1. An illustrative example of a study prepared for foreign companies and investors
who 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. CONTENTS
I. GENERAL OVERVIEW
II. SOCIAL / ECONOMIC ISSUES
III. BUSINESS ENVIRONMENT
IV. CONSTRUCTION BUSINESS
V. APPARENT ATTRACTIVINESS
APPENDIX :
- list of banks
4. I. General Overview – country size / geographics BRAZIL
BRAZIL HAS A TERRITORIAL AREA OF ABOUT 8.5 MILLION KM² AND CURRENT
POPULATION 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 BRAZIL
POPULATION 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 BRAZIL
SOUTHEAST 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
8. II. Social / Economic Issues– economy growth / trends BRAZIL
BRAZIL’s GDP IN US DOLLARS WAS SUBSTANTIALLY REDUCED AFTER 1999, AS A
RESULT 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 BRAZIL
EDUCATION LEVELS HAVE IMPROVED OVER THE LAST DECADE – LITERACY RATE
IS 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 BRAZIL
ECONOMICALLY ACTIVE POPULATION (PEA) IS CURRENTLY ESTIMATED TO BE
AROUND 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 BRAZIL
UNEMPLOYMENT RATE IN MAJOR METROPOLITAN REGIONS HAS EVOLVED
BETWEEN 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 BRAZIL
INFLATION RATES HAVE CONSISTENTELY SHOWN DECLINING TRENDS IN RECENT
MONTHS, 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 BRAZIL
REAL INTEREST RATES IN BRAZIL ARE AMONG THE HIGHEST IN THE WORLD, AS A
RESULT 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 BRAZIL
EXCHANGE RATE (R$/US$) HAD STRONG DEPRECIATION FROM JUNE/02 TO
MARCH/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 BRAZIL
ECONOMY IS EXPECTED TO IMPROVE WITH THE CONTINUATION OF RATIONAL
ECONOMIC 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 -- Brazil's privatization program generated over $90 billion up
to the end of 1999, including the sale of steel and telecommunications state companies
Passage of the Fiscal Responsibility Law in 2000 has improved fiscal discipline at all three levels
(federal, state, municipal) and branches of government activities
New Lula government (2003/06) viewed with large political support to approve and implement the most
controversial constitutional reforms, including the tax and social security systems
social security with large deficits (principally pensions to public sector retirees) -- reform
considered vital to avoid the system collapse and to alleviate public spending in the near future
feasible tax reform focusing substitution of “cascading” taxes on production, sales and financial
transactions, by a federal value-added more simplified tax system
New administration has in fact adopted tight monetary policies, with negative effect on production and
employment, but already reverting the inflationary surge and improving confidence levels (country risk
perception substantially reduced in June) -- creating better conditions for the second semester of 2003
II-8 PLANIMARK – Vagner Castro
16. II. Social / Economic – economic forecasts BRAZIL
EXPECTATIONS OF ECONOMIC ANALYSTS SHOW IMPROVEMENTS UP TO END OF
2003 AND BETTER PROSPECTS FOR 2004
Central Bank inflation target for 2004 was adjusted to 5,5%, down from 8,5% in 2003 –
allowing for a more relaxed monetary policy, which stimulates GDP growth
Expectations on the Brazilian Economy
Indicators (end of year) 2002¹ 2003 2004
GDP growth - % 1,5% 1,8% 3,0%
Inflation (IPCA) - % 12,5% 11,4% 7,0%
Interest rate (Selic) - % year 19,2% 21,0% 16,0%
Public net debt-GDP ratio - % 57,4% 55,0% 53,4%
Unemployment rate - % 7,5% 7,9% 7,6%
Trade Balance - US$ 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 BRAZIL
SEVERAL OTHER IMPORTANT ISSUES SHALL ALSO BE ADRESSED BY THE NEW
GOVERNMENT 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
19. III. Business Environment – inflows of foreign investments BRAZIL
BRAZIL HAS BEEN ONE OF THE MOST ATRACTIVE COUNTRIES FOR FOREIGN
DIRECT 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 BRAZIL
MOST PART OF FDI INFLOWS TO BRAZIL IN RECENT YEARS HAVE BEEN DESTINED
TO 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 BRAZIL
FOREIGN DIRECT INVESTMENTS ARE VIEWED AS AN ESSENTIAL SOURCE OF
FINANCING 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 BRAZIL
BRAZILIAN 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 company's 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 BRAZIL
GOVERNMENT PROPOSED REFORMS ON TAX SYSTEM IS UNDER DISCUSSION IN
CONGRESS 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 BRAZIL
LABOR RELATIONS IN BRAZIL ARE UNDER SCRUTINY AND PROPOSED REFORMS
SHALL 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 BRAZIL
BRAZIL HAS BEEN MORE ACTIVELY ENGAGED AND FLEXIBLE TO INTERNATIONAL
AGREEMENTS 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
27. IV. Construction Business – size / growth BRAZIL
THE CONSTRUCTION BUSINESS IN BRAZIL HAD BEST YEARS IN 1997/98 – ESTIMATE
TOTAL 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 BRAZIL
THE FORMALLY CONSTRUCTED ESTIMATE AREA OF NEW BUILDINGS, PRINCIPALLY
OF 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 BRAZIL
OVER 1.0 MILLION HOMES HAVE BEEN FORMALLY CONSTRUCTED PER YEAR ON
AVERAGE 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 BRAZIL
THE SOUTHEAST REGION ACCOUNTS FOR MOST PART OF THE CONSTRUCTION
MARKET – 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 BRAZIL
THE CONSTRUCTION SECTOR, INCLUDING BACKWARD AND FRONTWARD RELATED
PRODUCTS 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
33. V. Apparent Attractiveness BRAZIL
BRAZIL 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 BRAZIL
INVESTMENTS 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
