Country Profile: The world comes to Brazil

IN THE MINDS of most, Brazil is a place of flamboyance, footballing brilliance and huge, unexplored areas of dense, lush rainforest silently awaiting the arrival of chainsaws.

It’s the country that gave us the exquisite skill of Pele, Ronaldinho, Neymar, routinely shows the world how to party with the joyous exuberance of Rio de Janeiro’s annual Carnival and boasts the most ethnically diverse population on Earth, along with the very richest of natural habitats.

But despite those enthusiastically bestowed gifts to the world, Brazil is not an entirely content country.

It embarked on huge building projects in order to prepare for the 2014 World Cup and this summer’s Olympics in Rio, but despite that ostensible economic shot in the arm, Brazil’s GDP fared worse than almost any other major economy in 2015, contracting by 3.8%, according to the national statistics agency Instituto Brasileiro de Geografia e Estatística.

In fact, the economy contracted in both 2014 and 2015 and negative growth is expected to occur in 2016 unless oil and other commodity prices improve. As a result of the poor recent economic performance, the country’s currency – the real – has dropped sharply against other global currencies, affecting the appetite for imports.

The 2014 World Cup was delivered successfully – just. And not without furious popular demonstrations over the cost to the taxpayer of delivering seven new stadia and renovating five others including the famous Maracanã in Rio.

In all, eight people died in the construction works for the tournament, which ultimately cost the Brazilian state about US$15bn (£10.5bn), about $1.7bn over budget and largely ploughed into the stadia themselves, to the detriment of various ancillary infrastructure projects meant to accompany the World Cup, including the flagship São Paulo monorail.

The 2016 Olympics, too, is set to cost about $10.2bn, with squabbling over who should pay what and criticism from the International Olympic Committee over delays to key works.

“The management of the economy and the ability to manage complex, large projects isn’t as sophisticated as other major economies such as the UK or US, although it’s learning very quickly,” director of Brazil Business Hub Philip Gray tells Financial Director. “The World Cup especially, and the Olympics now, are both examples of where Brazil is having to do this in the public eye. These kind of projects have a cast-iron delivery date, with no possibility of it happening late. These are challenges Brazil has had to confront; it did get there with the World Cup and it will manage to get there with the Olympics. It’s all part of its growing up process.”

Brazil is vast in every sense of the word. It covers an approximate total area of 3.3 million square miles, taking in the Amazon basin and its dense surrounding rainforest. It boasts 205 million inhabitants drawn from its native population; Portuguese, black African and more recent European, Arab and Japanese immigration, while other significant groups include Koreans, Chinese, Paraguayans and Bolivians.

Its size is both a blessing and a curse. Many cities, towns and villages in the north of the country and in the Amazon basin are only accessible by boat or plane, yet despite that challenge a healthy portion of such places are not untouched by economic prosperity.

The city of Manaus, for example, isolated as it is deep in the State of Amazonas, is more than 1,300 miles by road from the nearest city of Santarém but has an unlikely technological and industrial hub, having taken advantage of the country’s federal system to put in place favourable tax tariffs.

The move has attracted the likes of Apple, Nokia, Honda, Pepsi, Coca Cola, Panasonic and Harley-Davidson to the city, despite its remoteness.

Indeed according to UKTI, 400 of the world’s 500 largest companies operate in Brazil, including many UK companies such as Rolls Royce, BG Group, Shell, BP, JCB, Rexam and Experian.

In particular, and well-evidenced by the presence of the aforementioned companies, the UK’s leading areas of export are machinery, vehicles, pharmaceuticals, chemicals, plastics and beverages.

Those sectors are very much aided by the relative stability of the government, the size of the economy, the presence of a strong finance sector in São Paulo and European-oriented culture and business practices.

But it wasn’t always thus. Between 1964 and 1985, Brazil was run by an authoritarian military junta. As a result, there is a strongly-held distrust of government across the country.

Even today, corruption is a real and present problem throughout Brazil. Transparency International ranked Brazil 76 out of 168 countries for corruption in 2015, and with a score of 38 was one of 114 nations that scored below 50 out of 100, indicating serious levels of public sector corruption.

Not only that, but according to Brazil Business Hub’s Philip Gray, the level of diligence with which bookkeeping and accounting standards are undertaken varies wildly between Brazilian companies.

“The one thing you’ve got to retain is the capacity for clear, objective thinking,” Gray explains. “There’s a very big cultural difference between the UK and Brazil. From the financial point of view, that really especially applies to financial planning, reporting and accounting standards.”

That was very much borne out in the experience of Gloucester-based dental equipment manufacturer Prima Dental.

“When we were looking for a partner [in Brazil], we did come across a number of potential candidates who, when we did due diligence on them, clearly had an underlying non-payment of taxes and undisclosed liabilities,” FD Alun Jones tells Financial Director. “We could have been sucked into their weak business model had we not done our homework on the businesses.”

In the end, Prima’s due diligence paid off, and they eventually found a partner business in Londrina in the State of Paraná in the south of the country.

Given that experience, Jones is keen to emphasise the importance of local knowledge as well as vigilance in undertaking due diligence.

“We never would have achieved what we set out to without a good local partner,” Jones explains. “You either need a partner or to employ advisers who understand the whole infrastructure you have to deal with in Brazil.

“We employed consultants, accountancy firms and law firms in Brazil to give us detailed overviews and modelling of the manufacturing model down there to prove what worked. A lot of the taxes are not creditable like in the UK. VAT, for example, is progressive – it’s an input and output tax. Brazilian taxes are mostly straightforward taxes so it becomes quite complicated.”

It’s imperative, too, to have a degree of proficiency in Portuguese. Many people and businesses labour under the misapprehension that Spanish will suffice given its prevalence in Latin America and its similarity to Portuguese. Not so, says Philip Gray.

“Language is a very big issue. It’s important if you don’t have Portuguese language skills that you have somebody around you who does,” Gray warns. “You won’t get away with Spanish. A lot of companies think they can, but really you need Portuguese.”

Despite these challenges, many of those properties currently hurting the country also equip it for dealing with today’s sluggish performance and provide enormous opportunities for inward investment. Indeed, the terrifying outbreak of the Zika virus evidences just that.

“Ironically, it’s one of the areas where opportunities have arisen for UK companies,” Gray says. “Several opportunities have occurred with UKTI for specialist UK expertise in mosquito-borne disease prevention. Those technologies and skills are in demand right now.

“In terms of the perceptions of Brazil with the beach, the football and the forest, there are a huge number of very successful other industries, such as automotive, oil and gas, clean energy and food production. There’s a huge amount of international-grade business and production that goes on in the country that isn’t recognised enough.”