APPENDIX 10
Memorandum submitted by the Confederation
of British Industry
1. The CBI welcomes the Trade and Industry
Committee's inquiry into Trade and Investment Opportunities with
Brazil. As the UK's leading business organisation, CBI speaks
for some 240,000 businesses that together employ around a third
of the private sector workforce, covering the full spectrum of
business interests both by sector and by size.
2. The CBI is actively engaged in promoting
UK business interests in Brazil, in seeking to eliminate barriers
to doing business and in securing broader common goals. We highlight
the following issues in this report:
— Brazil as a key emerging economy
and a country that is increasingly engaged in a leadership role
in the global economy;
— the UK's export and investment
position with Brazil compared to other economies (the BRIC countries—Brazil,
Russia, India and China);
— opportunities and difficulties
faced by UK business that wish to trade with or invest in Brazil;
and
— the role of the UK Government
in assisting businesses in overseas markets.
EXECUTIVE SUMMARY
3. Brazil is an important economy with significant
potential. It combines market size, natural resources, stable
government and an increasingly healthy macro-economic climate.
However, it is not the easiest market in which to do business
and, in common with other emerging economies, companies need to
be aware of these dynamics in order to execute a successful market
strategy.
4. The UK has significant levels of foreign
direct investment (FDI) in Brazil, but Brazil is still perhaps
sometimes overlooked in business strategies. CBI welcomes the
establishment of the Joint Economic Trade Committee (JETCO). It
will help strengthen the business relationship between the UK
and Brazil and address some basic mis-perceptions that exist in
both countries.
5. The UK Government's trade and investment
development work is carried out principally by UKTI, which has
a very good team focussing on Brazil both in market and in the
UK. CBI enjoys a good working relationship with this team.
BRAZIL AS
A KEY
EMERGING MARKET
AND ITS
ENGAGEMENT WITH
THE GLOBAL
ECONOMY
Brazil's economy
6. After years of protectionism, Brazil
embarked on a strategy to open its markets to foreign competition.
From the 1990s, privatisation and concessions liberalised the
economy and led to significant investment flows into the country.
Overall GDP growth has not been as high as other BRIC economies.
This is due in part to high interest and high tax rates, as well
as regulatory burdens and the need for greater infrastructure
investment. However, GDP per capita in Brazil is significantly
higher than in China and India.
7. Today Brazil operates a strict monetary
policy. Although interest rates are currently at 14.25%, they
have been falling steadily. We believe that a more favourable
and stable long-term macro economic environment provides scope
for further reductions in real interest rates. Inflation is down
to under 4% for the first time since 1999 and foreign debt has
been cut significantly.
8. Since 1998, the Brazilian current account
surplus has increased by more than 6% of GDP, driven by a dramatic
increase in the trade balance. Brazilian exports have grown on
average 25.1% p.a in the last three years, despite an appreciation
in the currency. The debt-to-exports ratio is also at its lowest
since 1971, which significantly reduces the Brazilian economy's
resilience to external threats. Brazil has a strong agricultural
sector with impressive growth and productivity rates. It is a
world-leader in sectors such as biofuel ethanol and short-to-medium
range aircraft and it is benefiting from China's increased demand
for food and raw materials.
9. Key building blocks are therefore in
place to sustain an increasingly healthy economy which is able
to withstand any future negative impacts. This is a significant
break with the past. The recently announced 2007 federal budget—still
to be approved by Congress and executed by the new government
after October's elections—shows a primary fiscal surplus
and a reduction in the debt-to-GDP ratio. The Government is not
expected to raise taxes next year nor propose the creation of
any new tax. Brazil is looking forward to obtaining investment
grade status from international rating agencies.
10. Income distribution inequalities remain
pronounced, with 21% of the population living on or under $2 a
day. The informal sector remains significant and is estimated
to account for about 40% of Brazil's GNP compared with 46% for
Russia, 23% for India and 13% for China.
11. Provided that necessary economic reforms
in the fiscal, tax, regulatory and labour areas are made, Brazil
will enjoy a period of sustained growth. Whilst at the time of
writing Presidential elections are still to be held, we feel there
will be continuing prudent management of the economy whichever
of the leading contenders is returned. With this view of long-term
economic stability, institutions are stronger, confidence levels
are rising and there is a widespread entrepreneurial spirit among
managers.
Brazil as a regional and global player
12. Within Latin America, Brazil exercises
a leadership role. This is particularly important at a time when
other more radical, populist, voices are seeking to be heard and
to set their own agenda for the region. Brazil is at the forefront
of efforts to deepen regional integration and it is a leading
member of Mercosul and the Rio Group. At the global level, Brazil
has forged a position as a leading emerging economy, which along
with Russia, India, China, and South Africa, has commanded attention
on issues ranging from global warming and the environment through
to UN reform. Brazil, India and South Africa have also established
a formal grouping called the G3 or IBSA, which is also co-ordinating
activity between them.
Brazil and Mercosul
13. Brazil is a key member of Mercosul,
a customs union comprised of Argentina, Brazil, Paraguay, Uruguay
and, just recently with transition arrangements, Venezuela. EU
Trade Commissioner Peter Mandelson speaking in Sao Paulo in September
2006 reiterated Europe's commitment to finalise EU-Mercosul negotiations
as soon as possible and he looked forward to "re-engaging
soon to conclude these negotiations on solid commercial terms".
14. However, EU-Mercosul negotiations have
not made as much progress as might have been hoped. The last round
of negotiations took place in November 2004 with neither side
willing to make the moves required to conclude a deal. Ministers
met in September 2005 and agreed that negotiations would continue
only after the conclusion of the WTO Doha Development Agenda (DDA),
since it was envisaged that any Free Trade Agreement would have
to reflect the final deal and liberalise further. A review of
EU bilateral and regional trade negotiating strategy may lead
to a resumption of more active engagement.
15. Mercosul countries' principal interest
remains agricultural market access. UK business also has interests
in the reduction of agricultural tariffs in the EU, which will
reduce the price of commodities imported from Brazil. EU priorities
remain non-agricultural market access, services, and geographical
indicators. The EU also insists that the agreement should guarantee
free movement of EU goods within the Mercosul area, irrespective
of any internal Mercosul problems.
Brazil and the WTO
16. Brazil founded and plays a co-ordinating
role in the G20 group of developing and emerging economies, which
is one of the most important WTO negotiating groups. As such,
Brazil has a critical role in ensuring progress is achieved. It
is also part of the G6—the EU, the US, Brazil, India Japan
and Australia—whose representatives in effect hold the key
to success or failure of negotiations. CBI urges all sides, and
particularly leading WTO members such as the G6, to return to
the negotiating table as soon as possible with meaningful new
offers to ensure the completion of the Doha round by the end of
2007. We believe that the DDA could significantly liberalise UK-Brazil
trade. An ambitious and balanced conclusion could resolve or ameliorate
many of the barriers that tend to restrict market access. These
are discussed fully in the next section.
OBSERVATIONS ON
THE UKS
TRADE AND
INVESTMENT WITH
BRAZIL
Investment
17. At end 2004 UK Foreign Direct Investment
(FDI) in Brazil stood at £2.9 billion and exceeded UK FDI
in Russia at £1.6 billion, India at £1.7 billion and
China (excluding Hong Kong) at £1.9 billion. (FDI in Hong
Kong was £19.2 billion).
Net UK FDI position as at end 2004 (£
million)
 7
(Source:
National Statistics.)
Export of goods and services
18. The value of UK export of goods in 2005
was £836m in 2005, lower than for other BRIC economies. UK
market share of Brazilian imports was 1.87% in 2005 compared to
France at 3.68% and Germany at 8.35%. China has shown a large
increase in market share, which for 2005 was 7.28%. The value
of UK export of services to Brazil in 2005 was £353 million.
Value of UK exports of goods and services
(£m)
(Source:
Pink Book.)
OPPORTUNITIES AND
DIFFICULTIES FACED
BY UK COMPANIES
Opportunities
19. Brazil has a population of some 186
million and shares a border with ten other countries. It is a
significant market in and of itself, but also provides access
to regional markets. Brazil's attraction for traders and investors
is a combination of market size, natural resources, growth potential,
and economic and political stability.
20. It is against this backdrop that opportunities
for UK companies can be judged. CBI fully supports the establishment
of the UK-Brazil Joint Economic and Trade Committee (JETCO) and
at the first meeting of private sector workshop in September 2006,
a number of sectors were identified with significant potential.
These were:
— hi-tech niche sectors, for example
bio-science and nano technology;
— oil and gas (and related shipbuilding);
and
21. The group felt that environmental technologies
were considered to have great potential. In addition, there has
agreement that co-operation and collaboration in R&D and innovation
could lead to expanding business links. The main areas of consideration
were:
22. We also believe that work should be
undertaken to demonstrate the comparative effectiveness and ease
of access of London's financial markets and expertise. Brazilian
business has a natural empathy for New York for listings or to
raise finance.
23. Improvements to and expansion of Brazil's
infrastructure, particularly ports and roads, is the key to future
development. Less than a quarter of the main highways in Brazil
can be classified as good and despite recent advances, the railway
system still needs modernisation. The energy sector, too, needs
to be developed further with significant investments in electricity
production and transmission.
24. The Brazilian Government has started
to launch federal public-private partnerships (PPP) projects which
should promote greater infrastructure investment. PPP projects
open up new opportunities for foreign investment by contractors.
They also present opportunities for professional firms in advising
on contracts and on innovative financing options. These are all
areas where the UK has considerable expertise.
25. The first federal government PPP project
was launched in September 2006 with the publication of the details
of a tender for a project to repair and operate around 637-km-worth
of roads in the north-eastern state of Bahai. It is important
that UK companies can find out about forthcoming PPP projects
at an early stage with sufficient specificity.
26. Individual states have varying degrees
of PPP activity, but some still like Sao Paulo are more advanced
than the federal government. Opportunities also exist for UK companies
at the sub-federal level, but again early knowledge of projects
needs to improve. At both federal and state level, local partnerships
can be advisable.
Difficulties
27. As well as being a market with significant
opportunities, Brazil faces some major problems. The JETCO working
group discussed these dynamics too and it was encouraging to see
both the Brazilian and UK business representatives agreeing on
areas where the business environment can improve.
28. In the World Bank's ranking of economies
based on the ease of doing business, Brazil ranks 121st. This
is ahead of India, but behind Russia and China. The index averages
a series of ten indicators. A high ranking on the index means
that the regulatory environment is conducive to the operation
of business. Out of the ten indicators, Brazil rates the highest
on trading across borders, investor protection and obtaining credit.
It rates lower on taxes, dealing with licenses, closing a business,
enforcing contracts, registering a property, starting a business
and employing workers. The JETCO covered very similar ground and
CBI members' experience in Brazil broadly agrees with the World
Bank's assessment. We recognise that reform and simplification
can be a sensitive issue, but we would like to see faster reform
in the areas of taxation and employment law. Both have the potential
to significantly boost Brazil's business environment.
29. As previously mentioned, CBI believes
an ambitious and balanced conclusion WTO Doha Development Agenda
(DDA) could significantly reduce some of the difficulties UK business
faces in Brazil.
Tax
30. The Brazilian tax system is complex
and burdensome with taxes levies at federal state and municipal
levels. Effective tax rates are high and there are some variations
between states within Brazil. We believe a stable and predictable
tax environment is vital. CBI also strongly endorses the JETCO
recommendation for the early adoption of double taxation agreement
between the UK and Brazil.
Employment law
31. CBI supports JETCO's observations that
issues relating to Brazilian employment law, its complexity and
cost act as a brake on investment and trade. For instance, by
law at least two thirds of the employees must be Brazilian nationals
and foreign nationals may not represent more than one third of
the payroll.
Regulation
32. Regulation, the burdens of regulatory
compliance and licensing procedures provide a major source of
concern for business. Improvements will generate greater business
activity. In particular, there is a need for clear and consistent
application of regulation in Brazil, as well as greater transparency
and timeliness, both in the formulation of regulations and their
enforcement. CBI strongly endorses the JETCO private sector working
group's recommendation that both governments institute a dialogue
between regulatory authorities and agencies that is designed to:
— explore ideas, best practice
and experience of regulation; and
— achieve greater convergence
of regulation or, if that proves impossible, at least greater
mutual recognition of standards.
Brazilian import and customs regimes
33. For UK exporters, a key issue is the
tariff rate that is paid on goods arriving in Brazil. As can be
seen from the table, average tariffs are higher than for Russia
and China. However, significant additional import taxes and charges,
onerous customs requirements and inconsistent interpretations
of the law can add to the cost and time taken to import goods
into Brazil. Non-tariff barriers are also an area of concern.
Services
34. The UK has a major competitive position
in many services sectors. There are barriers that exist to full
realisation of UK company potential in the market. These include:
— telecommunications—Brazil
is a significant market with some 40 million fixed lines and 86
million mobile phones. Whilst the telecommunications sector has
been privatised, some regulatory challenges remain. CBI would
like to see further liberalisation of the market, for instance
to allow the resale of mobile services and /or MVNOs (mobile virtual
network operator).
— financial services sector—CBI
would like to see the ratification of the WTO understanding on
financial services to improve market clarity. We would also like
to see liberalisation in the insurance sector and the privatisation
of the State's reinsurer, IRB.
— in the legal sector, CBI would
like to see a liberalisation of the market and a removal of the
restrictions on entering into partnerships.
Investment barriers
35. Foreign investment is restricted in
internal transport, public utilities, media and other designated
strategic industries. The UK signed an Investment Promotion and
Protection Agreement (IPPA) with Brazil in 1994 but this is still
awaiting Brazilian Congressional approval. We believe that ratification
of the IPPA would mark a major step forward in the framework for
investment relations between the two countries.
Intellectual Property Rights (IPR)
36. Many UK companies have high degrees
of IP in their products and services. Rather like regulation,
it is vital that high standards of IP protection are effected
in Brazil, together with consistent application and enforcement.
CBI believes that the recommendation from the JETCO working group
that both governments should examine these issues in depth and
take appropriate action to be the right one. Common goals should
be identified and measurement towards effective co-operation to
achieve these goals should be fast-tracked. This will enhance
the environment for trade and investment as well as R&D activities.
37. Whilst Brazil's National Institute for
Industrial Protection (INPI) received a significant increase in
its budget in 2004 and authorisation to hire additional patent
examiners, delays have meant that it will take some years to work
through the patent and trademark application backlog. This situation
should improve as quickly as possible.
38. Additionally, in the pharmaceutical
sector, ANVISA (the Brazilian health authority) reviews all patent
applications for pharmaceutical products and processes. ANVISA
also rejects applications for second use of a product on the basis
that they lack the required "product novelty". CBI believes
that the need for ANVISA approval should be eliminated and decisions
should be left to INPI as the appropriate body with the necessary
expertise.
Piracy
39. Piracy of copyrighted material in Brazil
remains a serious problem. Losses in the music industry have a
major impact on the UK industry. CBI recognises that Brazilian
authorities are addressing the problem, particularly with the
creation of the National Anti-Piracy Council at the end of 2004,
but challenges remain. There needs to be continued effective enforcement
and a resistance to pressures to enact new laws that dilute or
undermine copyright protection.
Price controls
40. A price freeze, which has been in effect
since July 2000, is a significant barrier to the pharmaceutical
industry where price adjustments allowed by the government have
not equalled the inflation rate.
National content
41. Brazil seeks local production in a number
of sectors, for example, automotive, aerospace, and oil and gas.
This has the effect of encouraging investment in Brazil over direct
exports to the country. It can also have an impact on technology
transfer issues.
Perceptions
42. In addition to the tangible difficulties
mentioned here, CBI is concerned that there is a perception gap
or lag about the Brazilian market. Difficulties still remain,
but this is not the same country of the 1970s and 1980s. We believe
that both governments have a key role in seeking to address these
misperceptions through a targeted, clear communications strategy.
Awareness raising is also important in Brazil to better understand
UK business strengths and capacities.
43. Enhanced co-operation on issues and
in areas of common interest will also have a positive input on
perceptions. This will reflect and recognise a growing and closer
relationship. Examples should include global frameworks, the sustainability
agenda and third country co-operation.
THE ROLE
OF GOVERNMENT
IN ASSISTING
BUSINESS
UKTI five-year strategy
44. In July 2006, UK Trade and Investment
(UKTI) announced its new five-year strategy. CBI welcomed the
new strategy to help UK business and support its goals. The greatest
challenge will, however, be delivering against objectives both
in the provision of customer facing services and in the internal
culture and management changes.
45. UKTI will focus more on emerging markets
and their strategy booklet talks of a step change in the UK's
profile in Brazil, Indonesia. Mexico, Russia, Saudi Arabia, South
Africa, Turkey and UAE with over £5 million of resources
being moved to these markets. Globalisation is not, after all,
just about China and India, important though they are undoubtedly
are. It will also give specific support to FTSE 100 and mid-cap
companies, as well as a focus on the City.
UKTI and Brazil
46. UKTI has very good and effective teams
in London and Brazil, and CBI has been pleased with the co-operation
with them. In particular, CBI worked with UKTI on the March 2006
State Visit of the President of Brazil when we organised a roundtable
meeting at Buckingham Palace of Chairmen and Chief Executives
with President Lula and his delegation. Subsequently, we have
worked together very successfully on the Joint Economic Trade
Committee (JETCO) process.
UKTI and JETCO
47. CBI welcomed the establishment of a
JETCO between Brazil and the UK. The JETCO process is an opportunity
for UK and Brazilian business and Governments to pursue key topics
to strengthen co-operation and promotion of trade and investment,
build a better business environment and define priorities for
collaboration. CBI took an active part in identifying both issues
to be discussed and attendees for the private sector workshop.
Gary Campkin, CBI's Head, International Group, co-chaired these
discussions in Sao Paulo and reported outcomes to the ministerial
meeting between UK Secretary of State, Alistair Darling and Brazil's
Minister of Development, Industry and Foreign Trade, Fernando
Furlan. The CBI endorses the JETCO statement and looks forward
to seeing the delivery of results-orientated activities.
Posts in Brazil and Brazilian diplomatic representation
in London
48. HM Ambassador in Brazil, Peter Collecutt,
leads a dedicated team. We have high praise for his efforts and
those of the Consul-General in Sao Paulo, Andrew Henderson, who
leads on UKTI's work. Recent and forthcoming changes in senior
staff should continue the quality team in Brazil. CBI also enjoys
an excellent working relationship with the Brazilian Embassy in
London under Ambassador Jose Mario Bustani.
UKTI liaison other government departments
49. Trade policy and trade development are
closely linked. It is important, therefore, that UKTI maintains
effective liaison with the Europe and World Trade group within
DTI which leads and has responsibility for trade policy, particularly
given Brazil's pivotal role in WTO and EU-Mercosul negotiations.
UKTI should also continue to maintain close links with FCO market
desks to ensure that they are aware of UK Ministerial visits to
markets which, although for other purposes, could possibly have
an element of trade development linked to them. The same is true
for liaison with other departments where necessary to ensure appropriate
opportunities are used to full advantage.
Respective responsibilities of UKTI and Regional
Development Agencies
50. CBI supports inward investment from
Brazil to the UK and is concerned if uncoordinated or competition
from differing agencies results in a less than optimum approach.
September 2006
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