UNCTAD - WORLD BANK TRADE FACILITATION SEMINAR GENEVA, MAY 13th, 2004 Brazil Programmatic Loan for Sustainable and Equitable Growth Paulo Guilherme Correa Team Leader Finance, Private Sector and Infrastructure Latin America and the Caribbean World Bank UNCTAD/World Bank - Trade Facilitation Seminar The Country Assistance Strategy Provide support towards a more equitable and sustainable Brazil, built on a foundation of good governance through … … four sets of programmatic adjustment loans supporting each of these areas. - Better knowledge and skills The Programmatic EQUITABLE - More efficient financial sector COMPETITIVE Adjustment Loan: - Adequate - Entrepreneur-friendly investment - More efficient protection for climate infrastructure and vulnerable groups. - More employment competition - Longer, healthier lives. - More modern innovation No fiscal Impact A MORE climate EQUITABLE, (Some) External Financing - More SUSTAINABLE, - More equitable sustainable COMPETITIVE Supports the design and access to local BRAZIL land management, services. implementation of a specific - Greater social forests and agenda of policy reform (technical inclusion. biodiversity advice & consensus building) - Better water quality and water International Reptuation resource management TALs SUSTAINABLE FOUNDATIONS - Sound macroeconomic management and fiscal reforms - More efficient public sector management - Good governance UNCTAD/World Bank - Trade Facilitation Seminar Background: The FHC years (1994-2001) Significant progress 98 60 96 in: 96 50 48 94 40 37 The Social Areas -- 92 30 Education and Health 90 89 20 – through important 88 10 policy changes; 86 - 84 Mortality Rate, under 5 (per Structural reforms in School Enrollment (%) 1,000) Source: Sima Source: Sima Infrastructure Industries; Macroeconomic 12,000 9,968 2,500 10,000 2,076 Stabilization ... 8,000 2,000 6,000 1,500 4,000 2,000 648 1,000 - Annual Investment in 500 Infrastructure Projects 7 with Private Participation - (US$ Million) Inflation (% annual) Source: PPI Database -World Bank Source: Sima UNCTAD/World Bank - Trade Facilitation Seminar Background ... And yet a difficult heritage. High debt to GDP ratio High real interest rate Public debt (% of GDP) Real Interest Rate, July 2001 ( %) 70 14 60 12 50 10 40 8 30 6 20 4 10 2 0 0 Brazil Mexico Chile Brazil Mexico Chile Source: Brazilian Central Bank Source: IMF Low GDP Growth High unemployment levels Unemployment, total, 2002 (% of total labor force) GDP growth - average 1991-2000 (annual %) 12 7 10 6 8 5 4 6 3 4 2 2 1 0 0 Brazil Mexico Chile Latin America Brazil Mexico Chile & Caribbean Source: Loayza, Fajnzylber and Calderón (2002) Source: Sima UNCTAD/World Bank - Trade Facilitation Seminar Background: Lula election in 2002 (53 million votes) expressed: • The need to grow and generate employment (2.7 million unemployed) … • … within a tight fiscal situation and poor external financing conditions (high risk by external markets)… Brazil EMBI Spreads and Exchange Rate 2800 4.5 ... leading to: Superavit (2002) - 2600 2400 4.0 2200 R$ 52.4 bi (4.06% EMBI - Spreads (Basis Points) Exchange Rate (R$/US$) 2000 1800 Elections 3.5 GDP) Domestic Interest 1600 3.0 1400 1200 2.5 Rate: 25.5% p.y. 1000 800 2.0 Pension Reform 600 400 1.5 Bill 1/2/01 2/14/01 4/2/01 5/15/01 6/27/01 8/9/01 9/26/01 11/8/01 2/7/02 3/22/02 5/7/02 6/20/02 8/2/02 9/16/02 1/29/03 3/13/03 4/29/03 6/11/03 7/24/03 9/4/03 12/24/01 10/29/02 12/12/02 10/16/03 11/27/03 Tax Reform Bill EMBI Spreads Exchange Rate Source: JP Morgan UNCTAD/World Bank - Trade Facilitation Seminar Growth and the FPLSEG: The Growth Agenda Despite structural reforms, low trade integration, poor business environment, limited financial intermediation, and insufficient technology performance. Indicator Brazil Latin America OECD Labor Productivity, 2000 (value added per 13,894 18,492 (Mexico) 54,879 (U.S) worker, US$) 27,765 (Chile) Trade volume, 2000 (% GDP) 23 63 (Chile) 64 (Mexico) Days to start a business, 2001 63 28 (Chile) 1-3 (Ireland) Private sector credit, 2001 (%GDP) 35 69 (Chile) 143 (U.S.) Patents registed in the US, 2001 (per 0.64 0.82 (Mexico) 68.0 (France) 1,000,000 population) Source: Sima, Brazil Jobs Report, Foreign Inestment Advisory Service and USPTO. UNCTAD/World Bank - Trade Facilitation Seminar Growth and the FPLSEG (contd) Low investment Patents Patents Granted in the US Gross fixed capital formation (% of GDP) 250 3 years m oving average 40 200 Singapore 35 China 150 30 Chile 100 25 India Brazil 20 Mexico 50 Brazil India 15 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 1987 1989 1991 1993 1995 1997 1999 Source: Sima Source: USPTO Low Productivity Value added per worker, 2000 (US$) 60000 54879 50000 40000 27765 30000 18492 20000 13894 10000 0 Brazil Mexico Chile United States Source: Sima Loan Overview • This adjustment loan of US$ 505 million is part of a broader program to support an specific set of microeconomic measures and institutional reforms, that will foster growth and employment generation in Brazil through increased investment and productivity. • This first loan will support four main objectives: reducing logistics costs, encompassing multi-modal transport planning, customs, ports, and roads; improving the business environment, including infrastructure regulation, competition policy, barriers to entry, and the framework for corporate insolvency and creditor rights; enhancing financial system efficiency and depth (including long- term credit, insurance, and venture capital), and improving Brazil’s capacity to transform knowledge into productivity gains (through the innovation system). • Subject to progress in the implementation of these measures, a second and loan and third loan are envisaged adding to US$ 1 billion in the next 4 years. UNCTAD/World Bank - Trade Facilitation Seminar Loan Overview (Architecture) • The reforms supported represent a coherent set of measures of sufficient breadth and depth to have a significant impact on growth, stability, and poverty reduction. • The package is focused on win-win reform areas to leverage the impact of the remaining political capital. • These form a robust subset of a longer list of growth-oriented measures on which the Government is acting, including measures to reduce tax distortions, improve contract enforcement, deepen trade integration, and strengthen labor markets. Growth Program Development Logistics Growth Agenda Strategy Business Environment Trade Policy Macroeconomic Financial Sector Taxation management Innovation Labor Education Contracts Institutions and Governance UNCTAD/World Bank - Trade Facilitation Seminar Growth, Trade and Logistics Costs in Brazil Poor trade integration although improving in recent years … Brazil China GDP per capita (constant 1995 GDP per capita (constant 1995 4800 32 1000 60 4600 30 900 Trade (% of GDP) 50 Trade (% of GDP) 4400 28 800 4200 26 700 40 4000 24 US$) 600 US$) 3800 22 500 30 3600 20 400 3400 18 20 300 3200 16 200 10 3000 14 100 2800 12 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 GDP per capita (constant 1995 GDP per capita (constant 1995 US$) US$) Trade (% of GDP) Trade (% of GDP) 29.3% 17.4% India 550 35 -72.2% -56.5% -42.6% -25.9% -18.4% -18.2% -14.0% (constant 1995 US$) 500 Trade (% of GDP) 30 GDP per capita 450 Ve b ia ia il 25 ela M e ico Co o r Ec u a 400 il az r tin liv Pe d Ch zu lom ex Br ua n 350 Bo 20 ne ge 300 Ar 15 250 200 10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 GDP per capita (constant 1995 US$) Trade (% of GDP) Source: Sima . … even though tariffs have not being particularly high (un-weighted tariff rates in percentage terms) 120.0 India 100.0 China Brazil 80.0 60.0 40.0 20.0 0.0 1986 1987 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 UNCTAD/World Bank - Trade Facilitation Seminar Logistics Cost in Brazil Lo gis t ic s c o s t of Logistics Costs as a share s GDP Logistics costs in Brazil are a s a s ha re o f G D P estimated at about 20 percent of GDP, almost P eru 24 twice the level in OECD A rgentina 21 countries… B razil 20 M exico 18 Germany 13 ….affecting trade integration Taiwan 13 and regional development P o rtugal 12.7 within Brazil. Canada 12 Japan 11.3 Italy 11.2 UK 10.6 USA 10.5 0 10 20 30 Per cent of GDP Source: Sima UNCTAD/World Bank - Trade Facilitation Seminar Logistics Cost in Brazil Inventory and Warehousing costs Ratio of inventory levels to U.S. are the main individual cause for the inventory levels high logistics costs ... Brazil ... accounting for almost 40 percent M exico in the region. Chile Inventory costs are proportional to Colombia interests rates, which have Venezuela remained high in the region, particularly in Brazil. But inventory Peru levels in Brazil and many other Bolivia developing countries are typically twice as high for final products and Ecuador three times as high for raw material as in the United States. 0 2 4 6 raw materials final goods Source: Sima UNCTAD/World Bank - Trade Facilitation Seminar Logistics Cost in Brazil Table 2 Transport and Modal Shares in Total Output and Expenditures in 1999 transshipment costs represent about a third of Output % Expenses % Rate billion tku $million $/000’ tku logistics costs in Latin America. Air 2.2 0.1 292 0.8 130 Costal 100.0 6.5 753 2.2 8 Brazil’s domestic freight shipping transport market has in recent decades been Pipes 33.1 2.1 102 0.3 3 dominated by the trucking industry ... Rail 140.8 9.1 1,111 3.2 8 Truck 1,271.2 82.1 32,766 93.6 26 ...which accounts for almost 80 percent of the Total 1,547.4 100.0 35,025 100.0 19 demand for transport and is essencially unregulated. Source: de Castro, N., (2001) “Freight Transportation and Logistics in Brazil: An Overview.” Following privatization, railways have been increasing their share of traditional markets (particularly the grain market) but still unable to compete with trucks. UNCTAD/World Bank - Trade Facilitation Seminar Logistics Costs in Brazil Table 1 Port transit times compared (days) The ongoing reform of the Brazil China India Malaysia ports system has led to significant reductions in Imports: the port cots and tariffs…. But labor costs in many Average 13.8 7.5 10.4 3.4 Brazilian ports remain high… Longest 32.4 12.2 21.6 7.4 Exports: 350 Average 8.4 5.5 5.1 2.6 300 Longest 16.9 8.1 9.3 5.1 250 200 Source: World Bank, Investment Climate Assessments 150 . … as well as transit times. 100 50 0 Brazil (1997) Brazil (2000) Buenos Aires Rotterndam UNCTAD/World Bank - Trade Facilitation Seminar Logistics in Brazil Customs and related administration costs represents more than 10 percent of operating costs average. Including losses and insurance, customs and administration account for 30 percent of the firms’ logistics costs in the region. Brazil’s customs procedures and practices are reported as the single most important obstacle for the expansion of Brazilian exports, according to the business community . Source: Os Problemas da Empresa Exportadora Brasileira - CNI UNCTAD/World Bank - Trade Facilitation Seminar Logistics in Brazil Customs (Based on a diagnostic prepared for the project - full report in Project Files) Outdated Customs procedures (further simplification needed, as for example consolidating export declaration and export register). Insufficient equipment (software and hardware), despite recent progress with Siscomex and Radar (further automation still needed) Excessive number of inspections, despite some recent progress (rationalization through risk management needed). Poor training of inspectors. Excessive emphasis on tax collection to the detriment of trade facilitation. Days to clear customs-- Imports Brazil China India Bangladesh Average 14.0 7.9 7.1 11.7 Longest 32.0 12.5 12.8 23.2 Days to clear customs --Exports Average 8.7 5.4 5.4 8.8 Longest 16.8 8.0 8.0 14.0 UNCTAD/World Bank - Trade Facilitation Seminar Logistics in Brazil Customs-Selectivity System for Custom Release (Siscomex) On line system for custom release (import and export). Customs releases are processed in Siscomex and results communicated to the trader. The system offers 4 modalities of customs release --immediate, document review and/or physical inspection and fraud. The selection process takes place during specific periods of time depending on the customs port, varying from every two hours to four times a day (not 24 hours). The built-in time frame gives the customs officers time to perform their own analysis independent of the system’s results, increasing arbitrary decisions. There is no link yet to the Radar System -- that collects importer/exporter profile data and inspection results -- nor to the Merchant Marine System (to capture vessel transportation data), making it more difficult to develop modern risk management systems. In 2002 (first quarter), at least 27% of imports were physically inspected and only 51% of exports were automatically released. UNCTAD/World Bank - Trade Facilitation Seminar Logistics in Brazil Road network is relatively … and in bad poor … conditions: Roads, paved (% of total roads) 1994 1999 var 3.4% of the production of non- Brazil 8.1 9.6 19% exporting and Chile 13.8 18.9 37% 1.6% of exporting Latin America & Caribbean 23.8 24.3 2% firms’ are lost annually due to transport failures , Indonesia 53.8 46.3 -14% Korea, Rep. 77.8 74.5 -4% while 1% of sales Philippines 16.6 20.0 20% of non-exporting Thailand 94.7 97.5 3% and 1.2 % of sales of exporting firms OECD -- High income 86.0 88.0 2% are annually lost in breakage. (Brazil- ICA, 2004) UNCTAD/World Bank - Trade Facilitation Seminar The First Programmatic Loan for Sustainable and Equitable Growth (FLSEG) – Reform Program (1of 4) Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Macroeconomic Management and Overall Growth Program Definition - Adequate macro-economic framework - Satisfactory Growth Program and Publication of White Paper Reduce Logistics Costs 1. Improve Customs - Customs Reform Strategy - Selectivity level cut from 40% to - Clearance systems and - Average gross release time Effectiveness approved 30% procedures streamlined and decreased from 5 to 3 days adapted to expanded Customs’ (imports) and from 2.0 days to 1.0 mission and selectivity cut to 20% day (exports) - Average net release time cut by 20% 2. Reduce Port Costs - Productivity improvement plan - Port authorities restructured and - Average cargo transit time and Delays approved productivity plan implemented through port cut from 13.8 to 10 days for imports and 8.4 to 5 days for exports; average container handling cost cut by 10% 3. Reduce Transport - Law reorganizing Federal - Output based - Road network classification law - 50% of road network in good Costs on Federal Road Transport Administration approved maintenance/rehab contracts on approved condition (as evaluated by the Network and implemented 30% of federal road network International Roughness Index), - 9% of non-trunk roads on - Further 12% of non-trunk roads - In addition to road concessions - Average road transport costs remaining federal network on remaining federal network existing in 2003, further 5% of the decreased 5% transferred to state management transferred to state management remaining federal network under concession - Total of 25% of non-trunk roads on remaining federal network transferred to state management 4. Foster Multi-modal - Geographical restructuring of - 10% increase in non-road Transport railway concessions underway transportation share UNCTAD/World Bank - Trade Facilitation Seminar The FLSEG – Reform Program (2 of 4) Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Improve the Business Environment 1. Strengthen Infrastructure Creation of land and water transport PPP Law approved by Congress Law on Career Development Plan 5 Public-Private Partnerships Regulation regulatory agencies (ANTT and for Regulators approved by Congress projects approved ANTAQ) PPP Law submitted to Congress Draft law on Career Development Plan for Regulators submitted to Congress 2. Enhance the Competitive Amendments to Antitrust Law Amendments to Antitrust Law Increase in number of “hard-core” Environment reviewed by inter-ministerial committee approved by Congress cartel cases with national impact successfully prosecuted Pre-merger notification made mandatory 3. Simplify Entry and Business Constitutional amendment approved Law regulating the unification Time needed to register a firm Operation to, inter alia, unify tax collection at of tax collection approved by decreased to 76 days in pilot cities federal, state and municipal levels for Congress micro and small companies Simplified procedures for companies’ registration adopted in some cities Export norms simplified by MDIC 4. Strengthen Corporate Insolvency New Bankruptcy Law and Tax Code Bankruptcy Law enacted Bankruptcy law becomes effective Increased speed of recuperation / Framework Amendment passed by Lower House resolution and higher recovery value of insolvent enterprises Amendment to Tax Code enacted Reduced spreads in financial intermediation Preparation program initiated for judiciary and courts for new law UNCTAD/World Bank - Trade Facilitation Seminar The Reform Program (3 of 4) Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Enhance the Efficiency and Depth of the Financial System 1. Increase Financial Draft Complementary Law, Effectiveness of Banking Examination of market Competition extending application of Competition Law conduct issues in banking sector Antitrust to Banking, submitted by competition authority to Congress initiated Reduced bank administrative costs components in bank spreads 2. Sound Fundamental Constitutional Amendment Key legal initiatives for Key legal reforms in financial Legal framework and Legislation and Systemic (Article 192) approved financial reform presented to system voted by Congress physical infrastructure for Risk Control Congress financial system modernized; risks reduced and access to New large value payments Evaluation of residual risk in Second phase (retail) financial services expanded. system installed and operating the payments system completed payments system reform successfully launched. Blueprint prepared for second phase payments reform (retail payments) 3. Mobilize Long-Term Regulations strengthened on Extend permission for Accelerated expansion of Resources in Insurance asset allocation, eligibility, provision of reinsurance to new insurance industry assets on Sector registration, custody and audit entrants sound basis requirements enhanced Enhanced service providers in reinsurance 4. Improve Efficient Provisional law and Evaluate impact of new Passage through Congress of Bank accounts Financial Access for the Resolutions passed to expand microfinance measures in terms new factoring law. (sight+savings) expanded from Poor and for SMEs financial access at banks of cost, outreach and impact. 95 (end 01’) to 103 million by 2006. Introduce small claims courts Enhanced use of positive Increased credit availability for small credits information for credit reporting on sound footing to small borrowers Establish interlinkage of Reduction of tax write offs credit registries for uncollected small claims UNCTAD/World Bank - Trade Facilitation Seminar The Proposed Loan (4 of 4) Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Increase Innovation Capacity to Transform Knowledge into Productivity Gains 1. Increase Public R&D Innovation Law sent to Innovation Law approved by Number of technology Effectiveness Congress Congress transfer contracts between public universities/research centers and the private sector increased by 20% 2. Foster Private Innovation Regulation of Fundo Verde- Evaluation completed of 10 percentage point increase Amarelo and other mechanisms operations and management in privately funded R&D share to support private R&D procedures of Sector Funds and in total R&D expenditures introduced FINEP 3. Create Innovation in Kyoto protocol ratified, ICCC ICCC approval and US$100 million in sales of Environmental Markets operational, and CDM project monitoring systems financially carbon credits approval mechanism published self-sustaining Implementation Arrangements • A US$ 12 million “Programmatic” TAL started to be negotiated this morning in Brazil, evolving three main counter-parts: Ministry of Finance; Ministry of Transport and Ministry of Science and Technology. • Creation/ revitalization of three inter-ministerial commissions/ working groups: – Economic Policy; – Infrastructure; – Science and Technology • Increased dialogue with the Private Sector through the National Council of Social and Economic Development (created in Lula’s Administration) and traditional business associations such as CNI. Possible creation of an informal steering committee. • Final Remarks: Documents that could be shared: Loan Document (with an annex on logistics). A Detailed Diagnostic of Brazilian Customs. EMAIL: PCORREA@WORLDBANK.ORG Thank you.
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