support of the shared value model.

In light of Brazil’s recent economic slow-down,(4) the importance of investing in infrastructure commands that much more attention. Companies would do well to do their research and modify their model accordingly before entering this promising market.

1. Porter, Michael E. and Kramer, Mark R. "Creating Shared Value." Harvard Business Review. January-February 2011.

2. “Brazil Seeking Bids to Build, Operate High-Speed Rail Line.” Latin American Herald Tribune. Accessed online December 8, 2011:

3. Khanna, Tarun, Palepu, Krishna G. and Sinha, Jayant. "Strategies That Fit Emerging Markets." Harvard Business Review. June 2005.

4. Romero, Simon. “Dip in Consumer Spending Slows Growth in Brazil.” The New York Times. December 6, 2011.

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