State-controlled oil giant Petrobras faces a tough task if it is to realise a find described by the president as 'a gift from God', writes TOM HENNIGAN
AFTER BRAZIL’S energy giant Petrobras discovered vast new oil fields off the country’s southeast coast in 2007, President Luiz Inácio Lula da Silva had no doubt about the significance of the find. It was, he said, “a gift from God”.
Brazil knows only too well the vital importance of oil to a modern economy. In the late 1960s and early 1970s the country was expanding at rates now associated with China. But as the economy grew it needed to import more crude, making it especially vulnerable to the oil shocks of 1973 and 1979. Those sudden spikes in prices caused a ballooning of its foreign debt, which by the start of the 1980s had strangled growth.
The resulting “lost decade” produced a rise in inequality and a decline in investment, leaving the country with an infrastructure creaking under the demands placed on it by the return of sustained growth in recent years.
Now the hope is that tapping the new fields will transform Brazil from self-sufficiency in oil into a big exporter, thus accelerating Brazil’s advance to become one of the world’s top five economies. The profits are to go towards transforming the underfunded public health and education systems as part of a campaign to eradicate centuries of poverty. “What we have in our hands is superior to all the opportunities offered to us by our history,” said President Lula on Friday.
He was speaking at a ceremony to mark the conclusion of the biggest share offering in Brazil’s history in which Petrobras raised the equivalent of €50 billion in capital. It will go towards the company’s €166 billion investment plan that will fund new oil platforms, tankers, refineries and pipelines over the next five years.
Such huge spending has reactivated the country’s long-moribund shipbuilding industry while captains of industries from steel to high tech can barely contain their excitement at the thought of the orders set to roll in from the energy industry in the future.
However, sceptics warn that Mr Lula’s government, in its eagerness to ensure most of the benefits from the oil boom stay in Brazil, is loading excessive risk on to state-controlled Petrobras. New legislation reserves the lion’s share of the pre-salt fields for the company, restricting foreign oil companies to being little more than junior investors in Petrobras operations.
Economists warn that this leaves Petrobras carrying most of the risk for realising what should be an oil region even bigger than the North Sea, which took decades and dozens of firms to develop.
Costs could also spiral as the government insists new drilling rigs, platforms and ships be at least 65 per cent “made in Brazil”. The goal is to use the oil to broaden and deepen the industrial base. But meeting that demand will be a challenge even to the rapidly expanding shipbuilding industry and its suppliers.
Petrobras will have to train tens of thousands of engineers and technicians in a country where 15 per cent of children between 15 and 17 do not attend school and where a fifth of the population is defined as functionally illiterate by the ministry of education. The foreign manager of one oil rig hired by the state oil company said it has to fly in electricians from abroad because of the difficulty finding qualified locals able to read a basic instruction manual.
The extent of the funds being raised to transform the pre-salt finds into productive oil fields also masks a worrying level of underinvestment in infrastructure in the wider economy that calls into question Brazil’s preparedness for hosting the World Cup and the Olympics within the next six years.
Even before the world’s sports’ fans descend on the country, the air network is straining under rising demand for flights. At Santos, Latin America’s biggest port, ships line up out at sea for a berth while there are often long lines of trucks forced to sit on the hard shoulder of roads leading to the quays as they wait to unload.
These trucks often have to travel for days across poor roads, all the while eating away at the country’s competitive advantage. Brazil’s boom is running into bottlenecks.
According to the Organisation for Economic Co-operation and Development of the world’s 11 biggest economies Brazil has the lowest rate of investment, at just 17.52 per cent. This compares to 40 per cent in China and is below the 25 per cent economists say the country needs to allow the economy to grow without running into bottlenecks that fuel inflation.
A perennial scourge for Brazil, the risk of higher inflation is that it will provoke a hawkish central bank to raise interest rates, which at 10.75 per cent makes Brazilian financing among the most expensive in the world. This would further discourage investment by a private sector already burdened by the sort of taxes and red tape which meant Brazil slipped this year to 58th in the World Economic Forum’s annual competitiveness index of 139 countries, behind China and India.
“There is no incentive to invest. The immediate bottleneck is infrastructure. But the biggest problem in terms of Brazil overall is taxes. The tax system explains the savings rate being low, the investment rate being low, interest rates being high. And why is that? Because we have a government that is very hungry,” says Emy Shayo, an economist with JP Morgan in São Paulo.
The favourite to win Sunday’s election to replace Lula as president is acutely aware of the problem. As chairwoman of Petrobras and charged with Mr Lula’s infrastructure investment programme, Dilma Rousseff knows the challenges the country faces. Moreover, Ms Rousseff realises she will be closely associated with any failure to overcome them. She has assembled a €600 billion investment programme over the next five years and is rumoured to be planning a “super” transport ministry in order to have Brazil’s airports ready for the 2014 World Cup. All of the main candidates talk about the urgent need for tax reform next year.
But with the world’s premier soccer tournament now less than four years away the growing sense of urgency risks exposing Brazil’s weak controls against corruption.
During Lula’s administration the country fell from 45th to 75th place on Transparency International’s ranking of the globe’s least corrupt states. The 2007 Pan American Games in Rio de Janeiro – seen as a trial run for the Olympics – came in eight times over budget, despite little of the promised infrastructure having been built.
“The government is already creating special rules to govern spending on the World Cup and the Olympics. When you start speaking of special rules you have to be careful, there is always something wrong going on. Why does it have to be special? Because they do not want this spending submitted to the usual controls,” says Claudio Weber Abramo, executive director of Transparência Brasil, a local anti-corruption organisation.
While Brazil’s government is confident that it will be ready to host the world’s showpiece sporting events the question for its citizens is – at what price?
Tomorrow: The environment saved? The Lula government has made major strides in reducing deforestation in the Amazon but the powerful agri-business sector has been given a free hand in other regions, resulting in the destruction of one of the world’s biggest savanna and a major carbon sink and source of biodiversity, and without the major land reform he had promised in opposition.