The House of Commons Trade and Industry Committee published a report entitled "Trade with Brazil & Mercosur" on June 13 which urges the British government and businesses to pay more attention to Brazil as a place for investment. The report says that UK businesses often overlook the large Brazilian market in favor of the faster-growing economies of China and India.  The Committee says it has previously warned that competitors were exploiting opportunities in both India and China, and the same appeared to be true of Brazil. The report said that one of the key reasons for the relative lack of engagement by UK businesses appeared to be a lack of knowledge of the opportunities available, such as aerospace, financial services, healthcare, environmental technology, information and communications technology, and oil and gas.  There also appeared to be insufficient understanding of the nature of the barriers — such as bureaucracy, tariffs and taxes — which, while significant, were not insurmountable. Brazil Political Comment presents an interview with the chairman of the committee, Peter Luff, Conservative MP for Mid Worcestershire, who visited São Paulo and Buenos Aires with the committee on a fact-finding mission at the end of 2006.

John Fitzpatrick: The privatization revolution started in the UK yet British companies were practically invisible when the Brazilian government started selling off state-owned assets in the telecommunications, electrical energy, steel and mining sectors. Many of these companies were bought by investors from the US, France, Spain, Italy and Portugal. Why this lack of interest? Why has the UK fallen down the list of foreign investors in Brazil?
Peter Luff: It’s a good question, and one we have tried to answer to in the course of the inquiry.  If you look at the countries that have bought into Brazil’s privatised utilities, Spain and Portugal are prominent which one would expect in Latin American markets; the US too has developed stronger links with Brazil than has the UK.  Of course, UK operators were involved in water privatisation, but experienced some problems in Latin America and have gradually withdrawn. Witnesses did not pinpoint any other factors, so we were led to identify a lack of knowledge and outdated perceptions among UK businesses as the main reasons for the lack of UK engagement compared with our competitors.  Perceptions that Latin America is a risky place do persist from past economic crises, and this doesn’t help.  The indications are that the risk in Brazil is declining: the Financial Times recently reported estimates of Brazil gaining investment grade status within 18 months, following upgrades by Standard & Poor’s and Fitch.We hope that our report will act as a useful guide to the potential opportunities, and possible pitfalls, of the Brazilian market and the other Mercosur markets.

What message did you get from established British firms?
Luff: We received written evidence from Anglo American, British Telecom, Clifford Chance and Rio Tinto, as well as the British Chamber of Commerce in Brazil.  During our visit we also got to visit CadburyAdams, Diageo, Rolls Royce, Clifford Chance, HSBC, BG, and Pilkington.  BG was led by a brilliant American, and they regard Brazil as very important for gas exploration and production.  HSBC gave us a useful economic briefing on Brazil.
What areas are promising for UK investors?
Luff: We found opportunities are available in sectors such as aerospace, financial services, such as Public Private Partnerships, healthcare, environmental technology, Information and Communications Technology, and oil and gas.  The report includes a lot more detail on this. It was interesting to see that your committee felt that barriers such as bureaucracy, tariffs and taxes were not insurmountable.

We all know there are lots of barriers to doing business in Brazil. Do you have the impression that some investors are too easily put off?
Luff: We do say that the barriers were not insurmountable, but we also say that they are significant – they clearly require effort and expense to resolve them.  As our report shows, there are clearly opportunities, but when individual businesses are weighing up the costs and benefits of their investment decisions, expensive barriers do not help.  Perhaps some investors are put off, either with or without a full recognition of the risks and opportunities, but as our report notes Brazil is probably not an ideal market for smaller or new-to-export companies, although even for these companies there are some niche areas that have seen successes.  We also suggest that greater involvement of larger businesses in Brazil’s aerospace sector could enable smaller companies to get involved in the supply chain.

Do political instability, corruption and violence play any part in putting off would-be investors?
Luff: Yes. Of course they would all be factors.  Brazil is fortunate among developing countries to have benefited from a stable political environment in recent years, and its economic strength today, and continued strength in the future, will depend on continued stability with reforms such as those suggested in the President’s five year growth plan. Corruption was an issue, particularly in terms of customs and so-called ‘grease payments’, but we did not have a raft of evidence suggesting this was a particular problem in Brazil.  On violence, I assume you are referring to drug-related lawlessness in the poorer areas of Brazil’s vast cities.  We were not presented with any evidence of this directly affecting investor decisions, but poverty and social inequality are recognised problem in Brazil (and programmes such as the Bolsa Familia are recognised, and apparently effective, solutions), and violence stemming from poverty cannot do Brazil any favours on the international stage.

Can Brazil really compete with the opportunities in India and China?
Luff: Our report states that Brazil is a key emerging economy, and that it is an increasingly important global player.  We also looked at the arguments behind the inclusion or otherwise of Brazil among the ‘BRIC’ economies alongside China, India and Russia.  We didn’t reach a final conclusion on this as we haven’t studied all of the countries concerned.  However, Goldman Sachs are standing firm behind their projections of the possible future economic powers and Brazil is squarely in there: as recently as December 2006 they said they “remain confident” about Brazil’s growth potential, and that projected real GDP growth of c. 3.5% was consistent with their estimate of the BRIC countries’ potential growth rate (3.7%) - they concluded that “Brazil does belong in the BRICs”.  Of course, China and India are growing much faster than Brazil, but from a much lower base. However, their huge populations and potential have driven a lot of the commentary to focus on them alone.  But there is little doubt that Brazil has great potential for the future.

What actions have you recommended and what happens next?
Luff: We have made a number of recommendations, including a rethink about the scale of resources for UK Trade and Investment (the government body responsible for trade promotion) in the Mercosur countries, more clarity on UKTI’s priority sectors in Brazil, and a possible UKTI financial services strategy for Brazil as with the other three BRICs.  We also call for more progress – genuine action – in the Joint Economic and Trade Committee between the UK and Brazil in the coming months, with some big outcomes at the annual ministerial meeting later this year. The Government must issue a formal response to the points we raise, and we expect that this will be published in the autumn.  The future resourcing of UK Trade and Investment will become more apparent as the current Comprehensive Spending Review becomes clearer.  UKTI resources in Brazil have gone up in recent years as a result of UKTI’s new strategy, but are still below levels seen in the recent past. We have heard many good things about our report last year on trade with India, and we hope that this report can have such an impact.  The second volume, of written and oral evidence will follow later this month which contains a wealth of further information that will be of interest to businesses.

Finally, you mention the fact that Portuguese and Spanish are not widely taught in the UK and that trade inquiries written in English have often not received a reply as English is not widely spoken here. What can be done to overcome this problem?
Luff: Clearly, more British people learning these languages would help, but we recognise that Brazilian Portuguese is quite different to that spoken in Portugal.  Also, our processor Committee looked at trade with China and in that case it’s a given that you going to need language skills or translators. Local representation in Brazil is important for successful trade, so this could to some extent help bridge the language gap.  One possibility is for UK Trade and Investment to use its modestly greater resource in the emerging Brazilian market to offer greater support on first contact, which might include recommending translators to interested companies to help contact Brazilian businesses in Brazilian Portuguese where its advisors think that this would be effective. But the assumption that English is good enough just won’t do.