Analysis of the Potential of IIRSA Projects for Production Integration and Development of Value-Added Logistics Services (IPrLg)

Application to Group of projects 3 - Capricorn Hub

Asunción – Paranaguá D E V R

July 2009 E S E R S T H G I R L L A - A S R I I

www.iirsa.org I I R S A - A L L R I G H T S R E S E R V E D Introduction

In 2006, within the framework of the Initiative for the Integration of Regional Infrastructure in South America (IIRSA), methodologies aimed at identifying infrastructure projects and actions complementary to IIRSA’s Project Portfolio were designed. These methodologies —the Methodology for the Evaluation of the Production Integration Potential of IIRSA’s Integration and Development Hubs [Pacheco, López, 2006], and the Methodology for the Promotion of the Development of Value Added Logistics Services (SLVAs) in IIRSA’s Hubs [ALG, Farromeque, 2006]— were partially applied to the Asunción-Paranaguá and Valparaíso-Buenos Aires Project Groups (GPs, in Spanish), in the case of the production integration methodology, and to the La Paz-Tacna-Lima Project Group, in the case of the methodology for the development of logistics services.

The development of these two methodologies proved that it was necessary to approach the analysis of production integration and logistics issues from an integrated perspective. The integration of both methodologies and the complementation of aspects relevant for IIRSA, D

partially covered by the instruments already mentioned, would enhance data collection and E consultation to different actors, creating significant potential for a structured dialogue. V R E

The consolidated methodology, developed in 2007 by Marelia Martínez Rivas, Carola S

Venot de Suárez, José Enrique Pérez Fiaño and João Furtado, was applied to Capricorn E Hub’s GP-3 (Brazil and Paraguay) and to Central Interoceanic Hub’s GP-5 (Bolivia, Chile R and Peru). With a view to this implementation, national teams were set up in the countries S involved and their members were trained by international consultants. T H

G The Brazilian national team was made up of experts from the staff of two institutions: a I R

federal institution, the Institute of Applied Economic Research (IPEA), under the purview of L the Planning, Budget and Administration Ministry, and a state institution, the Paraná L Institute of Social and Economic Development (IPARDES), reporting to the Planning and A - General Coordination State Department, state of Paraná. Experts from the Planning and A

Transport Ministries and from the Transport Secretariat of the state of Paraná also S participated in the workshops. The national team of Paraguay was made up of experts from R I the Export and Investment Network (REDIEX), under the Ministry of Industry and Trade, I and by specialists from the staff of the Ministry of Public Works and Communications.

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List of the Persons Participating in the Application

Brazilian National Team

Liana María da Frota Carleial Regional and Urban Studies Director - IPEA Bruno Cruz Assistant Director - IPEA Bolivar Pego Technical Coordinator - IPEA Francesca Emmanuelle Leite Viana Abreu Research Assistant - IPEA Alfredo Eric Romminger Research Assistant - IPEA Joao Carlos Magalhaes IPEA Amarildo Floriani Research Assistant Silvana Costa Research Assistant Vande Lage Magalhaes National Agency for Land Transportation - ANTT Elaine de Melo Xavier Representative of the Ministry of Planning Carlos Manuel V.A. dos Santos Director-President - IPARDES Paulo Delgado Researcher - IPARDES

Daniel Nojima Researcher - IPARDES D Gracia Viecelli Besen Researcher - IPARDES E Darcy Marzulo Ribeiro Researcher - IPARDES V R

Rejane Karam Transport Secretariat of the State of Paraná E S

Paraguayan National Team E R

Eduardo Clari Business Environment Director of REDIEX – S Team Supervisor T Luis Añazco IIRSA Coordinator from the Ministry of Public H G

Works and Communications (MOPC) I

Roberto Salinas IIRSA National Coordinator R

José Luis Argaña Institutional Relations Director at the National L Transport Directorate (DINATRAN) L A

Jorge Angulo Manager of the Logistics Committee at -

REDIEX A

Enrique Báez Office of Commercial Intelligence - REDIEX S

Illian Marecos Expert on geographical information systems - R I

REDIEX I Natalia Rodriguez Ministry of Industry and Trade Roberto Petters Research assistant of the Paraguayan National Team

Consultants

Marcel Barceló Logistics Expert Rinaldo Barcia Fonseca Production Processes Expert

This document is primarily based on the information and texts included in the national teams’ reports. In some cases, the information and original texts were modified, adapted or summarized to be properly incorporated into this final report. In addition, this document resorts to information contained in other texts published by IIRSA, particularly the reports by Pacheco and López [2006] about the design and implementation of the preliminary methodology to evaluate the potential for production integration of the areas of influence of the Hubs’ Project Groups. Such texts are available at www.iirsa.org.

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The contents of this document are organized as follows:

 Section 1 presents the projects included in Capricorn Hub’s GP-3 and describes their current status. Then, the criteria used to delimit the project group’s area of influence are described, and finally, the area of influence is outlined so that the reader may have a first general idea of the territory involved.

 Section 2 includes a more detailed characterization of the area of influence, focusing on the structure and general dynamics of its main economic activities as well as on the infrastructure available to support them.

 Section 3 explains the method used for the selection of production chains and value-added logistics services that served as the basis for hypotheses that were put to test in interviews made in Paraguay and Brazil.

 Section 4 presents the results of the interviews, paying special attention to the interviewees’ comments on the structure and dynamics of the selected production D E

chains, references to the potential of these chains for production integration, the V

identification of infrastructures complementary to IIRSA’s projects that may R contribute to production integration, the identification of problems, obstacles and E S

restrictions hindering Brazil-Paraguay economic relations as well as the production E

integration process, and the identification of business opportunities that, should they R

come true, could support production integration. S

T  Section 5 specifies the reasons for which it is deemed suitable to envision the H G

establishment of sets (or groups) that should include infrastructure projects, any I restrictions that need to be overcome for the production integration process to R L

advance, as well as business opportunities associated with the previous elements. L

A  Sections 6 and 7 present the assessment of the impacts of GP-3 projects as well as - of the proposed actions and projects related to production integration and the A S

logistics system, respectively. R I

I  Section 8 outlines the resulting recommendations and the indicative action program.

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Table of Contents

1. The GP's Area of Influence ...... 9 1.1 Current Status of the Group’s Projects ...... 9 1.2 Criteria Used to Delimit the Area of Influence ...... 10 1.3 The Joint Area of Influence: General References ...... 12 2. General Characterization of the Area of Influence ...... 15 2.1 Structure and Dynamics of the Fabric of Production ...... 15 2.2 Existing Infrastructure in the Area of Influence ...... 24 3. Selection of Production Chains and Formulation of Production

Integration Hypotheses ...... 33 D E

4. Interview Results: The Potential for Production Integration and V R

Development of Logistics Services in the Area of Influence of the Project E S

Group...... 39 E R

4.1. Validation of the Hypotheses about Production Chain Structure and S T

Dynamics ...... 39 H G

4.2. Complementary Infrastructure, Problems and Business Opportunities I R

Identified by Interviewees ...... 49 L L

5. Proposed Projects and Actions ...... 53 A -

6. Assessment of the Impacts of the GP Projects and of the Proposed A S

R Actions and Projects on Production Integration ...... 59 I I 7. Assessment of the Impacts of the GP Projects and the Proposed Actions and Projects on the Logistics System ...... 61 8. Recommendations and a Guiding Action Plan ...... 61

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1. The GP's Area of Influence

1.1 Current Status of the Group’s Projects

Capricorn Hub’s GP-3 (Asunción-Paranaguá) is made up of 14 projects, the total investment of which has been estimated at US$1,582,500,000. Four of the projects are at an initial stage, during which discussions are held to define either their profile or business model, if the private sector needs to be involved; seven projects are at different pre- execution phases (feasibility study, design of basic project, bidding), and three are currently being executed.1

Amount Code Name of Project Stage Financing (US$) New Bridge: Puerto Presidente Franco CAP14 (Presidente Franco Port)-Porto Meira, with 75,000,000 Pre-execution Not initiated Border Center (BR-PY) Enlargement of Port Infrastructure in CAP15 19,000,000 Execution Implemented Paranaguá Port (BR) D CAP16 Completion of Curitiba Road Ring (BR) 75,000,000 Execution Implemented E

CAP17 Building of Curitiba Railway Ring(BR) 70,000,000 Profiling Not initiated V Concession for the Improvement of Routes R CAP18 No 2 and 7 (Asunción-Ciudad del Este) 136,000,000 Pre-execution Not initiated E (PY) S Building Railway Asunción-Ciudad del Este E

CAP19 297,500,000 Profiling Not initiated R (PY) Building of the Railway: Cascavel-Foz do S Iguaçu and Cascavel–Guaíra-Maracaju CAP20 no data Pre-execution Not initiated T (BR) (Hinge Project with GP-2, Paraná- H Paraguay Waterway Hub) G

CAP22 Relocation of Asunción Port (PY) 25,000,000 Pre-execution Not initiated I Railway Bridge with a Freight Yard (Ciudad R

CAP52 70,000,000 Pre-execution Not initiated L Del Este-Foz do Iguaçu) (PY-BR) New Railway Corridor West of Paraná L

CAP53 270,000,000 Profiling Not initiated A River (PY) Enlargement of Puerto Villeta (Villeta Port) - CAP40 30,000,000 Profiling Not initiated (PY) A S

CAP69 Building of the Iguazú Hydroelectric Station 260,000,000 Execution Implemented R I Transmission Line: 500 kW (Yacyretá- I CAP68 130,000,000 Pre-execution Implemented Ayolas-Carayao) (PY) Transmission Line: 500 Kw (Itaipú- CAP67 125,000,000 Pre-execution Not initiated Asunción) (PY)

1 For further details, visit www.iirsa.org/proyectos. 9

1.2 Criteria Used to Delimit the Area of Influence

In order to delimit the Paraguayan portion of the area of influence, departmental divisions were agreed to be used as a basis, since they fit well into the structure of the demographic and socio-economic census data, thus facilitating the systematization of data required for characterizing the area of influence and the selected sectors.

Even though GP-3 clearly runs East-West along routes 2 and 7, it was decided to incorporate the Canendiyú department in the North in view of the fact that the economic dynamism around Itaipú lake, from Ciudad del Este to Salto del Guairá, was considered important. To the South, the incorporation of the department of Itapúa was also deemed relevant due to its homogeneous agricultural features, mainly based on oilseeds. Furthermore, route 6 (Ciudad del Este-Encarnación) is a connection that structures economic activities and an alternative for import/export flows through the city of Encarnación.

Thus, the Paraguayan portion of the area of influence is made up of the departments of D Alto Paraná, Asunción, Central, Cordillera, Caazapá, Caaguazú, Canendiyu, Guairá and E V

Itapúa. R

E S

Saltos del Guairá E R

CANENDIYU S T H G I R L L A -

CAAGUAZU A Asunción S CORDILLERA R I

CENTRAL Ciudad del Este I GUAIRA ALTO PARANA

CAAZAPA

ITAPUA

Encarnación R. Salinas – R. Petters

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The area of influence on the Brazilian side was delimited by using the strip of route BR 277, joining Foz do Iguaçu with Paranaguá port, as a reference. Once this axis was chosen, two equidistant lines —150 km to the North and 150 km to the South of the route— were drawn, thus defining a region of reference.

This region of reference comprised, in addition to portions of the Paraná state, some Southeastern areas of the state of São Paulo and some Western, Northeastern and Central-Northern areas of the state of Santa Catarina. These areas, which do not belong to the state of Paraná, were not considered, since they have little or no economic relationship with Paraguay. As for the Western area of Santa Catarina, which has considerable poultry and pork meat production, some exploratory interviews revealed that the corn imported from Paraguay is mainly incorporated into the meat production chain, located in the Southwestern area of the Paraná state, and is only marginally integrated into the chain of the Western area of Santa Catarina. In the Northeast of Santa Catarina, the economic activities are far more linked to the dynamics of the MERCOSUR-Chile Hub —in a North- South direction— than to the economic dynamics of the Capricorn Hub or its GP-3. The

Southeastern side of the state of São Paulo (and, in fact, part of the Northeast of the state D of Paraná) has a low economic dynamism, which is also linked to the MERCOSUR-Chile E V

Hub. R

E Thus, the region of reference fell fully within the territory of the Paraná state. To the South, S E

the region runs up to the Paraná-Santa Catarina border. To the North, as the 150 km line R ran across some geographical micro-regions,2 the southern line was moved (reducing the S

region of reference) in order to consider only the geographical micro-regions falling entirely T within the space defined by the Northern line. In other words, geographical micro-regions H G

included only partially in the region of reference were not taken into account. I

R

To verify the consistency of this delimitation, its relationship with the polarization exerted by L the cities included in the region was analyzed. For this purpose, urban centers were L A classified according to their polarization into strong-medium, strong, very strong and - 3 maximum. Seven polarization areas were identified, only a few of which were not totally A included in the region of reference. As a result, the municipalities and geographical micro- S R regions polarized by the cities under consideration were included. Once these final I I adjustments were introduced, the region of reference was finally established as the Brazilian portion of area of influence of the Asunción-Paranaguá Project Group.

2 Geographical micro-regions are sets of municipalities, as established by the Brazilian Institute of Geography and Statistics (IBGE). A micro-region comprises municipalities bearing resemblance in terms of space occupation. Such resemblance refers to the agricultural, industrial, mining and fishing production structure. 3 This subdivision results from having listed all municipalities in the area of polarization of a given urban center showing at least a strong-to-medium intensity. Whenever a municipality belonged to two polarization areas, it was allocated to the area polarized by the largest urban center. When one of these urban centers fell within the region of reference and the other one fell outside such region, the municipality was allocated to the polarization area of the urban center within the region of reference. 11

D E V R E S

E R

S T

1.3 The Joint Area of Influence: General References H

G The map below shows both areas of influence. I R L L A - A S R I I

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The Paraguayan portion of the area of influence covers 87,250 km2, accounting for 54.5% of Paraguay’s Eastern region and 21% of the total territory of the country. It comprises 156 of the 218 cities in Paraguay and its total population is 4,755,396 (80% of the country’s total inhabitants in 2006). The estimated GDP of this area of influence amounts to US$10 billion, i.e. about 80% of the national GDP (2007 figures).

This area of influence includes the country’s most important urban centers, such as the metropolitan area of Asunción, Ciudad del Este and Encarnación, where the leading industrial and port activities are located.

The Human Development Index (HDI) values for the Paraguayan departments that form part of the area of influence are very similar to one another (and very close to the country’s average), suggesting an important degree of social homogeneity in the whole area.4

D E V

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R

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H G

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L L A

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The area of influence on the Brazilian side includes 189 of the 399 municipalities in Paraná, accounting for 56.4% of the territory of the state. In 2007, there were 6.674,342 inhabitants, accounting for 64.9% of the total population in Paraná, 83.5% of which lived in urban areas.

It is in the Brazilian portion of the area of influence where some of the most important cities of Paraná are located, such as Curitiba, the state capital; Foz do Iguaçu; Cascavel, and Ponta Grossa. However, only 47 of the 189 municipalities that form part of this area of influence have an urban population exceeding 15,000 inhabitants. More than half of these 47 municipalities are located in the region of Curitiba/Ponta Grossa.

4 As a reference, it may be stated that the HDI of the four MERCOSUR member countries are the following: Argentina, 0.863; Brazil, 0.792; Paraguay, 0.755, and Uruguay, 0.840. 13

The HDI values of the municipalities that are part of the area of influence vary considerably. The municipalities with the highest HDI, such as Cascavel and Pato Branco, on the West, and Curitiba and Ponta Grossa, on the East, are located in the extremes or borders of the area of influence. The central portion is characterized by municipalities with lower HDI values.

From the economic point of view, the area of influence accounted for more than 70% of the state of Paraná’s gross value added (GVA) in 2005. Although the share of the agricultural sector is lower than 70%, the area of influence concentrates almost 60% of the state production.

Share of Sectors in the Gross Value Added, per Region, Paraná, 2005

Share (%) Region Agriculture Industry Services Total D E

Area of influence 59.1 78.0 70.5 71.8 V R

Other regions 40.9 22.0 29.5 28.2 E

Paraná 100.0 100.0 100.0 100.0 S Source: IBGE E R Note: The gross value added is the GDP net of taxes. S

T

This reflects the higher urban and industrial density of the area of influence, led by Curitiba H G

and its metropolitan area and followed by other small- and medium-sized urban centers. I

R L L A - A S R I I

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2. General Characterization of the Area of Influence

2.1 Structure and Dynamics of the Fabric of Production

2.1.1 Brazil

Although under this item the area of influence will be taken as a unit, regardless of any differences, it is important to point out that it involves three regions with distinct characteristics and economic dynamics.

The first one is the portion comprised by the areas polarized by Curitiba and Ponta Grossa. This geographical space boasts the largest and most diversified industrial park of the state of Paraná, with important metalworking industry, home appliances, wood, paper and cellulose production, and oil refinery. The second region is the one polarized by Guarapuava and União da Vitória, where the segments related to the forestry-based industry (sawn timber and furniture) and the food industry prevail, to which some paper and cellulose production and bituminous schists extraction undertakings must be added. The D third region is the area polarized by Cascavel, Foz do Iguaçu, Francisco Beltrão, Pato E V

Branco and Goioerê, which is characterized by the presence of a commercial, modern and R intensive grain-producing agriculture (soybean, corn and wheat). There are many family- E based farmers, who have strong links with poultry and pork slaughterhouses. An important S E

part of the local industrial structure is linked to food and animal protein production. R However, there are clear signs of an industrial diversification and sophistication process, S

including metalwork products (grain silos, bus bodies, agricultural equipment), T pharmaceutical products (generic drugs), and home appliances. As will be explained later, H G

the Paraguay-Paraná production integration is stronger in this third portion of the area of I influence. R

L L

In the area of influence globally considered, an important share of Paraná’s agricultural A production is concentrated: more than 66% of the tobacco, potatoes, beans and corn, more - than 50% of the soybean and about 50% of the wheat produced in the entire state. This A area also produces 75% of the poultry and swine and 42% of the cattle in the whole state. S R

Cattle are basically raised for milk production; moreover, this area of influence produces I I 75% of all the milk produced in the state.

Poultry and swine production, particularly in the West, is an activity structuring the regional economy, clearly integrated into the national and international markets and having strong linkages with the region’s agricultural production (soybean and corn) and manufacture of parts, machines and equipment for the agricultural industry. This production chain has a crucial influence on the region’s employment and income generation.

The area of influence also abounds in natural forests and includes one of the largest reforestation areas in the state of Paraná.

Even though in the last years there has been an increase in the use of wood for the production of paper and cellulose in the area of influence, this is not yet significant in terms of value and volume vis-à-vis other economic activities. In the state of Paraná, paper and cellulose production extends from the metropolitan region of Curitiba to municipalities located outside the area of influence, such as Telêmaco Borba y Jaguariaíva.

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Just as Paraná stands out in Brazil for the importance of agricultural cooperatives in agricultural processing and production, the presence and action of such organizations in the area of influence are very significant: 63.8% of these co-ops in Paraná are located in the area of influence; if only the area of influence is considered, most of them settle in the region polarized by Cascavel/Foz do Iguaçu/Francisco Beltrão/Pato Branco.

In the state of Paraná, industries are highly concentrated in the metropolitan region of Curitiba. However, there are clear signs of a tendency for production chains to settle in the interior of the state, with a high degree of agroindustrial production specialization and a strong presence of agricultural co-ops. Important industrial establishments have emerged in Ponta Grossa, Pato Branco, Francisco Beltrão and Cascavel, where industrial activity grows faster than the average in the state of Paraná.

Distribution of Industrial Value Added, per Region, Polarization Area and Area of Influence, Paraná, 2005 (%)

Polarization Area D E

Region V

2005 R E

Curitiba 64.6 S

Ponta Grossa 6.7 E União da Vitória 1.2 R Area of influence of the Capricorn Guarapuava 1.2 S T

Hub / GP Asunción-Paranaguá Pato Branco 1.0 H

Francisco Beltrão 1.2 G I

Cascavel 4.5 R

Goioerê 0.1 L Other regions Grande Norte Paraná 19.5 L A

Paraná Total 100.0 -

A The region of Curitiba features the most diversified and integrated industrial structure. In S R

Ponta Grossa and its surroundings, industrial activity relates to food, beverages, wood and I I chemical products, although it shows a strong tendency towards diversification thanks to the growth of manufactures such as electric home appliances, plastics and rubber, and the mechanical industry. In the Western and Southwestern areas of the state of Paraná, the main industrial activity is linked to the food industry, particularly the meat industry, followed by wood and furniture production. These activities have an important influence on the local economy performance, a situation that becomes even more patent in Cascavel, where the food industry, with a significant presence of large-scale private companies and agricultural cooperatives, and the industry of wood and wood products account for 75% of the industrial output. With regard to the other three regions that form part of the area of influence (União da Vitória, Guarapuava and Goioerê), if the production activities resulting from their enclave situation is not taken into account, their industrial parks are only fledgling, based on small- scale traditional production activities.

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2.1.2 Paraguay

The combination of primary production, industries and important ports for exports and imports associated with major economic activities gives the Paraguayan portion of the area of influence a key role to play in the economic dynamics of the country.

Corn-Soybean Complex. The most important sector in the national economy is the agricultural one, since it accounts for approximately a third of the country’s GDP. Its major products are soybean, cotton, corn, wheat, sugar and tobacco. They are all deemed traditional products, responsible for the country's exports, except for sugar and, partly, for corn and wheat, since in their case the country sells the exportable surplus in foreign markets only after domestic demand is met. In the period ranging between 2000 and 2008, the extension of cultivated land multiplied 2.2 times, reaching a total of 2,644,856 hectares. The annual sales volume in 2007 was as follows: soybean (beans, oil, pellets), US$1,253,600,000; corn, US$282,700,000; wheat (grains and flour), US$70,600,000. Eighty percent of soybean production comes from the area of influence.

D The grain production chain in Paraguay is 95% mechanized from seed production to grain E V

harvest and marketing. The high level of technology introduced into this chain is similar to R the one attained by leading world producers, resulting in the use of improved seed E varieties, technology applied to production, irrigation systems, storage in silos, and S E

transport logistics and shipment to destination markets. R

S

As commodities are produced for the world market, their production is usually in the hands T of multinational companies, which invest heavily in the territory. Leading exporting H G

companies in the country are related to the agricultural sector, particularly to soybean, the I exports of which are highly concentrated —traded primarily by ADM Paraguay, a R multinational company operating on a large scale in the country, and followed by Cargill L Agropecuaria, another multinational. Other companies, such as Dreyfus, Noble, Bunge, L A

Grupo Agrorama, Grupo Lourenço, Grupo Favero and some farmers co-ops, participate as - well, though with lesser volumes. A S R I I

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The diagram below shows the geographical distribution of the corn-soybean complex:

CANENDIYU Saltos del Guairá

Coronel Oviedo CAAGUAZU Asunsunciónción CORDILLERA Ciudad del Este

CENTRAL D E GUAIRA ALTO PARANA V

R

E S E

CAAZAPA R Silos taken in 2002 census S

New silos T ITAPUA Silos added in 2004 H G

I

R

L L Encarnación R. Salinas– R. Petters A

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A S R

Poultry. The Paraguayan poultry sector is run by four major industrial companies located I I between the production area and their main destination market: Asunción. These companies are vertically integrated, from farm to industry. The technology that they apply to raw materials and to manufactures is of an intermediate level —i.e. it is neither high-tech nor low-tech. They are family-run, nationally-owned companies.

Production is targeted for the local (small-sized) market and competition is on price rather than quality. Part of the production, however, is exported, mainly to African countries and Russia.

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The diagram below shows the geographical distribution of the poultry sector:

Saltos del Guairá

Coronel Oviedo

Asunción

Ciudad del Este Poultry D E

Poultry Production Plant V

Main Poultry Area: R 4,440,000 head (78% of the E total 5,697,495 head in the S country) E 2007 R Poultry meat exports in 2006: S 490 tons T US$451,000 FOB H G I R

Encarnación R. Salinas – R. Petters L L

A -

A

S

R I I

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Forestry. The main geographical areas involved in forestry-based activities are the following: - Raw material production areas: Concepción, Caaguazú, San Pedro - Collection and storage: Concepción, Caaguazú, Asunción - Industrial/manufacturing centers: Coronel Oviedo, Caaguazú, Asunción - Customs/exporting ports: Asunción, Ciudad del Este

Most forestry-based industrial facilities are concentrated in Asunción and its surroundings and in the area from Coronel Oviedo to Caaguazú. The reason for which these activities are primarily carried out in Asunción lies in its proximity to the main domestic market and its traditional exporting port, with all the services associated to it, such as the offices where to complete export formalities. The area of Coronel Oviedo, in Caaguazú, forms part of the wood production chain because the largest forests and major raw-material suppliers used to be traditionally found there.

Most plants are national establishments, since foreign investments are rare in the forestry sector. The technology used for the cutting, transportation and first processing of wood is a D relatively traditional one, and little use is made of advanced technologies. However, E V

parquet flooring production uses state-of-the-art technology; in fact, some companies apply R the most advanced technology of the highest international quality. E S E

The main export products are bulk and bagged coal as well as a wide variety of parquet R flooring. Brazil is the main destination market for coal, while Argentina is the main S

destination for parquet flooring. T

H G

The forestry sector is deemed strategic for the country because it creates a great number I of jobs related to the processing of a renewable raw material (provided investments are R made in forest care and plantations), and also because the forest biomass exploitation for L energy supply might help reduce substantially the importation of petroleum-derived fuels. L A

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However, for the forest industrial sector to grow, raw material is needed. Greater availability A of raw material depends on investments in forest plantations. Even though there have been S R some investments, they are not only recent, thus yielding little production, but also in small I I amount for lack of support policies from the State. Three major actions need to be taken to overcome existing obstacles: improve legal security and credibility; design an investment policy for the long term, and create adequate financing systems. Investors interested in forest plantations await the evolution of the political situation, legal security and institutional framework that impact on this industrial sector. Brazil would be an ideal partner to exploit forest biomass, mainly coal, for energy purposes from forest plantations that might be jointly financed with Brazilian and Paraguayan investments.

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The diagram below shows the geographical distribution of the activities in this sector:

2,000 ha reforested Gravilea Saltos delGuairá

3,000 ha reforested Eucalyptus

Coronel Oviedo

Asunción Ciudad del Este

Wood manufactures D E V

Forest production areas R 4,000 ha reforested E Eucalyptus S E 2,000 ha reforested R Eucalyptus S T H G

100% road I R

Encarnación R. Salinas – R. Petters L L

A - A

S

R I I Sugar and Alcohol Industry. Except for one State-run company, all the other companies in this sector are family businesses entirely owned by Paraguayans. Investments in the sector are estimated at about US$500 million. The leading products are anhydrous ethanol, hydrated ethanol, organic sugar, and conventional sugar. The annual sales volume of the industry amounts to approximately US$80 million.

The principal market for this industry is the domestic market, consuming about 90 million liters per year. Its potential markets are the United States, Europe, China and India.

Its main suppliers of technology and technical assistance are Paraguayan engineering companies engaged in joint venture operations with engineering enterprises from Brazil. The importance of Brazil in the installation and maintenance of the industrial machinery of the sector is enormous in all respects. Without Brazilian participation, there would be neither local nor international markets where to sell, as there would be neither industrial nor agricultural technology to apply.

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Its potential for integration with Brazil would involve independent production systems owing to the nature and purpose of this industry. Hence, integration may take place in the storage and distribution fields.

Prospective investors are from Brazil or Argentina, in association with investors from Paraguay, and investments range from US$100 to US$200 million.

In the domestic field, the companies in the sector are investing in expanding their own plants, while new investors are showing up, with investments ranging from US$5 to US$20, as a result of the returns yielded in the local ethanol market.

The diagram below shows the geographical distribution of ethanol production:

Saltos delGuairá

D E V

R

E S E

R Coronel Oviedo

Asunción S

T ETHANOL Ciudad del Este H G

I Ethanol plants R

L Market in 2008 = 90 million liters/year L A

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Agricultural production areas A S R

Storage and distribution I I

Encarnación R. Salinas – R. Petters

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Metalworking. Industries are poorly developed except for agroindustry. They are concentrated in the surroundings of the city of Asunción and, to a lesser extent, in Ciudad del Este. The main manufactures are food products and textiles. Ciudad del Este is becoming increasingly attractive for Brazilian companies due to the tax incentives offered by the Paraguayan Government and to its proximity to Brazil.

One of the industries in whose development the Paraguayan Government is most interested is the metalworking industry, particularly the manufacture of auto and motorcycle parts, supplies and components, which is a fledgling sector.5

The most important metalworking companies are concentrated in the metropolitan area of Asunción and in Ciudad del Este, with some suppliers established in Coronel Oviedo and Encarnación.

CAPAFAM (the Paraguayan Chamber of Auto and Motorcycle Parts Manufacturers) is formed by 24 companies in the sector that manufacture a wide range of parts for cars and motorcycles. The leading products are motorcycle parts, motorcycle kits, foot pegs and D auto parts, which in 2007 accounted for almost 50% of the total production value. E V

R E

Auto and Motorcycle Parts – Annual Production Level, 2007 (in US$) S

E

Product Value R

Foot pegs 329,000 S Auto parts 262,980 T H

Motorcycle parts 525,960 G Motorcycle kits 500,000 I Other products and services 1,734,652 R L

Total 3,352,592 L A - A

The percentage of imported raw materials incorporated into final products varies S considerably (from 15% to 100%), which means that manufactured goods often have a high R I share of imported material. The machinery used originates in Europe (Italy, France and I Germany), MERCOSUR (Brazil and Argentina) and the United States.

5 The Paraguayan team suggests that the manufacturing of motorcycle spare parts will help train Paraguayan manufacturers to produce auto parts. Auto part production is viewed as a real prospect for Paraguay (and/or Uruguay), since in March 2007 the MERCOSUR created the Executive Group for Automotive Chain Production Integration (GEIPA) in order to support the development of competitive conditions in and the training of the two member countries of the bloc with less activity in the sector.

23

2.2 Existing Infrastructure in the Area of Influence

2.2.1 Brazil

In the state of Paraná, and particularly in the Paraná portion of the area of influence, infrastructure is in large supply.

Railways. Rails extend along 2,288 km in this Brazilian state; 88.7% of this network is run by ALL (América Latina Logística do Brasil), while the remaining 248 km are managed by Ferroeste (Estrada de Ferro Paraná Oeste S.A.). Ferroeste’s network falls entirely within the area of influence, while a considerable part of ALL’s railway network falls outside. An important characteristic of these Paraná railway lines is that they connect the Northern and Western regions of the state with the Paranaguá port; however, Foz do Iguaçu and Guaíra (in the Western corner of the state), important cities in the Brazil-Paraguay border area, have no railway connection with the port.

Railway Infrastructure in the State of Paraná D E

Paraná Railway Network V R E

S E

R S T H G I R L L A

- A S R I I

Source: WebGeo/PR [2008], SEPL IPARDES. Prepared by IPEA (DIRUR)

24

Roads. Federal routes BR 116 and BR 277 stand out among the main roads connecting the area of influence. The former cuts across the state in a North-South direction, whereas the latter runs East-West. Both routes account for the greatest volume in cargo transportation to and from the Paranaguá port.

Road Infrastructure in the Area of Influence Main routes in the Hub

Routes that should also be considered in the area of influence

Capital city

BR ‐ 376 BR ‐ 369 BR ‐ 476 D

BR ‐ 163/ E

BR ‐ 467 V

BR ‐ 116 R E

BR ‐ 277 BR ‐ 277 S E R

S

BR ‐ 116 T

BR ‐ 476 BR ‐ 376 H G I R

L

Source: DNIT [2002], SEPL IPARDES. Prepared by IPEA (DIRUR) L A - A S R I I

25

Maritime and river transport. The main ports in the area of influence are Paranaguá and Antonina (seaports) and Guaíra, Santa Helena and Foz do Iguaçu (river ports), on the Paraná river. Paranaguá, undoubtedly the most important of all, is the second largest port in Brazil and may be accessed by road or railway.

Ports in the Area of Influence Involved in Foreign Trade

Railway network in Paraná Capital city Port with international movement

D E V

R

E S E

R

S

T

H G

Source: SECEX/MDIC [2008], SEPL IPARDES. Prepared by IPEA (DIRUR) I

R L L A - A S R I I

26

Air transport. There are nine major airports within the area of influence. The three most important ones, in terms of departures and arrivals, are Afonso Pena International Airport, Foz do Iguaçu International Airport, and Bacacheri Airport.

Airport Infrastructure in the Area of Influence

Airports in the area of influence

Toledo D E

Cascavel V Ponta Grossa R

Guarapuava E

Bacacheri S E

Afonso Pena R ç Foz do Igua u Pato Branco S T

Francisco H G

Beltrão I R Source: SETU-PR [2008], SEPL IPARDES. Prepared by IPEA (DIRUR) L L A - A S R I I

27

Pipelines. Pipeline systems in the state of Paraná are primarily located in the East, which is crossed by the Bolivia-Brazil gas pipeline known as GASBOL (207 km), and three oil pipelines, OPASC (200 km), OSPAR (117 km) and OLAPA (94 km). The latter connects the refinery President Getúlio Vargas, located in the metropolitan region of Curitiba, with the Paranaguá port.

Pipeline Infrastructure in the State of Paraná

Refinery Existing terminal Existing oil pipeline existente Future terminal Future oil pipeline Gasbol D

E V R E S E R S T H G I

R L L A - A

S

R I

I

Source: Transpetro [2008], SEPL IPARDES. Prepared by IPEA (DIRUR)

28

Electric power generation and transmission. There are eight hydroelectric power plants and one thermoelectric power station in the area of influence. The most important hydroelectric power plant is Itaipú, a binational undertaking with an installed capacity of 14,000 MW. Electricity is distributed in the area of influence through 3,000 km of high-voltage transmission lines.

Electric Energy Infrastructure in the Area of Influence Capital city Power plant Transmission lines D E V R E S E R S T H G I R L

L Source: ONS [2008], SEPL IPARDES. Prepared by IPEA (DIRUR) A -

A

S

2.2.2 Paraguay R I I The best-developed infrastructure of the country is located in this area of influence.

Railways. The Paraguayan railway network used to run along 376 km, but the service between Asunción and Encarnación was interrupted some years ago. The section still active covers 6 km in Encarnación and operates with rolling stock of Paraguayan and Argentine origin.

Roads. The routes identified in the area, including national, departmental and local roads, cover almost 26,000 km, 3,000 of which are paved.

There are twelve national routes connecting the most important cities in the country, the most important of which are the following:

 National routes 2 and 7 form the Asunción-Ciudad del Este corridor, which serves as a communication pathway for vehicles transporting goods or people from and to

29

Brazil. This corridor receives the greatest traffic volume in the country. Route 7 to Ciudad del Este is the only road under concession in Paraguay.

 National route 1 connects Asunción to Encarnación and serves as a communication pathway for vehicles transporting goods or people from and to Argentina.

 National route 9 (Transchaco) and its branches cross the Paraguayan Chaco to communicate Paraguay with Argentina, Bolivia and Brazil.

 National routes 3 and 8 serve as a North-South pathway connecting the Eastern side of the country.

 National route 5 connects the city of Concepción with Brazil through the city of Pedro Juan Caballero.

 National route 6, connecting Encarnación with Ciudad del Este, is key for the transportation of agricultural exports to Brazil and Argentina. D E

V

 National route 4 connects San Ignacio and Pila cities, in the South of the country. R E S

 National route 10 is the main East-West corridor for grain exports. E

R

Maritime and river transport. Transportation by water has become vitally important for S Paraguayan foreign trade. There are many national ports, both private and State-run, on T the rivers that form part of the Paraná-Paraguay Waterway. The most important ones in H G terms of the country’s foreign trade are Asunción and Villeta, on the Paraguay river, and I Encarnación and Presidente Franco, on the Paraná river.6 R L

L

For its export and import operations, Paraguay depends on foreign ports located on the A Paraná, Uruguay and Plata rivers, particularly Rosario, San Lorenzo, Nueva Palmira, - Buenos Aires and Montevideo ports. The first three are used by Paraguay to handle its bulk A S

exports, while the Buenos Aires and Montevideo ports are used to handle transshipment R I containers in import/export operations. Paraguay also resorts to the maritime port of I Paranaguá, in Brazil, which is accessed either by land or by sea (vessels sailing from the Plata river to Paranaguá to complete the cargo).

Transportation by water in Paraguay has faced serious difficulties throughout its history. In addition to geopolitical problems, there were other factors that interfered with its development: infrastructure and management deficiencies in national and transshipment ports, reduced ship hold capacity, and poor maintenance dredging and waterway signaling. In the last ten to fifteen years, many of these problems have been solved —infrastructure and management in national and foreign ports have been improved, while hold capacity is quite reasonable now. Still pending are the dredging works and the installation of waterway markers in the Alto Paraná, Paraguay and Paraná rivers, from the confluence of these rivers to Santa Fe port.

6 There is a dry port (Puerto Falcón) used for goods arriving by land from Argentina and Chile. 30

Air transport. In Paraguay, there are two international airports: Silvio Pettirossi, close to the capital city, and Guaraní, near Ciudad del Este. The national airport network also includes Itapúa, Concepción, Vallemí, Pilar, Ayuolas and Mariscal Estigarribia airports.

Electric power generation and transmission. Electric power generation in Paraguay has increased extraordinarily since the hydroelectric potential of the Paraná river began to be exploited by Itaipú dam, built in association with Brazil. Other important hydroelectric projects are Yacyretá-Apipé and Corpus, undertaken jointly with Argentina, on the Alto Paraná river.

 Saltos del Guairá

10 D E V

 R  3 E

Coronel Oviedo S        E Asunción 2 7

  R  330 km Ciudad del Este  S

 T Infrastructure Diagram H G I

Main road network 8 R 1  L

6 L  River ports A

 International bridges -

 Hydroelectric power plants  A  International airports  S R I

Optic fiber network I  High-voltage lines, 220 KV  Encarnación R. Salinas – R. Petters 

31

D E V R E S E R S T H G I R L L A - A S R I I

32

3. Selection of Production Chains and Formulation of Production Integration Hypotheses

In order to select the production chains on which to conduct a subtler analysis of the limitations to and potential for production integration, the strategy briefly summarized below was adopted:

 Examine trade flows to identify the intermediate and capital goods7 exchanged by the two countries. These products cross the border, in principle, to become integrated into a production chain in the other country.

 Choose products subject to a regular (not occasional) trade flow, so that they account for production integration processes already in place and relatively consolidated.

 Select products whose trade flow is important in terms of value. D E

 Identify all the products (and then select some of them) whose trade flows, though V

modest, show a clear potential for production integration. R E S

 Identify all the products and sectors (and then select some of them) in whose E

development one of the countries is interested, according to its national team’ R

viewpoint, even if their trade flow is modest. S T The analysis of the data on the exchange of intermediate and capital goods between the H G Paraná state and Paraguay was an important input to guide the discussions of both I national teams as to which production chains to select. Such discussions focused on two R L

interrelated questions: 1) if, and to what extent, an imported intermediate product is used L by industries located in the area of influence and, symmetrically, if exports involve products A originated in the area of influence; 2) in which specific sectors of Paraná imports from - A

Paraguay become integrated and, conversely, in which specific sectors of Paraguay S

imports from Paraná become integrated. R I

I Based on this line of inquiry and these criteria, the following chains were identified as the most promising and interesting in terms of production integration: soybean (Paraguay) – agrochemicals, capital goods, seeds (Brazil); corn, poultry (Paraguay) – agrochemicals, capital goods, seeds, poultry, hatching eggs (Brazil); coal from biomass (PY) – ovens, household use (Brazil); wood, laminated wood (Paraguay) – capital goods, MDF fiber wood, furniture (Brazil); packaging production (Paraguay) – paper (Brazil); auto parts, supplies and components (Paraguay), metalworking, dies and moulds, metals (Brazil).

The tables below show the trade flows between Paraná and Paraguay, classified by chains (first column) and links (second column).8

7 Intermediate goods are those integrated in the production process, such as inputs, raw material, parts and components, whereas capital goods involve the machinery, equipment and transportation material that support production. 33

Importation of Paraguayan Products by Paraná, Classified by Production Chain and Stage – 2007

Chain Stage 2007 (US$) (%) Poultry Rations 1,576,684 1.0 Corn, soybean and wheat Corn 71,456,223 43.8 Soya 9,718,570 6.0 Wheat 20,756,608 12.7 Parts, supplies and Moulds 12,000 0.0 components Parts and supplies 800 0.0 Metal scrap 5,035,718 3.1 Forest products Biomass 323,754 0.2 Wood and laminates 2,711,718 1.7 Other Other 51,685,897 31.7 D

Total Total 163,277,972 100.0 E

Source: MDIC (Brazilian Ministry of Development, Industry and Foreign Trade) V R E

Exportation of Products from Paraná to Paraguay, Classified by Production Chain and S

Stage – 2007 E R

Chain Stage 2007 S (US$) (%) T H

Poultry Capital goods 228,835 0.1 G Eggs and day-old 6,776,294 2.3 I R

chicks L

Corn, soybean and wheat Fertilizers 105,973,281 36.3 L A

Capital goods 21,325,108 7.3 -

Seeds 6,772,518 2.3 A

Parts, supplies and Metallurgical products 4,639,566 1.6 S R components I Forest products Capital goods 609,215 0.2 I Wood and laminates 454,732 0.2 Furniture 3,621,580 1.2 Paper, packaging and 20,241,394 6.9 paper items Other Other 121,367,284 41.6 Total Total 292,009,807 100.0 Source: MDIC

Based on the selected chains, their links and other related activities, it was possible to draw up an outline of the production chains, as shown below. On the left we listed the chain links located in Paraguay, and on the right, those in the state of Paraná.

8 These tables were designed with data prepared by the Ministry of Development, Industry and Foreign Trade (MDIC-SECEX). It should be noted that these tables are only a summary. For further details, see the Report by the Brazilian national team, p. 82 et seq. 34

PY BR

Agrochemicals and Soybean capital goods Seeds Oils

PY BR Agrochemicals and capital goods Seeds Corn Concentrate feed

Concentrate feed Poultry

Poultry Eggs/genetic material D E

V

R

PY BR E S E

Biomass Ovens R Household use S T

H

G

PY BR I R L

Capital goods L A

Wood MDF - A S

Laminates Furniture R I I

PY BR

Wood Wood

Cellulose

Consumption Paper/Packaging Industry

35

PY BR

Parts & supplies Dies & moulds, and metals Dies & moulds Replacement

Metal scrap/Pb Metalworking

The diagrams above present sectoral links between both countries that were either already existing and about which there was enough evidence (for example, they were included in foreign trade records or known by the members of the national teams), or taken as hypotheses to be verified in interviews. Such hypotheses sought to confirm whether the links actually existed, whether the destinations of the products were the sectors indicated in the diagrams, or whether the sectors of origin or destination were actually located in the area of influence. Arrows with dashed lines are used to indicate the situations about which there was greater uncertainty. D E

V

These hypotheses were supplemented with another set of assumptions related to the R prospects for different production integration types, broken down into high, medium and E S

low, as shown below. E

R

BR PY BR PY BR PY BR PY S Increased Production Upstream Downstream T H Scale Strengthening Integration Integration Sectors G

I

Corn-Soybean (agrochemicals R HIGH HIGH HIGH HIGH HIGH HIGH HIGH HIGH and capital goods) L Forest products L A

Biomass-energy n/a HIGH n/a MEDIUM LOW LOW LOW LOW - A

Laminates-MDF-furniture LOW LOW LOW LOW LOW LOW LOW LOW S R I I Cellulose-paper LOW LOW LOW LOW LOW LOW LOW LOW Poultry (rations - capital HIGH HIGH HIGH HIGH HIGH HIGH HIGH HIGH goods) Metalworking industry parts, ? n/a HIGH supplies and components

Furthermore, three other hypotheses of a more general nature were formulated with regard to the future of production integration in some sectors. The first one inquired about whether there were any chances for Paraguayan soybean to be transported by land to Paranaguá again, since its port facilities now enable transgenic soybean to be segregated. The second hypothesis referred to the fact that the Paraguayan corn production increase would lead to an increase in the importation of fertilizers from Brazil, but corn production scale in Paraguay could very well justify that fertilizers be imported and/or prepared in regions other than Brazil (for example, in Paraguay, Nueva Palmira). In other words, the increase in corn production in Paraguay might not necessarily lead to an increase in the trade flow of the 36 production chain as it is, but to a partial or total relocation of one of its links. Similarly, the third hypothesis sought to verify whether the increase in poultry production in Paraguay (for domestic consumption and for export to other markets, such as Bolivia and Chile) could lead to an increase in domestic consumption of corn in Paraguay and a fall in corn trade flows to Brazil, thus weakening the link between Paraguayan corn and Brazilian poultry.

Finally, as suggested by the Paraguayan national team, the possibility of setting up a logistics and industrial platform in the region of Ciudad del Este was also included in the analysis.

This idea results from the fact that the region of Ciudad del Este has —or will have— very favorable conditions for an undertaking of this kind. Among other factors, electric power is plentiful and of low-cost, and there is an important network of routes for transportation by water, air and land, which connects Paraguay to important production and consumption centers in Brazil, and the two countries with ports on the Atlantic and the Pacific. The railway line from Cascavel to Ciudad del Este that is expected be built in the future will connect Paraguay with the port of Paranaguá. This is how multimodality is envisioned for D the region. E V

R

The interviews sought to explore the respondents’ opinion about the idea of implementing E the above-mentioned platform, identify Paraná-Paraguay cooperation opportunities with a S E

view to designing and implementing this undertaking, and receive suggestions based on R complementary studies. S

T H G I R L L A - A S R I I

37

D E V R E S E R S T H G I R L L A - A S R I I

38

4. Interview Results: The Potential for Production Integration and Development of Logistics Services in the Area of Influence of the Project Group

The results of the interviews, together with the analysis of the regionalization of trade between Paraná and Paraguay, provide the necessary inputs to discuss the validation of the hypotheses about the structure and dynamics of the selected production chains.

The following section is organized per production chain; however, unlike the criterion used in the previous sections, corn is included in the grain production chain (corn, soybean, wheat).9

It is important to point out that the trade information used so far was taken from ALICE- Web, a system of the Brazilian Ministry of Development, Industry and Foreign Trade. The criteria used by this source are the production area and the customs clearance area. The information obtained refers to the values of export and import flows, consolidated for the entire state of Paraná. D E

V

To regionalize these flows, however, it was necessary to resort to other data organized R according to the exporter or importer’s fiscal domicile criterion. Such data are consolidated E S

per municipality, facilitating regionalization, as shown below. Given the different criteria E 10 applied, the two sets of data may differ. R

S

It should also be noticed that the geographical division adopted for regionalization was the T same as the one used in characterizing the fabric of production of the area of influence. H G

I R L

4.1. Validation of the Hypotheses about Production Chain Structure and Dynamics L A

Corn, soybean and wheat production chain. The interviews confirmed the initial structure - designed for this chain, but also suggested including the wheat produced in Paraguay. A Even though Paraguayan wheat imported by Brazil goes to the São Paulo market, the area S R I

of influence becomes integrated into the Paraguayan wheat production just as in the case I of corn and soybean production, i.e. through exports of machines and supplies.

Interviewees unanimously agreed that there are positive perspectives for further strengthening production integration, since the grain production process in Paraguay is expected to continue and its links with international markets are expected to increase; in addition, integration with Brazil is expected to grow stronger.

9 Although corn imports are basically related to the poultry industry in the state of Paraná, trade statistics do not enable us to clearly identify what percentage of imported corn is used for this purpose. In addition, Paraguayan corn is produced with machines and supplies imported from Paraná. For this reason, corn was included as a component of the grain production chain rather than of the poultry production chain. 10 With the information organized according to the fiscal domicile criterion, exports refer to the commercial exchange conducted by companies located in Paraná, but these companies do not necessarily produce what they export. They may export goods manufactured in another region of the state or even in other Brazilian states. Imports, in turn, include purchases made by companies according to their fiscal domicile rather than the address reported in customs documents.

39

When analyzing the destination or origin in Paraná of the grain trade flows between Paraguay and the Brazilian state, the following can be observed:

 Trade flows are clearly concentrated in the area of influence (90% of corn, soybean and wheat from Paraguay is sold in the three regions that make up the area of influence —first column of the table— and 96.3% of Paraná fertilizers, capital goods and seeds exported to Paraguay originate in these three regions);

 The destination and origin of trade flows are strongly concentrated in the Western region of the area of influence (69.5% of corn, soybean and wheat imported by Paraná is sold in Cascavel/Francisco Beltrão/Pato Branco and 45.8% of the fertilizers, capital goods and seeds exported by Paraná originates in this region).11

Corn, Soybean and, Wheat – Destination of Paraná Imports and Origin of Paraná Exports vis-à-vis Paraguay, per Paraná Region, 2007, %

D E

Region Imports Exports V

Curitiba / Ponta Grossa 19.0 50.1 R E

Guarapuava / União da Vitória 1.5 0.4 S

Cascavel / Foz / F. Beltrão / Pato Branco 69.5 45.8 E Other regions 10.0 3.7 R

Paraná 100.0 100.0 S T

Source: MDIC. Prepared by IPEA/IPARDES H

G I R L L A - A S R I I

11 The importance of the Paraná Western region as supplier of goods from this chain to Paraguay is only surpassed by the Curitiba/Ponta Grossa region because of its great supply of agrochemicals. 40

D E V R E S E R S T H G I

R Source: Prepared by IPARDES L

L A

Poultry production chain. The main links of the chain, as originally designed, were - confirmed in general terms during the interviews, though a conceptual correction regarding A S

genetics was introduced. According to a representative of this production chain, Brazil R I neither produces nor exports poultry genetic material, and Paraguay does not multiply I genetic stock. Paraná imports the genetic material and reproduces it (hatching eggs and day-old chicks). In Paraguay, there are two companies that import and hatch eggs produced in Paraná.

The most important link in this chain is the importation of corn, basically used for producing rations.12 All poultry-producing regions in Paraná buy corn produced in Paraguay but, as will be later discussed, the Western area of the state accounts for most of such importation, precisely because almost all the poultry production of the state is concentrated there.

The decision to import corn from Paraguay is based on production insufficiency and business strategy. In the case of co-ops, the reason is that Paraná areas are used to cultivate soybean given its higher commercial value and, hence, its relatively lower

12 It should be pointed out that, except for corn, the Paraguayan products from the poultry production chain imported by Paraná are limited to rations. Moreover, corn importation amounts were not included in the poultry but in the grain production chain. 41 transport cost for its exportation. Thus, co-ops supplement their grain by importing corn from Paraguay, which is traded at a lower price (since the local market is small) and is available before the harvest season in Paraná.

As for the prospects of this chain, two scenarios should be considered. The first one is that poultry production in Paraná should keep the rate of growth of its installed capacity in the coming years, which would strengthen its links with the Paraguayan corn production and Paraná input supply for the production of this grain in Paraguay. A sign of this trend is that it is forecasted that in the next five years the five leading co-ops in the Western region will invest R$860 million in poultry slaughtering. In addition, another two co-ops in other regions of the state (Coasul, in the Southwest, and Cocari, in the North) are planning to invest R$150 million in this activity. Moreover, there have been announcements of private investments in the state, for example Big Frango (associated with Coagru), Sadia, and Tyson Foods (associated with a slaughterhouse in Campo Mourão).

Evidently, poultry production is expected to grow in Paraguay. Nevertheless, according to a

Paraná representative’s opinion, such growth must not undermine, in the mid-term, the D links existing in the import-export relationship between Paraná and Paraguay. This opinion E V

results from the fact that Paraguayan production is still relatively small (120,000 tons per R year) vis-à-vis the Paraná production (2 million tons per year). Likewise, as the starting E point is small, an increase in Paraguayan poultry production to exclusively meet the S E

demand of its domestic market cannot possibly affect the immediate provision of corn to the R state of Paraná. However, this scenario may turn out to be different if the Paraguayan S

strategy is to seek new markets. T

H G

If, as above, the origin and destination in Paraná of the poultry chain trade flows, the I conclusion is that trade flows take place almost exclusively in the area of influence and, R specifically, in the Western region. L L A

Poultry Production – Destination of Paraná Imports and Origin of Paraná Exports vis-à-vis -

Paraguay, per Paraná Region, 2007, % A S R

Region Imports Exports I I Curitiba / Ponta Grossa 11.2 0.4 Guarapuava / União da Vitória 0.0 0.0 Cascavel / Foz / F. Beltrão / Pato Branco 88.8 99.3 Other regions 0.0 0.3 Paraná 100.0 100.0 Source: MDIC. Prepared by IPEA/IPARDES

42

D E V R E S E R S T H G I R L

L A -

Source: Prepared by IPARDES A S R

Metalworking: Parts, supplies and components production chain. According to its original I I design, the possibilities of this chain included the following links: Paraná imports of parts and supplies, industrial moulds, and metal scrap, primarily for the metalworking industry and the auto parts replacement market. Specifically, in the auto part sector, we had advanced a hypothesis about the potential integration of Paraguay with the car industry and other metalworking industries of Paraná.

The interviews revealed that the prospects for Paraguay-Paraná production integration were fragile. Regarding the importation of industrial moulds, it was verified that Paraguay re-exports moulds of Asian origin used in the production of simple plastic items, such as containers, utensils for household use, low-quality toys, etc. As stated by interviewees, the manufacture of more sophisticated industrial moulds requires higher qualifications, which would hamper their production in Paraguay.

The current Paraguayan production of auto parts and supplies (for example, radiators) would hardly meet the demands of the replacement market, and would be restricted to secondary or tertiary market niches.

43

Within this chain, metal scrap accounts for almost the total importation by Paraná from Paraguay. This scrap is linked to Paraná metallurgical enterprises (iron and steel industry and foundries).

Jointly considered, about 90% of all imports related to this chain is found to be traded by a single important industrial agent that manufactures steel from metal scrap and operates in the metropolitan region of Curitiba. Londrina is another region with some relative weight in this chain for its importation of scrap to produce electric batteries.

On the exports side, there is a high incidence of metallurgical products, showing a diversified pattern of products, some of which are relatively sophisticated. The Cascavel/Francisco Beltrão/Pato Branco region stands out as the main exporter, accounting for around 75% of this trade flow.

Metalworking (Parts, Supplies and Components) – Destination of Paraná Imports and Origin of Paraná Exports vis-à-vis Paraguay, per Paraná Region, 2007, %

D Region Imports Exports E V

Curitiba / Ponta Grossa 90.7 11.8 R

Guarapuava / União da Vitória 0.0 0.0 E S

Cascavel / Foz / F. Beltrão / Pato Branco 3.0 67.3 E

Other regions 6.3 20.9 R

Paraná 100.0 100.0 S Source: MDIC. Prepared by IPEA/IPARDES T H G I R L L A - A S R I I

44

D E V R E S E R S T H G I R

L Source: Prepared by IPARDES L A

-

Forest production chain. This chain was selected for two reasons. First, because attention A was paid to the foreign trade data from the Brazilian Ministry of Development, Industry and S R

Foreign Trade, which indicated that there was a range of products traded between I I Paraguay and Paraná (such as wood charcoal, sawn/cut wood, laminated wood, furniture, paper). Second, because there were some projects of interest to Paraguay that were associated with the country’s forest development and its potential for complementarity with forestry-based industries in Paraná, particularly, furniture, paper and cellulose, and related capital goods.

In order to evaluate the potential for production integration, this chain was broken down into three groups: i) biomass (wood charcoal); ii) wood and furniture; iii) paper and cellulose.

The supply of wood charcoal lies in extractive operations, which involve the felling of native forests (partly due to the expansion of soybean cultivation). Therefore, this is an activity that leads to the depletion of a natural resource. Wood charcoal trade flows could not be accurately identified on the basis of the current Paraguayan biomass exported to Paraná. However, the data from the Brazilian Ministry of Development, Industry and Foreign Trade indicate that it is mainly sold in border areas (Foz do Iguaçu and Guaíra), where the operations identified prove that biomass is used for household purposes and/or small foundries located in the Western side of the state.

45

In the wood and furniture group, Paraná imports of laminated wood from Paraguay stand out. According to the initial hypothesis, laminates were assumed to be used by the Paraná furniture industry. The information gathered from interviewees was not conclusive in this respect. The modular furniture and/or furniture design industry uses MDF rather than laminates as its main raw material. Laminated wood is more commonly used in woodworkers’ or carpenters’ workshops, where pieces of furniture are made upon request and not manufactured in series.

The interviews also revealed that there is a small-scale importation of noble woods, probably for flooring, parquet, mouldings (finishings) and door and window carpentry.

With regard to the furniture produced in the state of Paraná, there is no evidence of an upstream integration with Paraguay. Instead, machinery and equipment from Paraná are exported to meet the demand of the Paraguayan wood industry. Pieces of furniture made in Paraná —among which desk furniture stands out— are exported to Paraguay through exporters in Foz do Iguaçu, but on a small scale. D E V

As for the paper and cellulose group, data from the Brazilian Ministry of Development, R

Industry and Foreign Trade indicate that a wide range of paper-related products, such as E packaging and other items, are exported to Paraguay. S E

R Inversely, the possibility for Paraguay to supply Paraná with wood for paper and cellulose S

production was explored. This link is currently nonexistent, and there are technical and T economic limitations for the long-distance transport of wood. H G

I

Biomass, wood and laminates imported by Paraná are sold almost entirely to agents in the R border region (Foz do Iguaçu and Guaíra). With regard to Paraná exports to Paraguay, the L Curitiba/Ponta Grossa region accounts for almost half the trade flow, with paper and paper L A items as the leading products. The vast Western region accounts for 27% of the chain - exports, mainly selling furniture, paper and paper items to Paraguay. The Guarapuava A region has a share of almost 13% in these exports, primarily paper and paper items. As for S R the other regions (outside the area of influence), the exportation of furniture, especially from I I Arapongas , as well as the exportation of paper and paper items from the Telêmaco Borba and Jaguariaíva region are extremely important.

Forestry-based Products – Destination of Paraná Imports and Origin of Paraná Exports vis- à-vis Paraguay, per Paraná Region, 2007, %

Region Imports Exports Curitiba / Ponta Grossa 0.0 49.2 Guarapuava / União da Vitória 0.0 12.7 Cascavel / Foz / F. Beltrão / Pato Branco 100.0 27.1 Other regions 0.0 11.0 Paraná 100.0 100.0 Source: MDIC. Prepared by IPEA/IPARDES

46

D E V R E S E R S T H G I R L L

A

Source: Prepared by IPARDES -

A At this stage, it is worth stating that, as anticipated at the end of Section 3, Paraguayan S R interviewees were confronted with three hypotheses about the future of production I I integration in the grain and poultry production chains, namely: (i) the possibility for Paraguayan soybean to be transported by land to Paranaguá again; (ii) the possibility that fertilizers used to supply Paraguay be imported from and/or produced in places other than the state of Paraná; and (iii) the possibility that a greater consumption of corn in Paraguay might lead to a fall in the exportation of the product to Brazil.

With regard to the possibility for Paraguayan soybean to leave the country by land, interviewees stated that: “In the last five years, the private sector in Paraguay invested US$700 million in the private port system in the surroundings of Asunción as well as in barge fleets for bulk cargo; therefore, it is unlikely that the corn-soybean complex production be exported again through the Paranaguá port. Anyway, the extension of the Cascavel-Foz de Iguaçu railway plus the construction of a railway bridge in Ciudad del Este and a cargo yard in Paraguay may favor exportation through the Paranaguá port, provided three conditions are met: a) the railway system should have enough availability to capture the cargo produced in Paraguay at competitive costs and on a regular basis; b) the Paraná-

47

Paraguay waterway navigability should not be improved; and c) there should not be enough capacity in barges to transport the production to the ports on the Plata river.”13

Confronted with the hypothesis about fertilizers being imported from and/or produced in regions other than Paraná, interviewees argued as follows: “Should the corn-soybean complex in Paraguay undergo an increase in its production scale, the supply of fertilizers will increase at the same rate as the cultivated area, demanding a greater volume to be imported from Brazil. If in the next ten years the cultivated area, presently 2.5 million hectares, doubles in size, the use of fertilizers will double and reach two million tons per year. Yet, even if production in the state of Paraná does not grow in the same proportion, the demand for fertilizers may anyway increase at the same rate (one million tons) in the coming ten years, which would involve a five times gap. With this proportion and considering that the supply of fertilizers is managed by large transnational companies, it is very unlikely —for scale economy reasons— that the corn-soybean complex in Paraguay will become integrated upstream into the fertilizer production chain. But this likelihood may increase if the Paraguay-Brazil border infrastructure does not improve and if transportation logistics costs rise. However, in this scenario imports are likely to increase through the D Paraná-Paraguay waterway and the Rio Grande port-Encarnación railway.” E V

R

With respect to the increase in corn consumption in Paraguay, the conclusion was as E follows: “Upstream integration of the Brazilian poultry industry, particularly with regard to S E

the corn-soybean storage sector, would be hampered if the border infrastructure projects in R the project group are implemented, since by facilitating transportation from the silos located S

in Paraguay to the balanced poultry feed processing plants in Brazil, industrial plants would T not need to relocate the raw material storage centers. However, infrastructure H G

improvements might promote the relocation of production plants or slaughterhouses, I provided Paraguay improves its sanitary conditions and export operations can be carried R out as efficiently through the East via the Paranaguá port as through the South via the L Paraguay-Paraná waterway. If improvements are introduced in the sanitary situation of L A

Paraguay and if the efficiency of exports is enhanced through the Paraguay-Paraná - waterway rather than through the Paranaguá port, relocations favoring Paraguay are more A likely to occur. In both scenarios, the cold chain handling in transportation, especially in S R ports and border crossings, should be taken into account.” I I

Before concluding this section, it is important to point out some differences of opinion between Paraguayan and Brazilian interviewees regarding the chances for production integration.

They all agree that grain (corn, soybean and wheat) and poultry production chains are main activities that determine trade relationships in the area of influence of Capricorn Hub’s GP- 3 and that there are real chances to strengthen existing levels of production integration. At the same time, all interviewees share the feeling that the proposed infrastructure projects are crucial for consolidating this trend.

In relation to the other production chains (forest products and metalworking parts and supplies), interviewees’ readings differ not only regarding their present integration status but also regarding the patterns that they may adopt in the future. Changes in these patterns

13 Quotation marks indicate that the text is a literal transcript taken from the Paraguayan National Team’s report. 48 depend primarily on the initiatives that the Paraguayan Government may undertake as well as on the design of an effective policy capable of enlarging and diversifying the structure of these chains.

Concerning the forest production chain, Paraná representatives have made a favorable evaluation of the potential for expanding the Paraguayan forest production integrated to cellulose production, thus becoming a link in the chain for supplying Paraná and/or other regions in Brazil.14

The evaluation made by Paraná representatives is less optimistic in relation to the metalworking sector. If, according to the viewpoint of the Paraguayan team, there is an increase in the production scale and integration with Brazil in the field of parts and supplies for agricultural machinery and equipment manufactured in Paraná, Paraná representatives anticipate difficulties, especially due to the existence of consolidated centers of suppliers (in Paraná as well as in other parts of the country and even of the world) with which a fledgling industry in Paraguay would find it hard to compete. In fact, if the case of Paraná is taken as an example, it should be added that a center of this nature took about thirty years to D develop, and managed to become consolidated thanks to the presence of assembly E V

companies in the transportation material sector. R

E S E

4.2. Complementary Infrastructure, Problems and Business Opportunities R

Identified by Interviewees S

T

Interviewees identified complementary infrastructure projects deemed necessary to H G promote physical integration in the area of influence and facilitate the development of I production integration. Several (regulatory and other) aspects were also discussed, which, R if properly dealt with, could enhance the economic relations and production integration L L

between Brazil and Paraguay. Furthermore, business opportunities were pointed out, A which, if implemented, could support the production integration process and help reduce - production and transportation costs in Paraguay. A S R

We will now examine in more detail the complementary infrastructure as well as the I I obstacles and difficulties that have a more direct impact on production integration. As for the business opportunities identified by interviewees, we will focus on the ones that have a closer bearing on infrastructure, transport and logistics and are more likely to be developed in the short or medium term.

4.2.1 Infrastructure Projects Complementary to IIRSA’s Portfolio Projects

Brazilian interviewees listed a great number of infrastructure projects deemed complementary to those included in IIRSA’s Project Portfolio, among which the following

14 “Regarding cellulose and paper, it is very likely that if border infrastructure improves, companies established in Brazil, such as International Paper and others, become integrated upstream by setting up forest production areas and cellulose plants in Paraguay in the following areas: a) Itaipú lake, b) on the Paraná river between the Itaipú dam and the Paraná-Paraguay confluence or c) on the Paraguay river, North of Asunción. The first area plays an important role in a project to improve navigability in the Paraná-Tieté waterway as well as in the “Transposition of Itaipú” project. (Report by the National Team of Paraguay, p. 5)

49 stand out:15

 Construction of a new Curitiba-Paranaguá railway  Implementation of the MERCOSUR port  Enlargement of Antonina port  Building of a new railway section between Guarapuava and Curitiba  Building of a new Ponta Grossa-Curitiba railway  Building of the Foz do Iguaçu beltway  Building of the Cascavel beltway  Construction of the intermodal terminal on route BR 277 in one of the following cities: Curitiba, Iratí, Laranjeiras do Sul, Cascavel or Foz do Iguaçu  Construction of the intermodal terminals in União da Vitória and Guaíra

In Paraguay, interviewees have not indicated any complementary project. However, it is important to point out two observations, whose details are presented further on. The first one is that the area of influence of Capricorn Hub’s GP-3 is strongly influenced by other D

Hubs’ projects, mainly those included in GP-3 and GP-4 of the Paraguay-Paraná Waterway E

Hub, which may be easily regarded as complementary to GP-3 projects, as will be V explained further on. The second one is that, given the importance that a logistics and R E

industrial platform may have for the industrial development of the region of Ciudad del Este S and probably for Paraguay, this platform has been decided to be analyzed as a E complementary project. R

S T

H

4.2.2 Obstacles and Difficulties for the Development of Trade and Production G Investment I R L

Interviewees stressed the need to carefully analyze, and wherever possible, improve some L regulatory aspects interfering in the commercial relations of both countries and, directly or A indirectly, in their potential for production integration. Among the obstacles and difficulties - 16 A

pointed out by interviewees, two are worthy of note: S

R I  Circulation of trailers. Even though the circulation of multi-trailer trucks is not I regulated in Paraguay, there is a heated debate about the impact (wearing degree) of these vehicles on the pavement. Before obstacles are imposed, it is important to analyze some kind of cooperation and exchange of experiences between Paraná (the Road Department of the state) and Paraguay in order to adequately assess such impact. Trucks of this kind have been in use in Paraná for long time, transporting goods that may weigh more than 45 tons, depending on the number of axles on the vehicle. This reduces grain and input transportation costs, thus increasing grain production competitiveness.

15 Some of these infrastructure projects do not necessarily depend on public investment and may be considered business opportunities for private investors. Some intermodal terminals may be logistics platforms and others, like Cascavel, may include an Intermediate Customs Station. 16 Interviewees also mentioned other obstacles and difficulties, such as the need to develop an integrated border crossing in Ciudad del Este-Foz do Iguaçu in order to avoid bureaucracy and accelerate formalities; the payment of PIS-COFINS on goods in transit; the need to introduce greater flexibility immigration rules and the double payment of the Common External Tariff. These are important restrictions, but of a more general nature and not specific to production integration processes. 50

 Regulatory framework for agricultural cooperatives in MERCOSUR. The development of the agroindustry in the East of Paraguay and the strengthening of its production integration with the state of Paraná are closely linked to the possibilities of expansion of Brazilian cooperatives in Paraguay. Investments by Brazilian cooperatives in Paraguay are hindered by the fact that, in order to operate in the country, they should be incorporated as firms. In other words, they must give up their farmers’ co-ops status, a requirement with which they disagree. An initiative was proposed at the MERCOSUR level for member countries to modify their legislations in order to enable cooperatives to operate and be recognized as such in any other country of the bloc.

Interviewees also referred to the need to pay attention to other aspects that interfere in the trade relationship between both countries and that somehow affect production integration:17

 Improvement of the sanitary status of poultry in Paraguay: The entry of chickens

raised in Paraguay into Brazil or their being carried in transit through the country is D usually hindered on the argument that Paraguay has sanitary problems. Sanitary E V

conditions in Paraguay are poorer than in Brazil —with regard to Newcastle disease R

and avian influenza, Paraguay is under the disease-free status with vaccination, E while Brazil has been certified as a disease-free without vaccination country. S E

 Mutual recognition of technical regulations. Some interviewees from Paraguay R

stated that the products they export or may export to Brazil receive discriminatory S

treatment because Brazilian authorities demand compliance with requirements, T rules, standards and guidelines that, in their opinion, are not required from Brazilian H G

producers. I

R L

4.2.3 Business Opportunities Mentioned by Interviewees L

A The following are business opportunities closely related to the infrastructure, transport and - logistics areas,18 as identified by interviewees. A S R I

 Probable use of products from an asphalt plant in the Western region of Paraná: It has I already been decided to build an asphalt plant in the Western region of the state of Paraná (probably in Cascavel) to meet the needs of a road improvement plan in the

17 In this regard, interviewees mentioned two additional aspects: the need to improve the sanitary status of swine in the state of Paraná and the need to develop a sustainable forestry model in Paraguay. 18 Interviewees also mentioned business opportunities linked to the production integration process. Some of them were regarded as genuine alternatives to promote production integration; therefore, they were incorporated as hypotheses to be tested in the interviews (for example, the development of metalworking chain links in Paraguay). Other important investment opportunities mentioned were, for example, the development of the iron and steel industry with iron ore from El Mutum and Paraguayan wood charcoal produced with reforested wood; the development of the furniture industry using reforested wood; the development of aluminum production as a result of the existence of bauxite mines and availability of electricity from Itaipú; the increase in sugarcane-based ethanol production; and the development of the clothing industry by tapping the national cotton and low-cost labor. In many cases, Paraguayans interviewees identified opportunities for technology transfer from Brazil, investment opportunities for Brazilian capital, and production integration opportunities. But some of these activities involve long-term processes. Wood or charcoal production based on planted forests, for example, may take two to three decades. In this and the following sections of the report we have considered investments that can be materialized in the short or medium term (a 1 to 5-year period). 51

area. The possibility that Paraguay should become interested in meeting its own demands with the products from this plant —as the paving of local roads becomes increasingly necessary due to the expansion of agricultural production in the Eastern area of the country— should not be excluded.

 A hydrocarbon source to supply Paraguay from Paraná: In Paraguay, the supply and demand of petroleum products are always in a delicate balance due to lack of stock. One way of ensuring a more regular supply would be to transport petroleum products by railway from Paranaguá to Cascavel, and set up in Cascavel an alternative source of supply for Paraguay.

 Manufacture of barges in Paraguay: The area of Concepción offers investment opportunities for the construction of barges, since Brazil needs to gain access by the river from this area. According to the comments made during the interviews, the problem does not lie in the insufficient number of containers but in the insufficient number of barges available. D E V R E S E R S T H G I R L L A - A S R I I

52

5. Proposed Projects and Actions

Infrastructure is only a means that, though important, cannot by itself initiate or enhance a development process in a given geographical area. Its contribution to the economic (social and cultural) life of the area of influence depends on the response of the private sector to the stimuli given by the presence or quality of the infrastructure available. For this reason, it is necessary to be sure as to what is more urgent in terms not only of infrastructure development but also of obstacle removal in order to facilitate and optimize the actions of the private sector and open up the path for new business opportunities.

The previous section of this report focused only on listing the complementary infrastructure, the obstacles and difficulties encountered, and the business opportunities identified by interviewees. To turn these lists into a more practical, interesting and guiding input for the public and private sectors, it is necessary to gather —in a realistic and coherently articulated set— the infrastructure projects, the limitations to be overcome in order to encourage production integration, and the business opportunities that emerge as a result of the combination of the previous elements, as observed in the interviews. D E V

To make progress in this regard, it is necessary to follow the path indicated below: R

E a) Identify infrastructure projects (within IIRSA’s Portfolio or complementary to it), S E

having a more direct bearing —from the functional and regional perspective— on R the current or potential production integration process, and a timeframe for S

implementation that is not very long, but rather the nearest possible to the T

timeframes usually considered by the private sector for its decisions. H G I

b) Match these infrastructure projects with the limitations, obstacles and difficulties R

encountered, on the one hand, and with the business opportunities identified, on the L other. L A - c) Sort all the elements of the resulting set (infrastructure projects, solutions to A

difficulties, and business opportunities), trying to establish desirable timeframes for S R

implementation. I I In order to support and guide this plan, it is important to review —and organize in a manner best suited to our purposes here— some elements and information outlined in the previous sections of this document, or more thoroughly analyzed in the reports by the national teams of Brazil and Paraguay and in those prepared by Pacheco and López [2006] about the development and application of the first methodology for evaluating production integration possibilities in the area of influence of the project groups in the Integration and Development Hubs (www.iirsa.org/iprlg.asp).

In the first place, two findings and their consequences are to be noted. The first finding is that production integration is stronger in some production chains than in others, as can be deduced from the figures in the following table showing how intense Paraguay and Paraná trade relationships are in the production chains under analysis. The grain production chain, for example, shows Paraná’s greatest engagement —importations of corn and soybean of Paraguayan origin account for almost 100% of the total imports of these products by Paraná. In the other direction of the chain, exports of fertilizers and seeds from Paraná to Paraguay account for almost all the Paraná exports of these products.

53

Importations of Paraguayan Products by Paraná as a Percentage of the Total Imports of Paraná in Each Stage, and Exportations of Paraná Products to Paraguay as a Percentage of the Total Exports of Paraná in Each Stage

Chain Stage Imports of Stage Exports from Paraguayan Paraná to products by Paraguay Paraná Poultry Rations 17.78 Capital goods 9.56 Corn, soybean Corn 96.61 Eggs and day- 37.07 and wheat old chicks Soybean 99.18 Fertilizers 97.84 Wheat 29.26 Capital goods 9.49 Parts, supplies Moulds 98.01 Seeds 96.33 and components D E

Parts and 0.75 Metallurgical 5.50 V

supplies products R E

Metal scrap 53.88 Capital goods 3.99 S

Forest products Biomass 94.82 Wood and 0.08 E laminates R

Wood and 59.05 Furniture 3.35 S laminates T H

Paper, 8.22 G packaging and I R

paper items L

L The second finding is that production integration is stronger in some regions of the area of A -

influence of GP-3, close to the Brazil-Paraguay border. A

S R

As observed in Section 4 of this report, when analyzing the destination of Paraná imports I and the origin of Paraná exports of the products in the links of the production chains I selected, an important percentage of the trade flow is concentrated in the Western portion of the area of influence (Cascavel/Francisco Beltrão/Pato Branco region).19

If, with the implementation of infrastructure projects integration production is encouraged, these findings have to be seriously taken into account in order to establish priorities and desirable timeframes to execute the GP-3 projects (those within IIRSA’s portfolio or complementary to it). These findings indicate that, from the territorial point of view, it is advisable to focus on the Western area of the state of Paraná and on the Eastern region of Paraguay, and that, from the production point of view, attention should be focused especially on the grain and poultry chain. It is in these territories of the area of influence and in these production chains where the best conditions are found to strengthen production integration between Paraguay and Paraná in the short or medium term.

19 Except for some activities in the forestry production chain, which do not show the same pattern. 54

Reinforcing this conclusion, we may add that it is necessary to consider other circumstances that contribute to the consistency and cohesion of the set of projects, obstacles and business opportunities that will be outlined further on. These circumstances are:

1. Whatever the economic future envisioned for Paraguay, it will undoubtedly include the following: development of agricultural production in the Eastern side of the country, development of agroindustry associated with agricultural production, equal and/or improved levels of competitiveness to ensure an increase in agricultural exports, constant improvement of accessibility and mobility conditions in the Paraguay-Paraná waterway, enlargement and improvement of ports related to the waterway and of transportation and logistics services for agricultural and agroindustrial products and inputs.

2. Realistic perspectives for the implementation of plans designed to enlarge and recondition the railway transport system in Paraná are as follows: the Cascavel-Guaíra section is likely to be more rapidly implemented than the Cascavel-Foz do Iguaçu section, and the construction of the railway bridge over the Paraná river is at the preliminary study D stage. However, strong disagreements between Ferroeste and ALL preclude us from E V

making any reasonable prediction about the investments in railway infrastructure that are R required to improve the Cascavel-Paranaguá connection. For this reason, provided E transportation costs in the Paraguay-Paraná waterway are kept below land transport costs S E

(either by road or by railway) to get to Paranaguá, the waterway will continue to be the R main pathway for agricultural exports.20 S

T

3. The exportation of seeds, fertilizers, hatching eggs and capital goods to Paraguay as H G

well as the importation of grains from Paraguay have become a very significant business I for companies and cooperatives in the Western area of Paraná. The grain and poultry R production growth in Paraguay may considerably increase the scale of Paraná activities L related to the grain-poultry production chain. This means that there are powerful economic L A interests that support the strengthening of the production integration process. -

A 4. Constrained by the conflict between the geographical concentration of animal protein S R production and the environmental and sanitary rules in force, among other factors, poultry I I production in the Western area of the state of Paraná will find it difficult to expand in the near future. For this reason, there is already some interest in investing in poultry production in Paraguay. With its soybean, corn and wheat production and with its skilled farmers who make use of technology for production, Paraguay may become a target for Brazilian investments in the sector. Cooperatives in the Western region of Paraná have the necessary technology and capital to make such investments, but face the problem, as

20 In this respect it is interesting to remember the comment made by one of the persons interviewed: “In the last five years, the private sector in Paraguay invested US$700 million in the private port system in the surroundings of Asunción as well as in barge fleets for bulk cargo; therefore, it is unlikely that the corn-soybean complex production be exported again through the Paranaguá port. Anyway, the extension of the Cascavel-Foz de Iguaçu railway plus the construction of a railway bridge in Ciudad del Este and a cargo yard in Paraguay may favor exportation through the Paranaguá port, provided three conditions are met: a) the railway system should have enough availability to capture the cargo produced in Paraguay at competitive costs and on a regular basis; b) the Paraguay-Paraná waterway navigability should not be improved; and c) there should not be enough capacity in barges to transport the production to the ports on the Plata river.” 55 already stated, of not being allowed to operate in Paraguay as co-ops.21

Against the backdrop of these facts, we may propose a set of infrastructure projects (within IIRSA’s portfolio or complementary to it), obstacles, difficulties and business opportunities that should include the following elements: expansion of poultry production in Paraguay; an asphalt plant in the Western region of Paraná; the duplication of route BR 277 between Cascavel and Foz do Iguaçu; beltways in Cascavel and Foz do Iguaçu; a second road bridge; the paving of rural roads in Paraguay; energy transmission lines for rural electrification purposes; improved sanitary status for the Paraguayan poultry production; poultry production in Alto Paraná and Itapúa departments; poultry exports through the Paraná river; cold chain development/improvement to support an increase in poultry exports through the river; increased movement in the Paraguay-Paraná waterway; improvements in the waterway (dredging, signaling); business expansion at ports; expansion of port operating capacity; introduction of trucks with greater load capacity in Paraguay; production of barges in Paraguay or Brazil.22

With these proposals in mind, we may build a realistic and plausible scenario to be D implemented in the mid-term (approximately five years). If only some of these proposals are E V

considered, the following picture can be depicted: an increase in poultry production (as a R result of Brazilian investments the private sector or co-ops) will demand improvements in E the basic infrastructure of Paraguay (rural roads, port access roads and rural S E

electrification); the increase in poultry exports through the Paraná river will press for R physical improvements to be introduced to the river, ports and cold chain; the increase in S

exports will also demand a greater number of barges; increased exports will justify T investments in the enlargement and improvement of services offered by the ports and river H G

transportation companies; increased poultry production will contribute to an increase in I grain production and, therefore, in the movement of seeds, fertilizers, machinery and R equipment from Brazil to Paraguay, which in turn will account for the improvements in L transport infrastructure connecting the Western area of Paraná to Paraguay. This scenario L A may be associated with the proposal of setting up a logistics and industrial platform as an - anchor for a project related to the industrial development of the Eastern area of Paraguay, A with the co-occurrence of projects included in other IIRSA’s GPs. Among other things, the S R logistics and industrial platform in the region of Ciudad del Este is intended to encourage I I Brazilian companies, especially from Paraná, to produce and export goods under the maquilas legislation. This may exert a greater pressure on the waterway, which would increase the demand for more and better services and strengthen the operation of the demand-investment mechanism already described.

The economic reasoning behind this scenario is that the new demands create new business opportunities. If these opportunities are supported by timely investments of an adequate amount, the efficiency of the set of components increases, on the one hand, and

21 It is worth stating that the interest in producing animal protein in Paraguay is not limited to cooperatives. An important company from Cascavel has recently analyzed the possibility of setting up in the Eastern area of Paraguay. We emphasize the case of the cooperatives due to the existing legal difficulties to operate as such in Paraguay. The removal of this obstacle may open the door to new investments. 22 Some of the projects and actions related to the Paraguay-Paraná waterway as well as to the improvement of the ports on the Paraná river and of its access roads fall under GP-3 and GP-4 of the Paraguay-Paraná Waterway Hub. For the purposes of this paper, these projects are taken as complementary to the Capricorn Hub’s GP-3 projects. 56 new realistic business opportunities are created, on the other. For example, when production in the area grows, a greater demand for transportation services in the waterway is created, thus opening new business opportunities for the private sector. If these business opportunities are not properly tapped and, hence, neither the scope nor the quality of the services related to the waterway improves, railways and/or roads will become again the best alternatives.23 In turn, an increase in the demand for railway services may give rise to a virtuous circle of demand for and investment in land transportation, similar to the successive events already described for the waterway.24

Creating a set as the one we have just proposed is useful to show that infrastructure is an element that has to be associated with other elements (or other obstacles), which in turn must be identified, analyzed and decided as a whole so that infrastructure should actually work and produce the desired results, which for IIRSA means supporting production integration.

We may try to sort by priority the elements that form part of the set, for which purpose it is advisable to reassemble the previously described set, by dividing it into four subsets. D E V

The first one would be composed of the actions and projects related to the need to improve R the flow of goods between the Western side of Paraná and the Eastern side of Paraguay. E This subset would include, for example, the Cascavel and Foz do Iguaçu beltways, an S E

intermodal terminal in Cascavel or Foz do Iguaçu, an Intermediate Customs Station in R Cascavel, a second road bridge over the Paraná river, the border center and the Cascavel- S

Foz do Iguaçu railway. T

H G

The second subset would include the elements related to the goal of improving the supply I of infrastructure and services that support the agricultural production in the departments of R the area of influence located south of Ciudad del Este (Itapúa and Alto Paraná). In this L subset, secondary roads and the circulation of multi-trailer trucks may be included, for L A example. -

A The third subset would comprise the actions and projects associated with the improvement S R of the transportation conditions in the waterway. It would include, for example, dredging I I and signaling of rivers, access roads to ports, improvement of services rendered by ports and development of the cold chain.

The fourth subset would include projects and actions with more general effects, such as actions designed to improve the sanitary status of poultry produced in Paraguay as well as actions aimed at enhancing labor qualifications.

23 Since we are referring to commodities (grains, poultry) that are exported through the river, we can hardly talk about development of more value-added or complex logistics services. This case, far simpler in terms of logistics, involves improvements in infrastructure (roads, ports, cold chain, navigability conditions in the waterway), the removal of regulatory obstacles, and trade facilitation actions (removal of bureaucratic obstacles, simplified formalities, computerization of processes, etc.). 24 It should be noted that we assume that the implementation of certain infrastructure and the development of transport and logistics services may be conducted in stages, i.e. investments in infrastructure and service development in order to meet an increase in the demand for them are assumed to be made as such increase takes place. Anyway, it is evident that some infrastructure investments are indivisible and prevent us from easily adjusting investment relative to demand over time. 57

If the strategy, as proposed, is to attract investments to poultry production in the Itapúa and Alto Paraná departments and export such production through the waterway, it is necessary to adequately match projects and actions in each subset by combining those deemed more urgent and necessary for supporting the strategy designed to attract investments to poultry production,25 on the one hand, and for ensuring the availability of infrastructure and other conditions so that the production and exportation pursued with such investments can take place in adequate circumstances, on the other. In this regard, the most urgent actions would be those designed to increase the availability of infrastructure and services to support production (for example, the improvement or paving of rural roads, and rural electrification), combined with other actions related to the improvement of navigability in the waterway (for example, dredging and signaling). The least urgent actions would be those included in the first subset.26

D E V R E S E R S T H G I R L L A - A S R I I

25 It should be stressed that in infrastructure-deficient areas, investment decisions may be strongly influenced by the confidence the investor may have in the infrastructure project implementation. For this reason it is necessary to show clear signs that infrastructure projects will actually materialize. In other words, to attract investments to situations in which infrastructure will support the production resulting from such investments (for example, secondary roads, rural roads and port access roads, telecommunications, rural electrification), it is important to make clear that infrastructure projects will be implemented in the short run. 26 It should be added that many services and infrastructure development projects can be divided in stages. 58

6. Assessment of the Impacts of the GP Projects and of the Proposed Actions and Projects on Production Integration

The availability of transportation, telecommunications and energy distribution infrastructure in Paraguay poses some difficulties. If the transportation infrastructure and services currently available are kept at the same level, any increase in the economic activity in Paraguay may face bottlenecks of different kinds and magnitude in the domestic movement of products and inputs, in land traffic to or from Brazil, and in river transportation through the Paraguay-Paraná waterway.

As for the relationship between infrastructure and production integration, Section 5 of this report tried to identify the projects and actions that may directly and immediately impact on the two most promising chains for strengthening production integration, i.e. grains and poultry. The increase in grain production in Paraguay will increase the pressure on the transportation system and its related infrastructure, which will demand improvements in secondary roads and in other roads with greater capacity, in port access roads, in ports and their related services, in the navigability conditions of the waterway, and in the connections D E

with Brazil, in order to ensure adequate transportation times and costs for the supply of V

inputs, machinery and equipment for the Paraguayan agricultural production. If on top of all R this we consider, as in the hypothesis of the previous section, that there will be an increase E in poultry production in the area south of Ciudad del Este to be exported through the S E

Paraguay-Paraná waterway, pressures are very likely to grow and, at the same time, R

change. Apart from the needs of improving transport systems and related infrastructure, as S already mentioned, new needs will be created or the present needs related to frozen cargo T transportation, for example, will become more pressing. H G

I

In the light of this situation, the execution of the projects and actions that form part of the R set outlined in Section 5 of this report is essential to ensure the strengthening of production L L

integration in the grain-poultry production chains. A - A S R I I

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D E V R E S E R S T H G I R L L A - A S R I I

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7. Assessment of the Impacts of the GP Projects and the Proposed Actions and Projects on the Logistics System

As already stated, since we are referring to commodities (grains, poultry) that are exported through the river, we can hardly talk about development of more value-added or complex logistics services. This case, far simpler in terms of logistics, involves improvements in infrastructure (roads, ports, cold chain, navigability conditions in the waterway), the removal of regulatory obstacles, and trade facilitation actions (removal of bureaucratic obstacles, simplified formalities, computerization of processes, etc.).

8. Recommendations and a Guiding Action Plan

The recommendations and action plan presented below focus on building a strategy for the development of production integration between the Western area of the state of Paraná and the Eastern area of Paraguay in the seeds/fertilizers/capital goods-grains-poultry production chain. D E

V

 The Government of Paraguay, particularly the Technical Planning Secretariat, the R Ministry of Public Works and Communications and the Network of Investments and E S

Exports (REDIEX) are advised to examine the consistency of the idea of creating a set E

of projects and actions, as suggested in Section 5. In such assessment, it would be R

interesting to consider the following: S

T - The absence of institutions and governmental mechanisms in Paraguay H G

concerned with regional development, and the advisability of creating an I organization to fulfill these functions. R L

- The need to set a clear and realistic implementation schedule for those actions L

and projects having a more immediate impact on the attraction of new A investments to the chain of events mentioned in Section 5. - - The strategies and actions proposed in JICA [2000], JICA [2006] and Technical A 27 S

Planning Secretariat [2007], with the purpose of linking them to the proposal R I

of designing a regional development strategic plan, which may include elements I of the set proposed in Section 5 (transportation, logistics, investment attraction, labor training, etc.). - Setting up a logistics and industrial platform, as mentioned in Section 5, as part of the possible composition of a regional development plan. - The actual participation of the private sector, by trying to encourage it to participate not only in the design of the plan but also in its execution, where appropriate.

 The Government of Paraguay is recommended to examine the possibility of establishing forms of technical cooperation between the Paraná Institute of Economic and Social Development (IPARDES) —a governmental institution in Curitiba— and its counterparts in Paraguay for the production and exchange of socio-economic data and

27 Jica [2000]. “Estudio sobre el desarrollo económico de la República de Paraguay;” JICA [2006]. “Estudio para el mejoramiento del corredor de exportación y puerto granelero en Paraguay;” Secretaría Técnica de Planificación [2007]. “Proyecto de fortalecimiento de la competitividad del sector exportador paraguayo.” 61

information of interest to the governments and private sectors of both countries. All the data created and exchanged would be aimed at promoting investments in Paraguay among prospective investors from Paraná.

 The Government of Paraguay is advised to conduct pre-feasibility studies to set up an industrial and logistics platform in the region of Ciudad del Este.

 The Governments of Paraná and Paraguay are recommended to gather information about existing proposals to modify national legislations on agricultural cooperatives, so that these organizations are allowed to operate in their capacity as cooperatives in any economic area within MERCOSUR. The Specialized Meeting of MERCOSUR Cooperatives (RECM) has already adopted Draft Rules for Cooperative Organizations in MERCOSUR.

 As part of its policy to get closer to the private industrial sector of Paraná, REDIEX is recommended to include the Organization of Paraná Cooperatives (OCEPAR) and, possibly, the agricultural cooperatives themselves that process agricultural products in D E

the Western area of Paraná. V

R  The Governments of Paraguay and Paraná (the Road Department of the state) are E S

recommended to analyze the possibility of establishing forms of technical cooperation E

to transfer to the Government of Paraguay the experience gained in Paraná regarding R

the circulation in its road system of multi-trailer trucks with a greater number of axles S

and transporting greater tonnage. T H G

 The Government of Paraguay is recommended to study the possibility of establishing I forms of cooperation with the Brazilian National Industrial Training Service (SENAI) and R L

the Brazilian Service of Support for Micro and Small Businesses (SEBRAE), to train and L

educate both workers and entrepreneurs. A -  The Government of Paraguay is recommended to examine the possibility of A S

establishing forms of cooperation with Brazil to train and educate workers in the R I

following fields: food safety, agroindustrial process and product certification, and I sanitary surveillance.

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