Latin America’s RegionsDoing Business in Brazil’s Northeast

Energy boostPetrobras refinerycreates 40,000jobs but costsescalate sixfoldPage 2

Inside »

Retail boomNew middle­classconsumers provideopportunities forinvestorsPage 2

Tourism woesInfrastructurebottlenecks prove aproblem too farfor foreign visitorsPage 3

Soccer kickstartWorld Cup arena inPernambuco statewill be part ofwider regenerationPage 4

FT SPECIAL REPORT

Thursday March 27 2014 www.ft.com/reports | @ftreports

As the bus enters the site ofthe future industrial zone,an expanse of civil construc-tion works stretches as faras the eye can see.

The vastness of the scene and thestrong winds whipping up dust fromthe extensive earthworks recall thegrand projects of China, a countrynormally associated with ambitiousinfrastructure schemes.

This is a long way from Asia, how-ever. The 140 sq km port industrialcomplex of Suape in Brazil’s north-eastern state of Pernambuco willhouse a huge refinery and petrochem-ical project, the southern hemi-sphere’s largest shipbuilding facility,

a port and numerous other activities.It is not only Suape but the entire

northeast region of Brazil that ofteninvites superlative comparisons withChina. Once known only as the coun-try’s poorest region, an exporter ofdestitute farmers and manual labour-ers to the industrialised south in amovement immortalised in master-pieces such as “Os Retirantes” bypainter Candido Portinari, today thenortheast is recognised for its highgrowth, with some states expandingas fast as China itself during theboom year of 2010. The question forthe region and its politicians is how tosustain these high levels of growth ata time when Brazil’s economy as a

whole is slowing down. “We seeemerging regional players,” says Hec-tor Gomez Ang, country manager inBrazil at the International FinanceCorporation, the private sector invest-ment arm of the World Bank. “Youreally see companies from the regionor that were born in the northeastthat are becoming global or nationalplayers.”

Comprising nine states clusteredtightly together, curling along theBrazilian seafront as it juts out intothe Atlantic, the northeast is one ofthe country’s oldest centres of Euro-pean civilisation. It is also a centre ofBrazilian culture thanks in part to itsstrong roots in the country’s Africanheritage. Northeastern musiciansinclude bossa nova singer João Gil-berto and his daughter, the contempo-rary Brazilian singer Bebel Gilberto;and Caetano Veloso and Gilberto Gil,known for the Tropicália culturalmovement. Other famous sons of theregion include former president Luiz

Inácio Lula da Silva, whose familymoved from Pernambuco to São Paulowhen he was a boy.

The nine states – Maranhão, Piauí,Ceará, Rio Grande do Norte, Paraíba,Pernambuco, Alagoas, Sergipe andBahia – together represented 28 percent of Brazil’s population of 191mpeople as of 2010, but they contributedonly 13.4 per cent of national grossdomestic product in 2011, according tothe latest figures available from thenational statistics agency.

In the 10 years between 2002 and2012, poverty declined more rapidlyin the northeast than on average in

Continued on Page 2Cause for celebration: poverty is on the retreat in the northeast Reuters

‘You really see companiesfrom the region that arebecoming global ornational players’

Big projectsfuel region’spush to keepmomentumThe once neglected northeast has beenoutgrowing the rest of the country but faces ahuge task to stay on track, writes Joe Leahy

2 ★ FINANCIAL TIMES THURSDAY MARCH 27 2014

For Gilson Alexandre, a 42-year-old truck mechanic,there is nothing better thanspending an afternoon atthe local shopping centre.

“It has everything youcould want,” he says,browsing the food court ofShopping Recife, one of thelargest retail centres in thenortheastern Brazilian city.

With more than 450shops, 19 restaurants, 10cinema screens and plentyof benches on which to takea nap in the comfort of thebuilding’s air conditioning,Shopping Recife attractsabout 65,000 people a day.

Visiting shopping centreshas become a national pas-time in Brazil. Aside frombeing somewhere to meetfriends and family, they area relatively safe place tohang out in otherwise dan-gerous cities, thanks toheavily armed guards onthe doors.

Demand for new shoppingcentres is strongest in thecountry’s poorer northeastregion, which until recentlyhad been largely neglectedby developers. As consumerspending begins to slowacross the rest of the coun-try, the region’s nine statesremain a bright spot forretailers, as millions of Bra-zilians enter the middleclass for the first time.

As of December last year,32 shopping centres wereunder construction acrossBrazil’s northeast, up from30 at the end of 2012, saysLuís Augusto Ildefonso daSilva, institutional directorof the national retail associ-ation Alshop.

The number of shoppingcentres being built nation-ally decreased to 153 from157 over the same period.

“Many of the new shop-ping centres [in the north-east] are in smaller citiesthat don’t already haveone,” says Mr Ildefonso daSilva. “It is hard to gowrong when you are build-ing a city’s first shoppingcentre.”

To a large extent, thenortheast is simply catch-ing up with the rest of Bra-zil. Lumbered with a vast,barren hinterland andlocated thousands of kilo-metres from the country’ssouthern centres of power,the northeast has longranked as the poorest andleast developed region.

Despite the recent growth,development indicators insome parts of the region arestill comparable with thoseof African countries.

However, this is whatmakes the northeast one ofthe country’s most promis-ing consumer markets, saysRenato Meirelles, presidentof the Instituto Data Popu-lar, a consultancy.

“The ownership of televi-sions, mobile phones, com-puters, washing machinesand other goods is lower inthe northeast than acrossthe rest of Brazil, so there isa lot of pent-up demand,”Mr Meirelles says.

“Like the rest of Brazil,the northeast will growat a slower rate than in thepast decade, but the regionwill still grow faster than

the rest of the country.”However, the northeast’s

consumer boom is also aresult of concerted effortsby the federal governmentto accelerate the region’sdevelopment.

“In spite of the necessityof [public investment in thenortheast], the decision tofocus on the region hasbeen a political one,” saysOtto Nogami, an economicsprofessor at São Paulo’sInsper business school.

The Bolsa Família welfareprogramme, a cornerstonepolicy of the ruling Work-ers’ Party (PT), has beenresponsible for lifting mil-lions out of poverty overthe past decade and hashelped keep the PT in powersince 2003.

Mr Meirelles estimatesthat more than 40 per centof families in the northeastreceive the stipend, makingthe region a loyal base ofpolitical support.

Other government pro-grammes have boosted con-sumer spending, such as“Minha Casa Melhor” (“MyBetter Home”), which giveslower-income families afour-year loan of up toR$5,000 ($2,174) to buy homeappliances and furniture.

Families are only eligiblefor it if they bought theirhome via the

government’s “Minha CasaMinha Vida” (“My Home,My Life”) programme.

The region’s consumerboom has encouraged manyfirms to build factories inthe region. O Boticário, oneof the country’s most popu-lar cosmetics chains, is toopen a production plant anddistribution centre this yearin the state of Bahia at acost of R$535m. The factorywill serve as a base for thewhole of northeast andnorth Brazil.

International consumergroups have also venturedinto the region. In 2011,Kraft opened a factory inPernambuco – its first inthe northeast – to producechocolate and powdereddrinks. Upmarket brandssuch as Pernod Ricard’sChivas Regal whisky havealso found success, as theregion’s new middle classesstart to spend. In 2012, thecompany ranked Recife asthe top market in the worldin terms of per capitawhisky consumption.

“This is a sign of socialmobility, which in Brazil isshown through the capacityto consume,” says Insper’sProf Nogami.

However, for producers ofhigher-value durable goodssuch as home appliances, itstill does not make sense tobuild a factory in the north-east, he says.

“You will find strongdemand in the state capitalsbut not outside the cities –the market is not matureenough,” Prof Nogami says,adding that the northeast’slogistical problems and lackof skilled labour can alsodrive up companies’ costs.

“The region has hugepotential, but it is still onlythat,” he says.

Retail boomacts as stimulusfor investmentConsumer markets

Companies targetshoppers from newmiddle class, reportsSamantha Pearson

’Social mobility inBrazil is shownthrough thecapacity toconsume’

Few projects betterillustrate the frustrationsof Brazil’s efforts todevelop infrastructure thanthe urban railway underconstruction in thesprawling northeastern cityof Salvador.

Since work began 14years ago, the multibillion-dollar plan has been besetby difficulties. Yet over thepast few months therehave been signs that asaga of incompetence andmismanagement isreaching a conclusion.

It is possible that a 6km

stretch will be open intime for the World Cupmatch between Spain andthe Netherlands on June13. That should pave theway for the completion ofthe 36km metro schemeover the next four years.

Delays to Brazilianinfrastructure projects arecommonplace, but thosethat have doggedSalvador’s metro have beenparticularly mind-bogglingand frustrating, given theabysmal state of publicprovision in one of Brazil’spoorest and most sociallydivided cities.

For the conservativeadministrations thatpresided over the city’srapid expansion in the1970s and 1980s, uglymulti-lane urban highwaysdesigned to meet the needsof middle-class car owners

were a priority. Myriadlocal business interestscontrolled the competingbus companies that tookresidents from the poornorthern suburbs to workin the better-off south ofthe city.

As Rui Costa, chief ofstaff of the leftwing stategovernment of Bahia, putsit: “Public transport hasnever been on the agendabefore.” The metro hasbeen flawed since itsconception. The firstplanned line covers anarrow area towards thecentre of the city, and evenwhen complete would leavemost commuters dependenton overcrowded buses.

Management of theproject was handed over tothe Salvador citygovernment, a body thatcould not hope to assemble

the financial resources fordevelopment.

During the 2000s, workwas interrupted repeatedlyby financial and politicalproblems.

Although the Lapa-Retirostretch was finished in2008 and bright new trainsdelivered in 2010, themunicipality could notafford to meet the runningcosts of the line.

Consequently, railsdeteriorated and rollingstock was mothballed. Astand-off between apopulist mayor and thepro-government stateadministration led tofurther delays. It was onlylast year after a newimage-conscious rightwingcity government came toan agreement with MrCosta’s colleagues in thestate government that

progress has accelerated.In October, CCR, a

Brazilian toll road builderand operator, won a build-and-operate contract tocomplete the work. It haspromised to double thelength of the first line andis pledged to complete asecond line by 2017, whichwill link Salvador’s centrewith its internationalairport 25km away.

It would be easy to becynical, however. Some ofthe progress is certainlydue to the World Cup.After all, Brazil is prettygood at the short-termmobilisation of resourcesfor sports events,international conferencesor carnivals. But longer-term sustainableimprovement has beenmuch more challenging.

During the 1980s and

1990s, it was mainly aquestion of budgetaryconstraints on publicinvestment.

Under the leftwinggovernments of Luiz InácioLula da Silva (2003-10) andDilma Rousseff (2011-present) infrastructure hasbeen a priority, butprogress has been patchy.

Projects become mired inbureaucracy, environmentallicences can be hard toobtain and it can takeconsiderable time to

acquire land. Publicprosecutors and governmentauditors often stop worksapparently on a whim.

Although public-privateco-operation is now theorder of the day, leftistofficials have sometimesresisted change.

For example, Brazil’sinefficient publicly ownedrailway company retains akey role in the project tobuild much needed freightlines that could transportsoya and mineral exportsmore efficiently to port.Almost no progress hasbeen made.

There have been someadvances. however. Severalreasonably efficientprivately owned, publiclylisted infrastructureconcession companies –such as CCR – haveemerged.

Ms Rousseff hasprivatised five of thecountry’s largest airportsover the past two years.After bowing to businesspressure for better terms,the government hasauctioned off contracts tobuild and operate morethan half a dozenhighways over the pastyear.

Dozens of statesand municipalities havebeen making reasonableprogress too, with anumber of metro, monorailand bus rapid transitschemes, in whicharticulated buses circulatealong dedicated trafficlanes, under construction.

The writer is principal ofFT Confidential, anemerging marketsinvestment research service

Public­private partnerships help transport get back on track

Six years ago this month, Bra-zil’s former president LuizInácio Lula da Silva and hislate Venezuelan counterpart,Hugo Chávez, were pictured

shaking hands at the site of Brazilianenergy group Petrobras’ new refineryin Suape, Pernambuco state.

The red dirt of the construction siteof the Abreu e Lima refinery was sup-posed to be ground zero for a closerenergy relationship between the twoneighbours and their populist govern-ments, with Venezuela supplying theoil and Petrobras doing the refining.

However, it was not to be, and latelast year, Petrobras took over fullresponsibility for the project, whichwill cost an estimated $17bn (up froman original $2.7bn).

“The unit’s products will be des-tined predominantly for the northeastmarket,” the company’s website said.“At the moment, the project is gener-ating 40,000 jobs directly and is beingconstructed with 86 per cent localcontent.”

The sheer size of the project, which,once completed, will provide 230,000barrels a day, and the fact that it isBrazil’s first new refinery in years,have increased enthusiasm in thenortheast for the petroleum industry.

The plant is also acting as a stronganchor tenant for the Suape portindustrial complex, with a petrochem-ical unit also planned to come onstream, and shipbuilder EstaleiroAtlântico Sul constructing vessels forPetrobras’ oil exploration and produc-tion arm.

“The northeast is growing from alower starting point but it is the fast-est-growing part of the country andthe main entry point is the port ofSuape,” says Peter Gyde, Brazil man-aging director for Maersk Line, theworld’s largest container carrier.

Half of the refinery’s capacity willbe delivered in November this year,with the other half due to come onstream in May 2015. The refinery will

be Petrobras’ largest producer of die-sel, with 70 per cent of its plannedcapacity able to process the fuel.

Once fully operational, the plantwill represent 11 per cent of Brazil’stotal refining capacity and it is hopedit will help reduce the country’sdependence on refined fuel imports.

As demand in the country hasgrown for petrol, led by the growth inthe number of trucks and cars on theroads, the ability of its refineries tosupply this fuel has lagged behind.

According to the US Energy Infor-mation Administration, total primaryenergy consumption in Brazil hasgrown by more than a third in thepast decade because of sustained eco-nomic growth. At the moment, thecountry has 1.9bn bpd of refiningcapacity spread across 13 facilities, 11of them operated by Petrobras.

“Petrobras plans to increase its Bra-zilian refining capacity to more than3.2m bpd by 2020 to meet burgeoningdomestic demand,” the EIA says,adding that this includes plans forfive new refineries, including Abreu eLima.

The other vital aspect of Petrobras’presence in Pernambuco is EstaleiroAtlântico Sul, which is a big part ofthe government’s programme toincrease the oil producer’s use ofdomestic content in equipment.

This policy was boosted by Petro-bras’ discovery of huge oilfields offthe country’s southeast coast. Theexpected production increase fromthese fields should provide the cash tosubsidise domestic production ofequipment, which is generally muchmore expensive than imports.

President Dilma Rousseff, who in an

earlier role was energy minister underher predecessor President Lula daSilva, visited Suape in December toattend the inauguration of one of theEstaleiro Atlântico Sul’s most prizedproducts to date, the P-62 floating oilplatform. Built by 5,000 workers overthree years at the shipyard andweighing 60,500 tonnes, it cost R$2.6bn($1.1bn) and has a processing capacityof 180,000 bpd of crude oil.

Suape has contributed to rapidgrowth in Pernambuco, ironically forMs Rousseff and her Workers’ Party,boosting the career of the state’s gov-ernor, Eduardo Campos, who willstand against her in presidential elec-tions this year.

But the exorbitant cost of some ofthe government projects, such as theAbreu e Lima refinery, has alsoattracted critics, who believe the gov-ernment is squandering taxpayers’money on bloated public projects.

Responding to such concerns on itsblog, Petrobras said the Abreu e Limarefinery exceeded initial cost esti-mates because these were made when

the project was in the very initialphase of evaluation. It said that as theproject developed, a clearer estimateof costs emerged.

The budget for the project was alsoswollen by “exchange rate adjust-ments and the overheating of theequipment market, among others,that caused the value of the invest-ment to increase during the evolutionof the project”, Petrobras said.

“Various factors contributed to thechanges in estimated delivery times,among them the necessity to holdnew tenders because of excessiveprices. Other factors were strikes,environmental conditions and theconstruction of infrastructure toaccess the project,” Petrobras’ blogcontinued.

Politics too played its part, as Vene-zuela – in spite of Mr Chávez and MrLula da Silva’s apparently warm rela-tionship – failed to live up to its prom-ise of investing alongside Petrobras,leaving the already heavily financiallyburdened Brazilian company to takeup the slack.

Suape refinerywins politicalsupport despiteescalating costEnergy Petrobras project cost soars sixfold butplant creates 40,000 jobs and attracts otherindustry to port complex, reports Joe Leahy

Liftingexpectations:Petrobras now hasfull control of theSuape project

Getty Images

It is hoped the plant willreduce Brazil’s dependenceon refined fuel imports

Doing Business in Brazil’s Northeast

ColumnRICHARD LAPPER

Public prosecutorsand governmentauditors often stopworks apparentlyon a whim

Brazil. The region’s middleclass grew from 22 per centof the population to 42 percent, compared with growthin the national averagefrom 30 to 52 per cent dur-ing the period, according togovernment data. This wasthanks partly to a steadyincrease in householdincome per head of 3.9 percent a year in the two dec-ades to 2012, according togovernment research insti-tute Ipea.

Even as Brazil’s economyhas slowed down, parts ofthe northeast have contin-ued to outperform. Pernam-buco, for example, grew2.3 per cent in 2012 – morethan twice the national rateof 0.9 per cent.

But the region still suf-fers from the country’sworst illiteracy rates, atmore than 15 per cent of

Continued from Page 1 those aged 15 and over –although this is improving– and has most of thenation’s extremely poorpeople (classified as thoseliving on up to R$70 ($30) amonth). As of 2010, 9.6m ofa total of 16.3m extremelypoor Brazilians lived in thenortheast.

“In general, we see thatthe northeast is [still]poorer. Its [social] indica-tors are worse, but theyhave improved muchmore,” said Marcelo Neri,minister and head of Ipea –and known as Brazil’s fore-most specialist on the mid-dle class – during a presstrip to the region last year.

The northeast’s threeengines of growth are Bahiastate and its capital Salva-dor, Pernambuco and itscapital Recife, and Cearáand its biggest cityFortaleza. Part of theirsuccess has been based onthe Chinese-style model

of setting up industrialzones to attract clusters ofcompanies.

In Suape, for instance,Petrobras, Brazil’s state-controlled oil company, isinvesting about $17bn in its230,000 barrel per dayAbreu e Lima refinery.There will also be a petro-chemical complex to pro-duce petroleum derivatives.

Nearby is the EstaleiroAtlântico Sul, a shipbuildercontrolled by Brazilian con-struction groups CamargoCorrêa and Queiroz Galvão,that is producing a fleet ofvessels for Petrobras. Thecomplex is also home tonumerous other companiesspecialising in logistics andports.

Other so-called pólos orclusters include steel andpharma-chemical industrialzones in Pernambuco, andanother petrochemical clus-ter in Bahia. The region hasalso succeeded in diversify-

ing from old heavy industryinto new technology sectors.Recife has the Porto Digital,a district of high-technologycompanies located in thecity’s old port area, whilethe region’s high winds andintense sunshine are stimu-lating growth in renewableenergy businesses.

Some of Brazil’s mostprominent companies have

their roots in northeasternbusiness families, includingOdebrecht and QueirozGalvão, the constructioncompanies. But new onesare emerging too, includingCoca-Cola’s bottlers in theregion, Guararapes, Norsaand Renosa, which follow-ing a merger will becomethe second-largest producer

for the beverage maker inBrazil, with a reportedR$6bn in revenues.

Stacked against theseopportunities is what thefuture will hold for thenortheast once the con-struction boom associatedwith its megaprojects ends.The region lacks semi-skilled, skilled and highlyqualified labour, eventhough it is attracting tech-nology-intensive industriesthat traditionally were theprovince of the richersouth, such as automotivesand chemicals.

“One of the key chal-lenges . . . is what is goingto happen after those con-struction jobs are gone,”says Mr Gomez Ang of theIFC. “What are people goingto be doing and where isthe job generation going tocome from?”

The lack of large privatesector lenders to help spurgrowth provides another

challenge, he adds. Thebusiness culture can bequite insular for a regionthat needs to attract outsidecapital to grow, althoughthat is changing as a newgeneration of business lead-ers emerges.

Against its drawbacks,new infrastructure, such asplanned railway links withthe interior of Brazil thatwill provide an alternativeto southern ports for soyfarmers looking to exporttheir produce, will helpprompt growth.

The IFC has alreadyinvested about $1bn in 10projects, including helpingto advise alongside the Bra-zilian Development Bank(BNDES) and the Inter-American DevelopmentBank on Hospital do Subúr-bio, a medical facility in anunderserved part of Salva-dor that was Brazil’s firstpublic-private partnershipin health.

Big projects fuel region’s push to keep momentum

42%Middle class as a proportionof the northeast’s population