Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (43 page)

Heretofore, the absence of terrorism in Brazil has made it very attractive to me. I have always found it a good thing that one can generally travel within Brazil without having to deal with heavy-handed security at airports or to worry about a terrorist attack. Unless you're flying to the United States, airport security is low-key in Brazil. The way I like it. You do not have to take off your belt or your shoes or remove every scrap of lint in your pockets to board a plane. You don't even have to take your computer from your briefcase to clear security. That part of travel in Brazil can be a delight.

Less delightful is the fact that Brazil needs to invest hundreds of billions in upgrading its infrastructure beginning with airports. Economists suggest that infrastructure bottlenecks cost Brazil more than 1 percent of GDP annually. I would guess that this is an underestimation.

For example, much of Brazil is comprised of unexploited iron deposits. But transportation bottlenecks prevent production of many potentially world-class deposits. Many of the transportation and port assets that are required to access the huge iron deposits are controlled by Vale, the world's largest iron exporter, and Anglo Ferrous, a wholly owned subsidiary of AngloAmerican, PLC. The Brazilian government requires Vale to share a small portion of the haulage capacity on its private railroad with other iron producers. But the demand far exceeds the capacity.

There are plans or hopes of spending vast sums to expand railroads in Brazil. Included are plans to build high-speed bullet rail links between Rio de Janeiro and São Paulo. And many more billions will have to be spent upgrading airports, freight rail links, and highways. Part of the difficulty that explains the slow development of infrastructure in Brazil is based in the country's geography. While Brazil is the world's most well-watered country (in the sense that it has more fresh water than any other country), as discussed previously, the waterways are not conveniently situated to facilitate transport. Among Brazil's major navigable rivers, only the Amazon flows to the sea. But the area it drains is mostly tropical jungle—a region of low productivity. Brazil's most productive regions, in the southeast of the country, do not have easy access to the sea through waterways. Unlike coastal regions of the United States, most of Brazil's Atlantic Coast is defined by a high wall known as the Grand Escarpment. This is the exposed face of another difficult geological/topological feature, the so-called Brazilian or Amazonian Shield; an area where most of the rivers flow away from the sea, either north, as tributaries of the Amazon, or to the west where they eventually feed into the Paraná River system, and thus into the Rio de la Plata, past Buenos Aires and Montevideo into the Atlantic Ocean.

As discussed, the engineering required to provide infrastructure for transport of Brazilian products is much more complicated and costly than the equivalent infrastructure in the United States. Fundamental logistics obstacles help explain the slow development of Brazilian infrastructure. Another hampering factor blocking improved infrastructure in Brazil has been a tradition of astonishing, Italian-style corruption in the public sector. As in Italy, the bureaucracy in Brazil is bloated and ponderous. (Not that it is always much better in the United States.) What Brazilians get in return, like the Italians, “is mediocre secondary schooling, a lottery in healthcare, and a permit-mad bureaucracy apparently designed to impede what it cannot entirely prevent.”
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The heavy-handed bureaucracy is the handmaiden of corruption. Among the most corrupt agencies of Brazilian government is the Ministry of Transportation. As the BBC reported on July 7, 2011,

Alfredo Nascimento stepped down after a magazine alleged staff at his ministry were skimming off money from federal infrastructure contracts.

Mr. Nascimento denies any wrongdoing, and says he will co-operate with any investigation.

He is the second member of President Dilma Rousseff's cabinet to resign over corruption claims in the past month.

Her chief of staff, Antonio Palocci, resigned after press reports questioned his rapid accumulation of wealth. He's also denied wrongdoing.
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Setting aside the question of whether Minister Nascimento is personally part of the ring of corruption in his agency, it is easy for anyone who drives on Brazilian public highways to credit the notion that large sums are being skimmed from infrastructure projects. The public highways are always in disrepair. The pavement is wavy, curdled, and punctuated with potholes.

The bright spot for drivers in Brazil is the fact that many thoroughfares have been converted to private concessions. In general the upkeep on private toll roads is vastly better than on public highways. The private toll roads in Brazil can be very lucrative. More than 1.2 billion people travel the highways in Brazil each year. And auto sales have surged, leading Brazil to surpass Germany as the world's number four car market. Note that we have made handsome profits in
Strategic Investment
from our holdings of the public Brazilian tollroad company, CCR Rodovias. As of July 2011, we had posted an unrealized gain of 173.69 percent, equivalent to more than 1,000 years of income from constant maturity U.S. Treasury bills. As I write,
Bankrate.com
reports the constant maturity yield for one-year Treasury notes at 0.16 percent.
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In a mere millennium, plus another lifetime (1,085 years), you could gain 173.69 percent in U.S. Treasury yield. Brazil has troubles. But among them is not the trouble of living with an insolvent government. Brazilians with money to invest do not face financial repression as those of us in the United States do.

But even though there appears to be a broad political consensus in favor of privatized highways, (even the left-oriented Workers Party government has pushed privatization), many members of the public resent paying the higher tolls generally charged on privately maintained roads. There is a feeling that the public gets very little return on the high taxes it pays. So you may have to keep an eye out for the danger of a backlash against private toll roads, which could eat into the high profits of CCR Rodovias. But so far, so good.

The Brazilian news magazine
Epoca
published a cover story in its July 25 2011 issue “Agencia da Nacional da Propina” (National Bureau of Tips) documenting corruption in the Agencia Nacional do Petroleo (ANP). This story details the procedures employed by high officials of the ANP to transform theirs into an agency for payoffs and extortion. Transcripts of conversations, including photographs, document the bold demand for R45,000 of
propinas
to secure a meeting for clarification of the process to be followed by an oil company to register its interest in obtaining an oil concession. The story goes on to list nine other agencies that appear to be tainted by similar corruption.
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The
Epoca
exposé underscores the pernicious logic, familiar to everyone who does business in Brazil, that links ponderous bureaucracy to payoffs and extortion. (Think of doing business in Broward County, Florida.) It is commonplace for mayors and other officials of municipalities, much less national politicians and administrators of ministries, to grow quite rich in the course of a few years in office. Their support is so often required to expedite the approval process for licenses and permits to do anything associated with building that major contractors shower them with
propinas
(tips) as a cost of doing business. The bureaucrats may not contribute much to the productive process, but their support is essential.

I recently heard an example that starkly illustrates the fact that regulators and administrators of bureaucracies in Brazil tend to pursue their own interests rather than their ostensible purpose in promoting the welfare of the public. A tycoon in the major industrial city of Belo Horizonte proposed to build and contribute a civic center to the city at his own expense. He proposed to provide the land upon which the structure would be built, commission a first-caliber design, and pay the full construction costs. All told, he offered the city a gift worth more than R10 million. What he was not prepared to do was pay off officials in the permitting departments to accept the gift. In the end, that proved to be a fatal deficiency, as the bureaucracy rejected the proposed civic center.

The apparently cavalier rejection of this large donation to the city made good economic sense from the point of view of bureaucrats looking to optimize the value they receive in
propinas
. Obviously, they could not expect to extort large sums from a civic benefactor simply for the privilege of permitting him to proceed with his contribution.

They would much prefer to deal with the landowner trying to advance a for-profit project. By rejecting the civic center this is what they got. The tycoon still owns the land. Since he was frustrated in his endeavor to make a civic contribution, he has decided instead to try to build a for-profit concert center. Time will tell whether he will be more prepared to “tip” the bureaucracy to gain their approval of his for-profit endeavor. But as he grew quite rich doing business in Brazil it is reasonable to assume that he is comfortable doing business in the Brazilian way. This must be what the bureaucrats assumed and helps explain why functionaries allegedly working in the public interest would be only too glad to block a major civic contribution.

The bureaucracy has nothing to gain from civic benefaction. But for-profit projects, office blocks, apartment buildings, retail space, and, yes, concert venues, entail situations where time is money and well-placed functionaries can find themselves in a position to profit handsomely by helping landowners, developers, and contractors to create a more favorable equation between time and money by parting with some of the latter in the interests of saving a lot of the former.

As this suggests, one of the troubles with Brazil is that it is not an easy place to do business. A big part of the problem is that almost every step in launching a company is ponderous and heavily regulated. I have had a hand in launching companies in many countries over the past 40 years. Unlike the process in the United States, Canada, New Zealand, Australia, or in most European countries, where opening a company is quick, usually requiring no more than filling out a form or two, launching a company in Brazil is a much more drawn-out, complicated process. It takes an average of 120 days to open a new business in Brazil, compared with just under two weeks in the average OECD country. I recently slogged through a process of almost a year to launch a new company in Brazil. It entailed hours wasted at the notary and standing in successive lines in various bureaucracies. In the process, I had to apply for a Brazilian social security number or CPF. It gave me an appreciation of what Antonio Carlos Jobim may have had in mind when he warned that, “Brazil is no country for beginners.”

Consider it a form of protectionism (for those already in business, the competition is lessened when would-be competitors are sidelined by red tape), or merely an expression of a peculiarly Brazilian approach to business, but unlike in most other countries, official applications in Brazil require that your name must be executed with your first name first followed by the middle names and your last name. In the United States, the United Kingdom, or Canada, any legal document that asks for your name would be answered with your last name first, followed by your first name, and then your middle names. When I filled out my application for my CPF, as an analog reaction, I automatically began with my last name as I have become accustomed to doing. In due course (a matter of more than a month), my CPF was issued. I was dismayed to discover, however, that due to my unfamiliarity with the Brazilian way to fill out applications my CPF was useless in completing the formalities for launching the company. It was issued to a man with the first name of Davidson. To remedy this, effectively required me to “change my name,” a process that entails a whirlwind of visits to the notary and one bureaucracy after another.

One thing that process taught me was that it is not always preferable to handle documentation and paperwork for Brazil in Brazil. Most official documents, including the CPF, can be obtained from Brazilian consulates overseas. Dealing with them has the advantage that they are usually consolidated in one place, so you don't have to wander all over large cities visiting many different official offices as a supplicant. Also your chance of getting help in a language other than Portuguese is much higher in a consulate office than it would be in Brazil itself.

While there are certainly informing differences, if anything Brazil has a tendency to be too much like the United States. I have never been a fan of the surfeit of lawyers in the United States; there is one for every 265 Americans. Equally, it strikes me as a bad sign that Brazil follows the United States closely with one lawyer for each 306 persons.
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Of course, Brazil's legal tradition, unlike that of the United States, is not rooted in English common law. The common feature that Brazil shares with the United States is a tradition of high returns to pettifogging. People in both countries go into the practice of law because it pays. Unhappily, a slowdown in business development is a likely consequence of prosperity for lawyers.

Contemporary Brazil certainly provides ample evidence of stultifying bureaucracy inhibiting progress. One of the more striking examples involves evidence that foreign partners have been required to market innovations in dental practices created by Brazilians. Many residents of advanced countries would be surprised to learn that in keeping with brushing their teeth more than any other people, the Brazilian standard of dentistry is among the highest in the world. Recently the American dental supply company Ultradent, along with its German competitor KaVo, expanded their product research into Brazil: