são paulo: sweet smell of success

SÃO PAULO — 1

Sweet smell of successResponsible development combined with years of prudent economic policies are finally waking a giant.

Good governance means cash for development. This new cable-stayed suspension bridge with twin curved decks is a striking symbol of the new São Paulo, South America’s largest industrialcity, which is rapidly being reborn as a major financial and services center. Second-generationethanol and other renewable energies are part of the dynamic regional economy.

SÃOPAULO

March / Apr i l 2009

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S p e c i a l A d v e r t i s i n g S u p p l e m e n t

SÃO PAULO — 3SÃO PAULO — 2

What a difference a period of goodgovernance can make! For decades,Brazilians and foreign residents,exasperated by rampant bureaucracy andpolitical failure to tackle glaring basicproblems, have joked that “Brazil is thecountry of the future—and always willbe.” But no longer. Subtly, the paradigmshave changed. In recent years, mountingevidence, and growing recognition,demonstrates that the world’s fifth largestnation, long an economic and socialunderperformer, is finally getting its acttogether. Successive administrations areconsolidating the democratic tradition ofpeaceful transition between opposingparties and gradually modernizing themachinery of government.

Since Brazil cast off military rule in 1985, ci-vilian governments of various hues have gai-ned competence at all levels—federal, state,and municipal—albeit not yet in every cornerof this USA-sized country. Good governance isperhaps most visible in economic policy, whe-re conservative fiscal restraint has been prac-ticed since the mid-1990s. Both widespreadprivatization and the recent favorable interna-tional economy have helped Brazil growaround 4 percent or 5 percent a year, at leastuntil the current crisis.

“Brazil is a stable economy because for 15or 16 years, we have had the same economicpolicy,” says Rubens Barbosa, a formerBrazilian ambassador in London (1994-1999)and Washington (1999-2004). “We managedto curb inflation and organize the country’s fi-nances. Public expenditure is more or less un-der control; the public deficit is under control.”

Most state banks, formerly treated as cashcows by many governors, have been closed orprivatized. In 2000, Congress passed a “fiscalresponsibility” law banning officeholders fromspending what they don’t have and threateningprison terms for those bold enough to try. Along-awaited and much-needed national taxreform has yet to materialize, but piecemealimprovements and great progress in tax collec-tion have been made. Most people now filetheir annual returns on the Internet, whileinteractive online invoicing between compa-nies helps curb cheating in high-tax sectors likefuel, tobacco, and liquor. São Paulo municipa-lity, the heart of the country’s services sector,has been a pioneer in using IT to clean up lo-cal tax collection: More than 95,000 compa-nies now use verified online billing.

With the mainstream parties now generallyaccepting serious government and responsiblefiscal management, the private sector has beengaining confidence: In April 2008, Standard &Poor’s promoted Brazil’s sovereign debt to in-vestment grade, a historic step for a countrythat has in the past been engulfed in various in-ternational crises.

“Investment grade was a plus for Brazil,”says Barbosa. “The country’s [sovereign risk]rate is low and continues to be low, so inves-tment grade didn’t change much as far as weare concerned, but it did give an additional res-ponsibility to the decision-makers in the eco-nomy because we have to keep the standardand continue to be seen as a great country forinvestment.”

In fact, multinational companies have beenpouring money into Brazil, at least until the cu-rrent crisis. Foreign direct investment (FDI) wason track for an annual record of some US$40billion in 2008, up more than 10 percent from

THE REWARDS OF GOOD GOVERNANCE

Introduction

S p e c i a l A d v e r t i s i n g S u p p l e m e n tS p e c i a l A d v e r t i s i n g S u p p l e m e n t

2007. FDI is expected to fall during 2009, a disappointing development considering that theoverall national investment rate has been toolow for too long, crawling along between 15.3percent and 17.5 percent during the last deca-de; the rate picked up to more than 20 percentin the third quarter of 2008, just before the cri-sis hit. Most economists would like to see it wellover 21 percent to ensure the long-term econo-mic growth of 6 percent or more that wouldhelp Brazil catch up with the other BRIC na-

tions (Russia, India, and China). Nevertheless,an FDI slowdown would not necessarily spelldisaster: Much long-term industrial and infras-tructure financing comes via the federal govern-ment’s Brazilian Development Bank, andPresident Luiz Inácio Lula da Silva has promi-sed to protect it from any budget cuts.

A better lifeThe recent good years of plentiful jobs, a sig-nificant hike in the minimum wage, and major

expansion of income-supplement programs forthe poor have helped chip away at Brazil’s his-toric inequality, although it remains the highestof any major country. Lower interest rates haveboosted middle-class ability to buy houses anddurable goods, while more low-income stu-dents are going to universities thanks to affir-mative-action programs, which have been ahallmark of Lula’s government. All in all, so-ciety is heading in the right direction, albeitmore slowly than many would like.

São PauloMunicipal Market

Don’t miss São Paulo’s beautifullyrestored Municipal Market: morethan 300 stalls selling top-quality fruitand vegetables, meat, sausages,seafood, cheese, wine, chocolate, andspices from all over the country—agreat way to appreciate Brazil’skaleidoscope culture. The mezzaninefood plaza has Arab, Italian,Japanese, and Brazilian dishes. Ifnothing else, sample a codfish pastel,made on the spot. Hours: Monday –Saturday, 7:00 a.m. – 6:00 p.m.;Sunday, 7:00 a.m. – 1:00 p.m.; SãoBento Metro Station.


city; entire neighborhoods are redeveloping,and the city is being reborn as the new servicescenter of South America: A major Caterpillartractor plant has become a major shoppingmall; a Victorian railroad station now housesa world-class concert hall.

Even São Paulo air is cleaner. Virtually allnew cars are flex-fuel, running on any mix ofgasoline and sugarcane ethanol; in March2008, Brazil became the world’s first country

where national ethanol consumption surpassedthat of gasoline in automobiles and light vehi-cles. The quest for biofuel started three decadesago. Initially, the aim was to reduce costly oilimports, but now Brazil is self-sufficient in pe-troleum and could soon be an exporter thanksto huge offshore discoveries. As a result, the in-centives for biofuels have become environmen-tal and economic. Sugarcane ethanol is trans-forming upstate São Paulo from low-intensity

ranching to large-scale, sugar-based agribusi-ness.

Does the current economic crisis threatenthis progress? Probably not. The economic fun-damentals are solid, there’s no real estate bub-ble, and personal debt is low. Expect a slow-down but no catastrophe. And as the world re-covers, Brazil will bounce back—above all, be-cause Brazil produces what the world needs,much of it in São Paulo. ■

SÃO PAULO — 5

Nowhere is progress more visible than inSão Paulo, a Wyoming-sized state that enjoyseconomic and political clout within Brazil simi-lar to that of California in the United States. SãoPaulo is home to 22 percent of Brazil’s popu-lation but generates 31 percent of GDP and 68percent of financial operations. Rio de Janeirowill always be sexier—a seaside jewel that pul-ses to the beat of Carnival and the sway ofskimpy bikinis on Copacabana and Ipanemabeaches. And Rio used to be more powerful; itwas the federal capital until Brasília was builtin 1960. But São Paulo, now home to 19 mi-llion people in its metro area, started eclipsingRio in the late 19th century as millionaire cof-fee planters financed early industrialization. Bythe 1950s, São Paulo City, the homonymous,massive state capital, had become Brazil’s lar-gest urban center, powered by sprawling facto-ries. But it was depressing, pell-mell develop-ment—thousands of dreary concrete apart-ment blocks under an acrid brown blanket offilthy air that could leave locals crying in thestreets during the dry winter months. As the sa-ying went, “São Paulo is for making money;Rio is for spending it.” Today, São Paulo is stillfor making money, but in high-tech, 21st-cen-tury ways, and it has also become a far betterplace to live.

Decades ago, the São Paulo metropolitan re-gion housed the greatest concentration of in-dustry in Brazil. Some factories remain, but sin-ce the early 1990s, massive restructuring hasspawned modern industrial hubs almost na-tionwide. Ford and GM, both in São Paulo sin-ce the 1920s, built new assembly lines in thenortheast and far south, respectively.Newcomers also broke with tradition:Mitsubishi went inland to Goiás State, whereits 4x4 SUVs are popular with prosperous far-mers, while Honda and Toyota chose upstateSão Paulo near high-tech leaders like IBM. SãoPaulo Deputy Gov. Alberto Goldman, whoalso serves as development secretary, explains,“We [the state government] are making majorinvestments in the area of technical andtechnological education. One major concernis technological innovation linking universitiesand the private sector. The vocation of São

Paulo State is more advanced industry thatadds greater value.”

As heavy industry moves out of the SãoPaulo metro area, mirror-glass office blocksmove in, full of multinational companies. Rioremains home to many energy, mining, and te-lecommunications companies, but most of theother major foreign players choose São Paulo.Thirteen of the 20 largest banks operating inBrazil have their headquarters in or around the

Crafts and AntiquesFair in PraçaBenedito Calixto

Street fair for the young and hip—butothers are welcome! Lots of stalls andstreet vendors, some great stuff, somerather questionable. Interestingneighborhood shops, too. Fair isSaturday only, 9 a.m. to 7 p.m., moreor less. Usually traditional chorinhoand live music in the afternoon, aswell as regional Brazilian foods.The Pinheiros/Vila Madalena regionis home to numerous trendy bars andrestaurants. Metro to Clinicas then aneight-block walk down Rua TeodoroSampaio, or take a cab to PraçaBenedito Calixto.


Introduction

01. São Paulo: a forest of concrete. Thewhole is a pulsating global center with a 24-7 lifestyle. 02. One of the world’s largest helicopterfleets helps executives dodge the traffic. 03. Parks aren’t exactly plentiful — theIpiranga Museum commemorating Brazil’s1822 independence from Portugal offerswelcome greenery — but many streets aretree-lined.04. Fasano Hotel.05. Rogério Fasano.

Inhabitants Million - 2006 186 41GDP - PPP* US$ billon - 2006 1,881 640GDP - Nominal US$ billon - 2006 1,067 363GDP PPP Per Capita – US$ 2005/2006 10,073 15,610Area (Thousand Km2) 8,547 248GDP Growth (2005/2006) 3.1% 3.8%

Source: International Monetary Fund / World Bank - 2006 and Seade 2005

Brazil São Paulo State

A nation

within a nation

Brasil

São Paulo

THE BIGAPPLE OF HIS EYE

Think Brazil with a taste of Italy. Think luxuriousmarble and mahogany, or handmade brickimported from England. Finally, think New York,three years from now.

For over a quarter of a century, Fasano’s has beena top São Paulo restaurant. Some say the top. It’s thelatest in a long line of Fasano restaurants in the city,dating back to a brasserie opened in 1902. Today, thevarious descendants of immigrant Vittorio Fasanohave a small empire of very high-quality restaurantsand hotels in São Paulo, Rio de Janeiro, and soon thefashionable Punta del Este resort in Uruguay. The onein São Paulo has a warm orange brick frontageleading to a lobby of antique leather armchairs.There’s also a 21st-floor pool with loungers and amemorable city view.

“What makes these hotels fun and nice ... is thatyou don’t look to one kind of client. You have here

bankers, artists, young people, very old people, verytraditional people, very crazy people, people whodrink in the lobby,” explains Rogério Fasano,grandson of the founder.

The biggest step will be New York. It will be asmall hotel and restaurant, one where the owner’seye ensures the difference. “Brazilian, but veryItalian and low profile,” he says.

SPOTLIGHT ON SÃO PAULO

SÃO PAULOBusiness city

SOCIAL CHALLENGES

Gilberto Kassab, a 48-year-oldeconomist and civil engineer, runs oneof the world’s biggest cities. Formerly alightweight deputy mayor, he inheritedthe top spot in 2006, when veteranpolitician José Serra resigned to becomegovernor. Kassab won reelection in hisown right in 2008, coming frombehind to defeat two major nationalfigures. Voters approved hisbusinesslike administration and radicalcity cleanup, including a totalbillboard ban.

They also apparentlyapproved his decision tocontinue building the modernUnified Educational Centers(CEU)—which combinepreschool with basic andcommunity education. The

CEUs were started by aprevious mayor, andpolitical rival, butSerra and Kassabbroke withtradition andmaintained anoppositionprogramthat wasproducinggoodresults.

“Cityfinances

are healthy without any tax increase,”Kassab notes, crediting improvedcollection methods. “This means wehave money for investment,particularly in the social area: buildingschools and hospitals and improvinghealth care.”

Kassab is responsible for São Paulomunicipality, home to some 11 millionof the 19 million people in themetropolitan region. “We have majorsocial needs,” he explains. “We have

2.2 million children in the publicschool system, and some 7 millionpeople lack private health insuranceand depend on the public system, so51 percent of our budget goes to thesetwo areas.” Three million people livein substandard housing.

Faced with such challenges, Kassabsays, a mayor must work for long-term change: “We can’t manage thecity properly if we always have oneeye on the next election.”

01 02 03

05

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SÃO PAULO — 7


Spotlight


Eth

anol

Energy

LOWER GHG EMISSIONSWhen used as a substitute for gasoline, Brazilian sugarcane ethanol offers the

best whole-life-cycle (“well-to-wheel”) reduction in greenhouse gas emissions:more than 80 percent, compared with around 20 percent for corn-based ethanol.

Both calculations assume raw material is produced on existing farmland.

MORE FUEL PER HECTAREBrazilian sugarcane plantations currently yield an average of 6,800 liters ofethanol per hectare, compared with 5,500 liters for European beetroot and

roughly 3,100 liters for U.S. corn.

LESS FERTILIZERSugarcane in Brazil requires on average 0.46 tons of chemical fertilizer per

hectare, thanks to the use of organic fertilizers including vinasse, a liquid residueof sugar and ethanol production sprayed onto the plantation.

NATURAL PROTECTIONBiological pest control has reduced the use of chemical herbicides and pesticides.

LOW WATER CONSUMPTIONAmple, dependable rainfall virtually eliminates the need for irrigation in the main

sugarcane areas. Water consumption in sugar mills and ethanol distilleries hasfallen from roughly 15 m3 per ton of cane 30 years ago to 1.8 m3 per ton in 2005.

NO IMPACT ON FOOD PRODUCTIONAt the end of the 2007-2008 harvest year, sugarcane occupied 7.8 million hectares

(19.3 million acres), representing 2.3 percent of all Brazil’s arable land. Cane forethanol takes up just 1 percent of Brazil’s arable land.

IMPACT ON THE AMAZONIt is common to hear people say that Brazilian ethanol farmers are choppingdown the Amazon. In fact, most sugarcane is grown in São Paulo State and

neighboring regions, more than 2,000 kilometers from the Amazon. In most ofthe Amazon, the climate—principally the rainfall cycle—is not favorable forsugarcane. Most of the recent expansion has taken place by incorporatingdegraded land or underused pastureland in and around São Paulo State.

MORE EXPENSIVE U.S. corn ethanol is much more expensive to produce. It receivessubstantial government subsidies and is protected against Brazilianethanol imports by a tariff of US$0.54 per gallon.

WORSE ENERGY BALANCE U.S. corn ethanol yields just 1.4 units of renewable energy for every oneunit of fossil fuel consumed in its production, which includes farming,transportation, and processing. This is the worst ratio of all majorethanol raw materials: Wheat and beet yield roughly 2.0 units, whileBrazilian sugarcane ethanol yields a whopping 9.3 units. All yields couldimprove with ongoing research.

IMPACT ON THE AMAZONCuriously, while Brazilian sugarcane ethanol production has little or nodirect or even indirect impact on the Amazon, some scientists see aconnection between the U.S. corn-ethanol program and tree-felling inthe rain forest. The link? Increased corn prices lead U.S. farmers to switchfrom soy to corn, thus pushing up the international price for soy, ofwhich Brazil is the world’s second biggest producer. Soy farmers in Brazilexpand onto ranching land, and ranchers cut down the forest for morepasture.

REDUCES FOOD PRODUCTION Many experts blame the U.S. corn-ethanol program for divertingproduction from food to energy, thereby sparking the world’s first“biofuel food riots” in Mexico in early 2007; according to the BBC, theprice of tortillas rose by more than 400 percent.

Sources: 2008 Sustainability Report of UNICA (Brazilian Sugarcane Industry

Association) using data from WWI, IEA; and others; Climate Progress (citing

William F. Laurance of the Smithsonian Tropical Research Institute).

Why SugarcaneEthanol?

Why Not CornEthanol?

As the world seeks to move toward themore efficient use of cleaner, renewableenergy, with lower emission of greenhousegases, few countries are better placed thanBrazil. The World Resources Institute’sCAIT database ranks Brazil fifth inabsolute terms as a global emitter ofgreenhouse gases. However, Brazil has theworld’s fifth-biggest population. In percapita terms, it ranks 33rd as a carbonemitter and falls to just 79th after excludingdeforestation, which authorities and privatecompanies are fighting with tough controlsand innovative programs (see page 12).

“The Brazilian energy matrix is around 46 per-cent renewable, compared with around 13 per-cent globally, so we are definitely leading theworld,” says Alan Kardec, head of a new bio-fuels subsidiary at oil giant Petrobras.Unlike many developed countries struggling toreplace fossil-based power with wind and otherexpensive new sources, Brazil already derivessome 85 percent of its electric power fromhydroelectric dams. Brazil has also become thefirst country to substitute more than half of itsautomobile gasoline requirement with renewa-ble, low-emission biofuel.

The ethanol program started after the1970s oil shocks, when Brazil imported vir-tually all its fuel. It was an urgent, nationalisticdrive to save money and reduce dependency.Huge government subsidies helped sugarcaneplanters build distilleries. The program had twocomponents: providing “pure” ethanol (in fact,

it contains 4 percent water to boost ignition) forcars with specially prepared engines; and mi-xing ethanol into “ordinary” gasoline, makingwhat elsewhere might be called E-25.

Gas stations throughout the country recei-ved ethanol-only pumps, and by the late1980s, some 4 million cars and light trucks—one third of the national fleet—ran on “pure”ethanol. But fuel production lagged behind de-mand, world petroleum prices fell, and lines ofirate drivers at empty pumps seemed to soundthe death knell of the “pure” ethanol program,although E-25 remained a success. Then, in2003 came the flex-fuel engine, which acceptsany mixture of E-25 and “pure” hydrated etha-nol. Today, about 90 percent of cars sold haveflex-fuel engines.

Brazil has joined the United States to try andstandardize ethanol as a world commodity, andto promote its production in dozens of poortropical nations. Marcos Jank, president of theBrazilian Sugarcane Industry Association (UNI-CA), says he sees countries like Mozambiqueand Nicaragua as prime candidates to growmore sugarcane, produce ethanol, and genera-te bioelectricity, maybe even becoming energy

Leading the World in Clean Energy

LEAN, GREEN, AND NOT MEAN

POINT OF VIEW

From Tradition to Trail-Blazer Sugar was brought to Brazil by 16thcentury Portuguese sailors and is oneof Brazil’s oldest economic activities,initially associated with slavery andlater with a traditional, autocraticrural way of life. Change gatheredpace with ethanol, and as thisbecame a global biofuel the sectorhas become acutely aware of theneed for environmental and socialresponsibility. UNICA, the SugarcaneIndustry Association, has justpublished its first sustainability reportusing Global Reporting Initiative(GRI) guidelines.

exporters to the first world: “We’re not sugges-ting that a country that is today extremely de-pendent on imported oil should become extre-mely dependent on Brazilian ethanol. We seeBrazilian ethanol as a complement to a natio-nal policy of substitution of oil and the reduc-tion of greenhouse gas emissions.” ■

Marcos Jank

President of UNICA



complex chemical processes. In the UnitedStates, the challenge is to make second-genera-tion ethanol out of wood chips and switchgrass,and the U.S. Department of Energy is helpingbuild six experimental cellulosic ethanol refine-ries for some US$1.2 billion.

“Whoever dominates hydrolysis to makecellulosic ethanol will lead the field,” says Prof.José Tadeu Jorge, president of the StateUniversity of Campinas (Unicamp), one ofBrazil’s technology leaders. Unicamp is direc-ting substantial resources to ethanol research,Jorge notes. “In my view, Brazil can easily useits great agricultural potential to resolve the twomost important questions facing the world to-day, food and energy, without any environmen-tal downside.”

Unicamp is Brazil’s leading generator of pa-tents, with more than 500 pending in all fieldsand over 50 licensed for commercial use.Interestingly, the second place goes to Petrobras,whose Cenpes Research Center in Rio deJaneiro is a world leader in deepwater petro-leum technology and is now working withUnicamp and other universities on biodiesel andsecond-generation ethanol.

“Technically speaking, we already knowhow to make second-generation ethanol from

Brazil’s future lies in a different direction fromEurope or the United States. There will be somewind power—the government is guaranteeingthe purchase of 1,100 megawatts from newwind farms—but that’s just 1 percent of projec-ted national generating capacity in 2010.

“Brazil has lots of rivers and has developeda huge industry based on building hydroelectricstations, so there aren’t the incentives for windgeneration,” explains António Pita de Abreu,president of Energias do Brasil (EDB), the localsubsidiary of Energias de Portugal (EDP), oneof Europe’s leading wind-farm operators.“Wind and hydro complement each other, be-cause you can have power from rain withoutwind, or from wind without rain.”

Brazil may downplay wind power, but itdoesn’t ignore other renewables. Governmentplanning calls for adding some 44,000 mega-watts of new capacity through 2017, ofwhich 28,900 megawatts will be hydro.Some of this will come from huge dams in theAmazon, controversial because forest is floo-ded. Many reservoirs on the Madeira andXingu rivers have been scaled back to lessenthe impact, meaning the dams will produceless power in the dry season.

This has led planners to include 15,300megawatts of new thermal capacity through2017, 89 percent of it from oil and naturalgas. There’s potential to produce close to thatamount renewably, from sugarcane residue,but the technology is still being developed (seenext story).

Another interesting source of renewableenergy is biodiesel. Since early 2008, all die-sel must contain 3 percent biodiesel, reaching5 percent by 2013. The program is partenergy, part social, because the governmentwill give long-term contracts to thousands of

Two points are important. First, Brazil’s totalenergy matrix is already 46 percent renewa-ble—more than double the EU target. Second,

Visit Brazil today, and you’ll find a countrywith an energy matrix very different fromthe rest of the world. Most electric powercomes from giant hydro dams, and ethanolhas overtaken gasoline as the main fuel forlight vehicles. But what would you see ifyou visited again, in, say, 2020, by whenEuropean leaders hope to derive 20 percentof their total energy mix from renewablesources? Will Brazil be covered in windfarms, electric cars, and solar panels?Probably not.

A GREENERFUTURE?

sugarcane, but the big challenge is to make iteconomically,” says Alan Kardec of PetrobrasBiocombustível, noting the process could incre-ase ethanol yield by 60 percent without any in-crease in planted area.

Another force driving research in São Paulois Fapesp, a public foundation that by law recei-ves 1 percent of the annual state budget. Thatgave it US$350 million in 2008 for a slew of pro-jects, including second-generation ethanol. “Weare also working to create an industry that usesethanol by transforming it into plastic products,to substitute petroleum-based plastics,” ex-plains São Paulo Deputy Gov. Alberto Goldman.

Until second-generation ethanol becomes areality, the ethanol sector hopes to make betteruse of the bagasse and straw, some of which isburned in cogeneration plants to produce steamand power. Currently, the mills sell around 1,800megawatt-average of bioelectricity, over andabove their internal consumption. Switching tohigh-pressure, high-efficiency boilers and elimi-nating pre harvest straw-burning could increa-se this to as much as 11,500 megawatt-average,the industry says.■

José Tadeu Jorge

President of Unicamp

Deep and SaltyBrazil is emphasizing biofuels, but ithasn’t given up on petroleum.Recently, Petrobras discovered hugenew fields—the world’s biggest strikesince Kazakhstan in 2000—some 7kilometers below sea level off the SãoPaulo and Rio coast. It is called“subsalt” petroleum because it liesbeneath a treacherous subterraneanlayer of soft, gooey salt some 2,000meters thick. Getting the oil out will demand newrobotic technologies and huge newplatforms. That’s where companieslike São Paulo–based UTC come in:“We’re mainly focused on offshorebecause the investments today in oiland gas are very big,” says UTCPresident Ricardo Ribeiro Pessôa.Some analysts expect that fallingcrude prices might slow the massiveinvestments required, but thegovernment says development willcontinue.

RESEARCHING FOR TOMORROW

poor farmers to supply raw materials like cas-tor seeds, dendê nuts, sunflower seeds, pea-nuts, jatropha curcas, and other crops. “We’reencouraging farmers to intersperse their crops,planting one for oil together with one forfood,” notes Alan Kardec, president ofPetrobras Biocombustível, a new subsidiarythe oil giant formed to stimulate production,consumption, and export of biofuels.

“Biofuel isn’t the total solution to environ-mental problems, but it’s an important part,”says Kardec. ■

Brazil has spent the last 30-odd years steadilydeveloping its world-leading fuel ethanolprogram. Now, it’s in a race to make the leapto second-generation ethanol—or risk seeingother countries pull ahead.

“Second generation” means producing ethanolnot just from sugarcane juice, like Brazil does to-day, but also from the rest of the plant. The re-wards could be huge—sugarcane contains three,roughly equal potential energy sources: the jui-ce, the crushed cane residue known as bagasse,and the leaves and stalk tips. Making ethanolfrom juice is pretty easy: Crush the cane, then fer-ment and distill the juice. But prying second ge-neration from the fibrous parts—technicallyknown as “lignocellulosic biomass”—requires


Future Energy


Environment

Any discussion of environmental andsocial problems in Brazil must begin withthe obvious: The Amazon is huge, thecities are huge, and poverty remains aserious problem. Just about everythingstems from these basics.

How big is the Amazon? ARES, the Institutefor Responsible Agribusiness, estimates that theforest in Brazil (ignoring the parts in Peru,Colombia, Venezuela, and the Guianas) todaycovers about 298 million hectares. That’sthree-quarters the size of the European Union,or almost as big as India. From the air, it canseem unending; a magical green carpet brokenby mysterious silver slivers. But fly a differentroute, particularly in the southwest in the burningseason, and fires stretch out to the horizon.

ARES says that 19 percent of the forest hasbeen burned already, while Brazil’s NationalInstitute for Space Research calculates annualdeforestation at 12,000 to 25,000 square kilo-meters, or roughly 0.4 percent to 0.8 percenteach year. The government promises a clamp-down, but it’s difficult: The reasons behind de-forestation are complex and manifold. Someparts are doomed because the land is good for

So, his battle is to find ways to provide themwith income; not charity, but income. He hasvarious programs, the boldest of which is aUS$1 billion project for sustainable forestry.Right now, Orsa has around 500,000 hectaresof its own forest under FSC-certified sustaina-ble management; Amoroso wants to multiplythat tenfold, in partnership with local commu-nities that would protect their own areas andharvest wood sustainably.

Some 2,700 kilometers south of Jari, GesnerOliveira has the almost impossible task of pro-viding clean water and sewage disposal to 20million people in greater São Paulo and seve-ral million more throughout the state. A leadingeconomist with a Ph.D. from the University ofCalifornia–Berkeley, Oliveira runs the Sabespsanitation company, which is government-con-trolled but has shares traded in São Paulo andNew York. He’s managed to double his investment budget to $6 billion reals for 2007-2010, but he recognizes that more is neededfrom private investors.

“We currently treat 70 percent of sewage,but we plan on getting to 84 percent by the endof 2010,” he says.

Brazil has huge needs in water and sewage.Public investment is never enough, and plan-ners have wrestled for years with how to bringin private capital. Concessions were studied,but many of the communities where the needis greatest have the poorest populations and arethus least able to pay market rates to cover pri-vate investments.

Sabesp’s main market, sprawling greater SãoPaulo, mixes expensive high-rises with swaths ofslums, albeit more of the latter. This means price-conscious consumers who are also voters.Nevertheless, Oliveira manages to crank out aprofit, thanks to cost savings and creative schemeslike a $300 million real public-private partners-hip that supplies 5 m3/second of water—some 7percent of company requirements. The companyhas also developed low-cost remote operationsystems for smaller treatment stations that it isnow seeking to market to smaller cities.■

Letters of Light

Many companies in Brazil haveprograms to help attack socialproblems. One of the most creative isrun by EDB, the Brazilian subsidiaryof Portuguese energy company EDP.The program combines goodenvironmental and social practices.The company focuses on cleanenergy generation in Brazil, where ithas 1,700 megawatts of capacity,mainly hydro, but with some windpower. It generates carbon credits forpolluters in Europe using the KyotoProtocol’s Clean DevelopmentMechanism. It then uses the proceedsto finance an institute that runs socialprograms in the five states whereEDB has operations. One, called“Letras de Luz”—“Letters ofLight”—helps promote childhoodliteracy.“Companies are organizations madeup of people who exist to servepeople,” explains EDB PresidentAntónio Pita de Abreu.

THREE WAYS TO MAKELIFE BETTER

farming. But often, it comes back to poverty.About 20 million people live in the region.Most are in big cities, but millions live in or nextto the forest and are desperately poor. If theyhave no better option, they hack down a fewtrees and plant cassava.

“The biggest challenge, not just for Brazilbut also for the international community, is todiscover practical ways to preserve theAmazon, ways that make economic sense,”says businessman Sergio Amoroso. He is in aunique position to speak. Half his time he de-dicates to the Orsa Group, a major paper, pulp,and packaging company he built from scratch.The other half goes to the Orsa Foundation,

which plows back 1 percent of the group’sgross billings—not profits—into communitieswhere it operates.

One such community is around Jari, in theeastern Amazon, where Orsa produces400,000 tons a year of eucalyptus pulp andsome 50,000 m3 of prime Amazonian hardwo-od—all of it sustainably, with international cer-tification from the Forest Stewardship Council(FSC). But Amoroso—who brought Jari out ofbankruptcy in 2000—has discovered that ope-rating sustainably, treating his workers well, andrunning health and education programs for thecommunity isn’t enough to save the forest, becau-se all around him are thousands of poor people.

“The international community is to discover ways to preserve the Amazon, ways that make economic sense.”Sergio AmorosoPresident of Orsa Group

“We currently treat 70 percent of sewage, but we plan ongetting to 84 percent by the end of 2010.”Gesner OliveiraPresident of Sabesp

“Companies areorganizations made up of people whoexist to serve people.”António Pita de AbreuPresident of EDB



THE BLESSINGS OF STABILITY

Finance

On the crisis and Itaú’s market position:“I think that at the right moment, Brazilian banks will haveopportunities in the future, and we’ll have to keep an eye on them. …We are clearly the No. 1 private bank among high-net-worthindividuals, but we are very strong elsewhere as well.”

On the dynamism of small companies:“In the past, given the volatility of the economy, small companiessuffered a lot. Nowadays, the economy is much more stable andsustainable. It’s clearly a place where you see a lot ofentrepreneurship going on. In the credit market, for instance, theshare of small companies is increasing considerably. This is creatinga very good environment for them to develop. … We believe thatthe market for small companies is increasing and will be increasingmore in the coming years. We will continue to support thissegment a lot.”

On sustainable development:“We created a strategy in 2003 called DRS—Sustainable RegionalDevelopment. It’s not just another credit line, and it’s certainly notcharity; it’s a loan that must be repaid.”

How it works:“The bank offers this financing if the client is part of a sustainable-development supply chain. … We study the supply chain, forexample, from the field through production to marketing. But wealso look at value added and training. … In Piauí, beanproductivity was 100 kilos per hectare, but with training, technicalassistance, new seeds, and organizational help from the bank, thisjumped to 600 kilos per hectare. … In a very poor region ofParaíba, 38 women started planting flowers. It went well, and theybought 8 hectares to expand. Many husbands were against it; theywere just used to poverty and drinking.”

RobertoSetúbalChief Executive Officer

Banco Itaú

Luiz OswaldoS.M. de SouzaVP for PersonnelManagement andSocioenvironmentalResponsibility

Banco do Brasil

BANKERS’ VERDICT

USA Office 1050 Connecticut Avenue, NW. 10th floor, Suite 1000 Washington, DC 20036 - USA Tel +1 202 772 1090 Fax +1 202 772 3101Spain OfficePaseo de la Castellana, 95. 15 Planta 28046 Madrid - Spain Tel +34 91 418 50 32 Fax +34 91 418 50 55 [email protected] Stella KlauhsRegional Director Rafael MuñozProject Director Nicolas DanauxProject Coordinator Marie JungResearch Director Greg KunstlerWriter Brian NicholsonCreative Director Nuno Teixeira Designer Marta ConceiçãoPhotography Antoninho Perri, Antonio Scarpinetti, Hans Georg,SPCVB/Andre Stefano, iStockphoto, SXC, Sabesp, Peninsula Press

Man in the Eye of the Storm

Henrique Meirelles, a formerworld president of BankBoston,has presided over Brazil’s CentralBank with substantial autonomysince President Luiz Inácio Lula daSilva took office at the start of2003. Many in Lula’s leftistWorkers’ Party initially sawMeirelles’ conservative monetarypolicies as controversial, but morerecently, he has been widely creditedwith helping lay the groundworkfor Brazil’s strong growth.

How will Brazil ride out the currentinternational economic crisis? Not toobadly, says Central Bank PresidentHenrique Meirelles, thanks mainly to thesensible economic and financial policies ofthe last several years. “There are variousreasons to think that the slowdown inBrazil will be shorter and less severe thanin other countries,” he explains, listingfiscal responsibility, the free-floatingexchange rate, and the use of inflation-targeting as the “three strong legssupporting macroeconomic policy.”

is a net international creditor. This means thateven though the exchange rate took a hit in late2008, slipping some 40 percent against the do-llar, the public debt fell as a percentage of GDP.“This is a radical change from past times,”Meirelles says.

Brazil also arranged a first-ever US$30 bi-llion no-strings, short-term currency swap withthe U.S. Federal Reserve, as did Singapore,Mexico, and South Korea. Meirelles calls this“recognition of the systemic importance ofBrazil for the world economy.”

Another reason Brazil should ride out thestorm relatively well is that the local bankingsector is well capitalized and not exposed tothe kinds of problems that crippled theUnited States. There was no subprime len-ding, and Brazilians in general use much lesscredit than their first-world counterparts, al-though car sales initially slumped on higherinterest rates and shorter repayment terms.The credit crisis did impact the country’s fo-reign trade, some sectors of which were alsosuffering from falling demand and lower pri-ces, but the government-run BrazilianDevelopment Bank expanded its export finan-cing to mitigate the problem.

The government was quick to pump al-most 100 billion reals into the economy by re-ducing retail banks’ required reserves with theCentral Bank and took pains to stress that ba-sic economic policy would not change; neitherwould plans for significant public investmentsin infrastructure in 2009 and beyond.

Market expectation of economic growth,tracked by the Central Bank, was for a reaso-nable 2.4 percent in 2009, down from an ex-pected 5.6 percent in 2008. Not brilliant, butalso not the recession looming in much of thedeveloped world. ■

Banco do Brasil is a state-owned bank; Banco Itaú is private. As of mid-2008, Banco do Brasil was the country’s largest, with total assets of $403 billion reals, while Itaú was third, behindBradesco with $340 billion. Since then, Itaú announced a merger with fifth-placed Unibanco, and the new superbank will have potential total assets of $573 billion reals, easily grabbingfirst place. Banco do Brasil responded by buying Nossa Caixa and 49.99 percent of Banco Votorantim but is still second to Itaú-Unibanco by some $20 billion reals. Both banks areintimately involved in Brazil’s economic and social development.

In previous moments of international finan-cial turbulence, Brazil has been one of the firstcountries to wobble. Among the vulnerabili-ties were paltry foreign reserves and a chronicdependence on foreign capital. Today, thingslook much better. The country has accumula-ted more than US$200 billion in reserves and


são paulo: sweet smell of success

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