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SA studies Brazil’s model for leveraging industry through procurement

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SA studies Brazil’s model for leveraging industry through procurement

7th May 2010

By: Terence Creamer
Creamer Media Editor

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The decision by the Brazilian government to set a 65% to 75% local-content condition on companies seeking to secure concessional funding from the country’s influential development bank, BNDES, has been key to boosting manufacturing investment and industrial production in the South American country over the past decade.

But BNDES director of research, corporate planning and risk management Dr Joao Carlos Ferraz told a South African audience recently that it took time to extract the benefits, and that, in the initial phases, such localisation policies could introduce costs and inefficiencies.

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At times, the high local content threshold set for equipment such as floating storage, production and offloading terminals has even affected the timing of some of the contracts let by Brazil’s oil giant, Petrobras, where President Luiz Inácio Lula da Silva’s government has insisted on 75% local content.

Nevertheless, the experience from oil and gas giant Petrobras, which procures goods and services worth $35-billion yearly, is being studied closely by the South African authorities, which would like to see a similar crowding in of local industry around the large energy and transport projects being undertaken by Eskom and Transnet respectively.

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Speaking at a seminar hosted jointly by the Human Sciences Research Council and New Agenda, Ferraz reported that Petrobras alone now accounted for some 26% of the direct and indirect formal jobs in Brazil, owing partly to the industrialisation efforts surrounding the company.

Further, the Brazilian economy has added more than ten-million formal-sector jobs over the past decade and expects to add an additional one-million jobs in 2010. The economy even added to the ranks of the formally employed during the 2009 crisis, while inequality has reduced, with the Gini index (the key measure of income inequality) improving from 0,59 in 2002 to 0,55 by 2008 – a remarkable achievement for a country once labelled the most unequal in the world.

BNDES, which is a key financer of industry and infrastructure, disbursed a record $68,8-billion in 2009 as part of the Brazilian government’s stimulus response to the financial crisis. This unprecedented level of disbursements dwarfed even the World Bank, which released $18,6-billion last year.

But the development finance institution (DFI) only released funds on favourable terms (5% interest rate) to those companies that met localisation criteria, with the balance receiving loans at market rates (8,75%).

BNDES is able to extend favourable lending terms, owing to the fact that it has the Constitutional right to receive 40% of the proceeds from a Workers Assistance Fund levy, which is raised on the back of the wage bill. The DFI repays the fund at the long-term rate, which it then passes on to its clients.

However, during the recent financial crisis, BNDES also received an additional injection of $100-billion, in two tranches, directly from the National Treasury, in a bid to stimulate the economy through the downturn.

The policy action appears to have paid off, with Brazil having more or less trod water in 2009, and with expectations of a return to 5%-plus growth rates from 2010 onwards.

The leveraging of public and large enterprise procurement policy has been central to the country’s so-called ‘productive development’ policy, which seeks to stimulate investment into industrial production and exports, as well as growth-stimulating infrastructure.

“We do not finance, as BNDES, anything that does not have a local content of above 65%,” Ferraz explains, adding that, if the imported component is greater than 35%, only market rates could be extended.

“But for some corporations, such as Petrobras, a political decision was made by President Lula to raise that threshold to the 75% minimum,” he explained. The rationale was to capture, domestically, as much of the $35-billion spent yearly by Petrobras as possible.

“But it has been a struggle to build up a local oil-platform industry with the same efficiencies of an economy such as Korea. It has been a long process,” Ferraz explained, adding that the build-up to 75% has also had to be staged over a period.

“A similar approach was taken with GE and the production of locomotives. Initially, the local content was set at below 65%, with a plan to progressively reach that level over a period of three years.”

He said that it was looking to transfer the procurement experiences to other sectors, such as health, information tech- nology and defence.

In South Africa, meanwhile, the two key localisation programmes – the generalised National Industrial Participation Policy and the Competitive Supplier Development Programme, which is used specifically by Eskom and Transnet – are currently being reviewed by the Departments of Trade and Industry, Economic Development and Public Enterprises.

The Brazilian model is reportedly being interrogated, with plans being discussed for stricter targets, the enlargement of fleet procurement models and for greater coordination between government and its State-owned enterprises.

Further, an Office on Local Procurement is envisaged to ensure that local government is also incorporated into government’s plans for using procurement as a lever for industrial- isation and economic development.

 

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