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Brazil & Construction Business
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Brazil & Construction Business

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  • 1. An illustrative example of a study prepared for foreign companies and investorswho need an overview of business conditions and opportunities in Brazil Country Analysis BRAZIL Business and Investment Attractiveness CONSTRUCTION BUSINESS São Paulo, July, 2003 prepared by : Vagner Castro - Planimark
  • 2. CONTENTSI. GENERAL OVERVIEWII. SOCIAL / ECONOMIC ISSUESIII. BUSINESS ENVIRONMENTIV. CONSTRUCTION BUSINESSV. APPARENT ATTRACTIVINESS APPENDIX : - list of banks
  • 3. I. GENERAL OVERVIEW
  • 4. I. General Overview – country size / geographics BRAZILBRAZIL HAS A TERRITORIAL AREA OF ABOUT 8.5 MILLION KM² AND CURRENTPOPULATION AROUND 175 MILLION INHABITANTS The country is divided into 5 geopolitical areas with 26 states and the Federal District (Brasilia) GEOGRAPHIC REGIONS  5th largest country in area, after Russia, Canada, China and United States  6th largest country in population, after China, India, USA, Indonesia and Russia Federation  Largest country in Latin America, accounting for about 47% of South America territorial area  Only country of Portuguese language in the American continent  World leader as producer and exporter of sugar-cane, coffee, orange juice, iron ore, among other products  Federative Republic with multi-party political system -- democratic elections for federal, state and municipal governments and representatives Brasilia  World leader in electronic online voting (100 million voters)  58% of area covered with forests -- largest rainforest in the world, located in the Amazon River basin (North region)  7,400 kilometers of Atlantic Sea coastline (at east side) Source : Planimark based on published data  Climate predominantly tropical -- average temperatures exceeding 20° C I-1 PLANIMARK – Vagner Castro
  • 5. I. General Overview – population growth / trends BRAZILPOPULATION GROWTH RATES HAVE DECLINED OVER THE LAST DECADES  Country is expected to stabilize around 200 million inhabitants by year 2020  Over 81% of current population lives in urban areas POPULATION GROWTH – compared to 45% in 1960  About 76% lives in owned homes -- 24% in rented 190 177 and other home conditions 170 175 170 159  Southeast and Northeast are the most populated 148 regions -- about 70% of total inhabitants million inhab. 150 130 119 110 Brazilian Population by Regions year 2000 90 Southeast Northeast 70 42% 28% 50 1980 1990 1995 2000 2002 2003e South Mid-West 15% 7% North 8% Average 1971-80 2,44 Annual Rates (%) 1981-90 2,21  Over 53% of population is under 30 years old – 1991-00 1,43 about 40% between 30-64 years old Source: IBGE/FGV  Women account for about 51% of total population I-2 PLANIMARK – Vagner Castro
  • 6. I. General Overview – regional characteristics BRAZILSOUTHEAST REGION HAS OVER 58% OF GDP WITH ONLY 11% OF TOTAL AREA  São Paulo state alone has historically accounted for over one third of GDP % Total Area by Regions % Total GDP by Regions North 4,5% Southeast South Northeast 11% 7% Mid-West 6,4% Mid-West 18% 19% Northeast 13,1% South 17,8% North Southeast 58,3% 45% 0% 20% 40% 60% Demographic Density – inh/km² % Population and GDP by Major States -2000 States Region % Population % GDP São Paulo (SP) SE 21,8% 35,0% North 3,4 Rio de Janeiro (RJ) SE 8,5% 11,8% Minas Gerais (MG) SE 10,5% 9,6% Mid-West 7,2 Rio Grande do Sul (RS) S 6,0% 7,8% Paraná (PR) S 5,6% 6,3% Northeast 30,7 Bahia (BA) NE 7,7% 4,3% Santa Catarina (SC) S 3,2% 3,7% South 43,5 Pernambuco (PE) NE 4,7% 2,7% Federal District MW 1,2% 2,3% Southeast 78,2 Ceará (CE) NE 4,4% 2,0% Brazil 19,9 Top 10 by GDP 73,6% 85,4% Other 17 states 26,4% 14,6% Source: IBGE I-3 PLANIMARK – Vagner Castro
  • 7. II. SOCIAL / ECONOMIC ISSUES
  • 8. II. Social / Economic Issues– economy growth / trends BRAZILBRAZIL’s GDP IN US DOLLARS WAS SUBSTANTIALLY REDUCED AFTER 1999, AS ARESULT OF CURRENCY (R$) DEVALUATION FORCED BY INTERNATIONAL CRISIS  Per capita income has been additionally affected by declining employment basis GDP GROWTH GDP per capita $6.000 $4.809 $5.000 $4.436 $4.942 $4.755 $3.539 $4.000 $3.195 $2.961 $2.590 US$ $3.000 $2.583 $2.000 $1.000 $- 95 96 97 98 99 00 01 02 e 03 19 19 19 19 19 20 20 20 20 Actual¹ GDP Growth Rates Actual¹ GDP Per Capita Growth (% over previous year) (% over previous year) 95 96 97 98 99 00 01 02 03 95 96 97 98 99 00 01 02 03 4,2 2,7 3,3 0,1 0,8 4,4 1,4 1,5 1,6 2,8 1,2 1,9 -1,2 -1,0 3,0 0,1 0,2 0,3 (1) Based on R$ values at 2002 adjusted prices Source: BACEN/IBGE/FGV II-1 PLANIMARK – Vagner Castro
  • 9. II. Social / Economic – literacy / education BRAZILEDUCATION LEVELS HAVE IMPROVED OVER THE LAST DECADE – LITERACY RATEIS CURRENTLY AROUND 83% OF POPULATION AGED 5 YEARS AND OVER  Northeast and North present lower education levels compared to other more developed regions – Southeast with higher proportion of better educated population LITERACY RATES YEARS IN SCHOOL % 5+ aged population 1991 2000 % population 10+ Mid-West 71% 11+ years South Northeast Southeast 78% North Northeast 8-10 87% North Mid-West Brazil 89% Southeast 4-7 90% South 83% <=3 Brazil 0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% 50% 60% Source : IBGE II-2 PLANIMARK – Vagner Castro
  • 10. II. Social / Economic– employment / wage levels BRAZILECONOMICALLY ACTIVE POPULATION (PEA) IS CURRENTLY ESTIMATED TO BEAROUND 84-85 MILLION PEOPLE – ABOUT 90,5% ARE ACTUALLY OCCUPPIED  About two thirds of work force receive up to 5 minimum wages (equivalent to US$ 85 each) Economically Active Population (PEA) % Workers by Salary Bracket 90 > 20 min wages 1,4% 75 10-20 3,3% 60 m ill ion 45 5-10 18,6% 30 2-5 39,0% 15 0-1 24,6% 0 1997 1998 1999 2001 2002 not info / none 13,1% PEA Men Women 0% 10% 20% 30% 40% 50% Source : IBGE/IPEA/BC II-3 PLANIMARK – Vagner Castro
  • 11. II. Social / Economic – unemployment rates BRAZILUNEMPLOYMENT RATE IN MAJOR METROPOLITAN REGIONS HAS EVOLVEDBETWEEN 11-13% OF PEA IN THESE REGIONS OVER THE LAST 15 MONTHS  Estimates for the country over the same period range between 8-10% of PEA – large metropolitan areas have been more affected by economic and social problems Evolution of Unemployment Rates in Major Metropolitan Areas¹ 15 13 11 9 7 5 ar ar ay 02 03 l ov g r r n b b p ct ec Ju Ap Ap Au Fe Fe Se Ju M M O M N n/ n/ D Ja Ja (1) São Paulo /SP, Rio de Janeiro/RJ, Belo Horizonte/MG, Salvador/BA, Porto Alegre/RS Source: IBGE / Central Bank II-4 PLANIMARK – Vagner Castro
  • 12. II. Social / Economic – inflation rates BRAZILINFLATION RATES HAVE CONSISTENTELY SHOWN DECLINING TRENDS IN RECENTMONTHS, AFTER A SHARP INCREASE AT END OF 2002 AND BEGINNING 0F 2003  Associated to market expectations on the presidential elections (Oct/02) followed by restrict economic policies adopted by the new (2003-06) government of Luiz Ignacio “Lula” da Silva  Risk perception of likely discontinuity of Evolution of Inflation Rates in Brazil economic policies vs. former government (FHC-1995/2002) with the victory of - 12 months % average accumulated price indexes - candidate Lula (left-wing, Labor Party) 24  High public debt (57% of GDP in Dec/2002) 22 – 85% indexed to the exchange or overnight 20 interest rates 18 IGP-DI  Confidence crisis with reduction of 16 international trade and interbank credit IGP-M 14 lines to Brazil INPC 12 10 IPA-DI  Repatriation of portfolio investments by IPA-M non-residents and difficulties to roll over 8 IPC-FIPE mid-long term external debt 6 4  Scarcity of foreign exchange forcing 2 depreciation of the Real – from R$ 2.30 in May to 3.50 against the US dollar in Dec/02 01 01 03 02 05 02 07 02 09 /02 11 02 01 02 03 03 05 03 03 0/ 1/ 8/ 1/ 0/ 9/ 1/ 1/ 0/ 1 /3 /3 /2 /3 /3 /3 /2 /3 /3 /3  All impacting economic stability and 11 inflation, forcing the new government to impose restrict policies focused on high interest rates and credit restrictions Source: FGV / IBGE / CENTRAL BANK II-5 PLANIMARK – Vagner Castro
  • 13. II. Social / Economic – interest rates / availability of credit BRAZILREAL INTEREST RATES IN BRAZIL ARE AMONG THE HIGHEST IN THE WORLD, AS ARESULT OF GOVERNMENT RESTRICT POLICIES TO CONTROL INFLATION  Inflation declining trends and pressures for relaxation on credit restrictions will likely force a decline on the interests as a way to improve economic conditions in the short-term Evolution of Interest Rates in Brazil - in R$ (% year)  Central Bank basic rate for funds in local currency (settled according to 180 inflation targets) was reduced from 165 26.5 to 26% % in June/20 150 Individual - overdraft checks  Intense debates and divergences 135 Individual - bank credit suggesting relaxation on the inflation targets – cost as opposed to demand 120 Individual -acquisition of goods inflation, pushed by R$ depreciation 105 Discount trade bills against the US dollar in 2002 90 Discount promissory notes  Pressures for reduction of bank 75 Working capital spreads, which asphyxiate producers and consumers, with negative impact 60 Vendor on economic activity 45 Basic (Selic¹)  Need to recover and increase credit 30 availability, currently accounting for 15 only 23% of GDP -- compared to 36% in 1995 Jan/02 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan/03 Feb Mar Apr (1) Selic (overnight federal funds) Source: Central Bank II-6 PLANIMARK – Vagner Castro
  • 14. II. Social / Economic – exchange rates / currency stability BRAZILEXCHANGE RATE (R$/US$) HAD STRONG DEPRECIATION FROM JUNE/02 TOMARCH/03, DECLINING TO AROUND R$ 2.90/DOLLAR IN RECENT MONTHS  Stability in long term will depend on the country’s sustained economic growth with reduction of external vulnerability – surplus in trade balance, increases in foreign investments  Commercial dollar exchange index has been above the actual (deflationed) parity after Jan/99 Average Exchange Selling Rate – R$/US$ R exchange rate index eal $4,00 June 1994 = 100 IPC A $3,50 210 195 $3,00 180 Note: impact of Real Plan up to change to floating system in Jan/99 165 $2,50 150 144,7 135 $2,00 120 124,4 105 $1,50 90 75 $1,00 60 2000 2001 2002 Jun/02 Jul Aug Sep Oct Nov Dec Jan/03 Feb M ar Apr M ay Jun Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Effective Dollar Source: Central Bank II-7 PLANIMARK – Vagner Castro
  • 15. II. Social / Economic – constitutional reforms / economy stabilization BRAZILECONOMY IS EXPECTED TO IMPROVE WITH THE CONTINUATION OF RATIONALECONOMIC POLICIES AND IMPLEMENTATION OF NECESSARY REFORMS  Successful economic stabilization program started in July/94 (Plano Real, named for the new currency) – reduction of inflation from about 5,000% per year in 1993 to a low of 2.5% in 1998  Shift from an almost fixed exchange rate regime, utilized as an anchor to cut and control inflation, to a floating system in Jan/99 – needed to face with balance of payment problems (external crisis)  Introduction by FHC administration (1995/02) of constitutional reform proposals to replace a state- dominated economy and to restructure all levels of government on a sound fiscal basis  Congress has approved several amendments to open the economy and to enlarge private sector participation, including foreign investors -- Brazils privatization program generated over $90 billion up to the end of 1999, including the sale of steel and telecommunications state companies  Passage of the Fiscal Responsibility Law in 2000 has improved fiscal discipline at all three levels (federal, state, municipal) and branches of government activities  New Lula government (2003/06) viewed with large political support to approve and implement the most controversial constitutional reforms, including the tax and social security systems  social security with large deficits (principally pensions to public sector retirees) -- reform considered vital to avoid the system collapse and to alleviate public spending in the near future  feasible tax reform focusing substitution of “cascading” taxes on production, sales and financial transactions, by a federal value-added more simplified tax system  New administration has in fact adopted tight monetary policies, with negative effect on production and employment, but already reverting the inflationary surge and improving confidence levels (country risk perception substantially reduced in June) -- creating better conditions for the second semester of 2003 II-8 PLANIMARK – Vagner Castro
  • 16. II. Social / Economic – economic forecasts BRAZILEXPECTATIONS OF ECONOMIC ANALYSTS SHOW IMPROVEMENTS UP TO END OF2003 AND BETTER PROSPECTS FOR 2004  Central Bank inflation target for 2004 was adjusted to 5,5%, down from 8,5% in 2003 – allowing for a more relaxed monetary policy, which stimulates GDP growth Expectations on the Brazilian Economy Indicators (end of year) 2002¹ 2003 2004 GDP growth - % 1,5% 1,8% 3,0% Inflation (IPCA) - % 12,5% 11,4% 7,0% Interest rate (Selic) - % year 19,2% 21,0% 16,0% Public net debt-GDP ratio - % 57,4% 55,0% 53,4% Unemployment rate - % 7,5% 7,9% 7,6% Trade Balance - US$ billion $ 13,1 $ 17,2 $ 17,0 Foreign Direct Investments - US$ billion $ 16,6 $ 11,9 $ 15,5 Exchange rate - R$/US$ $ 3,53 $ 3,25 $ 3,50 (1) 2002 = actual figures Sources: Central Bank (Focus Report June/27), IPEA, Global Invest II-9 PLANIMARK – Vagner Castro
  • 17. II. Social / Economic – social inequalities / other major issues BRAZILSEVERAL OTHER IMPORTANT ISSUES SHALL ALSO BE ADRESSED BY THE NEWGOVERNMENT TO IMPROVE COUNTRY’S SOCIAL AND ECONOMIC CONDITIONS  Social pressures and demands to reduce regional inequalities (Northeast, North) and poverty levels -- Brazil has one of the worst (Gini < 0,60) levels of income distribution in the world -- Over one third of population living bellow minimum standards for adequate survival  Need to increase efficiency of government social programs, while resisting pressures to increase public spending and promoting better distribution of available resources -- limited possibility for increases in taxes revenues, which already represent over 40% of GDP -- no room for additional public debt, tied to requirements to stabilize the public debt-GDP ratio  Implementation of a more active industrial policy, aimed at stimulating substitution of imported goods and, consequently, to reduce the impact of exchange devaluation on inflation rates  Need to increase the competitiveness of Brazilian products in the international markets, tied with more aggressive trade policies, as a way to foster economic growth and reduce external vulnerability  Requirements to consolidate the Mercosul trade area and to to make it feasible for an adequate and favorable integration within the FTAA trade zone in the mid-long (2005 on)  Need to review and implement reforms on labor relations and regulations, making it more flexible as a necessary step to stimulate growth of formal employment in the country – favoring social security system and programs, as well reducing unemployment II-10 PLANIMARK – Vagner Castro
  • 18. III. BUSINESS ENVIRONMENT / REGULATIONS
  • 19. III. Business Environment – inflows of foreign investments BRAZILBRAZIL HAS BEEN ONE OF THE MOST ATRACTIVE COUNTRIES FOR FOREIGNDIRECT INVESTMENTS (FDI) IN THE WORLD OVER THE LAST YEARS  As a result of economy stabilization and privatization programs after 1995, the country has accumulated FDI inflows above US$ 150 billion in the last 7 years  Despite the FDI decline in recent years, associated to international crisis and wars in the middle-east, the country is expected to continue attracting large amounts of inflows World Foreign Direct Investments - FDI Inflows - US$ billion FDI Inflows - Brazil - US$ billion Regions / Countries 1995 1998 1999 2000 2001 $35 $32,8 $31,0 Total World 331 693 1075 1492 735 $29,0 $30 Developed countries 203 483 830 1227 503 $22,5 $25 Developing Countries 112 188 222 238 205 $20 $16,6 Latin America 31 83 110 95 85 $16,0 Brazil 4 29 31 33 22 $15 $12,0 Argentina 6 7 24 11 3 $10 Mexico 10 12 12 15 25 $5 Asia & Pacific 76 86 96 134 102 $- China (continental) 36 44 40 41 47 1998 1999 2000 2001 2002 2003e 2004e Hong Kong (China) 6 na na 62 23 Source: UNCTAD (World Investment Report) / BNDES / IPEA III-1 PLANIMARK – Vagner Castro
  • 20. III. Business Environment – foreign investments by country of origin / sectors BRAZILMOST PART OF FDI INFLOWS TO BRAZIL IN RECENT YEARS HAVE BEEN DESTINEDTO THE SERVICES SECTOR – PRINCIPALLY TO TELECOM AND PUBLIC UTILITIES  Investments from USA have historically been predominant, accounting for about 30% of total accumulated FDI inflows  Investments from Spain were more aggressive from 1998 to 2000, principally destined to the telecom sector FDI in Brazil by Country of Origin - % total inflows FDI in Brazil by Sector - % total inflows Countries 1997 1998 1999 2000 2001 2002 Sectors 1999 2000 2001 2002 Services 73% 80% 60% 58% USA 29% 20% 29% 18% 21% 12% Telecom 28% 36% 20% 23% Germany 1% 2% 2% 1% 5% 3% Financial/banks 6% 21% 10% 6% Japan 2% 1% 1% 1% 4% 2% Public utilities¹ 11% 10% 7% 9% France 8% 8% 7% 6% 9% 10% Trade/commerce 10% 5% 8% 8% UK 1% 1% 5% 1% 2% 3% Others 18% 8% 15% 12% Netherlands 10% 14% 7% 7% 9% 19% Industry 25% 17% 33% 39% Food and Beverage 4% 3% 3% 11% Cayman Islands 22% 8% 8% 7% 8% 9% Chemistry 5% 4% 7% 9% Spain 4% 22% 21% 32% 13% 3% Others 16% 10% 23% 19% Portugal 4% 8% 9% 8% 8% 5% Miscellaneous² 2% 3% 7% 3% Others 19% 16% 11% 19% 21% 34% (1) power, gas, water (2) agribusiness, mining, etc Source: BNDES / Central Bank III-2 PLANIMARK – Vagner Castro
  • 21. III. Business Environment – regulations on foreign investments BRAZILFOREIGN DIRECT INVESTMENTS ARE VIEWED AS AN ESSENTIAL SOURCE OFFINANCING FOR BRAZILIAN ECONOMIC GROWTH AND DEVELOPMENT  In addition to economy stabilization and country’s potential, regulations and rules related to foreign capitals were changed and simplified to attract and encourage FDI inflows  Foreign capital is regulated by Law no. 4.131/62, as amended by Law 4.390/64 -- the amended Law assured no limit on capital repatriation and remittance of profits  Central Bank (FIRCE Division) is responsible for registering foreign capitals -- although not mandatory, this registration is necessary for repatriation and transfer of capital and earnings  No preliminary official authorization is required for the remittance of funds relative to foreign investments, which shall be done via a bank authorized to deal with foreign exchange in Brazil  Central Bank has simplified the registration process since Aug/00, requiring now the recipient of the foreign investment to obtain a number from the Electronic Declaratory Registry of Direct Foreign Investment (RDE-IED), corresponding to the Investor (foreign investor) and Receiver (Brazilian company) pairing, through the Information System of the Central Bank (SISBACEN)  The RDE-IED number is indicated in the exchange contract related to the foreign investment, which shall be registered (via SISBACEN) within 30 days after closing the exchange contract  Brazilian Constitution of 1988 has been altered, eliminating many state monopolies and restrictions to the foreign capitals -- foreign capital invested in Brazil is also given identical treatment as domestic capital  Economy opening during the 90’s has improved and facilitated country’s relations with the rest of the world by removing or reducing tariffs and non tariff barriers on international trade; simplifying the bureaucratic rules and procedures and eliminating or reducing taxes on capital income III-3 PLANIMARK – Vagner Castro
  • 22. III. Business Environment – company establishment / forms BRAZILBRAZILIAN COMMERCIAL LAW ALLOWS FOR SEVERAL TYPES OF COMPANIES,ESTABLISHED AS LEGAL ENTITIES SEPARATE OR NOT FROM THEIR PARTICIPANTS  Most common types of established companies are LTDA and SA (Corporation) types, due to the limited liability of participants in both cases  The LTDA (Limited Responsibility by Quotas) is largely preferred due to the following characteristics:  Simplified formation process  Simplified management -- freedom to use the firm’s name or denomination  Quotaholders liability limited to companys total capital  Lower costs compared to an SA (publishing of balance sheets, external audits, etc)  The LTDA is established by contract and has only a single class of partners -- the limited liability quotaholders  The SA is essentially a commercial legal entity with its capital stock represented by shares -- liability of shareholders is limited to the amount of the issued share capital subscribed to or acquired by them  There are two types of allowed SA -- the open capital SA, which is capitalized by the public offer and subscription, and the closed capital SA, which obtains its resources privately  There are 4 requirements to establish an SA :  Subscription by at least 2 persons of the entire allotted share capital  Payment in cash of at least 10% of the subscribed capital value  Deposit of part of capital stock received in cash in any bank authorized by CVM (Brazilian SEC)  Registration of Incorporation Articles with the Commercial Register III-4 PLANIMARK – Vagner Castro
  • 23. III. Business Environment – taxation on companies BRAZILGOVERNMENT PROPOSED REFORMS ON TAX SYSTEM IS UNDER DISCUSSION INCONGRESS AND MAY LIKELY BE SIMPLIFIED UP TO END OF 2003  Principal taxes on established legal companies in Brazil are described as follows :  Income Tax (IR) -- companies domiciled in Brazil are liable to corporate income tax on profits arising both in Brazil and abroad – 15% basic rate on corporate profits (including capital gains), as adjusted for tax purposes, with an additional surtax of 10% on taxable profits exceeding R$ 240,000 per annum  Social Contribution on Net Profits (CSLL) -- for companies in general charged at the rate of 9% annual, and to companies opting for taxation on "annual real profit" or "presumed" profit bases is payable monthly or quarterly, calculated by 12% of the turnover plus any capital gains realized in the base period  Social Contribution on Invoicing (COFINS) – instituted in Dec/91 to help finance the Social Security Program, charged monthly at a rate of 3% on the gross receipts from sales of merchandise and the rendering of services  PIS/PASEP -- contributions to the Social Integration Program (PIS), instituted in Sep/70, liable by all private commercial companies and calculated at 0.65% of gross receipts from sales  Tax on Industrial Products (IPI) -- federal tax charged on industrial products at selective rates varying according to the class of products per the classification in the table included in the IPI tax law  Tax on the Circulation of Merchandise and Services (ICMS) -- a state tax charged on all products – for São Paulo state this tax is currently 18% of the value of the merchandise or services. For operations between the South of Brazil and the Southeast, the rate is 12%, and between the Southeast and the Northeast the rate is 7%.  Service Tax (ISS) -- tax on the rendering of services charged by the municipal authorities, who also charge tax on urban property (IPTU). In São Paulo city, the tax charged is 10% on entertainment, 5% on service providers and independent professionals and 2% on hospitable services III-5 PLANIMARK – Vagner Castro
  • 24. III. Business Environment – labor regulations / relations BRAZILLABOR RELATIONS IN BRAZIL ARE UNDER SCRUTINY AND PROPOSED REFORMSSHALL ALSO BE DISCUSSED BY CONGRESS IN THE NEAR FUTURE  Employment relationships are still essentially regulated by Decree-Law 5.452 of May/43 (CLT) – considered excessively normalized and paternalistic, entailing additional costs and inhibiting the growth of formal employment and labor contracts  All employees in Brazil must hold an employment booklet in which employers must register the main characteristics of the employment relationship (payment, time worked, admission date, etc)  Once the employee has been hired, the employer has to follow certain rules that are non-negotiable between the parties, related to minimum wage, holidays, the 13th salary, maximum working hours and others  Current minimum wage is R$ 240/month (~US$ 85) – there are variations according to professional category  Maximum working hours are 8/day (44/week) -- depending on professional category maximum may be reduced (bank employees = 6 hours/day) – extra working hours are paid 50% above the normal hours  For every 12 completed working months the employee receive 30 days holiday for which it is entitled to payment -- failing to be granted, the employer will be remunerated by double of holiday payment owned  In case of cancellation of the labor agreement without just cause, the employer must remunerate the period of holidays to which the employee was entitled  The employee has the right for an additional month’s salary at end of each year, known as the "13 th salary” – if fired without just cause, the employee receive the 13th salary proportional to the actual work period  The employer is obliged to deposit 8% (FGTS) of the employee’s gross salary in a bank account in name of the employee, who can withdrawn the amount collected only according to rules defined by law  Employers are obliged to contribute with 20% of gross salary in social security contribution, as well as a further 5.8% covering other social security payments (SESC, SENAC, etc), along with a variable tax of between 1% and 3% for labor accident insurance  The employee must also contribute a variable percentage between 8% and 11% of its gross salary to the National Social Security Institute - INSS, charged above a salary of R$ 1,255  In case of dismissal without just cause, the employer is obliged to pay to the employee the equivalent of 40% of the deposits made to FGTS III-6 PLANIMARK – Vagner Castro
  • 25. III. Business Environment – trade agreements / property protection BRAZILBRAZIL HAS BEEN MORE ACTIVELY ENGAGED AND FLEXIBLE TO INTERNATIONALAGREEMENTS AND REQUIREMENTS FOR BUSINESS IN RECENT YEARS  As a result of economy opening and the need to attract foreign investments for economic development and growth  INPI (Industrial Property National Institute) is the agency which regulates rights related to industrial property and is responsible for the registration of technology transfer contracts  According to the Brazilian laws in force, technology transfer contracts are classified for (a) use of patents; (b) use of trademarks; (c) technology supply and (d) technical and scientific assistance services  The protection granted for a patent extends to 20 years for inventions and 15 years for utility models, from the date the request for protection is filed at the INPI  The guidelines adopted by the INPI for inspection of technology supply and technical assistance contracts follow the Normative Act 135/97 and the Law 9.279/96, which determine that the validity of these contracts against third parties is dependent upon registration with INPI  The parties can freely negotiate contract terms provided that Brazilian national sovereignty, public order and morality are observed -- but the registration of contracts is dependent upon satisfying INPI requirements  Brazil is member and actively engaged in several international trade systems, including :  General Agreement on Tariffs and Trade (GATT) – multilateral agreements  Latin American Integration Association (ALADI) – multilateral with 11 Latin American Countries  Mercosul free trade zone -- Brazil, Argentina, Paraguay, Uruguay (Chile and Bolivia as signatories) III-7 PLANIMARK – Vagner Castro
  • 26. IV. CONSTRUCTION BUSINESS
  • 27. IV. Construction Business – size / growth BRAZILTHE CONSTRUCTION BUSINESS IN BRAZIL HAD BEST YEARS IN 1997/98 – ESTIMATETOTAL VALUE EQUIVALENT TO US$ 80 BILLION ( 10% OF COUNTRY’S GDP)  Sector is very fragmented and tends to be over-affected by overall economic conditions Construction Business Construction Business vs. GDP % GDP Brazil and US$ billion - Real Annual Growth Rates - 10% 9% 9% 8% GDP CB 7% 7% 6% 5% 5% 4% 3% 3% 1% 2% 1990 1992 1994 1996 1998 2000 2002 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003e -1% $80 $80 $74 -3% $65 $55 -5% $50 $50 $43 -7% $36 $35 $37 $29 $30 Sources : CBIC, IBGE, IPEA, FGV, BACEN 1990 1992 1994 1996 1998 2000 2002 IV-1 PLANIMARK – Vagner Castro
  • 28. IV. Construction Business – new buildings / remodeling BRAZILTHE FORMALLY CONSTRUCTED ESTIMATE AREA OF NEW BUILDINGS, PRINCIPALLYOF RESIDENTIAL USE, PRESENTED SIGNIFICANT GROWTH AFTER 1994 Associate to financial investments migration to real state, in addition to improvements of population income, as a result of the Real Plan (economy stabilization)  New buildings¹ represented 44% on the average of formal construction total value over 1991-2001  Remodeling and informal construction represent an additional important market – estimate to account for about 30% of cement consumption in recent years ( 39 million tons in 2002) New Buildings¹ Estimated Area New Buildings by Segments -- % area Formal Construction-- million m² 138 139 100% 135 128 127 90% 123 123 120 80% 112 70% 105 101 94 60% 90 50% 76 74 40% 75 72 64 30% 60 20% 10% 45 0% 30 1991 1993 1995 1997 1999 2001 1990 1992 1994 1996 1998 2000 2002 Residential Non-Residential (Coml, Instl, Indl) (1) Apart from heavy construction, infrastructure and other special construction/services Source: Planimark analysis based on IBGE/PAIC, CBIC, ABCP/SNIC, others IV-2 PLANIMARK – Vagner Castro
  • 29. IV. Construction Business – market by segments / regions BRAZILOVER 1.0 MILLION HOMES HAVE BEEN FORMALLY CONSTRUCTED PER YEAR ONAVERAGE TERMS OVER THE LAST DECADE – ABOUT 1,5 MILLION IN 2002  Residential buildings of mid/high quality standards, in terms of construction materials and finishing, represented about 25% of market volume in the average  Total country’s dwellings is currently around 47 compared to 35 million units in 1991 -- Southeast region accounts for 46% of total dwellings  Country’s deficit of habitations, for low income population living in rented or rustic home conditions, is currently estimated around 6-7 million units New Buildings by Segments - 1000 units Total Dwellings by Region - million units 1200 Formal Construction 1100 44,80 Brazil 1000 34,73 900 2,81 North 800 1,95 700 3,15 600 Mid-West 2,25 500 7,20 2000 400 South 1991 5,69 300 11,40 200 Northeast 100 9,01 20,22 0 Southeast 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 15,82 Resid popular Resid mid/high Non-Residential 0 5 10 15 20 25 30 35 40 45 50 Source: Planimark analysis based on IBGE/PAIC, CBIC, ABCP/SNIC, others IV-3 PLANIMARK – Vagner Castro
  • 30. IV. Construction Business – market by regions / distribution BRAZILTHE SOUTHEAST REGION ACCOUNTS FOR MOST PART OF THE CONSTRUCTIONMARKET – INCLUDING BUILDINGS OF HIGHER VALUE AND LARGER AREAS  The region also concentrates most part of the construction industry – including materials, service providers, construction and engineering companies and so on % Buildings Area by Regions  The largest construction material retail chains have headquarters and most part of Mid-West 5% North Southeast stores located in this region – including 1% South 66% C&C, Castoroma, Leroy Merlin and others 16%  About 35% of the country’s estimated Northeast 100,000 retail outlets of construction 12% materials are in the Southeast region  All major manufacturers of construction materials are located in this region – % Cement Comsumption by Regions principally in São Paulo state Mid-West North  The region absorbed 55% of total cement 8% 4% consumption and 66% of total building South Southeast 55% 17% construction area in average terms over the Northeast last decade 16% Source: Planimark analysis based on ABCP/SNIC, CBIC, others IV-4 PLANIMARK – Vagner Castro
  • 31. IV. Construction Business – overall industry importance BRAZILTHE CONSTRUCTION SECTOR, INCLUDING BACKWARD AND FRONTWARD RELATEDPRODUCTS AND SERVICES, IS THE LARGEST SECTOR IN THE BRAZILIAN ECONOMY  Accounting for 16% of country’s GDP in 2000 – employing (direct+indirectly) about 14 million people and representing about 70% of total investments in the economy  The sector also has low dependence on imported products and generates positive trade balance Source: CBIC IV-5 PLANIMARK – Vagner Castro
  • 32. V. COUNTRY APPARENT ATTRACTIVENES
  • 33. V. Apparent Attractiveness BRAZILBRAZIL OFFERS APPARENTLY GOOD ATTRACTIVENESS FOR FOREIGN INVESTORS  Compared to other emerging economies Brazil has major comparative advantages  Large population with a dynamic and fast growing internal consumer marketplace -- boosted by population income increases resulting from the sharp drop in the inflation rate after 1995 (Real Plan)  Economic integration within Mercosul -- free-trade zone initially made up of Brazil, Argentina, Uruguay and Paraguay -- with the corresponding expansion of marketplaces and business opportunities  A deep-rooted, dynamic and profitable capitalist economy with availability of skilled human resources in all levels, including management  A relevant presence of foreign capital, particularly on the industrial structure where it accounts for 30% of the production  A well-developed industrial sector, with a diversified export agenda – encompassing from mineral ores and orange juice to highly value-added manufactured products such as cars, airplanes, ships and capital goods  Diversified export marketplaces  Modern and integrated agriculture -- one of the largest crops in the world -- over 100 million tons/year  Stability of the democratic political institutions  Large territorial area, availability of natural resources V-1 PLANIMARK – Vagner Castro
  • 34. V. Apparent Attractiveness BRAZILINVESTMENTS IN THE CONSTRUCTION BUSINESS ALSO SEEM TO BE ATTRACTIVE  Degrees of opportunity may vary depending on specific focused segments  Pulverized and diversified market in terms of demand and offer, encompassing many different product and service segments  Presence of well established multinationals in several segments of construction products and materials – paints, glass, steel, cement, tubes, wires, floor, gypsum, chemicals, equipment, finishing products, etc  Availability of well established local companies for acquisition and joint- ventures in many segments, as a way to boost penetration and leverage market share – favored by depreciation of local currency in recent years  Growing requirements for higher quality and normalized products, principally to attend higher-end segments and growing presence of foreign investments in new commercial (hotels, flats) and office vertical buildings  Large market principally in the residential segment, encompassing the new buildings segment (over 1 million homes/year) and the remodeling with large potential -- over 45 million existing dwellings, being 80% aged 10+ years  Perspective of fast market growth over the next years, stimulated by :  economy stabilization and GDP likely growth increases from 2004 on  priority of investments in construction to expand employment basis  habitations deficit (6-7 million homes) adding construction needs V-2 PLANIMARK – Vagner Castro
  • 35. APPENDIX- Additional Information -
  • 36. Appendix – Banks BRAZIL Rank of Major Banks in Brazil by Total Assets - in US$ 1,000 (as of March/2003) HQ Type Capital Total Net Net Total Number NumberRank Bank State Bank Control Assets Worth Profit/Loss Deposits Employees Branches 1 BB (Banco do Brasil) DF C 1 $62.401.975 $3.031.201 $142.851 $29.265.338 95.674 3184 2 BNDES RJ I 1 $44.953.272 $3.574.674 -$110.388 $3.738.142 1.514 1 3 CEF DF I 1 $41.073.130 $1.548.897 $102.480 $23.099.942 103.469 2147 4 BRADESCO SP C 3 $37.145.173 $3.494.445 $151.956 $16.441.036 69.371 2973 5 ITAU SP C 3 $32.650.473 $3.569.793 $323.412 $11.570.414 49.127 2243 6 UNIBANCO SP C 5 $19.425.845 $2.031.308 $66.236 $7.626.449 22.592 912 7 SANTANDER BANESPA SP C 4 $15.473.593 $2.136.772 $172.943 $5.685.556 20.000 1017 8 ABN AMRO SP C 4 $12.417.972 $1.837.394 $39.775 $4.932.648 22.445 852 9 NOSSA CAIXA SP I 2 $8.300.659 $443.246 $36.267 $5.271.366 14.084 505 10 SAFRA SP C 3 $9.242.801 $866.292 $44.077 $2.421.417 4.102 79 11 CITIBANK SP C 4 $7.734.213 $1.157.251 $55.509 $376.969 2.189 51 12 HSBC PR C 4 $7.677.337 $421.324 $17.565 $4.205.132 20.468 939 13 BANKBOSTON SP C 4 $6.990.726 $832.325 $48.454 $990.460 3.991 59 14 VOTORANTIM SP C 3 $6.651.039 $565.452 $49.362 $2.419.623 295 4 15 SUDAMERIS SP C 4 $4.688.728 $433.731 $15.689 $1.776.775 6.302 298 16 BILBAO VIZCAYA BA C 4 $3.749.227 $786.838 $4.972 $1.674.989 5.778 440 17 BANRISUL RS C 2 $3.481.233 $209.760 $19.719 $1.978.644 8.472 377 18 BNB CE I 1 $3.341.632 $353.085 $8.235 $873.884 6.971 175 19 LLOYDS SP C 4 $2.414.323 $265.343 $18.400 $193.420 289 4 20 JP MORGAN CHASE SP C 4 $2.162.440 $432.746 $30.684 $70.161 402 5 Sub-Total Top 20 Banks $331.975.791 $27.991.877 $1.238.198 $124.612.365 457.535 16.265 % on Total Banking System 88,4% 82,2% 86,9% 90,9% 92,4% 92,6% Type : C - Conglomerate , I - Independent Institution Control : 1 - Federal Government Owned , 2 - State Government Owned , 3 - Domestic Private , 4 - Foreign Controlled Private , 5 - Foreign Participation Private Source: Central Bank A-1 PLANIMARK – Vagner Castro