President Luiz Inacio Lula da Silva has made it clear that he wants to see the economy growing by at least 5% a year in his second mandate which begins on January 1. One man who thinks there is no chance of this happening is Alfried Ploeger, chairman of the Brazilian Listed Companies Association (ABRASCA).  Mr. Ploeger, one of Brazil´s most influential businessmen, thinks growth in 2007 may be even lower than 3%. He believes Lula will not push ahead with the economic and political reforms the country needs to get it into shape to deliver sold growth in the coming years. He also talks about Brazil´s booming stock exchanges – the Bovespa and Novo Mercado – and how they are attracting companies and handling problems like leaks of insider information.

John Fitzpatrick: In a recent speech you said that GDP growth in 2007 would not meet the government target of 5%. Why are you so certain?
Alfried Ploeger: Because all the indices point to GDP growth being much lower – 3% at the most or even just 2.7%. An important factor which I´m particularly concerned about is the low rate of investment. Growth needs investment and the current rate of private investment –  22 %  of GDP  - is not enough. It needs to reach  25%. As for public investment, where is the money to come from?  President Lula has dreams of turning Eletrobras into another Petrobras and using it to drive development but he doesn´t say where the resources will come from to achieve this and they are too little for the other large scale investments.  
There are three main obstacles facing industry – environmental issues, legal rulings preventing projects going ahead and the heavy tax burden for some sectors. I do not see these obstacles going away in the near future – on the contrary. The most harmful institution today is the public prosecutor´s office which is constantly interfering in environmental decisions and delaying projects. Even in cases where a company has received permission from the environmental authorities to cut down trees, for example, the public prosecutor interferes. Legal rulings are another drawback to development. Companies like Petrobras have to deal with them practically every time there is a public tender.

What about tax and pension reform?
Ploeger: I don´t expect to see any meaningful reform. Look at the so-called “Super Simple” plan to streamline company taxation. The government now says it is not going to be introduced until next July. This means it will become bogged down in bureaucracy and changes will probably be made to it. Everyone knows that tax reforms have to start being implemented immediately and the Super Simple system should be introduced now. As for the ICMS value-added tax levied by the state governments, any chance of standardizing it across the country depends on satisfying 26 different state governors and there is no chance of a breakthrough.
I also don´t foresee any meaningful reform of the pension system. This means billions more Reais will be added to the public debt. Lula´s attempts to alter the pension system so far have been nothing more than plastic surgery and salami slicing. What is particularly frustrating is that this is all happening against a background of growth on the world economy and in other Latin American countries.

What about political reform?
Ploeger: This is another area where I expect little or no progress to be made. Members of Congress are not going to vote against the system which allowed them to win their seats. Another point that worries me is that society as a whole is not prepared to make a sacrifice. Lula and other politicians are providing no leadership and preparing people for the pain which reform involves. Lula is not going to weaken or remove Constitutional or legal rights. To be honest, I don´t even know what he stands for anymore. He has been re-elected but doesn´t seem to know where he wants to go. His ministers present proposals which he turns down but doesn´t come up with alternatives.

Turning to the markets, the Brazilian stock exchange, the BOVESPA, and the Novo Mercado have attracted many new companies this year. Why is this and has improved corporate governance played a part?
Ploeger: There are various reasons. First of all, I have never seen so much liquidity on the international market and a lot of foreign investment has come to Brazil. At the same time, a lot of Brazilian companies have seized this opportunity and opened their capital. Corporate governance has improved not only on the Novo Mercado but also on the Bovespa. ABRASCA has been calling for better corporate governance for years and held seminars on how companies should be more transparent in publishing information and treating shareholders with greater respect and equality. Great progress has certainly been made in this area.

You recently expressed concern about leaks and insider information. Is this a serious problem in Brazil?
Ploeger: This is problem which is found everywhere, not just in Brazil. The point is to combat and reduce it and efforts are being made to so.  For example, the Brazilian Securities and Exchange Commission, the CVM, is currently carrying out about six investigations into allegations of leaks of insider information.

Who is responsible for leaking this information?
Ploeger: Leaks tend to appear when there are mergers and acquisitions and large numbers of people have access to information. Generally speaking, these leaks do not come from the companies directly involved but intermediaries. These could be banks, law or accountancy firms where employees might not deliberately leak information but make comments from which others can infer what is going on. ABRASCA and the Brazilian Association of Investment Banks and Securities Dealers (ANBID) are considering introducing a regulation which would make all companies involved legally responsible for leaks which come from them. All parties to any deal would be required to sign this recommendation. We will be discussing this further with ANBID and the CVM and make a decision in 2007.

Allegations of insiders using information for their benefit arose after the recent unsuccessful bid by Sadia to take over Perdigão. This was the first hostile takeover bid in Brazil. Can we expect to see more?
Ploeger: I don´t think so. The system here is very different from the United States where you tend to have a wider shareholder base. The only publicly-listed company I can think of with a really broad shareholder base is Renner. The others tend to have the majority of shares in fewer hands and, for this reason, it is not so easy to make a hostile bid.

Does ABRASCA represent just the listed companies or investors in general?
Ploeger: ABRASCA has about 170 members and represents 85% of the market capitalization of the companies traded on the Bovespa and Novo Mercado. Our members are all corporate entities. We have changed our by-laws to allow other associations and companies linked to the capital markets to join, such as lawyers and auditors. These law firms and auditors can also take part in committees. One of the reasons for doing this was to make their expert advice available to Brazilian companies and help them adjust to the Sarbanes-Oxley law.

A final personal question – how can you run a big company like Melhoramentos and, at the same time, hold responsible positions in ABRASCA, ABIGRAF, FIESP and many more, including charitable bodies?
Ploeger: I am actively involved in 22 associations. My method is to choose good teams, delegate responsibility and let them get on with it.

(c) John Fitzpatrick 2006