[A-List] Brazil: further surrender

["Michael Keaney" <michael.keaney@xxxxxx>]

Lula to woo capitalism's high priests at Davos
By Raymond Colitt in Brasília
Financial Times: January 26 2005

Luiz Inácio Lula da Silva, Brazil's left-leaning president, will try to
sweet-talk many government and business leaders that he once considered his
worst enemies at this week's World Economic Forum.

The former union leader, who abandoned his fiery, anti-capitalist rhetoric
to win the presidency at his fourth attempt in 2002, has good reason to woo
the high priests of capitalism.

He will lead a roadshow in Davos inviting foreign investors to help
modernise Brazil's transport system, seen as grossly inadequate for an
aspiring global trade power. "Bottlenecks are already penalising our
exports, Brazil risks losing international competitiveness," says the
National Industry Confederation.

According to one private sector estimate, average transport costs are twice
those in Russia and China. The National Transportation Confederation (CNT)
says roughly a third of Brazil's roads are in a bad or critical condition.

This year the government is investing R$6bn ($2.23bn, ?1.7bn, £.2bn) in
transport infrastructure, twice last year's budget but far short of the
R$50bn the CNT says is needed immediately.

Mr Lula da Silva's main selling point, in addition to the strongest economic
growth in a decade last year, will be recent legislation for public-private
partnerships (PPPs). Under the law, the government offers investors
financial and legal guarantees including R$6bn in government bonds in case
public contractors renege on their obligations.

The PPPs have generated a lot of interest, with law firms, construction
companies and pension funds in São Paulo, New York and London setting up
special task forces to identify investment opportunities. Multilateral
lenders, including the World Bank and the Inter-American Development Bank,
have also pledged assistance.
Yet analysts point to a series of potential pitfalls, including possible
delays in writing the bylaws to the PPPs. The government is uncertain the
first project will be ready this year and presidential elections next year
could put many dec-isions on hold.

Other concerns include government attempts to limit the power of industry
watchdogs by squeezing their budgets, and undermining them with new
legislation and political appointments. "This law would look good in the UK
or Germany but there are some serious political issues here," said Isabel
Franco, legal council of the American chamber of commerce in São Paulo.

She also said that PPPs could be challenged in the notoriously slow
judiciary: "Pioneers will face the risk of an untested law."

Paulo Sergio Oliveira Passos, deputy transport minister, insisted that the
PPP was "an agile legal instrument" and that "numerous investors" were
waiting in line.
Yet judging by the reaction of one US chief executive, Mr Lula da Silva will
have to be persuasive in Davos. "We are very interested in the PPPs but we
won't be the first to test them," the executive said.

------

Brazil prepares for first big privatisation
By Raymond Colitt in Brasília
Financial Times: January 27 2005

The left-leaning government of Brazilian President Luiz Inácio Lula da Silva
is preparing its first large privatisation, Antonio Palocci, finance
minister, told the Financial Times.

The government will soon present a legislative proposal to congress that
would end the state monopoly in the reinsurance industry and sell a majority
stake in the Brazilian Reassurance Institute (IRB), Mr Palocci said.

The move is a break with Mr Lula da Silva's historic aversion to
privatisation and part of a new round ofmarket-driven reforms designed to
ensure international competitiveness.

Mr Palocci also denied recent speculation that the government intends to
sack conservative central bank directors.

The announcements help reinforce the perceived government commitment to
economic orthodoxy. Several press reports in recent days suggested Mr Lula
da Silva had been upset with the central bank's decision to tighten monetary
policy for the fifth consecutive time last week and was considering
dismissing "ultra-conservative" directors.

Yet Mr Palocci not only denied imminent changes at the central bank but
insisted he would push ahead with legislation to grant formally the central
bank autonomy, after the debate within the government coalition. "This
controversy strengthened our perception that the central bank needs
autonomy. At no time did the [president] question a central bank director,
nor does he have plans for change."

Brazil's economy last year grew at more than 5 per cent, the fastest rate in
a decade, and Mr Lula da Silva's popularity ratings have been close to their
highest since he took office in January 2003.

Yet business leaders and at least one senior cabinet member have recently
warned that excessively tight monetary policy to meet aggressive inflation
targets was putting at risk Brazil's export-led economic growth.

Mr Palocci insisted the president fully backed the current inflation
targets. "As a union leader fighting for wage adjustments, the president
knows better than anybody else the [negative] impact of inflation on
people's income and the economy. I am very at ease with the president's
position on economic policy," he said.

Following its legal proposal to reform corrupt and unrepresentative labour
unions, the government later this year plans to push ahead with legislation
that will deregulate the labour market and cut back many costly benefits.

In an effort to improve the investment climate, the government is also to
"fundamentally overhaul" its antitrust legislation, under which the
government considers approval of mergers only after they have been
completed. Two years after Nestlé, the Swiss food company, acquired a local
chocolate company, it received a red light from authorities.

Analysts caution that the finance minister's success in pushing ahead with
an ambitious reform agenda depended on the government patching up a shaky
alliance in congress. The ability to maintain its narrow majority may depend
on the forthcoming election of the president of the lower house and a
pending cabinet reshuffle designed to increase representation of allies.

Yet the former physician is optimistic. "Congress has not only backed every
important legislation we sent, it improved them. I don't see a risk scenario
on the horizon."