Attractiveness of Brazil as an international investment and business hub - 2nd edition by BRAiN Brasil

Attractiveness of Brazil as an international investment and business hub 2012 /# 2

4 Attractiveness of Brazil as an international investment and business hub

Preface Brazil’s rise as a global economic power is undeniable. In recent decades the country finally left behind the old promise of “country of the future”; however, complete fulfillment requires capturing international recognition of Brazil’s transformation into an investment and business hub. This document is the second edition of our report entitled Attractiveness of Brazil as an international investment and business hub, published by BRAiN for the first time in 2011. This report attempts to shed new light on the attractiveness of an investment and business hub, identifying initiatives that will make the country even more attractive to investors and business executives, as well as to all other players involved. This version brings an updated view of Brazil’s performance compared to a number of selected nations along a set of seven pillars, considered to be essential for the attractiveness of an investment and business hub. In preparing this material BRAiN conducted extensive research and analysis, with the support of The Boston Consulting Group. This document is a result of this effort and describes in detail the attractiveness of Brazil as a Latin American investment and business hub. It also defines a number of indicators that can be used to dynamically track the position of the country, and lists next steps and initiatives that will further this position.

Created in 2010, BRAiN’s mission is to ensure the creation of a multi-sector vision of Latin America as a strongly interconnected regional business hub, within which Brazil should be one of the preeminent hubs. Additional information about BRAiN and its vision is available at www.brainbrasil.org.

6 Attractiveness of Brazil as an international investment and business hub

Contents Executive Summary

Dashboard of Brazil’s attractiveness

01 Macroeconomic environment

02 Institutional environment

03 Talent and human capital

04 Physical infrastructure

05 Financial infrastructure

06 Connectivity 102 07 Image of the country

124

Appendix: details of the indicators used

140

Attractiveness of Brazil as an international investment and business hub

8 Attractiveness of Brazil as an international investment and business hub

Executive Summary The attractiveness of Brazil as an investment and business destination is a recurring and very important theme. As part of its activities to articulate and catalyze the creation of an international hub in Brazil, BRAiN - Brasil Investimentos & Negócios (Brazil Investments & Business) is issuing this second edition of its Attractiveness of Brazil as an international investment and business hub report, first published in 2011. This new study, supported by extensive research and data analysis, re-examines the seven pillars that constitute BRAiN’s vision of the fundamental prerequisites for the creation and excellence of an attractive investment and business hub: macroeconomic environment, institutional environment, talent and human capital, physical infrastructure, financial infrastructure, connectivity and image of the country. Brazil has numerous characteristics that make it suitable for the international investment and business hub status, such as the strength of the economy and its importance within its region, its financial infrastructure as well as political and institutional stability. However, its prominence in the international scenario still faces numerous challenges that the country must address, such as the quality of the education, an irrational tax system and poor transport infrastructure. These challenges represent ultimately additional costs for investing and doing business in the country. However, given the advances of the past decade, including the country’s resilience to recent crises, the outlook is far more positive for Brazil. Below are the main elements of each of the pillars analyzed: 1) Macroeconomic environment: Brazil is currently a strong economy with global relevance. In 2011 it became the world’s sixth largest economy in terms of nominal GDP. It is also a stable economy, having kept inflation in single digits since 2002, with an average consumer price index (IPCA1) of 5.8% a year between 2003 and 2011. In addition, exchange volatility has been low over the past five years. The nation also proved quite resilient to the effects of the global economic crisis, growing at an annual rate of 4.4% between 2006 and 2010. However, growth slowed to 2.7% in 2011, a clear indication that there are challenges ahead if Brazil is to keep growing with no increase in inflation. In particular, a new model for growth should be pursued, one that is not so much dependent on consumer spending as it has been recently.

Ample Consumer Price Index (IPCA), the official index the Brazilian Government has used to measure inflation since 1999

Attractiveness of Brazil as an international investment and business hub

In order to keep on this positive path for growth, it is essential that Brazil increases its investment capacity. Between 2002 and 2011, investment in Brazil averaged 17.3% of the GDP, well below countries such as China and India, and even other Latin American countries such as Chile and Mexico. Investment as a percentage of GDP in these countries was 41.5%, 29.9%, 21.5% and 20.6% respectively over this same period. Increasing the rate of investment is particularly critical in light of the low average rate of internal savings in Brazil, which was only 19% from 2008 to 2011. This means that attracting foreign investment is key for future growth. Continued reduction in the nominal public deficit, which decreased from 4.5% of the GDP in 2002 to 2.6% in 2011 as well as continued fiscal discipline are the basis for continued economic stability and thus attracting foreign capital, and essential for increasing the investment rate and consequently the country’s growth over the coming years. 2) Institutional environment: Brazil has reached important milestones in its political and institutional systems. It has consolidated its position as a democracy, with regular, direct and multi-party elections, and there is no sign of any internal or external conflict.

The 2012 World Competitiveness Yearbook, an annual global survey of middle and senior managers in 59 countries

However, it faces important challenges in institutional aspects related to the economy, in particular those related to its complex tax system and bureaucracy. Regarding the former, it must be mentioned how difficult and complex it is for companies to calculate and pay taxes such as ICMS, ISS, PIS and COFINS. Regarding the latter, bureaucracy is a clear hurdle for business activities, and according to an IMD survey2, Brazil is more bureaucratic than China or Mexico, and very far from the main international investment and business hubs such as the United Kingdom and the United States of America. Merely as an example, one could mention the process of opening a business, which is complex and decentralized, with numerous steps at the municipal, state and federal levels, taking an average of 119 days in São Paulo, Brazil’s main business city.

10 Attractiveness of Brazil as an international investment and business hub

However, progress has been made and further progress is expected in the future, such as the government of Minas Gerais’ initiative to optimize the process to open a business, which has already proven a successful model and may be implemented in other eight states in 2012. In addition to rationalizing bureaucracy, the Brazilian State took an additional step in institutional matters, making government data more transparent with the signing of the Law # 12,527 in November 2011 that requires the disclosure of public information, including civil servants’ salaries. 3) Talent and human capital: Brazil has a solid and positive demographic base, and it is the world’s largest economy with an economically active base growing fast enough to supply the expected increase in the demand for labor in the coming years. However, if it is to leverage this advantage and become more attractive, Brazil must improve significantly the training and qualification of its workforce. Net enrollment rates of 87% in primary school (grades 1 - 5) and 69% in secondary school (grade 6 to the end of secondary school) are close to world averages. However, this does not mean that the quality of the education is good. To illustrate the problem, in 2009 the average score for Brazilian students in the international PISA3 test was 401, well below the average of 497 for the OECD countries and 468 for all countries evaluated. The performance of secondary school students is also unsatisfactory, scoring below the expected in the 2011 Prova Brasil, with essentially no change compared to 2009. In terms of higher education, net enrollment in Brazil is 27%, below the world average of 40%, and has the same quality problems as primary and secondary education. Regarding the alignment between higher education and market needs, an IMD survey4 reveals that Brazil is the worst of the 13 nations compared. In addition to this, only 9% of the programs analyzed were rated as good in the 2010 General Course Index, Brazil’s Ministry of Education’s assessment of the quality of higher education5. Changes are underway and the Brazilian Government is making an effort to grant scholarships and invest in technical education, with programs such as PROUNI, which granted 195 thousand scholarships for higher education in the first half of 2012, and PRONATEC, created in late 2011 to promote technical education. Additionally, the private sector has numerous initiatives to give people the training and knowledge necessary for their activities. However, taking benefit from the country’s demographic advantage requires a continuous effort in training the population in order to meet market needs, with long-term impacts.

Programme for International Student Assessment: a test applied from time to time by the OECD to 15-yearold students (equivalent to the 9th grade) in 65 countries 3

The 2012 World Competitiveness Yearbook, an annual global survey of middle and senior managers in 59 countries 4

Schools scoring 4 or 5 on a scale of 1 to 5, with the higher scores being better

Attractiveness of Brazil as an international investment and business hub

12 Attractiveness of Brazil as an international investment and business hub

In transportation there are clear infrastructure bottlenecks, resulting from a slowdown in investments in this sector dating back to more than three decades

4) Physical infrastructure: The availability of basic services within Brazil’s urban centers is adequate, with 99% and 85% of the urban population having access to clean water and basic sanitation, respectively. In this regard, Brazil performs better than other BRICS, and it is close to the level of developed nations. However, its performance along other dimensions is still quite poor. In transportation there are clear infrastructure bottlenecks, resulting from a slowdown in investments in this sector dating back to more than three decades - in the seventies the country invested 5.4% of its GDP in infrastructure, but by the two thousands was investing only 2.1%. This puts Brazil at a disadvantage compared to developed nations with established infrastructure and emerging nations such as China, which in 2010 spent 11% of its GDP on infrastructure, and India, which invested 5.1% between 2004 and 2008. And the latter plans to invest 7.6% of its GDP a year between 2008 and 2012. Addressing this challenge is part of the Brazilian Government’s current agenda, which includes greater involvement of the private sector. Concessions for the private operation of three airports - Cumbica (SP), Viracopos (SP) and Juscelino Kubitschek (DF), awarded in the first half of 2012, are illustrations of the Government’s greater willingness to allow private participation in physical infrastructure investments. Additional concessions and PPPs (public-private partnerships) are planned for the coming years. The Investment in Logistics Program announced in August 2012 points to clear opportunities in the road, railway, port and airport sectors. In addition to attracting investments and creating jobs, these works will also make the country more competitive as an investment and business hub. 5) Financial infrastructure: Brazil has solid financial regulations, for which it is recognized worldwide. Its rules of prudence, for example, make fraudulent market schemes, such as the Madoff affair, more difficult to happen in the country. This is probably the pillar in which Brazil stands out the most compared to other investment and business hubs. It was largely due to the solidity of its banking infrastructure that Brazil weathered the 2008 financial crisis so well.

Attractiveness of Brazil as an international investment and business hub

In terms of funding for businesses, in recent years the number of bank loans has increased, and companies have diversified their sources of funds, in particular using the stock market. Nevertheless, there remain opportunities for greater diversification of the instruments used. It is hoped that falling real interest rates will foster the debentures market, for instance. The use of this financing instrument in Brazil is rather limited in comparison to other countries: it represents less than 1% of the GDP, compared to 36% in South Korea. Also, its growth in real terms in Brazil, about 4% a year between 2004 and 2011, was quite low compared to the 15% annual increase in bank credit during the same period. When it sought to replicate the success of the Novo Mercado6 self-regulation initiative to private-debt issues, the market organized and created added incentives for businesses to use this type of financing. 6) Connectivity: Brazil captures a major share of Latin America’s inward foreign direct investment (FDI). In 2011, 41.1% of the total FDI in Latin America went to Brazil, and it is the major destination of large North American, European and Asian companies. However, there’s room for growth, as Brazil attracts proportionally less FDI than its share of regional GDP – the country has an FDI to GDP ratio of 0.957, while Chile has 3.13.

BM&FBOVESPA rules for listing that demand corporate governance standards above those required by law 7

Average between 2009 and 2011

Imports of goods and services increased 16.7% and 19.7% respectively over the same period 8

Exports of goods and services increased 12.4% and 12.5% a year respectively between 2007 and 20118, a rate that is larger than those experienced by the rest of Latin America and the world at large. However, Brazil’s share of global trade is small, something around 1% of the total. In order to bolster both the flows of capital and goods and services, Brazil could promote further integration with other countries in the form of international trade agreements as a means to soften still-existing protectionist policies.

14 Attractiveness of Brazil as an international investment and business hub

Brazil has a unique opportunity to promote itself abroad over the next few years, given the exposure it will get for hosting the FIFA World Cup and the Olympic Games

7) Image of the country: Brazil has a positive image as a tourist destination, according to the Anholt-GfK Roper Nation Brands Index, and cities such as São Paulo and Rio de Janeiro are recognized as some of the best places to do business in Latin America, as shown in the ranking published by the AméricaEconomía magazine. In terms of image as a place to do business, Brazil could increase its efforts to promote itself within a broader context, which are still quite limited. Here one could mention the BEST BRAZIL initiative, which presents Brazil’s financial and capital markets to foreign investors, and APEX, whose goal is to promote the country’s foreign trade. Brazil has a unique opportunity to promote itself abroad over the next few years, given the exposure it will get for hosting the 2014 FIFA World Cup and the 2016 Olympic Games, which should attract some 600 thousand visitors in 2014, and 380 thousand in 2016. If Brazil successfully exports its image during these sports events, the current flow of tourists, which in 2011 was 5.4 million, could reach a higher level and offer the country an opportunity to improve its image abroad as a destination for tourism and, more importantly, for business. In the next section, we present a dashboard of indicators with a comparative analysis of Brazil. The country is compared to 13 selected countries in each of the 57 dimensions of the 7 pillars of attractiveness. In the sections ahead, we discuss Brazil’s position as an investment and business hub in each of these dimensions and pillars in greater depth.

Attractiveness of Brazil as an international investment and business hub

16 Attractiveness of Brazil as an international investment and business hub

A dashboard of Brazil's attractiveness

To analyze the attractiveness of a hub we considered two main streams: the country’s intrinsic characteristics and its connectivity. Intrinsic characteristics are those that define a country as attractive in itself: a strong economy, its physical, financial, legal and regulatory infrastructure, and a trained and qualified population. Connectivity, meaning flows, defines the attractiveness of the network to which the country belongs, reflection of the number and quality of its intra-regional connections, and its connections to other relevant hubs around the world. These streams make up a country’s attractiveness as a hub and allow a nation to compete with other global hubs for resources for itself and for its region of influence. These characteristics are detailed in seven pillars that constitute BRAiN’s vision of the fundamental prerequisites for the creation and excellence of an attractive investment and business hub: macroeconomic environment, institutional environment, talent and human capital, physical infrastructure, financial infrastructure, connectivity and image of the country (see Exhibit 1). From this starting point, separate dashboards were created for each pillar to enable easy comparison of how Brazil is doing in relation to a list of 13 countries. These dashboards contain 57 dimensions, representing the main elements analyzed in this report. The objective is to track Brazil’s progress over the years so as to enable mapping the next steps required to enhance Brazil’s attractiveness as an investment and business hub. These metrics take into consideration the quality of the source, the availability of data for different countries, and the possibility of continuous monitoring over time.

Attractiveness of Brazil as an international investment and business hub

Exhibit 1

The seven pillars that underlie the fundamental requirements for creating and excelling as an investment and business hub

Macroeconomic environment

Steady economic growth and little uncertainty regarding interest and the exchange rate are examples of the underlying conditions required for creating an international investment and business hub in any country

Institutional environment

A solid state of law, enabling economic agents to fully meet their obligations and transparent and efficient administrative processes are key elements when it comes to qualifying a country as a hub, in particular compared to other potential hubs

TALENT AND HUMAN CAPITAL

An adequate supply of talents, not only in terms of numbers but also in terms of their qualification and training, which must be aligned with what the job market is looking for, along with possibility of attracting and bringing in experts from outside the country are also requirements that any location that aspires to be an international hub must fulfill

Physical infrastructure

Multimodal shipping options that enable flows into, out of and within the hub, along with access to a communications network that is competitive in terms of both cost and performance are clearly some of the factors of success for any business hub

Financial infrastructure

The existence of capable financial intermediaries, continuous access to several sources of funding and tools to mitigate risk all directly support the development of an investment and business hub

Connectivity

Intense trade in goods and services, capital and people flows are vital to continuously nurture an investment and business hub

Image of the country

A positive perception of what a country as a whole has to offer is an important asset to consolidate the position of any hub, and in particular for attracting companies and talents

18 Attractiveness of Brazil as an international investment and business hub

The basket of countries for comparison was made up by looking for examples of countries that are recognized as investment and business hubs: the United States, the United Kingdom, Hong Kong and Singapore; developed nations: France, Germany, Japan and South Korea; and countries that, like Brazil, are considered emerging: Russia, India, China, Chile and Mexico. In order to assign countries to positions along each indicator scale, and to classify them as “excellent”, “good”, “needs improvement” and “critical”, one of two rationales was used: (1) where available, a publicly established social, political or economic consensus, (2) where no such consensus exists, a statistical rationale where the population average is the divider between the “good” and “needs development” levers, and a standard deviation added to or subtracted from the average and used as the divider between the “excellent” and “critical” levels respectively. Details regarding indicator sources and the criteria for allocating countries along each scale are available in the Appendix of this report.

Macroeconomic Environment critical

needs improvement

good

deu GBR

Economic GrowthP

Monetary Stability

Fiscal SolidityP

fra

excellent

BRA

USA

SGP

KOR RUS

JPN

CHL

CHN

MEX HKG

IND

BRA IND

RUS

MEX HKG KOR

USA FRA

JPN

CHN

CHL GBR SGP

DEU

BRA JPN

FRA

USA SGP

DEU

MEX HKG KOR

IND

CHN

RUS

GBR

CHL

BRA

CHL

External Vulnerability

MEX KOR

IND

RUS

HKG CHN

SGP

BRA

Economic Volatility

Human Development

HKG

USA

GBR

SGP DEU JPN CHL

RUS

CHN KOR

MEX

IND

FRA

BRA IND

CHN

RUS MEX

CHL

SGP

FRA

GBR

HKG DEU KOR JPN USA

BRA

Income distribution

CHL MEX

HKG

RUS SGP

Emerging nations P: indicator based on projected data

Main international hubs

USA CHN

GBR IND

Other developed nations

KOR FRA

DEU

JPN

Attractiveness of Brazil as an international investment and business hub

Institutional Environment critical

needs improvement IND

Political stability

good

BRA

RUS CHN

USA

MEX

KOR

excellent

CHL

GBR

DEU HKG

FRA

JPN

SGP

BRA

Quality of regulations

Legal Security

RUS

CHN

MEX

JPN

IND

FRA USA DEU GBR HKG

KOR

CHL

SGP

BRA RUS

MEX

CHN

IND

KOR

CHL JPN

FRA USA SGP HKG DEU GBR

BRA

Labor market flexibility1

Ease of opening a businesS1

How easy it is for businesses to pay taxes

FRA

DEU MEX

KOR

CHN

RUS

CHL

JPN

gbr

IND

HKG

BRA CHN

RUS

KOR

IND

CHL MEX

SGP JPN GBR

FRA USA

BRA MEX JPN CHN

Emerging nations

Main international hubs

1. Data cannot be updated from the 2011 Attractiveness Report

USA SGP

RUS CHL

IND KOR USA DEU

FRA

Other developed nations

GBR

HKG SGP

20 Attractiveness of Brazil as an international investment and business hub

TALENT AND HUMAN CAPITAL critical

Demographic contingent

Quantity of primary and secondary education

CHN

needs improvement

KOR DEU

FRA

JPN

good

USA GBR

excellent

BRA

IND

MEX

RUS

BRA IND

HKG

CHN CHL

MEX

SGP DEU FRA

USA

RUS

KOR GBR JPN

BRA

MEX CHL

Quality of primary and secondary education1

RUS

FRA

DEU CHN

JPN KOR HKG

USA GBR

SGP

BRA

Quantity of higher education

Alignment between higher education and the market

Internationalization of the country’s education (foreign languages and experience)

Availability of qualified managers and engineers

Intensity of Research and Development

Country attractiveness to international talent

IND

CHN

MEX

FRA HKG JPN SGP RUS

DEU

USA

KOR

GBR CHL

BRA JPN CHN KOR RUS

IND CHL FRA

USA HKG

GBR

DEU

SGP

MEX

BRA JPN

CHL CHN

USA

IND

FRA

KOR

GBR

DEU

SGP HKG

MEX RUS

BRA KOR CHN

DEU JPN

GBR

IND

RUS

CHL FRA

SGP

HKG

USA

BRA IND CHL

CHN

HKG

GBR

RUS

FRA

DEU

SGP

JPN

KOR

BRA JPN

MEX

FRA KOR

DEU HKG

RUS

CHN

IND

CHL GBR

USA SGP

BRA Talent immigration

10. complexity

KOR

JPN RUS CHN

SGP DEU

IND

FRA

GBR

MEX

CHL

USA

HKG

BRA

11. Diaspora management Emerging nations

GBR

DEU

CHL RUS

SGP

HKG

IND

Main international hubs

P: indicator based on projected data 1. Data cannot be updated from the 2011 Attractiveness Report

Other developed nations

Attractiveness of Brazil as an international investment and business hub

Physical Infrastructure critical

Urban mobility1

Quality of air transport

Quality and cost of telecommunications

needs improvement

good

BRA IND

CHN

FRA RUS

excellent

DEU

GBR

USA

MEX

BRA RUS

CHN

MEX

JPN

KOR

CHL

IND

USA

FRA

DEU

SGP

GBR

HKG

BRA MEX

CHN RUS

IND

JPN GBR

FRA CHL DEU USA

SGP KOR HKG

BRA

Power availability

Basic services available to the urban population1

IND

MEX CHL

GBR

CHN USA

KOR

JPN

BRA IND

Emerging nations

Main international hubs

1. Data cannot be updated from the 2011 Attractiveness Report

DEU FRA SGP HKG

RUS

CHN RUS

MEX

Other developed nations

SGP GBR USA JPNFRADEU

CHL KOR

22 Attractiveness of Brazil as an international investment and business hub

Financial Infrastructure critical

needs improvement RUS

Effectiveness of financial regulations

CHN

good

GBR DEU FRA MEX

excellent

BRA

USA

IND

CHL SGP HKG

JPN KOR

Use of financial resources

BRA

DEU CHN

Stock Exchange

IND JPN

MEX RUS

KOR

USA

CHL

GBR SGP

HKG

FRA

BRA

Debentures

Corporate credit

SGP IND

MEX

HKG

CHN

FRA

CHL

JPN

USA

KOR

DEU

GBR

BRA KOR DEU

SGP

FRA

USA

CHN

GBR IND

BRA

Share of regional and JPN KOR RUS international companies CHN in the stock exchange

Availability of financial services

Stock Exchange Liquidity

USA

IND

FRA

CHL

MEX SGP GBR

HKG

BRA MEX

KOR

RUS

IND

FRA

JPN

CHN

CHL USA DEU

GBR

HKG SGP

BRA CHL

MEX

FRA

IND

JPN RUS GBR HKG USA KOR

SGP

CHN

DEU

BRA

Projection as an IFC

IND

RUS

MEX

CHN

KOR

FRA JPN DEU

HKG SGP

Emerging nations

Main international hubs

Other developed nations

GBR USA

Attractiveness of Brazil as an international investment and business hub

Connectivity critical

BRA

International openness for trade in goods1

Trade in goods

International openness for trade in services1

MEX

needs improvement

IND

good

RUS

KOR

excellent

JPN DEU CHN

SGP

CHL USA

HKG

GBR FRA

BRA USA

JPN

IND

GBR RUS

CHN

MEX CHL

DEU KOR

SGP

HKG

Trade

FRA

BRA IND CHL

SGP

MEX CHN

KOR

FRA GBR

HKG

USA

DEU JPN

BRA

MEX

Trade in services

JPN CHN

USA

CHL FRA

DEU

IND

HKG

GBR

KOR

SGP

RUS

BRA

Capital flows

International agreements allowing capital flows1

National regulations supporting international capital flows1

Expansion of the country’s multinationals

Ease of entry for foreign multinationals1

10.

Openness to immigrantS1

JPN IND DEU

USA

FRA

RUS GBR

CHL

SGP

HKG

KOR MEX CHN

CAPITAL

BRA JPN

SGP MEX

USA CHL KOR CHN FRA

HKG

RUS IND

DEU

GBR

BRA CHN RUS

KOR

USA

JPN FRA MEX

CHL

IND

GBR SGP

HKG

DEU

businesses

BRA RUS CHL SGP IND

MEX

CHN

HKG

DEU FRA GBR

JPN

USA

KOR

BRA CHN MEX RUS KOR

IND FRA USA

GBR

SGP JPN

CHL

BRA CHN

IND MEX

KOR

JPN CHL

RUS GBR DEU

HKG

PEople

FRA USA

SGP

BRA CHL

11. People mobility Emerging nations

MEX

Main international hubs

1. Data cannot be updated from the 2011 Attractiveness Report

HKG SGP KOR JPN

IND

Other developed nations

CHN

RUS

USA DEU FRA GBR

24 Attractiveness of Brazil as an international investment and business hub

IMAGE OF THE COUNTRY critical

needs improvement

good

BRA

CHL CHN

Image as a place

1. to do business

KOR

MEX IND

excellent

SGP

GBR USA

RUS

FRA JPN DEU

BRA

Foreign interest in the country’s investment and business

Attractiveness for international events

Sustainability

Quality of life

Cultural openness

Personal safety and asset security

Image for tourism and leisure

CHL

KOR MEX

DEU HKG

SGP

CHN

GBR

IND

RUS JPN FRA

USA

BRA RUS HKG CHL

SGP

IND

MEX JPN

DEU

FRA

KOR CHN

USA

GBR

BRA IND CHN RUS

MEX

CHL

SGP KOR

JPN

DEU GBR FRA

USA

BRA CHN IND RUS

KOR HKG CHL

GBR

JPN USA SGP

MEX

DEU

FRA

BRA FRA

JPN RUS

KOR

DEU

CHN

GBR

IND

CHL

SGP

HKG

USA MEX

BRA RUS

MEX

KOR

IND

CHL FRA GBR

USA DEU

JPN

CHN

SGP

HKG

BRA CHL SGP

RUS CHN

MEX

KOR

JPN

DEU USA GBR FRA

IND

BRA

9. Quantity of visitors

CHL

IND

JPN

SGP

RUS HKG MEX DEU GBR

KOR Emerging nations

Main international hubs

Other developed nations

CHN USA

FRA

Attractiveness of Brazil as an international investment and business hub

26 Attractiveness of Brazil as an international investment and business hub

Macroeconomic Environment

To assess the attractiveness of an investment and business hub it is essential to look at the country’s macroeconomic scenario. Stable economies that are growing sustainably and that offer suitable financing terms are able to leverage the strength of their local businesses and create a virtuous economic circle. In this chapter we analyze the performance of Brazil’s macroeconomic environment along three dimensions - growth, predictability and financing terms.

Main aspects of the macroeconomic environment pillar Growth: The size of a country’s economy and conditions to ensure long term growth are essential for business expansion and to improve the quality of life of the population as a whole. Predictability: Predictability is critical to generate trust and facilitate business operations, in this way increasing the likelihood that economic agents invest in the country. Financing terms: The financial capability of a nation is extremely important for maintaining a healthy macroeconomic environment.

Growth Brazil continues to stand out in the global context, following a trend that has consolidated over recent years. Brazil passed the UK in nominal GDP in 2011, thus becoming the world’s sixth largest economy. Although its growth in 2011 was only 2.7%, below the 4.4% average for the period between 2006 and 2010, the outlook remains good for Brazil, and by 2020 the country should go up one more point in the ranking of the world’s largest economies (see Exhibit 2).

Attractiveness of Brazil as an international investment and business hub

Exhibit 2

A solid macroeconomic environment is key for a favorable business environment

1980

In 2011, Brazil overtook the UK to become the world’s 6th largest economy

Furthermore, it continues grows at satisfactory rates, despite a recent slowdown

World ranking of countries by GDP (US$)1

Selected country growths 1996-2011

1990

2000

2010

2011

2020

2030 15

CAGR by period (%)

Brazil’s growth is stable: Variation between 2006 and 2010 Brazil: 0.71 China: 0.19 USA: 3.73

2. 3. 4.

11.20

9.76

9.20 8.63

6. 7. 8.

4.45

4.30

2.78

10. 2.02

2.74

2.39

1.74

11.

0.73

BRA CHN USA BRA CHN USA BRA CHN USA BRA CHN USA

12.

1996-2000

2001-2005

2006-2010

2010-2011

1. Based on the nominal GDP of the countries in US dollars using the average US$ exchange rate for the year Note: According to the most recent data from EIU in May 2012 / Source: EIU Country Data; BCG analysis

9 This index ranges from 0 to 1. Higher scores indicate greater social inequality

Source: De volta ao país do futuro: crise europeia, projeções e a nova classe média (Back to the country of the future: European crisis, projections and the new middle class), 2012, Fundação Getúlio Vargas Center for Social Policies 10

With the increase in GDP, income distribution as measured by the Gini index9 also improved. In 2002 the Gini index for Brazil was 0.59, and in 2012 should reach 0.5210. Nevertheless, social inequality is still large compared to developed nations such as Germany or France, or even some emerging nations such as India and China, with much lower scores: 0.28, 0.33, 0.37 and 0.42 respectively.

28 Attractiveness of Brazil as an international investment and business hub

Attractiveness of Brazil as an international investment and business hub

Income distribution is also reflected in the growth of the middle class11, which in 2011 made up 55% of Brazil’s population, compared to 38.6% in 200212. According to the International Labor Organization13, a favorable economy, formal jobs14 and a real increase in the minimum wage15 all contributed to better income distribution. Despite better income distribution, Brazil still has a lot of room to improve in terms of its Human Development Index. Calculated based on criteria such as income, education and life expectancy, this index is measured on a scale of 0 to 1, with higher scores being better. Brazil has made progress, going from 0.665 in 2000 to 0.718 in 2011, but is still only 84th out of the 187 nations surveyed16.

11 Families making between R$ 1,200.00 and R$ 5,174.00 a month, 2011 prices

Source: A nova classe média: o lado brilhante da base da pirâmide (The new middle class: the bright side of the base of the pyramid), 2011, Fundação Getúlio Vargas Center for Social Policies

13 Source: Perfil do trabalho decente no Brasil: um olhar sobre as unidades da Federação (Profile of decent work in Brazil: a look at the different states), 2012

Between 2003 and 2010 the number of people holding formal jobs increased 53.6% 14

Between April 2003 and January 2010 the accumulated real increase in the minimum wage was 53.7% 15

16 In 2000 Brazil was 71st out of 153. Source: United Nations Development Program - Human Development Report

Within Latin America Brazil is ranked 15th in productivity, and 75th worldwide. Source: The Conference Board 17

The last decade has provided clear evidence of a positive cycle of growth for Brazil. However, the 2.7% growth the country recorded in 2011 shows that challenges remain, in particular in terms of its investment capacity, translated into Gross Fixed Capital formation. Estimates show that Brazil would need an investment rate of around 22% of its GDP to sustain 4% annual growth. Between 2002 and 2011 Brazil averaged a rate of 17.4%, while in China the investment rate was 41.5% and in India 29.9%. Even compared to other Latin American countries Brazil fares poorly, as in Chile the investment rate is 21.4% of the GDP, and in Mexico 20.6%. Thus it is critical that Brazil adjust its investment rate to ensure higher and sustained growth in future. Furthermore, one of Brazil’s greatest macroeconomic challenges in the coming years will be how to solve the paradigm of growth based on consumption. While it is undeniable that consumer spending helped the country go through the 2008 crisis, continued use of this model could have undesirable results. Unemployment at an all-time low rate - under 6% - should serve as a warning to the continued policy of economic expansion based on consumer spending. The low productivity17 of the workers that are being hired is in stark contrast with the high wages offered by a heated economy. The result are products that are expensive and non competitive, but that find a market within the country because they are protected by import tariffs. Continued use of a model that stimulates demand will require more expensive resources and, at the limit, could drive up inflation. The solution for this situation could encompass three actions: the first is to adjust credit expansion and consumption, with more restrictive fiscal policies designed not to overly accelerate demand and pressure inflation; the second is improving productivity of the Brazilian workforce, investing in education and making it easier for workers who are qualified in sectors where there is a labor shortage to enter the country (this is further discussed in the Talent and human capital chapter); the third action, which we will also further address along this report, are policies to increase savings and investments in the country.

30 Attractiveness of Brazil as an international investment and business hub

The formal implementation of inflation targets in 1999 was a major institutional milestone and remains a fundamental pillar of the country's macroeconomic policy

Predictability Inflation is one of the main factors that influence the predictability of an economy. Following the hyperinflation Brazil experienced in the 1980s, important reforms in the nineties were able to contain an inertial inflation process. In addition, the formal implementation of inflation targets in 1999, which increased predictability and aligned the expectations of economic agents, was a major institutional milestone and remains a fundamental pillar of the country’s macroeconomic policy. As a result, between 2002 and 2011 the IPCA18 averaged 5.8%. Between 2012 and 2016, inflation is expected to reach 5.0% annually, which although high compared to developed nations, puts Brazil in advantage compared to India and Russia. These two countries expect inflation rates of 7.7% and 5.3%, respectively. Another important element for economic predictability is the exchange rate, as it reduces market asymmetries and gives businesses the stability required to assess international trade. Even with the floating exchange system, the exchange rate fluctuation diminished over the past five years, with the US Dollar remaining at between R$ 1.50 and R$ 2.40. In the early 2000s, the Dollar had reached levels close to R$ 4.00. Financing terms The state of a country’s public finance has a major influence on its financing terms. Net public sector debt as a percentage of GDP is dropping in Brazil, going from 60.4% in 2002 to 36.4% in 2011. Regarding its foreign debt, in 2006 Brazil went from debtor to creditor. Furthermore, the public deficit has been dropping in recent years, reaching 2.6% of the GDP in 2011 (see Exhibit 3). The nation’s gross public debt also dropped, from a high in 2002, when it reached 70.9% of the GDP, to 66.2% in 2011. Over the coming years Brazil is expected to remain on this positive path, and by 2016 gross public debt is expected to be only 58% of the GDP19. Therefore, Brazil is moving in the opposite direction of developed countries such as the UK, France and Singapore, whose debts are expected to keep growing and be around 90% of the GDP, and the US, with a projected debt of 113% of the GDP.

18 Ample Consumer Price Index (IPCA), the official index the Government has used to measure inflation since 1999

19 Source: International Monetary Fund (IMF)

Attractiveness of Brazil as an international investment and business hub

exhibit 3

Financing terms in Brazil have evolved positively Over the course of the past years the public debt has dropped to a new level...

…the same is true for the deficit

Net Public Sector Debt

Public Deficit

% GDP1

% GDP

5.5

60.4

5.2

47.3

4.5 36.4

3.6 3.3

30 3.0

2.6

2.9

2.0

0 -10 2002

2003

2004

2005

2006

2007

-2

-16 -28 -21 -24 -36

External/total (%)

2008

Internal

2009

2010

External

2011

Total

0 2002

2003

2004

2005

2006

2007

1. Position at year end. Equivalent to the net balance of the non financial public sector and the Central Bank debt with the financial system (public and private), the non financial private sector and the other countries / Source: Brazilian Central Bank

2008

2009

2010

2011

32 Attractiveness of Brazil as an international investment and business hub

In that sense, an important institutional step that contributed to this was the signing in 2000 of the Complementary Law #101, also known as the Fiscal Responsibility Law, which rationalized and set limits for public spending (see Box A). Another critical factor for a country’s financing terms is the interest rate. Interest rates have been dropping in Brazil since 2006, and dropping faster in 2012, when the Central Bank set its target base interest rate to the lowest level since 1986, the first year such records were kept. The Brazilian Government expects the real base interest rate to be around 2% a year by 2014 - in 2006 it was 11.7%. All of this stimulates economic activity and reduces the spread to be paid by the Government. Changes in legislation governing how savings accounts are remunerated, formerly set at 6.2% a year + the TR (the Brazilian Central Bank Reference Rate), posing a barrier to any further drop in interest rates, and the Government’s policy to cut interest rates have paved the way for cheaper financing terms, aligning Brazil with countries such as China and Russia (see Exhibit 4).

box A

Contributions of the Fiscal Responsibility Law to Brazil’s financial health

The Fiscal Responsibility Law, enacted on May 4th, 2002, sets limits on state and municipal public spending, forcing them to stay within their budget (literally their ability to collect taxes). Supported on four principles (planning, transparency, control and accountability), the FRL defined the parameters for fiscal organization in Brazil. The law was designed to make public finance more transparent, and make it impossible for public managers to run up large debts at the end of their mandates, that their successors then had to tackle. Brazil was the world’s first emerging nation to approve a fiscal responsibility law, and significantly increased this nation’s maturity regarding this theme. Continuing along this path requires taking a number of additional steps, such as creating the Fiscal Management Board and setting limits on the federal public debt. In addition, the law could be perfected so as to provide sufficient incentives to keep the short-term fiscal balance and not compromising the long-term investments Brazil needs, such as spending on infrastructure.

Source: Fiscal Responsibility Law; Brazilian Federal Revenue; FGV Projetos

Attractiveness of Brazil as an international investment and business hub

exhibit 4

The trend is for lower interest rates going forward Interest rates have dropped steadily over the years

Brazil reaches the same level as countries such as Russia and China3

Interest rate1 (%)

Actual interest rate %

15.3

Emerging nations Brazil

12.4 10.1

11.7

Developed nations

11.7

2.7

9.8

2.6

2.5

1.6 7.2

mexico

2.7

chile

3.7

russia

4.8

china

0.7

5.5

brazil

6.1

usa

8.0

united kingdom

12.0

-1.9 -2.3 Actual rate

Nominal rate

1. Average rate over the period and actual rate deflated using the IPCA 2. Estimate based on an IPCA of 5.2% and interest rate of 8% 3. Estimates for 2012 based on the median on the data collected from Bloomberg in June, 2012 / Source: Tendências Consultoria, Brazilian Central Bank, Bloomberg

In looking at financing mechanisms, it is clear that the domestic savings rate in Brazil is lower than in other countries (see Exhibit 5). Between 2008 and 2010 domestic savings in Brazil was 19%, while in China, India, Chile and Mexico it was 52%, 31%, 28% and 23% respectively. The low savings rate limits the country’s ability to fund any increase in investment and demands that it attract foreign sources. Brazil is now in a more favorable position to attract foreign investment than it was in the past. In 2008 the rating agencies upped it to “investment grade”, and the country risk measured by the EMBI+20 has been around 200 points since 2011, compared to more than 2,000 in 2002.

Emerging Markets Bond Index Plus

In short, financing terms in Brazil have been on a positive path in recent years, both in terms of the performance of its public accounts, and the drop in interest rates. Nevertheless, the country must increase the domestic savings rates if it is to ensure good financing terms in future.

34 Attractiveness of Brazil as an international investment and business hub

exhibit 5

The savings rate in Brazil is among the lowest in the world The savings rate in Brazil is low compared to selected countries Gross domestic savings/GDP (%)1 52%

51% Emerging nations Brazil Developed nations

30%

28% 23%

23%

21%

BRAZIL

JAPAN

GERMANY

MEXICO

CHILE

hong kong

south korea

RUSSIA

INDIA

sINGAPoRe

CHINA

19%

18%

1. Average for 2008-2009 / Note: 2010 is the last year data is available for all of the countries in the comparison. In 2011, gross domestic savings in Brazil amounted to 19% of the GDP / Source: World Bank

Indicators The dimensions selected for continuous tracking of the macroeconomic environment pillar are: • Economic growth: The faster a country’s economy is expected to grow, the more attractive it will be for international agents. It is extremely difficult for a hub to attract investments and business if it does not rank better than other hubs competing with it for capital; • Monetary stability: Monetary stability contributes to predictable economics of a hub’s investments and business. Countries where there is the expectation of high inflation are less attractive, as international agents are concerned lest the value of their investments and companies erode together with the value of the local currency; • Fiscal solidity: If a country’s fiscal policies are inadequate, the cost of funding in general will go up, thus increasing operating costs in the economy as a whole. Therefore, the more fiscally solid a country, the more attractive it will be;

13%

12%

USA

31%

UNITED KINGDOM

31%

FRANCE

31%

Attractiveness of Brazil as an international investment and business hub

36 Attractiveness of Brazil as an international investment and business hub

Attractiveness of Brazil as an international investment and business hub

• External vulnerability: The availability of reserves to honor its foreign commitments is a measure of a country’s autonomy to ensure its global financial credibility and of its dependence on foreign funds; • Economic volatility: Short term interest rates on government bonds are a good indicator of the volatility of a country’s economy and the frequency with which it must make adjustments. Less volatile economies offer a more secure planning horizon for both companies and families, fostering high levels of investment and growth; • Human development: The higher the human development index the more attractive a country will be as a hub, since greater development means more talents, a larger domestic consumer market and better quality of life for its citizens; • Income distribution: Income distribution influences factors that are key for developing a hub, such as the availability of talents, the size and profile of the consumer market, the country’s level of innovation and its quality of life. If the income is better distributed, these aspects will be more positive for the business hub. The following exhibit shows how Brazil compares to other countries along the dimensions of the macroeconomic environment pillar:

Macroeconomic Environment critical

needs improvement

good

deu GBR

Economic GrowthP

Monetary Stability

Fiscal SolidityP

fra

excellent

BRA

USA

SGP

KOR RUS

JPN

CHL

CHN

MEX HKG

IND

BRA IND

RUS

MEX HKG KOR

USA FRA

JPN

CHN

CHL GBR SGP

DEU

BRA JPN

FRA

USA SGP

DEU

MEX HKG KOR

IND

CHN

RUS

GBR

CHL

BRA

CHL

External Vulnerability

MEX KOR

IND

RUS

HKG CHN

SGP

BRA

Economic Volatility

Human Development

HKG

USA

GBR

SGP DEU JPN CHL

RUS

CHN KOR

MEX

IND

FRA

BRA IND

CHN

RUS MEX

CHL

SGP

FRA

GBR

HKG DEU KOR JPN USA

BRA

Income distribution

CHL MEX

HKG

RUS SGP

Emerging nations P: indicator based on projected data

Main international hubs

USA CHN

GBR IND

Other developed nations

KOR FRA

DEU

JPN

38 Attractiveness of Brazil as an international investment and business hub

In the fiscal solidity indicator the country proved better, but still requires improvement, especially in light of high levels of public spending that could be reviewed and balanced

In general Brazil is well positioned in this pillar, in particular in the future economic growth dimension. In the fiscal solidity indicator the country proved better, but still requires improvement, especially in light of high levels of public spending that could be reviewed and balanced. It comes as no surprise that in the human development and income distribution indicators Brazil is at a disadvantage compared to other countries, despite the advances of the last decade. Conclusion Brazil clearly stands out in the world, combining growth with income distribution and economic stability. In addition, in 2011 it had the world’s sixth largest nominal GDP, and in 2012 the real interest rate reached the lowest level ever, reducing the interest on the public debt and driving a more vibrant economy. Even so, it is important to make sure the current macroeconomic policy is followed, in particular when it comes to fiscal issues and the public deficit, and that the model for growth that is primarily based on consumer spending be reviewed. In addition, the interest and savings rates must be addressed to ensure sustained growth at rates similar to the previous decade and continued advances in income distribution.

Attractiveness of Brazil as an international investment and business hub

40 Attractiveness of Brazil as an international investment and business hub

Institutional environment

Confidence in the effectiveness of a country’s laws, translated into political stability and legal security, is an essential condition for business, and consequently for the attractiveness of a hub. A solid institutional environment that is quick and efficient, with enhanced public controls, is also a catalyst of investment and business, making negotiations safer and business operations more agile and less costly. This chapter analyzes the current situation and the coming challenges Brazil will face in terms of the political system, the stability and clarity of its laws, legal security, and bureaucracy and business operations.

Main aspects of the institutional environment pillar Political system: This is the foundation upon which all of a country’s operating rules rest, and safeguards the nation’s core framework from sudden change. Stable and clear laws: The more consolidated, predictable and clear are the laws of a country, the more agents will be willing to invest and do business there. Legal security: Environments that are more secure reduce the risks associated with legal disputes and contract interpretation, which translate into lower costs for economic agents. Bureaucracy and business operations: More efficient government and limited bureaucratic hurdles act as catalysts of economic development, making business operations more efficient and agile, and less costly.

Attractiveness of Brazil as an international investment and business hub

Political System Brazil has had a stable, democratic, multi-party regime for over two entire decades. Elections are direct, regular and cast via electronic ballot, a safe, modern and quick system that has become a global reference. In addition, there are no signs of existing or potential conflicts between Brazil and its neighbors, ensuring an environment of international peace and political and economic collaboration. As a consequence, the perception of political stability in Brazil, as published by the World Bank, is equivalent to that of the United States and Great Britain21, both with longstanding traditions of democracy. The system can and should continue to improve. As an example of an important step, in November 2011 Brazil signed a law ensuring the right to access government data (freedom of information)22, in line with common practices in countries such as Sweden, the US and France, as well as Latin American countries such as Colombia, Peru, Chile and Mexico23. This law requires that all spheres of government actively disclose information such as financial records, bid and tender procedures, and data on monitoring government agencies. In addition, any interested party may ask to see information produced by government bodies that is of public interest, with deadlines and penalties for non fulfillment of such requests. This measure opens the way to a more transparent public sector. 21 Indicator: Political stability and absence of [political] violence, from 0 to 100. Score: Brazil: 51; Great Britain: 58; United States: 56. Source: World Governance Indicators – World Bank

Law 12,527/11

Source: Freedom of Information UNESCO

Law that created each of the ten regulatory agencies in the country

25 Source: Judgement #2,261/2011 of the Brazilian Audit Court, in response to a request of the Brazilian Senate

This positive agenda must continue to advance, especially the separation between matters of State and the political interests of governments. Examples of improvement might include topics such as the financial independence of regulatory agencies and the independence of mandates of the President of the Brazilian Central Bank. Regarding the former, although there are legal provisions for this24, in practice budgets are determined by the respective ministry. The development of formal funding mechanisms would benefit regulatory activities, making regulators more independent of politics and their resources more stable and predictable25. Regarding the latter, formalized fixed mandates that do not coincide to those of the nation’s president, as is the case in the US and the UK, would strengthen the Central Bank’s autonomy to conduct monetary policy.

42 Attractiveness of Brazil as an international investment and business hub

Stable and clear laws Brazil still faces challenges in the area of stable and clear laws. For instance, between the time the Federal Constitution was issued in 1988, and 2011, an average of 19 federal laws26 has been issued each day. In 2011 alone, 1,781 new federal laws were signed27. This clearly makes it hard to keep up with applicable laws and standards, thus increasing the level of legal insecurity and the cost of investing and going business in the country. There are other impediments related to the clarity of laws in Brazil. The technical quality of the wording of laws and standards must be improved, as well as enhanced control of their legality. For instance a 2009 study by FGV28 shows that 194 of the 218 articles of the Brazilian Tax Code - the main federal law governing the tax system have been challenged in the Superior Court of Justice. In addition to the legislative instability mentioned above, the frequent use of Provisional Measures by the Brazilian Executive Power as a legislative tool, and of so-called terminative decisions (a decision taken by a Commission that counts as if voted in the Senate Plenary) that result in some laws being approved without being submitted to the plenary, confer an undesired element of legislative uncertainty. • Legal Security The higher the degree of legal security, the fewer the uncertainties arising from court cases and contract interpretation, and consequently the lower the investment and business risk. It is important that Brazil stresses as a fundamental right29 the protection of acquired rights, meaning that such rights persist even if the law granting them is no longer in effect. Another principle that is being included in the Brazilian legal framework that also has a positive influence on legal safety is the non retroactivity of a law, meaning that a law cannot influence situations that preceded it, unless it will benefit society. The new Bankruptcy Law, signed in 200530, is a good example of how legislative changes can improve legal security and benefit the investment and business environment. The new law introduced the concept of judicial recovery in place of concordata (creditor protection), reducing the uncertainty regarding the assets at risk of liquidation, and the treatment of guarantees. Consequently, the number of actual bankruptcies in Brazil dropped significantly. In 2005, before the new law was passed, 9.5 thousand bankruptcy requests were filed in Brazil, after the new law the annual average went down to 2.5 thousand (see Exhibit 6), and in 2011 was only 1.7 thousand, the smallest number in the past 12 years.

Number of constitutional amendments, supplemental and ordinary laws, provisional measures, decrees and normative acts such as, for example, directives, opinions and instructions. Source: Instituto Brasileiro de Planejamento Tributário (Brazilian Tax Planning Institute) 26

27 Laws signed between October 2010 and October 2011 Source: Instituto Brasileiro de Planejamento Tributário (Brazilian Tax Planning Institute)

Source: Valor Econômico

Fundamental guarantees described in the Brazilian constitution are considered “cláusulas pétreas” (in English, fixed clauses), meaning that they cannot be subsequently changed 29

Law 11,101

Attractiveness of Brazil as an international investment and business hub

exhibit 6

Ultimately, institutional reforms impact the population in a positive manner The new Bankruptcy Law1 helped reduce the number of companies closing their doors in Brazil Number of bankruptcy filings per year (thousand) 25

20 19.9

20.7 With the new law created in 2005, the average number of bankruptcies each year dropped to 2.5 thousand

15 13.9

13.9 11.6

9.5

-5.4 Average = 2.5 thousand (2006-2011)

5 4.2

2,5 0

2000

2001

2002

2003

2004

2005

2006

2.7

2.2

2.4

1.9

1.7

2007

2008

2009

2010

2011

More companies operating could mean more jobs and increased value creation for society as a whole 1. Law 11,101/2005 / Source: Serasa Experian, BCG analysis

Even with this good example, it remains important to reduce the long time it takes to resolve disputes and enforce court rulings. To invest and conduct business in a country it is not enough to have a legal framework that has legal security as a principle, it is also necessary that the defense of one’s rights not be a slow, lengthy process as this in itself penalizes the party whose rights have been violated. A 2012 study by the World Bank ranks Brazil among the worst countries in the world when it comes to the time it takes to resolve a business dispute: 731 days, while in Singapore an equivalent dispute would be resolved in 150 days (see Exhibit 7). The main reasons for this have to do with the different systems adopted by each country. In Brazil, the delay is primarily the result of the rules that govern the civil and penal process codes, which allow a large number of appeals, and the overly detailed Constitution, which enables many cases to be submitted to the Supreme Court.

Law 11,417

Law 11,418

Law 11,672

Law 9,099 signed in 1995

Law 9,307 signed in 1996

In recent years there have been important reforms, in attempts to resolve this problem, both to reduce the volume of lawsuits as well as to facilitate the operation of the Judiciary system. Regarding the first initiative, one could mention the introduction of binding precedents31 and the principle of general repercussion32 in 2006, and the limits imposed on repetitive special appeals33 in 2008. The creation of so-called Special Courts34 and Arbitration Chambers35 has contributed to the reform of the Judiciary system. Another important step was the implementation in 2011 of goals for the Judiciary system, such as judging a larger number of cases in a year than were filed in order to reduce the backlog.

44 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 7

The time it takes to for rulings adds uncertainty to the operation of the Justice system Brazil has one of the longest conflict resolution terms of any international center Number of days to resolve a commercial dispute

1,420

Ruling: 480 days Sentence enforcement: 210 days Other: 41 days

731 570

280

300

331

HKG

USA

FRA

360

JPN

394

395

399

406

415

DEU

AUS

CHN

MEX

480

150

SGP

CHL

CAN

Note: The standard dispute used for this study is a transaction between two companies (the buyer and the seller) in which the buyer fails to pay for some of the goods claiming that the quality of the goods did not meet the agreed quality standards. The seller then files a lawsuit to collect the amount owed for the goods it sold / Source: Doing Business Report – World Bank – 2012

The enforcement of guarantees is another important element of legal security. Loans at lower interest rates are possible if there are no rules making it difficult for the creditor to recover an asset, as the associated risk is smaller. In Brazil, there are a number of hurdles for creating and enforcing guarantees, typically related to the rigidity of traditional guarantees, difficulty constituting guarantees and a slow judiciary. Regarding the first point, the effectiveness of guarantees is diminished since in the judicial recovery of companies and bankruptcies both labor and tax creditors have preference over creditors with real guarantee rights such as mortgages and pledges, reducing the effectiveness of these instruments. Furthermore, formally registering secured creditor agreements is a complex and costly process. As there is no standardization of the documents required for such agreements, the procedure is subject to the specificities and demands of each notary office. To eliminate the existing hurdles, efforts are being made to make processes more flexible and diversify the instruments available, such as the expansion of the concept of fiduciary property, where goods and rights do not become a part of the borrower’s assets until they have been paid for in full. Thus, the guarantee posted is not part of the judicial recovery process and, unless otherwise determined, there is no competition with the other types of creditors. There are also advantages in enforcement, which no longer requires that the case go through ordinary proceedings, which reduces the steps in the procedure and thus the time it takes for creditors to recover their assets.

BRA

IND

Attractiveness of Brazil as an international investment and business hub

Rank calculated from a score based on over 14 thousand interviews with executives. The question asked was: “How would you rate the protection of property rights in your country, including financial assets? [1 = very poor; 7 = very strong]. Brazil scored 4.7. Source: World Economic Forum – Global Competitiveness Report, 2012-2013 36

United States Trade Representation (USTR) 38

Source: INPI

Source: The 2012 World Competitiveness Yearbook, an annual global survey of middle and senior managers in 59 countries 39

Another theme that embodies legal security is respect for property, including intellectual property rights. A survey conducted by the World Economic Forum in 2012 puts Brazil in 51st place out of a list of 144 countries36. The reasons for this poor placing have to do both with the lengthy and costly patent application process, as well as the widespread practice of purchasing counterfeit (pirate) goods. In these two points there has been improvement. In 2011, Brazil was removed from the US list of “notorious piracy and contraband markets”37, and in fact is the only BRIC not on that list, and the time it takes to get a patent has dropped to five years in 2011, compared to eight just one year previously38. Bureaucracy and business operations Even if it does not actually impede business operations, it is generally believed that excessive bureaucracy greatly increases the cost of investing and doing business in a country. Brazil is the worst-ranked country in an indicator39 that reveals the impact of bureaucracy on business operations, behind other business hubs surveyed and behind other emerging nations such as Mexico, China and Chile (see Exhibit 8).

EXHIBIT 8

The high cost of bureaucracy impacts business In terms of the impact of bureaucracy on business, Brazil is the lowest ranked country The impact of bureaucracy on business / Score (0-10) 8.6 7.9 7.3

7.0 6.1

6.0

5.9

4.2 3.2

BRA

CHN

FRA

MEX

JPN

USA

Note: An annual global survey of middle and senior managers in 59 countries Source: World Competitiveness Yearbook 2012 - IMD; BCG analysis

CHL

HKG

2.9

SGP

46 Attractiveness of Brazil as an international investment and business hub

One consequence of excessive bureaucracy is that it creates opportunities for corruption, as lengthier, more complex and costlier transactions create more room for the payment of favors for speedier resolution. Reducing corruption is thus an additional advantage of reducing excessive bureaucracy in an investment and business hub. One example of a long, slow process is the time it takes to open a business, which in several of Brazil’s state capitals requires a large number of steps and a very long time. The average time it takes in São Paulo, for instance, is around 119 days40. Decentralizing procedures is one of the issues most often mentioned to justify this situation, and the number of entities involved confirms this perception (see Exhibit 9). In addition, according to the 2012 Doing Business report, it takes an average of 469 days to get approval for a real estate development41 in the city of São Paulo, compared to an average of 221 days in other Latin American and Caribbean nations. In São Paulo there is currently a proposal to create a Balcão Único law, something akin to a “one-stop-shop” to centralize the analysis and instruction of applications made to the different municipal bodies. This would pave the way to reduce bureaucracy and thus enable investments and business to proceed more swiftly. Although this is a problem in most Brazilian cities, numerous initiatives have demonstrated there is room for improvement and the entire process of opening a new business can be made more agile. In the state of Minas Gerais, a joint effort by the state government and the boards of trade, known as the Minas Fácil program, has made great strides in simplifying the process to open a new business, which currently takes eight days42. In addition, the Integrar project is an initiative that seeks to

40 Based on the time it takes to open a 50 employee company with share capital equal to ten times the per capita GDP, constituted as a limited company. Source: World Economic Forum’s 2012 Doing Business Report

41 The construction of an industrial warehouse was used as the basis for the study

Source: Minas Fácil

EXHIBIT 9

Opening a business involves numerous agencies Decentralized proceedings is one of the problems most often mentioned as the reason for this Entities involved in opening a new business in Brazil

Applies to All

Depending on the type of business

city

state

federal

other

Municipal Bureau of the Treasury Municipal Government

Bureau of the State Treasury Bureau Board of Trade

Caixa Econômica Federal Federal Revenue Ministry of Labor and Employment INSS (Social Security)

Industry Associations Employee Unions

Bureau of the Environment Works Inspector Fire Bureau

Bureau of the Environment

Central Bank1 IBAMA2 FUNAI2 ANVISA

Industry Associations

1. Foreign capital only 2. Applies only to businesses whose activities might impact the environment / Source: Doing Business 2012 - World Bank; RFOR Advogados; BCG analysis

Attractiveness of Brazil as an international investment and business hub

replicate the successful Minas Fácil model in the states of Sergipe, Paraná, Rondônia, Roraima, Tocantins, Ceará, Pará and Paraíba, paving the way for rolling it out to the entire country in the future. Another very sensitive point in Brazil is the cost of compliance with tax obligations. In a global survey of how many hours are required for businesses to calculate and pay equivalent taxes, Brazil, represented by São Paulo, is at the bottom of the list of 183 countries. It takes about six times as long to calculate and pay taxes here than in the next to last hub on the list: Shanghai. According to this same analysis, the tax that causes the greatest difficulty is the ICMS – a tax on the flow of goods and services (see Exhibit 10).

EXHIBIT 10

Difficulty paying taxes creates additional cost for companies The number of hours it takes to calculate taxes is the largest in the world How hard it is to pay taxes 3,000

Number of hours/year1

2,600 736 Corp. Inc. Tax

2,000 490 INSS,

FGTS, "S" System

1,374 ICMS 1,000

DUBAI

HONG KONG

109

110

london

131

132

187

NEW YORK

187

221

254

MUMBAI

1. Joint study with PwC based on a fictitious standard company in several countries / Source: Doing Business 2012 - World Bank; BCG analysis

316

330

347

398

SHAngHai SÃO PAULO

48 Attractiveness of Brazil as an international investment and business hub

When it comes to matters specific to hiring employees, Brazil is among the least flexible nations

The main factors influencing this poor position are the excessive number of taxes, changing laws and complexity in complying with the ancillary obligations required to pay taxes. According to the World Bank Doing Business report, businesses in Brazil must pay a total of nine taxes, where as in other business hubs such as Singapore and Hong Kong this number is five and three43 respectively. The issue of the large number of laws passed also applies to the tax system. As mentioned, this makes it hard to keep track of which federal laws are applicable, making it more likely for there to be gray areas that not only increase bureaucracy, but also contribute to greater uncertainty in the payment of taxes. In the case of non financial service providers, the requirements for calculating taxes such as the ICMS are even more complex. For financial institutions, the hardest taxes to calculate are ISS, PIS and COFINS. It is worth mentioning that in the case of investments in funds, debentures or fixed yield instruments, the financial institution managing the investment is responsible for paying the tax, and the investor receives its investment net of taxes. Finally, another very important element to doing business in a country is the flexibility of its labor market. When it comes to matters specific to hiring employees, Brazil is among the least flexible nations, behind Chile and the United States, for example. On the other hand, when it comes to dismissal process, Brazil does not do badly (see Exhibit 11). Care should be taken, however, lest this position be weakened (for example the possibility that ILO Convention 15844 may be adopted), so as to continue to be able to efficiently allocate people and pursue business. Even though Brazil faces a challenging situation in terms of bureaucracy, it is important to understand that efforts have and are being made, such as the creation of ENAP, the National School of Public Management, whose purpose is to develop competences in civil servants and improve the quality of government services, PNAFE, the National Program to Support Fiscal Administration in Brazilian States, which focuses on improving tax issues, and MBC, the Competitive Brazil Movement, an entity that, among other responsibilities, has programs to modernize government administration. In addition to these initiatives, increased use of digital technologies has contributed to speedier interaction between the government and the private sector. An example of it would be the SPED – the Government System of Digital Bookkeeping.

43 Doing Business database, completed in December 2010

44 International Labor Organization Convention 158 makes the termination process far more rigid and bureaucratic. If adopted its requirements include written justification as to why the employee is being let go submitted to the relevant authorities, the right to appeal against the decision, the inclusion of unions in individual termination decisions and lawsuits in the event of disagreements. Only 35 of the 183 ILO member States have ratified the convention and only six of them are developed nations (Australia, Finland, Luxembourg, Portugal and Spain). Source: ILO

Attractiveness of Brazil as an international investment and business hub

EXHIBIT 11

Brazil is not well positioned when it comes to flexibility of its labor market

Hiring

Labor market flexibility (% countries in each situation)1

Temporary contracts are allowed for permanent activities

no: 25%

Employment

Maximum allowed duration of temporary contracts (months)

up to 24: 31%

Overtime cost to the company (% over standard cost per hour)

100: 13%

Annual paid vacation (days)

60 or fewer 6%

unlimited: 63%

50: 56%

21 to 30: 31%

Need for third party approval

25 to 40: 19%

no: 88% yes: 38%

Existence of reemployment rules

02: 13%

10 or fewer: 25%

11 to 20: 44%

yes: 13%

Obligation to retrain or place before termination

Termination

yes: 75%

no: 63%

yes: 31%

Termination notice (months)

2: 25%

Termination costs (weeks of work)3

20 or more: 25%

no: 69%

1: 63%

8 to 11: 31%

0: 13%

1 to 6: 25%

0: 19%

Degree of flexibility 1. Countries included in the assessment: BRA, MEX, CHL, USA, GBR, FRA, GER, SGP, HGK, CHN, JPN, IND, RUS, KOR, AUS, CAN 2. Not defined by law 3. Average based on employees with 5 years tenure in the different countries analyzed / Source: Doing Business 2012 – World Bank; BCG analysis

Furthermore, models used in other countries could serve as an inspiration and be adapted to the situation in Brazil, such as the UK’s Better Regulation Executive, which improves the distribution of information to public agencies, reduces the number of registrations required and engages civil servants in understanding public services and processes to disseminate best practices.

50 Attractiveness of Brazil as an international investment and business hub

Indicators The dimensions selected for continuous tracking of the institutional environment pillar are: • Political stability: Normally the political situation has a major impact on the attractiveness of a country. Thus a country that is more stable and democratic, free of political violence, will be more attractive; • Quality of regulations: This indicator measures how clear a country’s regulations are and if there are clearly defined and understood roles for the regulators, with delegation of powers as necessary; • Legal Security: This attempts to measure the certainty that the country’s laws will be enforced; in other words, it measure the effectiveness of the nation’s laws and rules. There is a direct relationship between legal insecurity and the cost to do business resulting from judicial disputes, dubious contract interpretation and the duration of lawsuits; • Labor market flexibility: Hubs located in countries with flexible labor markets tend to be more dynamic, as labor supply and demand are able to quickly adjust and come into balance. For this to happen it is important that companies may quickly hire and fire at relatively low cost. In addition, flexible models, such as the possibility of hiring hourly employees, make a business hub more attractive; • Ease of opening a business: This illustrates part of the bureaucracy of doing business in a country, and takes into consideration not only the bureaucratic complexity of opening a business, but also the time required; • How easy it is for businesses to pay taxes: This indicator calculates the hours required to pay value added taxes, taxes on industrial profit and income taxes for a model company operating in different countries. Clearly, the easier it is to pay taxes the less time is involved and the lower the cost to the business, thus reducing the level of exposure to involuntary non compliance. The following exhibit shows how Brazil compares to other countries along the dimensions of the institutional environment pillar:

Attractiveness of Brazil as an international investment and business hub

Institutional Environment critical

needs improvement IND

Political stability

good

BRA

RUS CHN

USA

MEX

KOR

excellent

CHL

GBR

DEU HKG

FRA

JPN

SGP

BRA

Quality of regulations

Legal Security

RUS

CHN

MEX

JPN

IND

FRA USA DEU GBR HKG

KOR

SGP

CHL

BRA RUS

MEX

CHN

IND

KOR

CHL JPN

FRA USA SGP HKG DEU GBR

BRA

Labor market flexibility1

Ease of opening a businesS1

How easy it is for businesses to pay taxes

FRA

DEU MEX

KOR

CHN

RUS

CHL

JPN

gbr

IND

USA SGP HKG

BRA CHN

RUS

KOR

IND

CHL MEX

SGP JPN GBR

FRA USA

BRA MEX JPN CHN

Emerging nations

Main international hubs

RUS CHL

IND KOR USA DEU

FRA

GBR

HKG SGP

Other developed nations

1. Data cannot be updated from the 2011 Attractiveness Report

Although Brazil is ranked in the middle in the dimensions that reflect the institutional maturity of a nation: political stability, quality of regulations and legal security, it is more advanced than any other BRIC, and in principle has the platform required to provide an environment that favors international investment and business. However, looking at the conditions that directly impact the proper development of its economy the country is lacking, as shown in the limited flexibility of its labor market and the difficulty to open a business and pay taxes.

52 Attractiveness of Brazil as an international investment and business hub

It is essential to address the matter of excessive bureaucracy in Brazil, an area where the country is ranked poorly compared to other hubs, and that results in additional costs and wear and tear when doing business

Conclusion Brazil has consolidated itself as a strong, stable democracy, and should continue to progress towards improving its political system and the efficiency of the three Federal spheres of power. In particular, the issues related to the instability of its laws and the slowness of its Judiciary are not new, and although there have been recent efforts to minimize these problems, the legislative process must evolve. Finally, it is essential to address the matter of excessive bureaucracy in Brazil, an area where the country is ranked poorly compared to other hubs, and that results in additional costs and wear and tear when doing business. In addition to leading to undesired sluggishness in business operations, bureaucracy also opens a dangerous door to corruption. Legislative change is important and essential, but one must also change the mindset of the State, making it more dynamic and vigorous in its role as a provider of quality services. Businesses and citizens need quality services that fulfill their needs, in the same way as clients of the private sector. Thus, if the existing ties are lifted, there is a great potential to improve the pace of doing business in the country, projecting Brazil even more as an attractive investment and business hub.

Attractiveness of Brazil as an international investment and business hub

54 Attractiveness of Brazil as an international investment and business hub

Talent and human capital Creating an investment and business hub necessarily requires human capital that can provide the manpower it needs to conduct and expand its activities, with both sufficient numbers and adequate quality. Brazil departs from a solid and positive demographic platform, but when one looks at other characteristics such as quality of education and talent mobility, it is at a disadvantage compared to other countries. According to the projected Global Talent Index for 2015, Brazil is only the 38th out of a list of 60 countries surveyed45 (see Exhibit 12). Because of these gaps, on a global basis businesses headquartered in Brazil have the third largest difficulty hiring people46.

45 Not only are the demographics of Brazil favorable, it also as an environment that fosters talent. Source: Heidrick & Struggles Global Talent Index, published in 2011

Survey of 39 countries. Source: Manpower 2011 Talent Shortage Report 46

EXHIBIT 12

In terms of its talent group, Brazil is ranked 38th out of 60 countries Brazil is ranked 38th out of 60 countries in the Global Talent Index projections for 2015

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

USA Denmark Finland Sweden Norway Singapore Australia Canada Switzerland Hong Kong Germany Israel Netherlands United Kingdom New Zealand

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

France Ireland Belgium Taiwan Austria South Korea Spain Italy Japan Czech Republic Chile Portugal Poland Slovakia Hungary

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

Source: Global Talent Index Heidrick & Struggles, published in 2011

China Argentina Greece Russia India Mexico Rumania

Brazil Malaysia Saudi Arabia Colombia Ukraine Turkey Philippines Thailand

The main gaps in Brazil are talent training/education and mobility

46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

South Africa Peru Egypt Bulgaria Ecuador Venezuela Kazakhstan Vietnam Pakistan Iran Indonesia Sri Lanka Algeria Nigeria Azerbaijan

Talent training/ education

Talent mobility

32nd

Quality of compulsory education

44th

Quality of teaching in universities and business schools

39th

Quality of the workforce

55th

Mobility and openness of the local job market

22nd Ability to attract talent fromother countries

Attractiveness of Brazil as an international investment and business hub

This analysis explores the three main elements that go into creating a set of talents: demographics, education and training, and mobility.

Main aspects of the talent and human capital pillar Demographics: The availability of an Economically Active Population (EAP) determines the raw material for educating and training a country’s labor force. Education and training: In order for a country to become an investment and business hub there must be a set of talents that is qualified and aligned with the needs of the labor market. Talent mobility: Countries that are more open to the inflow of foreign workers are more readily able to meet fluctuations in the demand for professionals, leveraging the supply of qualified human capital in other countries for sectors where there may be a shortage of qualified local labor.

Demographics 47

Source: Growing Old in an Older Brazil, 2011 - World Bank

A period of demographic transition where the ratio of dependent people, meaning those younger than 15 and older than 60, per person of working age (15 to 59) reaches a minimum. This ratio has declined since 1965, and will reach a minimum in 2020, at which point it will start to climb up 48

The supply and demand analyzed under demographics are purely quantitative; in other words, manpower qualification and training not considered. Model excludes those currently unemployed 49

50 Source: Stimulating Economies through Fostering Talent Mobility, published in 2010

From a demographics standpoint, Brazil is at a significant advantage as it is experiencing what is known as the demographic bonus47, meaning that the workforce is relatively larger than the dependent population48. Because of this larger supply of workers, there is a window of opportunity that fosters the development of the nation’s economy. Furthermore, Brazil is the world’s largest economy with an Economically Active Population (EAP) growing fast enough to supply the expected demand for labor49. Numbers updated for 2011 through 2023 from a study originally published by The Boston Consulting Group and the World Economic Forum50, show that in all countries with economies that are currently larger than Brazil’s, meaning the United States, China, Japan, Germany and France, the increase in the demand for labor will outpace supply (see Exhibit 13).

56 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 13

Brazil is the world’s largest economy where the balance between the supply and demand for labor is positive Difference in the rate of growth of the supply and demand for labor1 - 2011-2023 RUS -0.9%

CAN -0.3%

DEU -1.3%

GBR -0.5% FRA -0.9% spn -2.2%

USA -0.7%

ITA -1.6%

TUR -0.1%

MEX 1.3%

KOR -1.6% CHN -2.4%

EGY 1.6% IND 0.7%

BRA 2.2%

IDN 0.6%

AUS -0.4%

ZAF 1.1% Average difference the increase in demand and supply of economically active people

JPN -1.5%

Labor shortage1

Limited deficit or surplus1

Increase in labor1

1. The values presented here represent the annual increase in the demand for labor minus the annual growth of the economically active population. Refers to an average of economic scenarios during and outside crisis periods. Annual growth figures for 2011 through 2023 are calculated / Note: the data submitted is based on a quantitative vision and do not reflect qualitative factors (e.g.: qualification) / Source: Based on Stimulating Economies through Fostering Talent Mobility, BCG and the World Economic Forum, published in 2010, using more up-to-date data

Given a global scenario anticipating a shortage of labor, it is expected that in the near future businesses will make efforts to be less dependent on local talent and take measures to attract global workers, which may even include a change of location for access to qualified workers (see Exhibit 14). Thus, an initiative capable of ensuring an environment that fosters the permanence of talents in Brazil must be developed to avoid depleting this nation’s economy because of widespread global competition.

Education and training Education and training in Brazil are further challenges to businesses in search of talents. This translates into additional expenses to train staff, and is closely linked to the quantity and quality of education. While the quantity of workers in the country is a competitive advantage, the quality of their education and training is a challenge that must be addressed.

Attractiveness of Brazil as an international investment and business hub

EXHIBIT 14

Businesses will shape their strategies around the search for talent Companies are expected to reduce their local recruiting ... % companies pointing to local recruiting as key

Latin America2

7 48

18 8

41 70

52 81

16 64

44 52

38 9

Pacific region7

56 81

Emerging Asia5

AFRICA4

Developed Asia6

% companies that would consider relocating to find talents

EUROPE3

...and relocate in search of talents

% companies pointing to international recruiting as key 78

North America1

...increase international recruiting...

57 82 59

33 60

1. USA and Canada 2. Brazil, Argentina and Chile 3. Germany, France, Russia, UK, Italy, Czech Republic, Denmark, Spain, Ireland, Netherlands, Switzerland, Belgium 4. South Africa 5. China and India 6. Singapore, Japan and South Korea 7. Australia Source: BCG People Advantage Report – 2008 and 2010

2007

2010 - 2015

The enrollment or matriculation rate is calculated as the number of school age children enrolled in school divided by the total population in that age bracket

52 According to the International Standard Classification of Education this refers to the number of 6 to 10 year olds enrolled in the 1st to 5th grade of primary school 53

Source: UNESCO – 2009 data

According to the International Standard Classification of Education this refers to the number of 11 to 17 year olds enrolled in the 6th to 9th grade of primary school and in secondary school

In 2009, net enrollment51 in primary school52 in Brazil was 87%, which is close to the world average. The net enrollment in secondary school53 was 69%, also quite close to the world average but far from universal. Net enrollment in higher education drops to 27%, which is below the global average of 40%54 (see Exhibit 15).

Source: 2010 Census, IBGE

Source: 2011 Primary Education School Census, INEP

The picture painted here shows that the country must still evolve in terms of the quantity of secondary and higher education, even though quite a bit of progress has been made over the past decades. Alphabetization in Brazil went from 30% in 1930 to 90% in 200955, and the number of students enrolled in primary and secondary school went from 1 million to 39 million over this same period56.

58 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 15

The country is close to the world average in primary education, but must still evolve, in particular at the secondary and higher levels

100

Primary education

Secondary education

Higher education

Net matriculation1 among school aged children - % in 2009

Net matriculation among school aged children - % in 2009

Total matriculation rate2 among school aged children - % in 2009

100

87 80

top 10: 99 global average: 89

100

top 10: 95

125

83 80

global average: 71

100

JPN mEx

CHl

BRA

JPN

CHl mEx BRA

top 10: 77% 59 59

global average: 40

CHl JPN mEx BRA

1. Excludes matriculated students no longer of school age 2. Includes individuals not of school age / Note: Average for countries in the study. For Brazil IBGE and Ministry of Education data was used rather than the UNESCO numbers, which are currently being reviewed / Source: PNAD 2009 micro-data – IBGE, Ministry of Education, World Bank, BCG analysis

Regarding the quality of the education and training available in Brazil, the scenario is far less favorable. The average score of Brazilian students in the 2009 PISA57 test was 401 out of 600 in reading, mathematics and science, lower than the average for all countries included in the test, which was 497 for the OECD countries and 468 for all countries evaluated. In addition, the average Prova Brasil/Saeb58 score of students in the public school system is at the lower end of the expected range in the basic education years, and below the expected range in the secondary school years (see Exhibit 16). Another indicator of the quality of teaching in Brazil is the Ideb (Índice de Desenvolvimento da Educação Básica or Basic Education Development Index) created by INEP (Instituto Nacional de Estudos e Pesquisas Educacionais Anísio Teixeira) in 2007, and measured every two years. The Ideb complements the results of Prova Brasil/Saeb with data on academic performance (passing, failing and abandonment) in primary and secondary school. Results are measured on a scale of 0 to 10, with 10 being the best score. Although the proposed goals for secondary school have been met, and those for primary school surpassed, Ideb scores remain low and uneven. In 2011 the average score for students in the first five years of primary school was 5.0, while the target was 4.6, the same as in 2009. The average score for students at the end of primary school (9th grade), was 4.1 in 2011. The goal was 3.9, also the same score as in 2009. Secondary school students did not perform as well, scoring an average of 3.7, even though they did meet the target. Primary school performance has progressed only modestly, with scores climbing only 0.1 percentage point every two years.

57 Source: Programme for International Student Assessment: a test applied every three years by the OECD to 15 year old students (equivalent to the 9th grade) in 65 countries. The results of the 2012 PISA exam had not been disclosed at the time this report was written 58 Average scores in Math and Portuguese in the tests applied to public school students in Brazil - Saeb (Basic Education Assessment System) up to 2005, and the Prova Brasil between 2005 and 2011. Data refers to the last year in each school cycle

Attractiveness of Brazil as an international investment and business hub

EXHIBIT 16

The quality of primary education in Brazil is critical Brazil’s performance in primary and secondary education is poor Average scores2 for primary school children in Brazil

340 320

Expected average: 201 - 325

300 280 260

average1

255

240

247

235

220

Primary education is performing at the lower edge of the expected range

0 1995

1997

1999

2001

2003

2005

2007

2009

2011

Average scores2 for secondary school children in Brazil

500

Expected average: 326 - 500

400

Secondary school students are performing below expectations

286

300

271

264

average1

0 2001

2003

2005

Average PISA3 score - 2009

2011

468

439

420

401

396

ARGENTINA

496

BRAZIL

497

MEXICO

UNITED KINGDOM

500

CHILE

OECD average: 497

510

GERMANY

519

AUSTRALIA

527

CANADA

529

JAPAN

541

SOUTH KOREA

543

SINGAPORE

HONG KONG

CHINA4

546

2009

Despite its poor performance, Brazil had the third best improvement among the 65 participating countries

Brazil performs poorly in the international PISA test

577

2007

RUSSIA

1999

USA

1997

FRANCE

1995

1. Average scores in Math and Portuguese 2.Saeb (Basic Education Assessment System) up to 2005 and the Prova Brasil applied to children enrolled in public school between 2005 and 2009. Data refers to the last year in each teaching cycle 3. Programme for International Student Assessment – OECD applied to 65 countries in 2009 – OECD + invited nations 4. Shanghai participants / Source: Ministry of Education; OECD; IMD; BCG analysis

60 Attractiveness of Brazil as an international investment and business hub

Also of interest is the difference between the scores of public and private school students, although one must remember that in this case the indicator is sample based only. Average scores for students in the first five years of education enrolled in private schools were 6.5, compared to 4.7 for public school children. The difference among students in grades 6 through 9 was 6.0 vs. 3.4, and among secondary schools scores were 5.7 for private schools and 3.4 for public schools, revealing the need to invest even more in public education. Looking at the gap in primary and secondary education, it should not come as a surprise that this has an impact on higher education. One example is the outcome of the General Course Index, an index used by the Brazilian Ministry of Education to measure the quality of the country’s institutes of higher learning: 91%59 of the colleges and universities analyzed were rated between 1 and 3 on a scale where 1 is the worst score and 5 the best. It is not only the quality of higher education in general that is lacking, but also its alignment with what the market needs, as shown in a survey of executives conducted by the IMD60, where Brazil is fifth from the bottom of a list of 59 countries. Also contributing to this mismatch are the teaching of foreign languages, also not aligned with market needs, and the international flow of students, which is below international averages (see Exhibit 17). However, the outlook going forward is more favorable. There are numerous public and private initiatives designed to improve the quality of labor in Brazil. An important milestone was defined in 2009, when the State’s obligation to provide free education to children aged 4 to 1761 was included in the Federal Constitution, to be implemented gradually through 2016. However, implementation details in the form of the National Education Plan are still being discussed by the Legislative. The Brazilian Government has also taken steps to increase the number of openings in public technical schools and universities, with programs such as REUNI (Program to Support the Restructuring and Expansion of Federal Universities), and scholarship programs such as PRONATEC (National Program to Foster Access to Technical Schools) and PROUNI (University for All). PRONATEC is a federal government initiative created in 2011 - it offers financially disadvantaged secondary school students, the unemployed and others receiving any type of social assistance from the Government scholarships and funding for technical education. PROUNI was designed for students from households with per capita incomes of less than three minimum wages, and offers full or partial scholarships to private colleges or universities. The program was responsible for more than 195 thousand scholarships in the first half of 2012. Student loans are another ally in the search to expand access to higher education, for instance through FIES, the Fund to Finance Higher Education Students. Some industry sectors have taken the initiative and created specific programs. One example is the Oil & Gas industry, which created PROMINP62, which by 2011 had already trained over 81.5 thousand persons, and should train another 200 thousand workers by 2013.

59 Data for 2010. Percentage calculated based on the institutions scored. Source: Ministry of Education 60 The 2012 World Competitiveness Yearbook, an annual global survey of middle and senior managers in 59 countries 61 The constitution also ensures access to education to all those who were deprived of it at the appropriate age 62 The Program to Mobilize the Domestic Oil and Natural Gas Market, created by Decree 4,925 of 2003

Attractiveness of Brazil as an international investment and business hub

EXHIBIT 17

Internationalization of talent education and training in Brazil is low and does not meet market needs

The market considers that language education in Brazil is inadequate

Education in Brazil has very limited international scope

Alignment between foreign language education and market requirements - score of 0 (lowest) to 10 (highest)

International student flows - incoming and outward per thousand inhabitants

BRAZIL

3.7

BRAZIL

0.2

JAPAN

3.9

INDIA1

0.2

rUssia

3.9

MEXICO1

0.2

CHINA

0.4

UNITED KINGDOM

4.4

china

4.4

mExico

4.6

SOUTH KOREA

4.6

CHILE

1.2

RUSSIA

1.3

JAPAN

1.4 Inbound2

USA India chile franCE USA hong kong GERMANY CANADA SINGAPORE

2.3 1. Data on inbound students not available for India, Mexico and Singapore 2. Data for 2009 Note: An annual global survey of middle and senior managers in 59 countries Source: World Competitiveness Yearbook - IMD; BCG analysis

5.6

GERMANY

3.5

SOUTH KOREA

3.6

5.6

5.8

6.3

7.1

SINGAPORE

3.9

CANADA

4.1

FRANCE 7.6

HONG KONG UNITED KINGDOM

7.8

8.4 Group average: 5.6

Outward2

4.8 6.1 6.3

AUSTRALIA

12.1 Group average: 3.2

62 Attractiveness of Brazil as an international investment and business hub

At the state level, one should highlight an education network launched in São Paulo in 2011, a joint effort with the Federal Institute for Education, Science and Technology in São Paulo, and Centro Paula Souza, combines secondary and technical education and by 2014 should have benefited 450 thousand students63. Centro Paula Souza focuses on higher and professional education and has over 226 thousand students enrolled in technical courses. It has become a reference for talent education and training that is aligned with industry needs. On the side of private enterprise numerous nongovernmental organizations whose mission is to promote better education and training in Brazil should be mentioned, such as Movimento Todos Pela Educação (Everybody for Education Movement), the Ayrton Senna and Unibanco Institutes, the Bradesco Foundation, the CIEE – Centro de Integração Empresa-Escola (Center for Integration Between Businesses and Schools) and the Amigos da Escola (Friends of the School) project. At the higher education level, non profits such as Fundação Estudar (Study Foundation) and Instituto Ling award scholarships64 that help accelerate the training of the qualified people a Brazilian investment and business hub needs. Lastly, some companies such as Totvs e Infosys act as a bridge with academia and train people with the knowledge they need to perform their jobs. To insert Brazil’s professionals into a global context, universities in Brazil are signing international exchange agreements. The EU’s Erasmus program is an example of the type of initiative that could further the international integration of Brazilian students, especially within Latin America.

Talent mobility Brazil has become more attractive to international talents, which is positive for any investment and business hub, and particularly useful for Brazil at this time, as it has immediate problems training and qualifying the manpower it needs. This increased attractiveness was revealed in the 2012 IMD65 survey, in which Brazil now ranks number 12, up 15 positions from the 2010 survey, when it was ranked 27th (see Exhibit 18). Most of the workers entering the country are highly educated and come primarily from Europe, the USA and Japan. This movement is the result of the positive outlook in Brazil and the global crisis that is driving companies to invest in countries such as Brazil, shifting their talents to take advantage of existing opportunities.

63 Source: State of São Paulo Education Bureau 64 The program recommends that those who receive scholarships donate the amount they received to ensure the sustainability of the initiative

The 2012 World Competitiveness Yearbook, an annual global survey of middle and senior managers in 59 countries 65

Attractiveness of Brazil as an international investment and business hub

64 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 18

The increase in the country’s attractiveness to international talent and the number of visas granted reflect Brazil’s improved position in talent mobility The number of long and medium term work visas granted increased at an annual rate of 15% between 2008 and 2011

The survey shows that in 2011-2012 Brazil became more attractive to international talent1

Number of work visas issued2 (thousand)

+15%

12th

braZil

18.0 26

15.4 2.4 2.0 11.0

23.6

CAGR ‘08-’11

2.7

3.7% 32.0%

4.6

2.2

13.7

3.5

16.3

14.0%

2.2 2.5

12.3

9.0

2008

2009

2010

2011

2012

Total number of visas (thousand)

2008

2009

2010

2011

44.0

42.9

56.0

70.5

Permanent

Temporary visas with a 2-year work contract in Brazil

Technical service or technology transfer

1. Brazil’s position relative to the other countries assessed regarding the following statement: “Highly specialized professionals are attractive by the country’s business environment”, initially on a scale of 1 to 6 subsequently transformed to a scale of 0 to 10 to enable country ranking. 57 countries were selected in 2008 and 2009. 58 in 2010 and 59 in 2011 and 2012 2. Temporary visas for work onboard seagoing vessels and other authorizations such as specifically for events or professional training were not included. These numbers do not include humanitarian visas granted by the National Immigration Board, and visas for foreign spouses (legal or common law) of Brazilian nationals. / Source: World Competitiveness Yearbook - IMD; Ministry of Labor and Employment

However, one should point out that there is still no Government initiative to attract these talents, and that there are bureaucratic hurdles that must be overcome to enter the country, and the visa granting process is complex, slow and costly. Because of this, many companies in Brazil are forced to keep positions open for a long period of time, as they are unable to find qualified people within the country and cannot easily bring in workers from abroad. Current legislation reflects the perception that foreign workers take positions that could be filled by Brazilians. However, if we look from another perspective, welcoming foreign professionals could contribute to knowledge sharing, improving the country’s productivity and slowing down a possible wage inflation process due to a shortage of workers, in a positive process known as the brain gain.

Attractiveness of Brazil as an international investment and business hub

The Government also makes no effort to manage the other end of the spectrum, known as the brain drain, or domestic talents who have left the country. There is no organized network to stay in touch with the over three million Brazilian expatriates, unlike countries such as India and Chile. Well managed, such a network could convince talents to return to Brazil, bringing with them financial resources and intellectual capital. The Australian program is an example of a successful strategy to attract talent. The country continuously discloses the list of professionals for which there is a shortage, and facilitates the entry of such talents into the country. Canada and the United Kingdom have similar systems, adopting a system of points for work visas, which balances the expertise of immigrants with what the country requires. Given the challenges foreign professionals willing to work in Brazil currently face, the Presidential Bureau of Strategic Affairs (Secretaria de Assuntos Estratégicos) is designing a fast-track project to facilitate and accelerate the process to grant visas to qualified workers. One possible path Brazil might pursue to take advantage of increased talent mobility is to map its short term manpower shortages and simplify the immigration procedures for such professionals, and at the same time develop initiatives to proactively attract the type of manpower it needs. Indicators The dimensions selected for continuous tracking of the talent and human capital pillar are: • Demographic contingent: This is an estimate of the economically active population (EAP) compared to the estimated demand for labor in each country. This indicator will reveal if there are enough people (human raw material) to build a talent pool – the larger the surplus increase in the EAP compared to the expected demand for professionals, the better it will be for a hub; • Quantity of primary and secondary education: This measures the initial level of qualification a country’s talent pool or, in other words, if everyone gets basic education; • Quality of primary and secondary education: An education has no value if it is not a quality education. Therefore this indicator tries to measure the quality of the basic education offered; • Quantity of higher education: This measures the next level in the qualification of the country’s talent pool in the form of the enrollment rate in colleges and universities; • Alignment between higher education and the market: This measures the extent to which the content of higher education, both technical and university, is aligned with what the market demands of its professionals. The greater the degree of alignment, the more attractive the country;

66 Attractiveness of Brazil as an international investment and business hub

• Internationalization of the country’s education (foreign languages and experience): This indicator measures two components that go into making an education international – exchange between nations, and the alignment between the teaching of foreign languages and the needs of the market. A more international education and training will result in a talent pool that is better prepared and qualified to serve the needs of an international hub; • Availability of qualified managers and engineers: This indictor measures if there are enough qualified managers and engineers, the two types of professionals that businesses thinking of establishing themselves in the country will demand; • Intensity of research and development: This measures how much research and development is done in the country, and how much of it is associated with the creation of intellectual capital, which in itself helps make a hub attractive. This is measured by the number of people working in research and development as a percentage of the total population; • Country attractiveness to international talent: This indicator reveals the perception of executives in each country and is based on the results of a survey of how attractive the country is to international professionals; • Talent immigration complexity: This measures how easy or difficult it is for foreign professionals to enter the country, bringing international knowledge and experience to the country, and also filling temporary gaps in specific qualifications within the domestic talent pool; • Diaspora management: This shows if there are measures in place to manage the country’s citizens dispersed throughout the world. For a hub, managing the diaspora is key, as expatriates are potential talents who could return to the country or promote their country of origin in the markets in which they are working. The following exhibit shows how Brazil compares to other countries along the dimensions of the talent and human capital pillar:

The country has an urgent need to address the education and training of its population

Attractiveness of Brazil as an international investment and business hub

TALENT AND HUMAN CAPITAL critical

Demographic contingent

Quantity of primary and secondary education

CHN

needs improvement

KOR DEU

FRA

JPN

good

USA GBR

excellent

BRA

IND

MEX

RUS

BRA IND

HKG

CHN CHL

MEX

SGP DEU FRA

USA

RUS

KOR GBR JPN

BRA

MEX CHL

Quality of primary and secondary education1

RUS

FRA

DEU CHN

JPN KOR HKG

USA GBR

SGP

BRA

Quantity of higher education

Alignment between higher education and the market

Internationalization of the country’s education (foreign languages and experience)

Availability of qualified managers and engineers

Intensity of Research and Development

Country attractiveness to international talent

IND

CHN

MEX

FRA HKG JPN SGP RUS

DEU

USA

KOR

GBR CHL

BRA JPN CHN KOR RUS

IND CHL FRA

USA HKG

GBR

DEU

SGP

MEX

BRA JPN

CHL CHN

USA

IND

FRA

KOR

GBR

DEU

SGP HKG

MEX RUS

BRA KOR CHN

DEU JPN

GBR

IND

RUS

CHL FRA

SGP

HKG

USA

BRA IND CHL

CHN

HKG

GBR

RUS

FRA

DEU

SGP

JPN

KOR

BRA JPN

MEX

FRA KOR

DEU HKG

RUS

CHN

IND

CHL

USA

GBR

SGP

BRA Talent immigration

10. complexity

KOR

JPN RUS CHN

SGP DEU

IND

FRA

GBR

MEX

CHL

USA

HKG

BRA

11. Diaspora management Emerging nations

GBR

DEU

CHL RUS

SGP

HKG

IND

Main international hubs

Other developed nations

P: indicator based on projected data 1. Data cannot be updated from the 2011 Attractiveness Report

In this pillar, Brazil stands out primarily for its demographic contingent and because it is increasingly able to attract international talent, as the nation offers favorable conditions in a world economic scenario that is still uncertain. However, in other dimensions Brazil is in positions that are either “critical” or “need development”, with a gap between the country and other investment and business hubs. This poor position in some dimensions highlights the country’s urgent need to address the education and training of its population, with particular emphasis on the quality of the education offered and its alignment with the demands of the market and of an investment and business hub.

68 Attractiveness of Brazil as an international investment and business hub

the delay in approving the National Education Plan (submitted in 2010) and quality goals that are quite timid may keep Brazil from evolving as it aspires to, holding it back at a level that is lower than what it needs to ensure growth

Conclusion Brazil’s demographics is potentially a key element to consolidate the country’s position as an investment and business hub. However, capturing this advantage requires long-term-strategic planning that must be implemented almost immediately, with initiatives focused on training the labor force and, most importantly, providing quality education and training to the population. While clearly the nation is willing to address this matter, the delay in approving the National Education Plan (submitted in 2010) and quality goals that are quite timid may keep Brazil from evolving as it aspires to, holding it back at a level that is lower than what it needs to ensure growth. Regarding talent mobility, Brazil is capturing more attention from foreign professionals. This could be an opportunity to close gaps in the immediate demand for professionals, help train local manpower and halt the disproportional increase in wages resulting from the shortage of qualified labor force. The Brazilian Government’s agenda has been considering how to take advantage of foreign and qualified labor force. Reforms are necessary to attract immigrants and not waste this window of opportunity.

Attractiveness of Brazil as an international investment and business hub

70 Attractiveness of Brazil as an international investment and business hub

Physical infrastructure

A physical infrastructure able to capture the advantages of a country and not impose additional costs to those investing and doing business in it is essential for creating a vibrant hub. This pillar provides an overall analysis of the level of investment in physical infrastructure in Brazil, and is segmented into the following elements: urban mobility, logistics connectivity, telecommunications and basic services.

Main aspects of the physical infrastructure pillar Urban mobility: An investment and business hub requires that people are able to easily travel between the main cities, reducing time and cost. Logistics connectivity: The larger the number of connections, the more dynamic and vibrant an economy is, and more easily it will be able to provide for the flow of goods and people. Telecommunications: Currently a good telecommunications network is essential to make a country more attractive. It is virtually impossible to build a solid service based economy, and thus an investment and business hub, without a structure that can handle increasingly large information flows quickly at cost effectively. Basic services: These are the availability of power, water and basic sanitation, and constitute the minimum standards required for people and businesses to establish themselves in a country.

Attractiveness of Brazil as an international investment and business hub

Relatively speaking, Brazil needs even more investment, as it is behind other hubs and developed nations. Furthermore, such investments would be an important contribution to increasing the Gross Domestic Product (see Exhibit 19).

EXHIBIT 19

Infrastructure investments increase the potential for growth of the Brazilian economy Infrastructure has a measurable impact on Brazil’s economic growth Projected growth scenarios for Brazil’s economy between 2011 and 20201 vary based on how much is invested in this country’s infrastructure

Growth of the Brazilian economy between 2011 and 2020 – % per year

Optimistic scenario used for the study1

Base case scenario used for the study1

Scenario at the current level of investment

3 2 1

Total invested in infrastructure % of Brazil’s GDP

1. Scenarios based on forecasts made by the Morgan Stanley Bank / Source: Morgan Stanley’s Paving the Way, published in 2010; press survey; BCG

72 Attractiveness of Brazil as an international investment and business hub

Infrastructure investments as a percentage of GDP have been falling gradually since the 1970s, going from 5.4% of the GDP to something around 2% in the 2000s. This level of investment is only enough to maintain the existing infrastructure (see Exhibit 20). Comparatively speaking, in 2010 China invested 11%66 of its GDP in infrastructure, and India set a goal of 7.6% a year between 2008 and 2012, after investing an average of 5.1% of its GDP in infrastructure between 2004 and 200867.

66 Source: Braking China Without Breaking the World - Black Rock, CEIC, China National Statistics Bureau 67 In 2009 the estimated investment was 7.2% / Source: India’s Secretariat for the Committee on Infrastructure

EXHIBIT 20

In recent decades Brazil’s has made only limited investments in its infrastructure Infrastructure investments in Brazil have not kept up with economic growth... Infrastructure investments in Brazil

...and current levels are only enough to maintain the existing infrastructure Infrastructure investments in Brazil

% GDP

BNDES estimates that between 2011 and 2014 R$ 378 billion will be invested in infrastructure, enough only to maintenance

5.4

6-8

3.6

1970s

1980s

2.3

2.1

1990s

2000s

2.0

Minimum maintenance level

1. Uses the EIU projection for the nominal GDP in over the period 2. World Bank estimate of what is required for Brazil to reach the level of South Korea, an infrastructure benchmark / Note: Investments between 2011 and 2014 do not take into account the Logistics Investment Program announced in August, 2012 / Source: Morgan Stanley’s Paving the Way; EIU; BNDES; BCG analysis

2.01

2011-2014

Growth rate2

Attractiveness of Brazil as an international investment and business hub

This low level of investment has clearly impacted the country’s current infrastructure, which is inadequate across the board. Brazil is ranked poorly in international rankings comparing the infrastructure of different countries, such as the one published by The Economist Intelligence Unit, in which Brazil is the 25th in a list of 60 countries (see Exhibit 21).

EXHIBIT 21

Brazil’s physical infrastructure is ranked 25th out of a list of 60 countries1 EIU infrastructure score: 0 (minimum) - 10 (maximum) - 2011

9.7

9.6

9.4

9.3

9.2

9.0

8.5

8.5 7.8

Average: 8.1

3rd

4th

5th

7th

10th

14th

19th

22nd

24th

25th

26th

france

singapore

germany

australia

canada

japan

united kingdom

hong kong

south korea

chile

russia

ARGENTINA

mexico

BRAzIL

COLoMBIA

5.9

usa

6.0

2nd

6.0

finland

6.2

1st

6.6

denmark

7.0

1. Countries with the same score are ranked in the same position. Nigeria, the last country on the list, is in 38th position / Source: EIU

74 Attractiveness of Brazil as an international investment and business hub

The infrastructure scenario is so unfavorable that the theme has become quite important on this nation’s agenda. One example is the Government’s PAC 2 (Accelerated Growth Program #2) announced for 2011 – 2014. This program calls for Government and private investments in infrastructure totaling R$ 955 billion. According to the 4th Balance Statement issued for PAC 2, by June 2012 34% of this had already been invested. The program includes improvements in energy, transportation and basic services, among others. However, the shortage of resources and fiscal austerity limit public investments in infrastructure. Given this, and the need to maintain a prudent macroeconomic policy, it is essential to attract private investors to close this structural gap. Early in 2011 concessions were granted for three major airports: Cumbica (São Paulo), Viracopos (Campinas) and Juscelino Kubitschek (Brasília), for an average premium of 348%. Before this, in 2011, the concession for the São Gonçalo do Amarante airport in Rio Grande do Norte had been purchased at auction for 229% above the minimum price (see Box B).

box B

The 2012 airport concessions are an attempt to attract private enterprise to reduce the nation’s infrastructure bottlenecks

In early 2012, the operation of three of the country’s main airports was handed over to private enterprise: Cumbica (São Paulo), Viracopos (Campinas) and Juscelino Kubitschek (Brasília), which together handle over 50 million passengers a year. The average premium paid for the airport concessions was 348%, and the Government collected some R$ 24 billion in these transactions. An important step to enable airport concessions was the creation of the Civil Aviation Bureau in 2011, which is responsible for, among other things, formulating civil aviation policies, was an important step to enable airport concessions. These measures signal the Brazilian Government’s commitment to addressing the infrastructure bottlenecks, as well as the interest of the private sector in investing in this sector. Other airports such as Galeão (Rio de Janeiro) and Confins (Belo Horizonte) should also be auctioned either as concessions or public-private partnerships. Note: The concession for the São Gonçalo do Amarante (RN) was granted in 2011 Source: Federal Government, Infraero, ANAC, press clippings, BCG analysis

Attractiveness of Brazil as an international investment and business hub

In addition to these initiatives, in August 2012 the Brazilian Government launched its Logistics Investment Plan, based primarily on attracting private enterprise to the road and railroad sectors68.

Plans for the port and airport sectors had not yet been disclosed when this report was issued

The road and rail program calls for building 7.5 thousand kilometers of roads, using a model where the concessionaire is selected based on the lowest toll rate charged. Another 10 thousand kilometers of railroads should be built using PPPs, and will provide an attractive option for the transportation sector (see Box C). In all, over the next five years some R$ 23.5 billion should be invested in roads and R$ 56.0 billion in railroads. The tender documents to enable these projects are expected to be published between late 2012 and early 2013, and the corresponding contracts should be signed by the middle of 2013.

BOX C

Concessions and Public-Private Partnerships (PPPs) as a means to enable infrastructure investments in Brazil

Public-Private Partnerships (PPPs) emerged following the 1970s oil crisis as a response to the State’s diminished ability to finance major works. A PPP is a concession agreement for a specified period of time between, on the one hand, a private entity that is responsible for designing, building, developing and running an enterprise of public interest and, on the other hand, the State, which shares the risks and ensures a previously agreed rate of return. Between 1985 and 2011 PPPs funded 1,969 projects around the world, with a total investment of some US$ 774 billion. In Latin America, US$ 88.5 billion were invested in 289 projects. Because of the shortage of government funds, PPPs and concessions present a viable option to close Brazil’s infrastructure gap. There are numerous examples of successful PPPs around the world, such as roads in Portugal, inter-city roads in Chile and investments in water and sanitation in France. In Brazil there are road concessions in the state of São Paulo, as well as concessions for ports and electricity generators and distributors. PPPs offer flexibility to allow private enterprise to invest in areas where their participation in the past has been timid, such as healthcare, education and public safety. For instance the first prison complex built as a PPP is going up in the state of Minas Gerais. This 3,000 inmate facility should be inaugurated in 2012. Source: 2010 International Survey of Public-Private Partnerships – Public Works Financing; BNDES, press clippings, BCG analysis

76 Attractiveness of Brazil as an international investment and business hub

Based on the main requirements of an investment and business hub, infrastructure can be split into four main categories: urban mobility, logistics connectivity, telecommunication and basic services. These are discussed below using the matrix shown in Exhibit 22.

EXHIBIT 22

Elements of physical infrastructure shall be addressed based on their importance for a hub and their level of development

Analyses focused on the most important categories and those with the slowest development Importance for a business hub

CRITICAL

2. Connectivity logistics

high

DEFICIENTE

1. Urban mobility

3. Telecom

4. Basicservices (power, water and sanitation)

LOW Acceptable

Level of development in Brazil (focus on SP and Rio)

Deficient Source: BCG analysis

Attractiveness of Brazil as an international investment and business hub

Urban mobility São Paulo and Rio de Janeiro are Brazil’s two main business centers, accounting for about 30% of the country’s population and 44% of its GDP69, yet both have significant gaps in urban mobility. São Paulo is the sixth worst city in the world according to the 2010 IBM Traffic Congestion Index70, with an average of 114 kilometers of congested streets each day in 200871. Rio de Janeiro is not far behind, with an average of 95 kilometers72 of traffic congestion during rush hours. The problem is even more critical because of the limited availability of subway lines. On a per capita basis, São Paulo and Rio have less than half the amount of subway lines as do Mexico City, London, Beijing and Shanghai, all of them with similar population densities. Both cities are working hard to address this gap: São Paulo expects to increase its subway lines from the current 74 kilometers to 104 kilometers by 2014, and to 200 kilometers by 2018. Rio, with only 42 kilometers of subway lines, will extend this to 55 kilometers by 2015. 69

Source: IBGE

This index is made up of variables such as time taken to get to work, perception of worsening traffic, stress caused to drivers and negative impact on work

Logistics connectivity

Calculated as the average traffic during the morning and evening rush hours. Source: Nossa São Paulo Observatory Source: Metropolitan Rio de Janeiro Urban Transportation Master Plan

73 The main airports serving these cities are: Rio de Janeiro International Airport/Galeão – Antônio Carlos Jobim (GIG), Santos Dumont Airport (SDU), São Paulo International Airport/ Guarulhos – Governador André Franco Montoro (GRU), Congonhas Airport/São Paulo (CGH), Viracopos International Airport/Campinas (VCP) 74

Data for June 4 - 10, 2012. Source: OAG database

75 With the exception of the Rio de Janeiro International Airport/Galeão

Below we find the logistics connectivity analyses that, for a purpose of simplicity, have been limited to the Rio-São Paulo axis and to air, road, port, rail and waterway connections: • Each day some 115 flights connect São Paulo and Rio de Janeiro73, far more than the 70 daily flights between New York and Washington D.C.74. 1,300 flights connect São Paulo to the world each week, almost the same number as Chicago, Beijing and Mexico City. However, the airports serving São Paulo and Rio de Janeiro are overloaded, and even with the recent concessions and planned works, increases in capacity may not be enough to relieve the situation in these airports over the short term75 (see Exhibit 23); • Road connections within the states of São Paulo and Rio de Janeiro are abundant and of relatively good quality, despite a few maintenance problems they share with the rest of the country. According to the 2011 survey by the National Transportation Federation (Confederação Nacional de Transportes), 78.8% and 65.9% of the roads in São Paulo and Rio de Janeiro, respectively, are considered good or excellent;

78 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 23

The airports in São Paulo and Rio de Janeiro are overloaded, and planned expansions may not be sufficient

Already the main airports are operating above capacity... Capacity utilization in number of passenger per year / nominal capacity - % CUMBICA (SP)

146%

CONGONHAS (SP) S. DUMONT (RJ) GALEÃO (RJ)

140% 100%

83%

Three of the four main airports in São Paulo and Rio de Janeiro are already overloaded

... and the improvements planned may not be sufficient Passenger capacity by 2014 - million CUMBICA (SP)2

GALEÃO (RJ) 2

CONGONHAS (SP)3

S. DUMONT (RJ)3

40 14 35

18 8

22 3 15

8 9

The plans do not include any buffer for peak hours1

1. 20 to 40% spare capacity is recommended to accommodate demand in peak periods 2. Based on IPEA projections 3. Total demand in Brazil has been calculated at 191 million passengers per year - demand breakdown by airport based on the current breakdown. This is not a final analysis but is merely a scenario simulation / Source: IATA; Infraero; Federal Audit Court; IPEA; BCG analysis

Additional capacity by 2014 Current capacity Estimated demand by 2014 - million

• Nine sea ports connect São Paulo and Rio de Janeiro to other parts of the world. In 2011 these ports handled 46% of all the containers in Brazil76. However, they have cost and efficiency bottlenecks, as do the ports elsewhere in the country. In an attempt to address this weakness, the Brazilian Government has been taking measures to improve and expand existing port facilities. In addition, the private sector has plans to build ports such as the Sudeste and Açu ports in the state of Rio de Janeiro, in which some R$ 5 billion will be invested77 headed by the EBX conglomerate. Outside the RioSão Paulo axis Vale announced it has initiated studies to build the Espadarte Port in the state of Pará to ship its iron ore output; • Rail connections in Brazil are limited for a country of this size, and highly concentrated in the Southeast. A serious problem affecting the Brazilian rail network is that there are different gauges, making continuity difficult and requiring transfer stations. In 2011, changes were implemented in the railroad regulatory framework to improve the existing network. Among other measures the new regulations require that rail concessionaires grant other rail operators right of way and to use their infrastructure for a price78, which could make the sector more competitive.

76 Calculated based on total weight. Source: National Waterway Transportation Agency (Agência Nacional de Transportes Aquaviários – ANTT) 77 Source: MMX and LLX investor relations web page 78 Source: ANTT Resolutions 3,694, 3,695 and 3,696 of 2011

Attractiveness of Brazil as an international investment and business hub

Furthermore, the Logistics Investment Program mentioned above calls for a publicprivate partnership model for new rail lines, with the Brazilian Government contracting the construction and maintenance of new lines, and management in charge of Valec, a state owned company that would offer the right of way to interested players. Revenue from this operation would be use to complement the remuneration of the railroad builder; • Although waterway transportation thrives in Brazil (25 million tons in 2011), currently this means is used only for commodities and other basic materials79. It is important to stimulate this modal so that more types of merchandise are transported by waterway, relieving other means of transport. Focusing specifically on the São Paulo - Rio de Janeiro axis, logistics connections in general are poor, with quite significant bottlenecks. The initiatives pointed out here follow the path of offering solutions to these problems, however these are long term projects and require continuous monitoring to ensure they proceed on spec and without delay. Telecommunications The states of São Paulo and Rio de Janeiro are fully covered by fixed and mobile telephony services80. Furthermore, with the exception of a few gaps in the areas farthest from the major urban centers, both states offer their populations good broadband Internet coverage. It is worth mentioning, though, that by 2011 2,625 cities81 and 83.2% of the population already had 3G coverage82. Telecommunications coverage is therefore an important item to highlight. In this case the shortcomings of both states are primarily related to the quality of the mobile services offered and the prices charged, which are quite high compared to other countries (see Exhibit 24).

2011 Inland Navigation Statistics, National Waterway Transportation Agency (Agência Nacional de Transportes Aquaviários) 79

Source: 2012 Brazilian Telecom Atlas

Out of a total of 5,565 cities and towns 82

Source: Telco

At the country level, in 2012 the Government adopted severe measures regarding the quality of the services provided by mobile telephony operators, and has tightened its control over the industry to improve quality of service. In June 2012, the country’s four main operators purchased 4G frequencies at a government auction for some R$ 2.5 billion. The 4G network should become operational sometime in 2013, and while it should not change the competitive environment, it will make more advanced services available to the population.

80 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 24

Brazil has a good telecom platform and clear opportunities for improvement Actual connection speeds are lower than what the operators sell

Mobile telephony costs in Brazil are higher than the world average

Actual data transmission speeds - Kbps

Cost of a 3 minute local call during peak hours - US$, 2010

0.1

china

0.3

CHILE

0.4

south korea

0.8 0.9 0.9

argentina

1.0

JAPan

857

371

0.5

united kingdom

CANADa

873

551

0.3

usa

873

661

singapore

australia1

767

1Q11

0.3

1.0

3Q10

mexico

769

4Q10

0.2

2Q10

germany

0.1

1Q10

russia

4Q11

iNDIA

3Q11

0.0

2Q11

1,024 Speed sold by the operators

HONG KONG

1.3

BRAzIL

1.9

france

2.3 average: 0.7

1. 2008 data 2. Data collected from local sources and converted using the average exchange rate for the year. Considers the average cost for a three minute call charged by four operators: NTT, KDDI, SoftBank Mobile and iMobile Source: Teleco; Akamai; ITU; Japan’s Ministry of Communications, EIU; BCG analysis

Attractiveness of Brazil as an international investment and business hub

82 Attractiveness of Brazil as an international investment and business hub

Basic services Between 2000 and 2002 Brazil experienced power rationing and rolling blackouts for a number of reasons, among them the absence of planning and investment in the electricity sector, and an extended period of drought, critical for the Brazilian power matrix which is heavily dependent on hydro plants. As a result, the electricity sector increased its planning efforts, including new regulations, power auctions and projects for new hydro and thermal power plants83. The availability of basic services such as water and sanitation is satisfactory in Brazil’s urban centers. According to a 2010 World Bank Report, Brazil is close to developed nations in access to potable water, and close to other emerging nations and better than the other BRICs when it comes to basic sanitation coverage (see Exhibit 25).

EXHIBIT 25

Access to water and basic sanitation in Brazil is close to benchmark levels Access to clean water

Access to sanitation

INDIA

MEXICO

ARGENTINA

CHINA

RUSSIA

BRAZIL

58 87 91

CHILE

100

GERMANY

100

AUSTRALIA

100

CANADA

100

SINGAPORE

100

SOUTH KOREA

100

USA

100

FRANCE

100

JAPAN

100

UNITED KINGDOM

100

% urban population

Source: World Bank; BCG analysis

83 According to the Government’s plans disclosed in the 10-year Energy Plan published by Empresa de Pesquisa Energética, through 2020 electricity supply should exceed demand by 6 to 10%

Attractiveness of Brazil as an international investment and business hub

Indicators The dimensions selected for continuous tracking of the physical infrastructure pillar are: • Urban mobility: This measures the availability of transportation options in the major urban centers of a country as a combination of subway availability and traffic criticality; • Quality of the air transport: This indicator measures the quality of the air transport in the country based on the opinions of executives; • Quality and cost of telecommunications: Telecommunications are key for any business hub, especially one focusing on services. This indicator measures the evolutionary status of a country’s telecommunications as a combination of the cost and quality of services offered; • Power availability: The current and future availability of power based on the opinion of the executives in each country; • Basic services available to the urban population: The availability of basic services in a hub is partially responsible for defining quality of life, and is also an indicator of the level of development of a country and its consumer market. The following exhibit shows how Brazil compares to other countries along the dimensions of the physical infrastructure pillar:

Physical Infrastructure critical

Urban mobility1

Quality of air transport

Quality and cost of telecommunications

needs improvement

good

BRA IND

CHN

FRA RUS

excellent

DEU

GBR

USA

MEX

BRA RUS

CHN

MEX

JPN

KOR

CHL

IND

USA

FRA

DEU

SGP

GBR

HKG

BRA MEX

CHN RUS

IND

JPN GBR

FRA CHL DEU USA

SGP KOR HKG

BRA

Power availability

Basic services available to the urban population1

IND

MEX CHL

GBR

CHN USA

KOR

JPN

BRA IND

Emerging nations

Main international hubs

DEU FRA SGP HKG

RUS

CHN RUS

MEX

SGP GBR USA JPNFRADEU

CHL KOR

Other developed nations

1. Data cannot be updated from the 2011 Attractiveness Report

In this pillar Brazil is behind the main countries with which it is being compared. Brazil is well positioned only in the supply of basic services to its urban population, where it does better than most emerging nations, but is still far from developed nations.

84 Attractiveness of Brazil as an international investment and business hub

Brazil is ranked well - above most emerging countries - regarding the offer of basic services to the urban population

However, in the other indicators Brazil ranks as “critical” or “needs development”. Urban mobility is poor and, in those dimensions where perceptions were measured, such as the quality of air transport, the quality and cost of telecommunications and power availability, the country is not attractive in relative or absolute terms. Conclusion After decades of limited investment in its physical infrastructure, Brazil now has major bottlenecks in all areas important for a business hub. The two main cities – São Paulo and Rio de Janeiro – do not offer suitable urban transportation, the nation’s railroad network is proportionately small, its ports are still inefficient, waterway flows are limited and the airports of both of these cities are already operating well above their capacity. This scenario would be even more serious were it not for the outlook for improvements going forward. Today the Brazilian Government is clearly committed to addressing these bottlenecks, in particular regarding the country’s transportation infrastructure, given its increasingly latent shortcomings. The recent concession of three important airports and the Logistics Investment Program announced in August 2012 are clear evidence of the Government’s determination to attract private enterprise as an effective option for addressing these bottlenecks. Already clear opportunities for investment in the coming years have arisen, which in itself is an advantage. Finally, these investments should also make a positive contribution to positioning Brazil as an investment and business hub.

Attractiveness of Brazil as an international investment and business hub

86 Attractiveness of Brazil as an international investment and business hub

Financial infrastructure

A strong and robust financial infrastructure that is capable of offering security and suitable financing terms is essential for an international investment and business hub. Brazil starts out from a solid position in this pillar: the regulation of the financial system is recognized internationally in rankings of competitiveness such as those published by the World Economic Forum and the IMD. This solid position may also be attributed to the regulation and oversight of specific segments such as derivatives, an area where it is a reference for other nations due to centralized negotiation and registration (see Box D). In addition, Brazilian banks increasingly stand out globally due to their solidity. For example, in 2012, two banks headquartered in Brazil were ranked among the World’s 20 Strongest Banks84. Furthermore, the Brazilian financial system has remained profitable, despite the recent financial crisis (see Exhibit 26).

Main aspects of the financial infrastructure pillar Direct benefits of a financial infrastructure: • Funding the economy: If a country offers the credit instruments businesses require, it will be more attractive for investments and business and foster the international expansion of its multinationals. • Efficient resource allocation: Widespread availability of risk management instruments reduces uncertainty and makes business operating costs more predictable. Indirect benefits of a financial infrastructure: The financial industry also contributes indirectly, in the form of taxes and jobs. It also stimulates specialized professional services such as auditing, legal counsel, information technology and consulting.

Source: Bloomberg

Attractiveness of Brazil as an international investment and business hub

88 Attractiveness of Brazil as an international investment and business hub

BOX D

Brazil as a reference of a solid, regulated financial market

One often hears that Brazil came through the 2008 financial crisis relatively unscathed. This is due not only to the country’s solid macroeconomics, but also to the organization and regulation of its financial industry. There are balanced rules and regulations in place that weigh the dichotomy between security and flexibility necessary for market development. Examples of reference regulations in Brazil include: • Investment funds are closely monitored by the regulator, for instance they are required to disclose their current portfolio positions within at most three months. This makes it much harder for fraudulent schemes such as the Madoff affair to take place in Brazil; • Derivative transactions are centrally recorded in the CED (Central de Exposição a Derivativos or Derivatives Exposure Center). If authorized, a company’s position in these transactions may be checked, conferring increased transparency to the market and avoiding potential overexposure. The US and the UK are developing systems inspired on this model; • Stock exchange transactions in Brazil have a central counterpart, ensuring transaction settlement and the security of the parties involved; • In Brazil, the risk of intermediary insolvency does not compromise the transfer of funds to complete transactions. These payments use Brazilian Central Bank reserve currency (settlement in central bank line), and the amounts involved are not included in the bankrupt estate even if they are still in the hands of the intermediaries; • The country demands that their banks have a Basel Index of 11%, higher than the 8% required worldwide. In April 2012 the average Basel Index for banks in Brazil was 16%, a solid position. Furthermore, the Central Bank has analyzed and has full confidence in the ability of Brazil’s financial institutions to comply with Basel III requirements as of 2013, which demand stricter composition of capital requirements and increase the minimum Basel Index to 13%.

Considering that in this regard Brazil starts out at a high level, below is a more granular analysis of the existing strengths and opportunities to continue to enhance Brazil’s already solid financial infrastructure and reap the direct and indirect benefits provided by a robust financial infrastructure, in particular as they relate to Brazil as an investment and business hub.

Attractiveness of Brazil as an international investment and business hub

EXHIBIT 26

Brazil has a strong financial system that compares well with that of developed nations

Bank shareholder returns are higher than in developed economies1 TSR2 2007–2011 p.y. (%)

indonEsia

20.2

colOmbia

14.1

chile

10.3

mExico

Of the world’s main economies, Brazil’s stock market has offered the greatest returns since 2004

10.2

India

6.2

braZil

6.2

Variation in the stock exchange index3 index 2004=100

400 -0.3

-4.5

SINGAPORE china

-5.5

hong kong

-5.9

rUssia

-13.8

-16.3

300

BRAZIL

200

CHINA MEXICO INDIA RUSSIA

100

USA JAPAN

USA UNITED KINGDOM GERMANY

-19.4

franCE

-21.3

2004

2005

2006

2007

2008

2009

2010

2011

JAPAN

-23.5

Emerging nations

Developed nations

1. Among the world’s main banking systems assessed in a BCG’s survey entitled “Creating Value in Banking” 2. TSR: Total shareholder returns, comprised of capital gains and dividends 3. In US$ / Note: TSRs always calculated in local currency / Source: 2012 BCG report entitled “Creating Value in Banking”; EIU; BIS; World Bank; Standard & Poor’s; World Federation of Exchanges; BCG analysis

90 Attractiveness of Brazil as an international investment and business hub

Direct benefits a financial infrastructure offers a hub The direct benefits of a financial infrastructure have been split into two main groups: funding the economy and efficient risk allocation.

Funding the economy Looking at some of the types of financing used by businesses, we find these have evolved greatly in recent years (see Exhibit 27). Bank credit, including both free funds and BNDES directed lines, has grown at 15% a year in real terms since 2004, more than doubling in the period. Capitalization of companies listed on the BM&FBOVESPA increased 43% between 2004 and 2007, and has been essentially stable since then. The only exception is the market for private debt (such as debentures), which in Brazil is still a little used funding mechanism. Private debt socks in Brazil amount to only some R$ 4 billion, quite low compared to corporate credit. It has also grown at only 4% a year or so in real terms.

EXHIBIT 27

Corporate funding has increased significantly in Brazil in recent years Business (PJ) credit has grown significantly in Brazil

The stock exchange grew through 2007, and had a slight drop ever since

The same is true for debentures, although they have grown at a slower pace

Inventory of business (PJ) credit in Brazil (R$ B)1

Market cap of the companies listed on the BM&FBOVESPA exchange2 (R$ B)1

Brazilian inventory of debentures (R$ B)1

-3%

1,073

+15%

898

789

414 38%

476 37%

62% 63%

543

635 30%

37%

961 39%

+43% 2,488

39%

1,512

32%

35%

65%

63% 68% 70%

61%

2004 2005 2006 2007 2008 2009 2010 2011 Free credit

Directed credit (BNDES)

846

2,335 2,398 2,225

1,362

+4% 16 15

17 18

20 19

1,073

2004 2005 2006 2007 2008 2009 2010 2011

1. Based on December 2009 values, adjusted using the IGPM 2. On the last business day of the year Source: Brazilian Central Bank; BIS; Central Banks and other institutions in the individual countries; Bloomberg

Attractiveness of Brazil as an international investment and business hub

However, falling interest rates over the years, with the lowest levels being reached in 2012, have made more room for this type of funding mechanism to grow, both because the implicit spread is smaller, and because investors are looking for options offering higher yields than government bonds. Looking at the ratio between these funding mechanisms and the country’s GDP, a comparison with other countries shows there is room for growth in Brazil, as it lags behind countries such as the US, China and France in terms of corporate credit and debentures. The only position in which Brazil is aligned with most other countries included in the survey is the market cap of its traded companies (see Exhibit 28). As right now the Brazilian Government’s agenda includes the search for increased investment, especially in physical infrastructure, there is a need to keep expanding and improving measures to develop the financing options available in the country. The Government has been taking specific measures to stimulate infrastructure (see the chapter on physical infrastructure) and research and development projects, especially by taking measures to reduce the tax burden.

EXHIBIT 28

The different types of corporate funding available in Brazil remain below global benchmarks Inventory of business credit/ 2010 GDP CHINA1

94%

USA FRANCE

76% 40%

Listed company market caps3/ 2011 GDP UNITED KINGDOM

125%

USA

99%

SOUTH KOREA

87%

Debenture inventory/ 2011 GDP SOUTH KOREA

36.5%

USA

21.6%

FRANCE

9.9%

GERMANY

9.6% 9.4%

India

32%

INDIA

GERMANY

32%

FRANCE

51%

CHINA

30%

BRAZIL

48%

INDIA

1.1%

29%

CHINA

37%

UNITED KINGDOM

0.8%

GERMANY

35%

BRAZIL

0.4%

UNITED KINGDOM SOUTH KOREA BRAZIL 15%

24%2

54%

1. 2011 data 2. Free and directed/BNDES resources account for 15% and 9% respectively 3. On the last business day of the year / Note: Data has been revised wince the previous report Source: Brazilian Central Bank; BIS; Central Banks and other institutions in the individual countries; Bloomberg; EIU

92 Attractiveness of Brazil as an international investment and business hub

• Bank credit: Although bank credit has expanded in recent years, barriers for further growth remain, the most important being the relative short loan terms and structural factors that drive up market spreads (see Exhibit 29). A system of positive credit ratings would help further bank credit. Such a system is incipient and in the regulation phase, and is expected to help measure the default rate and the spread charged of those who pay their debts on time (good payers). In addition to further regulation, the existence of positive credit ratings and what they are should be disclosed, as consumers must give their permission before their name is added to such lists. •Debentures: The debentures market in Brazil is not yet well developed, as shown in Exhibit 28. The main reason is that until recently, debentures competed with government bonds, as these offered high interest rates, lower risk and increased liquidity.

EXHIBIT 29

Terms and structural factors influence spreads and limit credit Breakdown of business (PJ) credit by loan term1,2 1%

> 2 years

19%

Other 1-2 years

57%

Working capital (~16 months)

23%

2011

Breakdown of the spread in Brazil3

< 1 year

33%

Net residue (profit)

26%

Taxes and compulsory loans

29%

Default

13%

Administrative costs

2010

1. Dec/2011. Only credit transactions using free resources that are interest rate references – excludes BNDES, leasing, etc. 2. < 1 year: Secured Accounts; Vendor; Trade receivables discounting, ACC and other; 1-2 years: External transfers, import finance, loans to purchase assets (and working capital); > 2 years: Mortgages 3. According to the Brazilian Central Bank Report on Credit and the Banking Economy (2010). Based on the calculation methodology used in 2008. This study does not distinguish personal (PF) and business (PJ) loans / Source: Brazilian Central Bank

Attractiveness of Brazil as an international investment and business hub

Falling interest rates should make debentures more attractive, nevertheless a structured program is required, involving the regulator and private initiative to ensure a simpler, more efficient issuing process, increased liquidity in the secondary market and a larger base of investors and issuers. The Brazilian Government has introduced important measures for this, such as lower taxes and institutional changes, allowing monetary correction in periods of less than a year, modernizing one of the provisions imposed by the Real Plan (see Box E).

BOX E

Incentivizing secondary market liquidity in domestic debt markets

Law #12,431, converted from Provisional Measure 517, was signed in June 2011 in order to encourage long term financing. This was an important step for developing private debt instruments in Brazil, and for enhancing the liquidity of the secondary debt market. This law introduced the following regulatory changes: • It reduced the Income Tax rate on the income earned by foreigners investing in Brazilian private bonds to zero; • It waived the 30-day IOF (Tax on Financial Transactions) on private debt1 transactions; • It allows issuers to buy debentures back for an amount larger than their face value in the event of an increase in value; • Private debt bonds may be monetarily corrected at the same interval as that stipulated for interest, even if this period is less than one year; • Changes in Brazil’s Corporate (S.A.) law allow bonds to be issued in amounts higher than the share capital of the issuer. Thus Special Purpose Enterprises (SPEs) need not be capitalized to issue debentures; • It enables concomitant issues of debentures by the same issuer in order to offer issuers more opportunities to take advantage of favorable market conditions. The changes brought about by this Law lifted most of the regulatory obstacles to liquidity. Furthermore, in 2012 more than 40 representatives from industry, trade and financial institutions met with the Minister of the Treasury and the BNDES President to present a proposal to eliminate the remaining hurdles, thus further improving the framework required to develop this type of funding. 1

IOF waived by Decree 7,632 of 2011

94 Attractiveness of Brazil as an international investment and business hub

One should also call attention to the efforts made in 2011 to self regulate the fixed yield market, similar to the successful model used by the Novo Mercado85 to issue stock, with stricter transparency and governance requirements to attract investors, such as: at least 10 investors, each holding no more than 20% of the offer, annually updated credit risk rating and a mechanism that ensures that investment analysts will issue a report on the asset within 12 months of issuing debentures. • Stock: As mentioned, the market cap of Brazil’s stock market is about 45% of the GDP, almost on a par with France and higher than Germany. Nevertheless, there are opportunities to increase the use of stocks as a source of funding. Small companies, for instance, make up less of the stock market in Brazil than in the UK, one of the world’s main investment and business hubs (see Exhibit 30). The stock market’s Bovespa Mais initiative to encourage the listing of smaller businesses must be followed by a broader effort to simplify and lower the cost of issuing and trading stock for this segment. Lastly, Brazilian businesses already have good access to international capital markets through the stock markets abroad. Nevertheless, as much of this is in the form of ADRs86, this does nothing to increase liquidity within the domestic market. Companies listed only locally do not benefit from the liquidity of these ADRs.

85 BM&FBOVESPA rules for listing that demand corporate governance standards above those required by law 86

American Depositary Receipts

EXHIBIT 30

Only a few small businesses are listed on exchanges in Brazil Breakdown of traded companies by range of Market Cap1

% total number of companies

BM&FBOVESPA is attempting to attract smaller businesses with initiatives such as the “Bovespa Mais” program

41 17 <500M

500M-5B

13 Market cap ranges (US$)

>5B

London

São Paulo

1. Data for June, 2012 / Source: Bloomberg; BCG analysis

Attractiveness of Brazil as an international investment and business hub

In almost all of Latin America’s main markets one finds shares being traded outside the market of origin (see Exhibit 31), which suggests that measures to pool liquidity in Latin American markets, such as the alliance underway between the stock markets in Peru, Chile and Colombia, could help attract to regional markets some of the liquidity that local businesses are now leaving in New York and other international hubs.

EXHIBIT 31

Latin companies “export” market liquidity % volume of shares traded in the market of origin compared to volume traded in other countries by company country of origin (2011)1 Argentina

95%

peru

90%

Colombia

67%

brazil

58%

Mexico

55%

Russia

52%

Hong Kong

28%

united kingdom 27% Chile

21%

singapore

19%

China

17%

France

16%

india

13%

Japan

usa

0% international

domestic

1. Volume traded (in US$) in the market of origin of the traded company’s “ultimate parent company” versus the volume traded in other markets Note: Includes shares, rights, depositary receipts and units. Data for June, 2011 / Source: Bloomberg; BCG analysis

96 Attractiveness of Brazil as an international investment and business hub

Conversely, in 2010 BM&FBOVESPA made room for unsponsored BDRs87 of some of the world’s main blue-chips such as Apple, Avon, Google, Nike and Walmart. Unsponsored BDRs are issued by depository institutions without the participation of the foreign companies that issued the backing securities. Currently BDRs for some 70 companies are traded, but this market is still very incipient and volumes are low. However, it is an additional step in the international expansion of the Brazilian market and connection with global markets.

Levers of efficient risk allocation Efficient risk allocation requires a strong financial system so as to enable offering instruments such as derivatives and insurance to mitigate all sorts of operating risks. For some types of derivatives, Brazil is already on a par with global standards in terms of volume traded, while penetration of commodity and index derivatives is still low (see Exhibit 32). If well managed, a stronger derivatives market will bring real benefits to the economy, such as more efficient risk management tools, consequently reducing the cost to fund production.

Brazilian Depositary Receipts

EXHIBIT 32

The Brazilian market has room to grow in commodity and index derivatives Nº of derivative contracts negotiated by type, World vs. Brazil (2011) 25.0 B 13%

1.5 B 8%

11% 32% 14%

22%

56%

Exchange Commodities Interest

41%

Shares Index

GLOBAL

BRAZIL

Note: Indices include ETFs Source: World Economic Forum; BCG analysis

Attractiveness of Brazil as an international investment and business hub

Compared to global standards, the insurance market in Brazil is under-penetrated. Premiums as a percentage of the country’s GDP suggest it could double in size (see Exhibit 33). Following the breakup of the IRB-Brasil (Brazilian Reinsurance Institute) monopoly in 2008, the country’s reinsurance industry changed significantly. Currently more than 100 reinsurers are registered to operate in Brazil, and the National Federation of Reinsurance Companies expects that this R$ 5.7 billion market (2011) will grow at annual rates of over 15% over the next five years.

EXHIBIT 33

There is ample room for insurance to grow in Brazil GDP vs. size of insurance market by country Log Premiums (US$ B, 2010)

10,000

1,000

Potential

100

BRAZIL GDP: US$ 2.1 T1 Premium: US$ 64 T1

1 Log GDP (US$ B, 2010)

100

1,000

10,000

100,000

1. Absolute values in comment boxes only, chart is log based / Source: SwissRe; BCG analysis

Indirect benefits of a financial infrastructure The financial industry is an important pillar of the economy of other investment and business hubs, due to its contribution to the GDP, the taxes it pays and the jobs it creates. Regarding this last topic, the financial industry could increase its share of total jobs, currently around 2% and below benchmark levels for other hubs (see Exhibit 34).

98 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 34

The financial industry plays an important role in creating jobs, economic growth and tax revenue Employment in the financial services industry1 (% of total)

Financial services GDP3 (% of total)

Taxes on financial services4 (% of total)

26%

8% of the jobs, but 32% of the payroll in NYC 15

13% 10

12%

10 8%

LON

NYC

12% 10

11% 9%

~7%

BRAZIL

5.5%

5.9%

4.0%

6.2%

~6% BRAZIL

~2%2 BRAZIL

united singapore kingdom

usa

Switzerland

united singapore kingdom

usa

Switzerland

united singapore kingdom

usa

Switzerland

1. 2009 data for London, 2010 for the United Kingdom, New York and Brazil, and 2011 for Singapore, Switzerland and the US. Data for the US excludes farm jobs 2. Calculated based on the total number of formal jobs in Brazil (~44 million in 2010) 3. 2010 data for the US, Brazil and UK, and 2011 for Switzerland and Singapore 4. 2007 data for Singapore, 2008 for the US, 2010 for Brazil and 2011 for the UK / Source: US Bureau of Labor; New York State Department of Labor; Federal Department of Finance (Switzerland); Ministry of Manpower (Singapore); City of London; Press Clippings; Ministry of Labor and Employment; IBGE; BCG analysis

A stronger financial infrastructure also stimulates other sectors of the economy with direct or indirect links to the financial industry such as auditing, consulting, legal counsel, information technology and even hotels and airlines. Furthermore, on the job creation side, it is important to remember that jobs in the financial industry are normally highly qualified and specialized. This contributes to offering the economy a more developed set of talents.

Attractiveness of Brazil as an international investment and business hub

Indicators The dimensions selected for continuous tracking of the financial infrastructure pillar are: • Effectiveness of the financial regulations: The opinion of executives on the sufficiency and effectiveness of regulations governing the financial system of each country, which is required for creating a hub as it ensures a balance between operational security and flexibility; • Use of financial resources: This can be split into three sub-dimensions: the stock exchange, debentures and corporate credit. Analyzing the combination of all three enables assessing the degree of maturity with which the different financial resources are used by businesses. However, each country may prefer a different mix, therefore the analysis of each sub-dimension alone is less relevant; • Share of regional and international companies in the stock exchange: This measures the international component of the stock exchange in each country. A more international exchange is more attractive to foreign businesses and is an indication that international business is more important for the country; • Availability of financial services: This measures the availability of financial services in each country based on the opinion of executives. The availability of financial services is important as it provides the funding needs and appropriate allocation of resources and risks within a hub; • Stock exchange liquidity: The greater the liquidity of the stock exchange the more dynamic the financial market of which it is a part, and the greater the possibilities of self funding and of entering and exiting investments in the stock exchange. • Projection as an IFC88: This indicator measures the recognition of a country’s financial system as an international financial center. A higher score means a country’s financial infrastructure is better prepared to support an investment and business hub.

International Financial Center

The following exhibit shows how Brazil compares to other countries along the dimensions of the financial infrastructure pillar:

100 Attractiveness of Brazil as an international investment and business hub

Financial Infrastructure critical

needs improvement RUS

Effectiveness of financial regulations

CHN

good

GBR DEU FRA MEX

excellent

BRA

USA

IND

CHL SGP HKG

JPN KOR

Use of financial resources

BRA

DEU CHN

Stock Exchange

IND JPN

MEX RUS

KOR

USA

CHL

GBR SGP

HKG

FRA

BRA

Debentures

Corporate credit

SGP IND

MEX

HKG

CHN

FRA

CHL

JPN

USA

KOR

DEU

GBR

BRA KOR DEU

SGP

FRA

USA

CHN

GBR IND

BRA

Share of regional and JPN KOR RUS international companies CHN in the stock exchange

Availability of financial services

Stock Exchange Liquidity

USA

IND

FRA

CHL

MEX SGP GBR

HKG

BRA MEX

KOR

RUS

IND

FRA

JPN

CHL USA

CHN

DEU

GBR

HKG SGP

BRA CHL

MEX

FRA

IND

JPN RUS GBR HKG USA KOR

SGP

CHN

DEU

BRA

Projection as an IFC

IND

RUS

MEX

CHN

KOR

FRA JPN DEU

HKG SGP

Emerging nations

Main international hubs

Other developed nations

The effectiveness of its financial regulations is one of Brazil’s strengths, where it stands out from the other countries in the analysis. Furthermore, the liquidity of its stock market is good and there is the perception of the country’s financial services is also good. However, these dimensions are not enough to propel the country into a position as an important international financial center. In addition, there is still a lot of room for the internationalization of its stock exchange and the use of financial services, translated as the ratio of market capitalization, debentures and corporate credit to the GDP.

GBR USA

Attractiveness of Brazil as an international investment and business hub

101

Conclusion Credibility of the financial environment is essential for the economic stability of a country. In this pillar Brazil presents a number of strengths for an investment and business hub, in particular its prudent regulations and solid and profitable financial institutions. There is suitable oversight of financial transactions, balancing the flexibility the market needs and the security it must provide to ensure the system endures. In addition, most Brazilian banks are solid and offer positive returns to their shareholders. This is important given that the returns of most of their international peers dropped sharply due to the current crisis scenario. All of these helped keep the effects of financial crisis that started in 2008 from being felt as strongly in Brazil as they were in a number of other countries. Given this strong platform, efforts can turn to addressing the theme of suitable financing for companies and businesses. Falling interest rates and recent legislative changes signal the Brazilian Government’s interest in increasing the availability of instruments that can meet market needs. This agenda may continue with initiatives to extend bank loan terms, expand and encourage the private debt market and enhance access to the stock exchange for both domestic and international companies. Brazil is well positioned and on the right path to increase its attractiveness in this pillar.

Brazil presents a number of strengths for an investment and business hub, in particular its prudent regulations and solid and profitable financial institutions

102 Attractiveness of Brazil as an international investment and business hub

Connectivity Being part of a dense network of intermodal connections is a reflection of a country’s importance as an investment and business hub. The connections within such networks may be intra-regional or global. The former relates to close partners within a hub, while the latter defines its position in terms of how open it is to the world. Despite the Mercosur and other initiatives to integrate the region, there are actually few connections between the countries that make up South America. A consolidated investment and business hub in the region would create economies of scale and scope that would be more evident to the other nations in the interconnected network where Brazil, because of its size and activities, would be a natural candidate to play a key role. For this reason integration between Brazil and Latin America and the world needs renewed impetus. Broad but not very effective measures such as UNASUR89 are not enough to consolidate the nation’s regional and global projection. Efforts focused more on matters that can truly deliver relevant economic impact are the best way for Brazil to increase its connectivity.

Main aspects of the connectivity pillar Trade in goods and services: A hub should offer an environment that enables and promotes the international trade of goods and services, which today is essential for the businesses installed in any country. Investment and capital flows: Stimulating and channeling international capital flows is a vital component of any hub. A favorable environment has advantages that affect the country and the entire region. International business operations: In order for a country to be truly integrated to a global business network, it is important that it be the headquarters of multinational corporations and contribute to the international expansion of local businesses. People mobility: It is essential that executives and decision makers in all sectors be able to easily enter and exit the hub. This has to do not only with regulations, but also airport infrastructure, the main means people use to travel between countries.

Union of South American Nations

Attractiveness of Brazil as an international investment and business hub

103

Brazil is in the lower half of rankings in four key aspects that translate this perception: the trade of goods and services, capital and investment flows, international business operations and people mobility (see Exhibit 35). The purpose of this chapter is to analyze the Country’s situation along these four aspects.

EXHIBIT 35

Brazil is still considered weak when it comes to connectivity

Goods and services Freedom for International Trade (Score of 1 through 10)1

1 2

SGP HKG

9 14

CHL GBR

DEU

CHN

40 41

KOR FRA

USA

MEX

Investment and capital

International business operations

People

Restrictions on Capital Flows

Prevalence of Foreign Property

Mobility and Relative Openness of the Job Market

(Score of 1 through 7)2

IND

HKG

6 10

SGP GBR

15 20

DEU CHL

42 46 51

MEX FRA JPN

69 73 75

USA BRA IND

94 105

BRA

111 114

RUS JPN

141

KOR

119

RUS

123

CHN

(Score of 1 through 7)3

3 4 5

SGP GBR HKG

14 18

CHL FRA

MEX

USA

DEU

82 84

BRA IND

90 91

JPN KOR

CHN

133

RUS

139 144

(Rank among the 30 study countries)4

2 3 8 9 10 11 16 19 21 23

GBR DEU FRA IND USA CHN MEX

JPN

KOR RUS BRA

1. Based on weights assigned to the various components: tariffs, quotas, customs efficiency, hidden administrative restrictions and controls on capital and the exchange rate. Source: Fraser Institute – Economic Freedom of the World 2. Based on a survey of executives. 1 = very restricted, 7 = no restrictions of any type. Source: World Economic Forum – Global Competitiveness Report 2010-2011 3. Based on a survey of executives. 1 = very rare, 7 = highly prevalent. Source: World Economic Forum – Global Competitiveness Report 20122013 4. Ranking based on the combination of a number of metrics: Number of citizens studying abroad, % foreign students in the country, knowledge of foreign languages, foreigner recruiting, openness of the country’s international trade. Source: Heidrick and Struggles – Mapping Global Talent. Study focusing on the more populous countries, excludes Chile, Singapore and Hong Kong

104 Attractiveness of Brazil as an international investment and business hub

Trade in Goods and Services International trade in goods and services has grown faster in Brazil and Latin America than global trade as a whole. Between 2007 and 2011 Latin American goods exports, in US Dollar terms, grew at an annual average rate of 9.2%, while imports grew 9.8%, compared to 6.8% and 6.4% globally. Service exports from Latin America grew 7.0%, and in the world 5.0%. Latin American imports grew 11.7%, while global imports increased 7.0%. These numbers are even larger for Brazil, with the trade of goods and services growing at twice the global rate (see Exhibit 36).

EXHIBIT 36

Latin America and Brazil stand out in terms of their growth in international trade services Average annual growth between 2007 and 2011, in US$ % p.y.

Export flows

goods Average annual growth between 2007 and 2011, in US$ % p.y.

9.2%

12.4%

world

LATIN AMERICA

BRAZIL

Import flows

6.8%

5.0%

7.0%

world

LATIN AMERICA

9.8%

world

LATIN AMERICA

5.2% BRAZIL

Note: All values are nominal. Latin America includes Brazil / Source: UNCTADStat; BCG analysis

BRAZIL

19.7%

16.7% 6.4%

12.5%

world

11.7% LATIN AMERICA

BRAZIL

Attractiveness of Brazil as an international investment and business hub

105

Despite this strong growth, there is still room for larger flows of goods and services in the region and country, in particular when one looks at foreign trade as a percentage of GDP. In 2011, while Asia and Europe were responsible for a larger share of international trade than their share of the global GDP, Latin America, which accounted for about 8% of the global GDP, was responsible for only 6% of the international trade in goods, and 4% of the trade in services. The same is true for Brazil, which is responsible for 3% of the global GDP, but for on 1% of the import and export of goods and services (see Exhibit 37).

EXHIBIT 37

There is room for Latin America and Brazil to increase their share of world trade

GOODS

SERVICES

Share of the GDP and international trade in goods % FT/ % GDP1

% 2011

37%

51%

6% 24%

Share of the GDP and international trade in services

38%

OTHER

73%

38%

LATIN america

74%

23%

ASIA

149%

51%

17% 8%

16%

BRAZIL

% FT/ % GDP1

% 2011

40%

OTHER

76%

LATIN america

47%

18%

ASIA

110%

EUROPE

158%

16%

33%

25%

34%

EXPORTS

GDP

IMPORTS

EUROPE

1. Imports and exports as a percent share of the GDP (average) Note: All values are nominal / Source: UNCTADStat; BCG analysis

132%

39%

42%

25%

38%

EXPORTS

GDP

IMPORTS

41%

106 Attractiveness of Brazil as an international investment and business hub

Intra-regional trade within Latin America also has room to grow. For example in 2010, 51% of Asia’s exports and 45% of its imports were intra-regional, while for Europe these figures are 65% and 62% respectively. That same year only 18% of the imports and exports in Latin America were within the region. To take advantage of this potential, Latin America should address the issue of customs barriers, as most of its countries have significant restrictions on the import of goods (see Exhibit 38) and services. In the case of services, this is reflected in the fact that it has the smallest number of service sectors with signed GATS90 agreements, and thus open to international trade and competition (see Exhibit 39).

90 General Agreement on Trade in Services

EXHIBIT 38

Customs barriers for importing and exporting goods are larger in Latin America than in Europe and Asia Equivalent import tariffs are the highest in Latin America

Tariffs imposed on Latin American exports are also the highest

Restrictions on the import of goods1

Restrictions for accessing other markets2

Tariffs include tariffs + non tariff restrictions on imports

Tariffs include tariffs + non tariff restrictions on exports

MEXICO

27.4% 22.1%

BRAZIL ARGENTINA CHILE

SOUTH KOREA CHINA INDONESIA

16.4% 12.3%

BRAZIL CHILE

15.7%

MEXICO

9.4%

SINGAPORE

ARGENTINA

19.7%

8.3% 5.1%

INDONESIA SOUTH KOREA

10.0%

SINGAPORE

7.6%

6.5%

10.1%

FRANCE

9.1%

GERMANY

10.1%

GERMANY

9.1%

ITALY

10.1%

ITALY

9.1%

UNITED KINGDOM

10.1%

UNITED KINGDOM

9.1%

More restrictive

Europe

9.2%

FRANCE

World average: 14.1

Asia

9.8%

CHINA

9.8%

Latin America

12.7%

World average: 12.2

More restrictive

1. Reflects a uniform tariff that would keep domestic import levels constant 2. Reflects a uniform tariff that would keep the level of imports by the exporter’s commercial partners constant / Source: World Trade Indicators 2009/10 – World Bank

Attractiveness of Brazil as an international investment and business hub

107

EXHIBIT 39

Latin American countries could increase their share of international service agreements Number of signed GATS1 commitments per country 50

CHILE

URUGUAY

MEXICO

ECUADOR

VENEZUELA

ARGENTINA

117 PARAGUAY

BOLIVIA

PERU

COLOMBIA

BRAZIL

01 VIETNAM

RANKING

Construction and engineering

Recreation and culture

Distribution

Telecom

Environmental services

Education

Transportation

Healthcare

ECUADOR

Business services

MEXICO

Travel and tourism

VIETNAM

Financial services

% commitments signed by sector2

100% 100%

100% 75%

83% 83%

100% 80%

100% 0%

80% 40%

60% 60%

100% 0%

80% 80%

100% 44%

100% 50%

67%

50%

67%

20%

60%

20%

100%

33%

25%

100%

40%

22%

VENEZUELA

67%

75%

83%

ARGENTINA

100%

50%

80%

60%

40%

BRAZIL

67%

25%

33%

80%

60%

20%

44%

COLOMBIA

67%

50%

67%

80%

20%

25%

PERU

67%

50%

40%

20%

22%

URUGUAY

67%

75%

67%

20%

11%

100%

75%

50%

20%

11%

BOLIVIA

67%

50%

60%

20%

25%

PARAGUAY

67%

75%

CHILE

1. From the WTO page: “The General Agreement on Trade in Services (GATS) is the first and only set of multilateral rules governing international trade in services. It was developed in response to the huge growth of the services economy over the past 30 years and the greater potential for trading services brought about by the communications revolution.” 2. Each sector has 3 to 9 sub-sectors that require specific commitments (e.g.: financial services has 3 sub-segments - Insurance, Banking and other financial services) / Source: WTO trade in services database

108 Attractiveness of Brazil as an international investment and business hub

To pursue this agenda, countries must address a variety of issues such as eliminating the current subsidies and protectionist policies, extensive bureaucracy and frequent demands from domestic manufacturers. Here Brazil has not made significant progress in the recent past. When it comes to International Trade, Brazil ranks only 121st out of the 183 countries in the World Bank’s 2012 Doing Business report. Also according to this report, exporting a standard container from Brazil requires 13 days, 7 documents and US$ 2,215. Importing this same container would take 17 days, 8 documents and US$ 2,275. Meanwhile, other countries in the region have made efforts to strengthen their global connection, such as the free trade agreement signed by Colombia and the US in 2012. In broader terms, discussions regarding more integration between the Mercosur and China and the EU remain on the table. To drive its economic growth, Brazil should focus on competitiveness and commercial diplomacy, opening itself to other markets, which were precisely the Mercosur’s aspirations when it was conceived. Twenty one years after it was created, the block still has trouble adopting strategies to foster free trade among its members and present an alternative to the advances of the United States, which already has bilateral agreements with Pacific Rim countries such as Chile, Colombia and Peru. In addition to the challenge of customs barriers and bureaucracy, trade in goods faces the additional bottleneck of Brazil’s logistics infrastructure. There are few overland connections with neighboring countries, roads are occasionally blocked and their quality is poor, and the railways have different gauges and are poorly maintained. This scenario repeats itself with Brazil’s ports, where a survey gave Brazil 2.6 points on a score of 1 to 791. The world’s main international hubs such as Hong Kong, Singapore, the US and UK all score 5.6 or above, reinforcing the fact that Brazil must improve in this area. While Brazil has taken a number of quite positive initiatives to address its infrastructure bottlenecks, more effective results require the completion of major works. As examples we have the revamping of the Santos and São Sebastião ports, and the construction of one of the world’s largest bulk export terminals in Maranhão. Important railroad projects are also in the design or construction phase, such as the São Paulo ring railroad (Ferroanel), Ferrovia Leste-Oeste (East-West), Nova Transnordestina (Northeast) and Ferrovia Norte-Sul (North-South) (see the chapter on physical infrastructure for more details regarding plans for Brazil’s infrastructure).

91 Source: World Economic Forum – Global Competitiveness Report, 2012-2013

Attractiveness of Brazil as an international investment and business hub

109

110 Attractiveness of Brazil as an international investment and business hub

Capital and Investment Flows Inward foreign direct investment (FDI) in Latin America increased between 2007 and 2011, with the region receiving a share of FDI similar to the region’s share of the global GDP. Here we can look up to Asia as evidence that, if stimulated due to intrinsic economics or the regulatory environment, FDI can reach levels above a region’s or nation’s share of the GDP. For example, between 2007 and 2011 Asia’s share of the global FDI was 1.26 times its share of the global GDP, but in Latin America this ratio was only 1.07. Also, Latin American countries still account for only a small share of the world’s outward FDI.

EXHIBIT 40

Inward FDI into Latin America is proportional to its GDP, but outward FDI is still smaller While Latin America’s share of inward FDI1 is growing, it is still smaller than other regions

39.2

Share of the world’s inward FDI

Share of the world’s outward FDI

% world total inward FDI

% world total outward FDI

49.5

46.6

44.4

41.0

5.6 11.9

43.2

Latin America has a negligible share of the outward FDI, even as a percent of its GDP

7.1

6.4

9.8

9.0

13.1

17.2

22.3

21.6

30.3

29.8

24.3

27.6

OTher2

36.1

LATIN AMERICA3

1.2 7.9

41.0

1.9 8.4

Southeast Asia4

50.4

1.1

46.7

50.8

3.3

1.9

15.0

16.7

14.2

54.8

48.6

33.5

33.3

33.2

2007

2008

2009

2010

2011

european union

2007

2008

INDEX % inward FDI /% world GDP (Average for 2007-2011)

2009

2010

2011

1.07 LATIN AMERICA 1.26 Southeast Asia 1.11 european union

INDEX

% outward FDI /% world GDP (Average for 2007-2011)

0.26 LATIN AMERICA 0.91 Southeast Asia 1.46 european union

1. Foreign Direct Investment 2. Includes the US, Canada, Australia, Russia and tax havens, among others 3. Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Falkland Islands, Guiana, Paraguay, Peru, Surinam, Uruguay, Venezuela, Belize, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua and Panama 4. Selected countries: Cambodia, North Korea, South Korea, China, Singapore, Philippines, Hong Kong, Indonesia, Laos, Macau, Malaysia, Myanmar, Thailand, Taiwan, Vietnam Note: According to the most recent data taken from UNCTAD by August 2012 / Source: UNCTADStat; BCG analysis

Between 2009 and 2011, Brazil led in terms of the share of foreign direct investment into Latin America, receiving 41% of the total. However, once we factor the GDP into these flows, the picture changes, and Chile comes out as the region’s winner, with a good indicator of regional attractiveness (see Exhibit 41).

Attractiveness of Brazil as an international investment and business hub

111

EXHIBIT 41

Although Brazil receives a significant volume of direct investments, overall Latin America’s share of the global FDI is limited Brazil is the leading Latin American country in inward net FDI, but lost share in outward FDI due to capital repatriation Net FDI for Latin America by country of destination - % of total1 BRAZIL

PERU

6.7

BRAZIL

5.3

OTHER

19.5

ARGENTINA 3.4

7.9

PERU

30.7

COLOMBIA

13.3

COLOMBIA

32.1

CHILE

16.4

CHILE

ARGENTINA

MEXICO

41.1

MEXICO

Net FDI for Latin America by country of origin - % of total1

0.9 0.5

OTHER

9.3

12.9

Net outward FDI weighted by the country’s share of the regional GDP3

Inward net FDI weighted by the country’s share of the regional GDP2

7.25 3.13

0.95 CHILE

0.76

BRAZIL MEXICO

CHILE

1.48

0.01

MEXICO

BRAZIL

Latin America accounts for less than 10% of Brazil’s gross inward and outward FDI Gross foreign investment in Brazil by country of origin (2011)4

Gross foreign investment made by Brazil by country of destination (2011)4

39,082 56%

EUROPE NORTH AMERICA

NORTH AMERICA

10,698 15%

LATIN 1,961 3% AMERICA

LATIN AMERICA

OTHER

13,365 19% 5,000

10,000

12,332 53%

EUROPE

15,000

US$ M

40,000

3,581 15% 2,306 10%

OTHER 855 4%

US$ M

5,000

10,000

1. Average for 2009 – 2011 2. Index (% of total inward FDI for the region/ country GDP as a % of total region GDP, based on the average for 2009 - 2011) 3. Index (country % of region’s outward FDI / country GDP as a % of total region GDP, based on the average for 2009 - 2011) 4. Fiscal havens are not included explicitly, but account for 6% and 19% of Brazil’s inward and outward FDI respectively / Note: Net value, considers positive and negative FDI flows. For outward FDI, positive values are the amount companies invested abroad. Negative amounts mean values companies sent funds to Brazil from their country of origin / Source: IMF; UNCTAD World Investment Report; UNCTADStat; Brazilian Central Bank; BCG analysis

15,000

112 Attractiveness of Brazil as an international investment and business hub

In the case of outward FDI, between 2009 and 2011 Brazil’s share is low, and the overall account was negative due to the repatriation of capital Brazilian companies had sent abroad92. This does not mean that Brazilian companies have discarded the idea of international expansion, but is an indication of a preference to invest in Brazil rather than in countries whose economic scenario is still uncertain. Finally, the intra-regional connectivity of Brazil’s Foreign Direct Investment is still limited, as the main focus of inward and outward FDI are the countries of Europe and North America (see Exhibit 41). Ratifying bilateral investment agreements, making investments between signatory countries easier and safer could be a tool to increase Brazil’s prominence. Creating rules to protect property and indemnify expropriations, the ability to freely transfer investment yields to the country or origin, and the stipulation that disputes may be resolved by international courts would enable the flow of portfolio93 and foreign direct investment. Comparatively speaking, Brazil has agreements with 14 countries, primarily within the Mercosur, far fewer than the 51 agreements Chile has signed with partners such as the US, Canada, Mexico and India. Another lever that could contribute to enhanced investment flows in Latin America is the implementation of Local Currency Payment Systems (SML in Portuguese). This is a payments system used in commercial transactions that allows payables and receivables to flow between countries in their respective currencies. SMLs reduce the transaction, financial and administrative costs of exchange transactions, and make the entire process more agile, eliminating the need for Real-US Dollar and US Dollar-local currency transactions, and vice-versa. Concerning Mercosur, the first local currency payment system was created in 2008, between Brazil and Argentina. Currently the implementation of such a system with Uruguay is being negotiated, and right now needs only approval by the Brazilian Congress. Other countries and regions are looking into using their own local currency for payments to reduce their dependence on the US Dollar. At the second BRIC summit in 2010, the leaders of the four BRIC economies agreed to look into mechanisms to use their own currency for bilateral trade. Other factors that facilitate the flow of capital are exchange policies and regulations. Simple, modern rules would eliminate the restrictions that hamper exchange transactions, making them more dynamic. Brazil has made a lot of progress here: the 2005 International Capital and Foreign Exchange Market Regulation (RMCCI in Portuguese) and other new standards revised obsolete requirements and the multiple documents that used to be necessary to complete an exchange transaction. In the macroeconomic context, the use of IOF (Tax on Financial Transactions) as an exchange-policy tool to contain the rising value of local currency still brings some insecurity to market agents, as any increase in the IOF rate is enforceable immediately after the Presidential decree is signed. To illustrate this, among the transactions subject to this tax, the percentage of IOF charged when settling exchange transactions contracted by a foreign investor interested in funds to invest in the Brazilian capital market has gone up gradually from 0% to 6% since late 2009.

92 This includes Brazilian individuals and government agencies 93 Unlike direct investment, portfolio investments do not have a lasting interest in the asset or in actual managerial control over the asset. These include government and company bonds and shares. Shareholdings of up to 10% of the a company’s capital are considered portfolio investments

Attractiveness of Brazil as an international investment and business hub

113

114 Attractiveness of Brazil as an international investment and business hub

International business operations Recent years have witnessed the steady growth of international expansion by Latin American businesses. In 2004, foreign direct investment (FDI) reached US$ 17 billion, more than three times as much as in 2002 and 2003, when inward FDI in Brazil amounted to around US$ 6 billion. A new level was set in the following years, and the trend has been upwards ever since. Furthermore, nine Latin American companies, three of them Brazilian, were on the 2010 list of the 100 emerging nation companies with the largest volume of assets abroad94. In 2010 these companies had a total of US$ 173 billion in assets abroad, compared to just US$ 35 billion in 2003, close to 400% growth in seven years. 16.2% of the total assets on this now belong to Multilatinas95, compared to 14.1% in 2003. In the past two years, one more Latin American joined the list of the 100 companies with the largest volume of assets held abroad: in 2011 Vale reached the 61st position, overcoming Cemex, the only other multilatin in this report, now in 86th place (see Exhibit 42). In June 2012, Fundação Dom Cabral (FDC) published a list of the most multinational companies in Brazil, and for the second consecutive year JBS was the first ranked, with 53.8% internationalization96. Gerdau came in second, at 51.6%, and Stefanini, which dropped a level between 2011 and 2012, came in third, at 46.4%. Among companies with annual revenue of R$ 1 billion or less, the most internationalized are Metalfrio (45.2%), Ibope (43.8%) and Sabó (36.3%) Vale is present in the largest number of countries (38). The mining giant is followed by Stefanini, present in 26 countries, and by Odebrecht, with activities in 25 countries. Among franchises, Via Uno has an internationalization level of 18.3%, Fábrica di Chocolate 12.1% and Showcolate 10.9%. This study, based on 2011 data, also shows that the internationalization of Brazilian companies has been growing steadily at a rate of 1% a year. In all, 47 multinationals were included in the survey. 60.9% of them plan to expand in the markets where they are already present, and 27.5% plan to enter new markets. Most of the businesses interviewed in the survey believe the advantages of internationalization are greater than the risks involved. 87.3% of the multinationals believe this type of move helps to improve Brazil’s image abroad. 69.9% believe that a further benefit is that it brings new processes and technologies to manufacturing activities in Brazil. According to the survey, Brazilian businesses are more present in other Latin American countries (77.8%) and in North America (57.1%). According to the FDC’s Nucleus for International Business, 63.3% of the surveyed companies had their first international subsidiary in one of the countries in the region.

Source: World Investment Report - UNCTAD

95 Multinationals headquartered in Latin America 96 Internationalization is represented by the Transnationality Index combining three measures: percentage of international assets to total assets, percentage of international revenues to total revenues and percentage of overseas employees to total employees, to determine the overall degree of internationalization of companies

Attractiveness of Brazil as an international investment and business hub

115

EXHIBIT 42

Although multilatinas are a growing force, they are still not very relevant on a global scale Latin American multinationals are a growing force... FDI exiting Latin America 1999-2011 US$ B

% outward/inward

100 44

42 40

80 34

11 10

8 1

8 4

0 % outward/inward FDI

Outward flows

...but they still have a limited share of global business Latin American Companies in the top 1001 emerging nation multinationals COUNTRY

COMPANY

Assets abroad (US$ B - 2010)

HONG KONG HUTCHINSON 75.4 CHINA CITIC GROUP 53.3 BRAZIL VALE 49.2 MEXICO CEMEX 36.4 MEXICO AMÉRICA MÓVIL 22.3 BRAZIL PETROBRAS 16.2 BRAZIL GERDAU 14.8 VENEZUELA PDVSA 11.8 MEXICO FEMSA 10.0 ARGENTINA TERNIUM 7.5 MEXICO Grupo Bimbo 5.1

Ranking of the 100 largest companies in developing nations (2010) 1 2 3 4 10 19 22 27 37 49 63

Ranking of the 100 largest in the world (2011)

The only Latin American companies included in the world’s top 100 multinationals in 2010

Not part of the global top 100 1. Ranking by assets outside the country of origin. Excludes financial institutions / Note: outward FDI is the total flow of investments sent abroad by each of the selected countries. Inward FDI is the flow of investments by non residents into each of the selected countries. Latin America represented by Brazil, Chile, Colombia, Mexico and Venezuela Source: UNCTAD World Investment Report; EIU; BCG analysis

116 Attractiveness of Brazil as an international investment and business hub

When it comes to attracting multinationals, Brazil stands out quite clearly. Of all Latin American countries, Brazil has the largest number of foreign companies, considering the 30 largest by revenue in North America, Asia and Europe. Furthermore, it is the most attractive country to companies in all three of these regions, capturing the attention of businesses seeking investment and business opportunities (see Exhibit 43).

EXHIBIT 43

Brazil is the leading Latin American nation when it comes to attracting European and Asian businesses Brazil is the country with the most foreign companies...

... and also leads in terms of attracting companies from regions abroad

Latin American presence of the 30 largest companies in Asia, Europe and North America1

Presence of the 10 largest companies of each region in Latin American’s countries1

EUROPE

Brazil

13 15

Argentina

Mexico

Chile

Brazil

ASIA

24 3

Argentina Mexico

NORTH AMERICA

Chile

Brazil

Argentina

Mexico Chile

1. Ten largest companies in each region by revenue / Note: Company presence may average manufacturing sites, offices etc. Includes all forms of activity Source: Forbes 2012; company websites; BCG analysis

6 4

Attractiveness of Brazil as an international investment and business hub

117

To further promote interconnection between Latin nations, converging accounting, financial, tax and technical standards would be an important initiative to reduce the cost of adapting investment and businesses, and leverage the region’s potential. This harmonization process is already underway for accounting standards, as more and more nations adopt International Financial Reporting Standards (IFRS)97 - adopted by Colombia and Chile in 2009, and by Brazil, Peru and Argentina in 2011. Common systems and databases, if adopted, would also benefit the region. There are other examples of possible unifications such as registration of businesses and individuals, payments, brands, patents, credit histories, customs and international trade data that could further promote Brazil’s image as an international investment and business hub. People mobility Brazil has been able to attract a growing number of foreign workers, as shown by the number of applications for work visas. However, it is important to understand that the country still has shortcomings, not only in terms of the difficulty to obtain visas, but also a relatively limited capability to operate international flights. The number of work visas granted increased from 40 thousand in 2008 to 70 thousand in 2011. Latin American nationals account for about 8% of all the work visas granted, a percentage that has remained relatively stable over time. However the flow of tourists has not increased, and numbers have remained relatively flat since 2005. The number of Latin American visitors to Brazil has increased in absolute terms and as a percentage of the tourists traveling to the country (see Exhibit 44).

97 International Accounting Standards published by the IASB (International Accounting Standards Board). The IASB has been attempting to implement these standards since 2011 to make it easier to combine and compare accounting data for businesses operating in different countries 98 A person born abroad, or born in Brazil but registered in a foreign embassy or consulate, and who has not been naturalized

It is interesting to note that, according to the 2010 IBGE Census, only 0.2% of the population is made up of foreigners98, quite a small number if one considers this nation’s history of welcoming immigrants in the late 19th and early 20th centuries. Bearing in mind the contribution of immigrants to the country, recently the Presidential Bureau of Strategic Affairs created a Working Group to look into the potential intensity of immigrant flows, their importance for the development of the country and means to encourage such flows. Among the themes discussed will be an assessment of the impact qualified and unskilled labor immigration policies may have on a country’s development, and factors that can be used to inhibit or promote such immigration flows. One factor that contributes to the low numbers of immigrants in Brazil is the complexity and slowness of the process for authorizing the entry of foreigners into the country, still overly protective of Brazilian workers.

118 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 44

Brazil is attracting larger numbers of foreign workers, but not tourists Latin America’s share of travelers to Brazil is large and growing

Latin America’s share of workers entering Brazil is dropping Number of work visas issued in Brazil each year by country of origin of worker

100

Travelers1 entering Brazil by country of origin

% work visas by region

OTHER

NORTH AMERICA

ASIA

40 36

Total number of visas (thousand)

% travelers from each region

14 OTHER2

25 EUROPE

NORTH AMERICA

40 36

EUROPE

20 0

100

20 8

2008

2009

2010

2011

44.0

42.9

56.0

70.5

LATIN AMERICA ~60% of the Latin American travelers come from Argentina, and ~50% of these travel in the south of the country

LATIN AMERICA

2005 2006 2007 2008 2009 2010 2011 5.4

5.0

5.1

4.8

5.2

5.4

Total travelers (M)

1. Number of travelers includes tourists and business travelers 2. Includes Asian nations / Note: Data available for 2008 through 2011 includes different countries from those included in the 2011 Attractiveness Report / Source: Ministry of Labor and Employment; Ministry of Tourism; BCG analysis

Non Mercosur foreigners who wish to work in Brazil face a two-month process that includes employer sponsorship, proof of professional experience, and a college or university degree. It can take up to two years to get such a visa renewed. One of the paths for simplifying this process would be to expand the boundaries of the Mercosur Free Movement and Residence agreement, similar to what was announced in August 2012 regarding Colombia, as well as regional databases of individuals. Finally, looking at the infrastructure required to connect people to the country, Brazil is relatively well connected compared to other Latin American nations. Flights from Brazil go to 31 international destinations, about half of them within Latin America. However, the number seats available on international flights is low compared to its population, and there is room to increase current capacity (see Exhibit 45).

Attractiveness of Brazil as an international investment and business hub

119

EXHIBIT 45

Brazil leads in the number of destinations of international flights, but has a low number of seats in proportion to its population Brazil offers more international flight destinations than any other country in Latin America...

...however, seats per capita is still low

# of international destinations by country of origin (2012)

Seats on international flights/day/million inhabitants1 (2012)

BRAZIL

52%

PanamA

87%

MExico

44%

37%

Venezuela

70%

22%

Argentina

61%

26% 13%

ColOmbia

75%

15%10%

Peru

75%

15%10%

26%

PANAMA

6% 6% 31

CHILE

12% 12% 7%

11% 21%

66%

Chile

23%

4,855 643

ARGENTINA

471

ECUADOR

406

PERU

414 374

MEXICO COLOMBIA

309

VENEZUELA

311

BRAZIL 167 0

Latin America

Asia

Europe

Other

500

1,000

4,000

Note: Based on flights in the week of June 4th to 10th, 2012. Departures only (~half of the total number of flights) / Source: OAG database; BCG analysis

Indicators The dimensions selected for continuous tracking of the connectivity pillar are: • International openness for trade in goods: Restrictions on the importation of goods, resistance on the part of other countries to its exports are evidence of a country’s willingness for commercial connectivity. • Trade in goods: Trade in goods is one of the most important activities for any business hub and is therefore something to be developed; • International openness for trade in services: Being a signatory to international agreements for the trade in services is evidence of a country’s disposition for connectivity in the trade in services;

120 Attractiveness of Brazil as an international investment and business hub

• Trade in services: Trade in services has added importance when it comes to creating a service based business hub; • Capital flows: The inward and outward flow of capital is a key indicator for an investment and business hub, as it enables funding domestic issuers and offers greater options for investing elsewhere in the world; • International agreements allowing capital flows: Being a signatory to bilateral investment agreements demonstrates willingness to facilitate the inward and outward capital flows; • National regulations supporting international capital flows: This helps measure the extent to which a country’s regulation, in and of itself, facilitates capital inflows, based on the opinion of experts; • Expansion of the country’s multinationals: International activities of the country’s multinationals and their ability to compete in the global arena are important means of connectivity for a hub, as they can leverage other flows such as people and trade; • Ease of entry for foreign multinationals: The readiness of a country’s regulation to receive foreign businesses is a determining factor when it comes to their willingness to enter a country, leveraging the country’s economy and connectivity; • Openness to immigrants: Immigrant share of the population of a country is evidence of its people connectivity to the rest of the world; • People mobility: International people mobility, measured here by the number of flights to foreign destinations originating in the country, is a relevant point as it enables people to enter and leave a hub. The following exhibit shows how Brazil compares to other countries along the indicators of the connectivity pillar:

Attractiveness of Brazil as an international investment and business hub

121

Connectivity critical

BRA

International openness for trade in goods1

Trade in goods

International openness for trade in services1

MEX

needs improvement

IND

good

RUS

KOR

excellent

JPN DEU CHN

SGP

CHL USA

HKG

GBR FRA

BRA JPN

USA

IND

GBR RUS

CHN

MEX CHL

DEU KOR

SGP

HKG

Trade

FRA

BRA IND CHL

SGP

MEX CHN

KOR

FRA GBR

HKG

USA

DEU JPN

BRA

MEX

Trade in services

JPN CHN

USA

CHL FRA

DEU

IND

HKG

GBR

KOR

SGP

RUS

BRA

Capital flows

International agreements allowing capital flows1

National regulations supporting international capital flows1

Expansion of the country’s multinationals

Ease of entry for foreign multinationals1

10.

Openness to immigrantS1

JPN IND DEU

USA

FRA

RUS GBR

CHL

SGP

HKG

KOR MEX CHN

CAPITAL

BRA JPN

SGP MEX

USA CHL KOR CHN FRA

HKG

RUS IND

DEU

GBR

BRA CHN RUS

KOR

USA

JPN FRA MEX

CHL

IND

GBR SGP

HKG

DEU

businesses

BRA RUS CHL SGP IND

MEX

CHN

HKG

DEU FRA GBR

JPN

USA

KOR

BRA CHN MEX RUS KOR

IND FRA USA

GBR

SGP JPN

CHL

BRA CHN

IND MEX

KOR

JPN CHL

RUS GBR DEU

HKG

PEople

FRA USA

SGP

BRA CHL

11. People mobility Emerging nations

MEX

Main international hubs

HKG SGP KOR JPN

IND

CHN

RUS

USA DEU FRA GBR

Other developed nations

1. Data cannot be updated from the 2011 Attractiveness Report

Brazil was found to be “critical” or “needs development” in all of the dimensions assessed, and is quite far from the other hubs included in the analysis. Nevertheless, when it comes to expansion of its multinationals, looking at the list of the 100 companies with the largest volume of assets abroad, the inclusion of Vale moved Brazil from “critical” to “needs improvement”. Capital flows and the trade in goods and services are weighted based on country share of the global GDP. Thus Hong Kong and Singapore, being smaller, come out at the top of the list. Nevertheless, other countries with GDPs larger than Brazil’s continue to be ranked higher, showing there is still room for improvement. To this end international agreements could be used to leverage flows, as they are enablers of such dimensions.

122 Attractiveness of Brazil as an international investment and business hub

Making it easier for decision makers and qualified professionals to enter and leave the country will foster an environment that is suitable for the decision making centers of businesses and regional headquarters

Conclusion Brazil’s size and prominence in the region make it an important center of connectivity with the world, and the natural destination of international flows of goods, services, capital and people. This important position can be consolidated to materialize the country’s potential, irradiating the advantages of being an investment and business hub to the entire region. To achieve this, Brazil must promote an international agenda focused on building partnerships and signing agreements with the rest of the world, along with initiatives to standardize its regulatory framework and technical standards. On the business front, multilatinas continue to expand their international activities but, with a few exceptions, are still far from being global exponents. Finally, regarding people mobility, modern legislation enabling greater flows of foreigners is essential. Making it easier for decision makers and qualified professionals to enter and leave the country will foster an environment that is suitable for the decision making centers of businesses and regional headquarters. This would be one more lever contributing to disclosing the virtues of the country.

Attractiveness of Brazil as an international investment and business hub

123

124 Attractiveness of Brazil as an international investment and business hub

Image of the country

The image of a country reflects the world’s perception of a hub and, to a certain extent, the other pillars of attractiveness. The image of a country may be the result of the experience of foreigners living in it, information spread in the media or formal reports. A country must have a suitable environment and this must be properly publicized so that its image may be projected accurately, stressing qualities and putting shortcomings in the right context in order to increase its attractiveness as a hub. This section is split into three aspects essential for the image of a hub: a place to do business, a place to live and a place to travel to.

Main aspects of the image of the country pillar A place to do business: The various business agents, be they businesses, people or investors, may be more inclined towards a country with a positive reputation for doing business. A place to live: The image of a country as a good place to live, the result of good living conditions for its inhabitants, is essential for attracting talents and therefore for creating an investment and business hub. A tourist destination: Tourism brings in revenue and helps disclose the country to international travelers, as they return to their countries of origin and talk about their experience.

Attractiveness of Brazil as an international investment and business hub

125

A place to do business

2010 Anholt-GfK Roper Nation Brands Report de evaluation of 50 countries

To consolidate its position as an investment and business hub it is critical that Brazil develop a solid and positive image as a place to do business. This can be measured using indexes that analyze the relative perception of a given country or city, or more tangible indicators such as a hub’s ability to attract events such as business congresses. The Nation Brands Index99, which measures country image based on a number of dimensions, shows that Brazil’s image in terms of idea and product generation, and also its institutional environment, is not favorable, scoring below the average for all countries included in the survey (see Exhibit 46).

EXHIBIT 46

Brazil’s image as a place to do business is below the global average Domestic Products1 JAPAN BEST

Institutional Environment2 CanadA 66

BEST

52 AVERAGE 53 AVERAGE

BRAZIL 51

BRAZIL 52

WORST

Angola

WORST

IRAN

1. The country contributes with innovations in science and technology; knowledge of where the product is manufactured increases likelihood to buy; has a creative environment and advanced business ideas 2. Government is honest and respectful of rights; the country acts responsibly in terms of protection and security; there is concern with poverty and the environment / Note: survey of 50 nations Source: The Anholt-GfK Roper Nation Brands IndexSM 2010 50 Country Report

126 Attractiveness of Brazil as an international investment and business hub

Despite this rather bleak picture, Brazilian cities such as São Paulo and Rio de Janeiro are ranked second and fifth respectively100 on the list of places to do business in Latin America, with Miami coming out in first place101 (see Exhibit 47). This positions the country quite well to become a regional hub. In 2011, Brazil was the leading Latin American country in terms of the number of international conventions and events it hosted, and the seventh worldwide102. Since 2003 the number of such events in Brazil has grown at around 11% a year (see Exhibit 47). Another indication that Brazil’s image as a place to do business is improving is a recent survey of financial asset managers103, who mentioned São Paulo as the third best financial center in terms of future prospects, losing out only to Hong Kong and Singapore.

100 Source: 2010 AméricaEconomía “Best cities for doing business”, based on macroeconomic and social aspects, services, infrastructure, talents and brand in a ranking published by the Universidad de Rosário in Colombia (Ranking de Ciudades Latinoamericanas para La Atracción de Inversiones); São Paulo was considered the best city for attracting investment 101 Included in the survey because of its Latin cultural connection 102 Itinerant events of more than 50 participants held at fixed intervals. Source: International Congress and Convention Association 103 International Financial Centres Power Plant 2012, The Banker

EXHIBIT 47

The country is starting to stand out as a place to do business Brazil attracts an increasing number of conventions and congresses

Brazilian cities stand out in the region

# of international1 events held in Brazil Brazil is the 7th country in the world with more international events held

RANKing CITY

+11%

297 256

231 174

304 275

224

187

133

1st 2nd 3rd 4th 5th 6th 7th 8th 9th

Miami São Paulo Santiago Mexico City Rio de Janeiro Buenos Aires Panama City Bogota Brasilia

COUNTRY

USA Brazil Chile México Brazil Argentina Panama Colombia Brazil

Ranking of the 45 cities considered the best for doing business in 2011, based on macroeconomic and social aspects, services, infrastructure, talents and brand

2003 2004 2005 2006 2007 2008 2009 2010 2011 1. Itinerant events of more than 50 participant held at fixed intervals / Note: Information reviewed based on the most recent data available / Source: AméricaEconomía magazine; 2010 and 2011 Statistics Report – International Congress and Convention Association

Attractiveness of Brazil as an international investment and business hub

127

Sustainability is increasingly a recurring and important theme on companies’ agendas, and contributes to a positive image of Brazil as an investment and business hub

Still on the growing importance of São Paulo as an international investment and business hub, a survey of Citi Private Bank consultants and Knight Frank experts in luxury properties around the world104 suggests that by 2022, São Paulo will be the 8th most important city in the world for the very wealthy, passing Geneva, Rome, Moscow, Dubai, Mumbai, Frankfurt, Madrid and Vancouver. Rio de Janeiro was also mentioned as being among the 20 cities that will most increase in importance in the world. Sustainability is increasingly a recurring and important theme on companies’ agendas, and contributes to a positive image of Brazil as an investment and business hub. In 2011, Brazil was the sixth country in the number of businesses publishing annual sustainability reports using GRI (Global Reporting Initiative) guidelines105 (see Exhibit 48). However, Brazilian corporate sustainability practices are not fully reflected in global sustainability rankings: of the 100 most sustainable businesses in the world according to Corporate Knights, only three are Brazilian (see Exhibit 48). However, it is worth mentioning that the three companies that are in the ranking improved their position compared to 2010, in particular Natura, which climbed to the number 2 position in 2012. Still on the theme of the country’s prominence in sustainability, in 2012 it hosted the Rio+20 United Nations Conference on sustainable development, consolidating its position in the global debate on the topic.

104

The Wealth Report 2012

The model most often used for such reports according to a KPMG and Ernst & Young survey 105

Given the economic scenario and increased exposure, Brazil should seize the moment and promote its international investment and business image. Both BEST (Brazil: Excellence in Securities Transactions), which presents the Brazilian capital and financial markets to foreign investors, and APEX (Brazilian Agency for the Promotion of Exports and Investments), which promotes Brazil in the context of world trade, have initiatives to attract businesses in Brazil, and while important, these efforts still have quite limited reach. Further efforts are required to spread Brazil’s strengths and mitigate any negative misconceptions there may be about doing business in the country.

128 Attractiveness of Brazil as an international investment and business hub

EXHIBIT 48

Brazilian businesses are very concerned with sustainability, yet this fact is not recognized internationally Brazil is number 6 when it comes to the number of reports published...

...but has only 3 companies on the global list of the 100 most sustainable

# of businesses publishing sustainability reports1 -2011

# of companies among the 100 most sustainable2

352

USA 197

JapAN 172

SPAIN

162

China

139

SWEDEN

123

BraZil

115

GERMANY

110

AustrAlia

UNITED KINGDOM 12

JapAN USA

FranCE

CanadA

AustrAlia

SWITZERLAND

GERMANY

SOUTH KOREA

SWEDEN

NETHERLANDS

DENMARK

NETHERLANDS

4 4

SOUTH AFRICA

CanadA

SPAIN

UNITED KINGDOM

BraZil

SWITZERLAND ItALY

74 59

FINLAND

SINGAPORE

SOUTH KOREA

RUssia

Argentina

India 1

Austria

OTHER

2. Natura 61. Bradesco 81. Petrobrás

1. Includes only companies that disclose their results using GRI standards (Global Reporting Initiative) guidelines, the ones most often used based on a KPMG and Ernst & Young survey completed in 2011 2. Corporate Knights The World’s Most Sustainable Companies - 2012 Source: GRI; Corporate Knights; BCG analysis

Attractiveness of Brazil as an international investment and business hub

129

A place to live Brazil is still not considered a good place to live, although recognized the world over for its cultural openness and hospitality, and in spite of the fact that in 2009 Forbes Magazine elected Rio de Janeiro the happiest city in the world106. In the Economist Intelligence Unit ranking on this same topic, published in 2012, São Paulo and Rio de Janeiro were ranked only 42nd and 43rd out of a list of 70 cities (see Exhibit 49). This gap may be based on real issues such as traffic congestion and public safety, but it is also partly the result of the poor spread of the country’s strengths and improvements made to remedy its weaknesses. Obviously, investing to improve weaknesses will have an important impact on Brazil’s perception abroad, but there should be some structured spread of these efforts and results, which does not exist right now. Today, Brazil’s image as a place to live is being diffusely spread by the media, international rankings and people going into and out of the country. There is still no consistent strategy to highlight the country’s advantages, or point to the progress it has made and put its shortcomings into perspective.

106

Source: Forbes magazine list of The World’s Happiest Cities, published in September 2009

107 In 2011 there were 1,019 homicides, or 9.0 per 100,000 inhabitants. Based on the numbers for the first half of the year, and the increase in population between 2009 and 2011, the homicide rate in 2012 should be around 10.7 per 100 thousand inhabitants. Source: State of São Paulo Bureau of Public Safety 108

Source: FBI (Federal Bureau of Investigation)

The 2011 effort to bring peace to Rio’s main slums was widely reported in the international media, which is an example of positive advertising. It is also worthwhile mentioning that in 2010, the homicide rate in São Paulo was lower than in some of the metropolitan regions of the United States: 10.6107 per 100 thousand inhabitants, compared to 21.9 in Washington D.C. and 15.2 in Chicago108. Brazil should spread its efforts in a more organized and consistent way, using the press, global opinion leaders visiting Brazil or international campaigns, working to tear down any resistance there may be resulting from a lack of information or even misinformation.

EXHIBIT 49

Brazil does not have a good image as a place to live

RANKING1

1 2nd 3rd 26th 27th 36th 42nd 43rd 48th 50th 55th st

CITY Toronto Sydney Osaka Buenos Aires Santiago Lima São Paulo Rio de Janeiro Mexico City Bogota Caracas

COUNTRY CanadA AustrAlia JapAN Argentina Chile Peru BraZil BraZil MExico ColOmbia Venezuela

1. 2012 EIU ranking of the 70 best cities to live in, based on stability, healthcare services, culture and environment, education and infrastructure / Source: EIU

130 Attractiveness of Brazil as an international investment and business hub

A tourist destination The country’s natural beauty and culture contribute to its positive image as a tourist destination, which is highlighted internationally (see Exhibit 50). However, this positive image is not reflected in the number of incoming tourists. Brazil is only the 39th ranked country on the list of the 60 most attractive travel destinations (see Exhibit 50), and gets less than 1% of the world travelers. What is even worse is that the country has not kept up with the growth in international travel, as the number of tourists into Brazil has remained flat and the number of business travelers actually declined (see Exhibit 51).

EXHIBIT 50

Despite a good image, Brazil attracts fewer than 1% of the world’s travelers Brazil has a positive image in tourism and cultural issues...

Tourism1 ITALY BEST

BRAZIL 67

AVERAGE

Culture2

Ranking Country

USA 70

BEST

63 BRAZIL Brazil is ranked 10th out of 50 countries

62 56

AVERAGE

Brazil is ranked 13th out of 50 countries

WORST

IRAN

...but attracts only a small share of the world’s tourist trade3

WORST

1st 2nd 4th 6th 7th 9th 11th 12th 15th 24th 27th 31st 37th 39th

France USA China United Kingdom Hong Kong Germany Russia Mexico Canada Singapore South Korea Japan India BRAZIL

% of world travelers

10.4% 7.8% 7.3% 4.0% 3.8% 3.4% 3.1% 3.1% 2.3% 1.2% 1.1% 1.0% 0.7% 0.7%

IRAN

1. Questions: Interest in visiting the country, it is rich in natural beauty and historical monuments, and its cities are exciting 2. It is successful in ports and has both cultural heritage and a contemporary culture Note: survey of 50 countries 3. Refers to all types of temporary visitors - tourists and business travelers - excludes visitors who will exercise some form of remunerated activity in the country of destination. Average for 2009 - 2011 / Source: The Anholt-GfK Roper Nation Brands Index SM, 2010 50 Country report, EIU

Brazil is ranked 39th out of 60 countries

Attractiveness of Brazil as an international investment and business hub

131

EXHIBIT 51

Tourism in Brazil has not followed the growing number of tourists in the world

The number of international travelers has remained constant

International travelers by destination (M)

International travelers in Brazil (M)

CAGR 05-11 785.8

756.5

Business travel to Brazil has increased since 2005

world

2.7%

5.4 5.0

747.4

2.4

(44%)

703.4

1.6

(29%)

5.4

2005

5.1

2.2

(44%)

2.2

(44%)

2.2

(43%)

5.2 4.8 2.2

(46%)

2.4

(46%)

LEISURE

-0.2%

715.2

668.5 34.8

5.0

762.2

CAGR 05-11

34.7

36.5

38.2

36.6

40.9

5.0

5.1

4.8

5.2

2006

2007

2008

2009

2010

42.0

5.4

LATIN 3.2% AMERICA BRAZIL

2011

0.2%

1.4

(28%)

1.4

(27%)

1.4

(27%)

1.5

1.1

(23%)

1.5

1.2

BUSINESS -5.2%

1.6

OTHER

(23%)

(27%)

(28%)

(30%)

(32%)

(31%)

2005

2006

2007

2008

2009

2010

+2.0%

Note: According to the most recent data taken from the EIU / Source: Ministry of Tourism; EIU, BCG analysis

Brazil has an even greater opportunity to capture a greater share of international travel, as it already enjoys a favorable image internationally. Brazil has a good standing in ecotourism, and according to both Forbes109 and National Geographic110, the Brazilian Pantanal is an absolute “must know” green vacation destination. Brazil could also use the perception of those tourists who have had the chance to learn about its potential as a lever to develop its image as a place to live and do business, one that is consistent with an investment and business hub.

109

The World’ Best Green Vacations 110

Best Green Adventures 111

Source: Embratur

The Brazilian Ministry of Tourism and the Brazilian Tourism Institute (Embratur) often take initiatives, and it is important to ensure they continue. The 2014 FIFA World Cup and the 2016 Olympic Games are events capable of attracting 600 thousand and 380 thousand foreign visitors respectively111, and they present unique opportunities to consolidate a positive image in a large number of travelers over a short period of time.

132 Attractiveness of Brazil as an international investment and business hub

Indicators The dimensions selected for continuous tracking of the image of the country pillar are: • Image as a place to do business: The positive image of a hub in the business world is essential if it is to attract investors and businesses in search of opportunities; • Foreign interest in the country’s investment and business: Foreign interest in Brazil, measured here by the number of searches containing the country name and business related words, measures its international projection and therefore its potential for attracting foreign business; • Attractiveness for international events: The number of international events held in a hub is a measure of how interesting it is to foreign businesses and investors, and contributes to creating a hub; • Sustainability: A country’s attitude towards its natural resources defines its sustainability and contributes to its business image. It also influences its image as a place to live and as a tourist destination; • Quality of life: Quality of life defines a country’s image as a place to live, and thus its attraction to international talents and businesses looking for locations around the world; • Cultural openness: The cultural openness of a country means it welcomes business travelers and tourists, and also ensures its own citizens are welcome abroad, it is a key element for consolidating a hub with international ambitions; • Personal safety and asset security: Together with quality of life, safety and security define the attractiveness of a hub as a place to live or travel to; • Image for tourism and leisure: Leisure and tourism contribute directly to a hub as they generate business and, indirectly, help develop a country’s image abroad; • Quantity of visitors: Intensity of travel, as well as the country’s image in this regard, measures international interest in the country and helps spread the hub’s international image. The following exhibit shows how Brazil compares to other countries along the dimensions of the image of the country pillar:

Attractiveness of Brazil as an international investment and business hub

133

134 Attractiveness of Brazil as an international investment and business hub

Image of the country critical

needs improvement

good

BRA

CHL CHN

Image as a place

1. to do business

KOR

MEX IND

excellent

SGP

GBR USA

RUS

FRA JPN DEU

BRA

Foreign interest in the country’s investment and business

Attractiveness for international events

CHL

KOR MEX

DEU HKG

SGP

CHN

GBR

IND

RUS JPN FRA

USA

BRA RUS HKG CHL

SGP

IND

MEX JPN

DEU

FRA

KOR CHN

USA

GBR

BRA IND CHN RUS

4. Sustainability

MEX

CHL

SGP KOR

JPN

DEU GBR FRA

USA

BRA CHN IND

5. Quality of life

RUS

KOR HKG CHL

GBR

JPN USA SGP

MEX

DEU

FRA

BRA

Cultural openness

Personal safety and asset security

Image for tourism and leisure

FRA

JPN RUS

KOR

DEU

CHN

GBR

IND

CHL

SGP

HKG

USA MEX

BRA RUS

MEX

KOR

IND

CHL FRA GBR

USA DEU

JPN

CHN

SGP

HKG

BRA CHL SGP

RUS CHN

MEX

KOR

JPN

DEU USA GBR FRA

IND

BRA

9. Quantity of visitors

CHL

IND

JPN

SGP

RUS HKG MEX DEU GBR

KOR Emerging nations

Main international hubs

Other developed nations

In the dimensions related to the image of the country as a place to live and do business, Brazil stands out in its attractiveness for international events and sustainability. However, in the more fundamental dimensions such as international interest in investment and business, and the image of the country for business, Brazil still comes out as “critical” or “needs development”. Brazil’s image is particularly unfavorable as a place to live, as it is rated “critical” in quality of life and personal safety and asset security, despite an excellent position in cultural openness, where it is the best-ranked country of all those included in the analysis. Finally, Brazil does well as a tourist destination but has not been able to translate this positive perception into more intense tourist flows.

CHN USA

FRA

Attractiveness of Brazil as an international investment and business hub

135

136 Attractiveness of Brazil as an international investment and business hub

Important international events such as Rio+20 in 2012, focusing on sustainable development, can help consolidate the country’s image

Conclusion To leverage this pillar, Brazil should continue to pursue its efforts, especially when it comes to its image for business. Furthermore, perceptions that impact day-to-day life such as quality of life, personal safety and asset security, if properly handled, could doubly contribute to improve Brazil’s image. In first place, they would have a positive impact on people’s interest in Brazil as a place to live, and would also impact the number of international travelers choosing Brazil as a destination. This would influence Brazil’s position in this matter, which does not accurately reflect reality, especially compared to other countries. Important international events such as Rio+20 in 2012, focusing on sustainable development, can help consolidate the country’s image. In the near future, the FIFA World Cup in 2014 and the Olympic Games in 2016 are events that can catalyze initiatives to advertise Brazil abroad and consequently help to improve the perception of the country. But it is critical that the improvement measures expected, especially those related to physical infrastructure, are actually completed in time for these events. Otherwise the country’s image could be seriously damaged. Furthermore, a better image of the country along any of the dimensions analyzed will benefit greatly from coordinated and focused efforts, such as media campaigns or initiatives such as BEST or APEX, which still have a limited scope.

Attractiveness of Brazil as an international investment and business hub

137

138 Attractiveness of Brazil as an international investment and business hub

CONCLUsion An international investment and business hub fosters the development of a country and its region. Latin America, like other regions in the world, needs a strong network of hubs, some of which must be global, and for this Brazil is one of the natural candidates. This report reexamines the seven pillars that make a hub attractive - macroeconomic environment, institutional environment, talent and human capital, physical infrastructure, financial infrastructure, connectivity and image of the country, showing how Brazil’s performance compares to that of 13 countries along the 57 dimensions that make up these pillars. While Brazil is currently quite far from the world’s leading hubs, the country has a number of qualities that make it suitable as a hub, such as a robust economy, strong financial infrastructure and political and institutional stability. Brazil stands out for its size. It is already the world’s sixth largest economy, having surpassed the UK in 2011. It is also in the demographic bonus phase, what makes it the only one of the world’s large economies whose population grows fast enough to supply the future need for manpower. Right now it attracts 40% of all of the foreign direct investment going into Latin America, and cities such as São Paulo and Rio de Janeiro are already considered as good places to do business in the region. Interest rates have been dropping steadily, and in 2012 reached the lowest level ever since records have been kept (1986) - less than 3% a year, compared to 12% in 2006. This brings interest rates in Brazil in line with other emerging nations such as China and Russia, and opens the way for cheaper financing. Lower interest rates also encourage the use of other financial instruments such as debentures, which are still little used in Brazil. Given this scenario, Brazil has become more attractive to international talents, as shown in the results of a global survey with executives conducted by the IMD and the growing number of work visas granted. This can be attributed to the positive outlook for Brazil and a global crisis that is driving companies to invest in the country and moving talents to come take advantage of the existing opportunities.

Attractiveness of Brazil as an international investment and business hub

139

There is still a lot to be done to ensure the continuity of the positive measures already underway. However, given the global scenario and the advances of the last decade, the outlook for Brazil is quite positive, not only because of its inherent potential, but also because of the progress it has made in recent years. However, the future presents clear challenges requiring long-term initiatives that should start as soon as possible. If these are properly addressed they can contribute to taking advantage of this auspicious economic moment, helping to make Brazil more attractive. Some of these challenges are: improving the still precarious transport infrastructure, a less complex tax system and better qualified manpower. It is clear that the Brazilian Government is committed to reducing the bottlenecks in physical infrastructure, with the involvement of the private sector, as in the case of the concession of three large airports in 2012 and the Logistics Investment Program announced in mid-2012. Besides this, 4G mobile telephone frequencies were auctioned also in 2012, enabling more advanced mobile data services available to the population in time for the FIFA World Cup in 2014, probably with no change in the competition environment. In order to take advantage of the favorable international scenario, the Presidential Bureau of Strategic Affairs is looking at ways to encourage qualified foreigners to come to Brazil, which would also help improving the training of local talents. BRAiN is aware of all the above and continuously looks for opportunities of improvement and, as it has been the case since the beginning, works hard to improve Brazil’s attractiveness. All those who realize the importance of creating an international investment and business hub in Brazil and Latin America are invited to participate. Visit our website to track and be part of this process: www.brainbrasil.org.

140 Attractiveness of Brazil as an international investment and business hub

Appendix: details of the indicators used112

112 Ranking criteria based on averages and standard deviations except where otherwise mentioned

Attractiveness of Brazil as an international investment and business hub

141

Macroeconomic environment INDICAtOR

source

Rationale for Selection

ranking criteria

Economic GrowthP

Projected average annual GDP growth over the next 5 years

The Economist Intelligence Unit

Covers 150 countries. 5-year projections for all countries

Analytical distribution: Critical: ≤ -1 Needs improvement: -1 - 1.5 Good: 1.5 to 4 Excellent: ≥ 4

Monetary StabilityP

Projected average annual inflation rate over the next 5 years

The Economist Intelligence Unit

Covers 150 countries. 5-year projections for all countries

Analytical distribution: Critical: ≥ 20 Needs improvement: 8 to 20 Good: 4 to 8 Excellent: ≤ 4

FISCAL solidityP

Projected Gross Public Sector Debt (% GDP)

World Economic Outlook Database, IMF

Consistent assessments since 1984, global coverage

Critical: ≥ 83 Needs improvement: 83 to 49 Good: 49 to 15 Excellent: ≤ 15

International reserves/ total external debt1

The Economist Intelligence Unit

Covers 150 countries

Critical: ≤ 23 Needs improvement: 23 to 99 Good: 99 to 175 Excellent: ≥ 175

ECONoMIC VOLATILIty

Variation in the short term interest rate for government bonds2

The Economist Intelligence Unit

Covers 150 countries

Critical: ≥ 0.8 Needs improvement: 0.8 to 0.5 Good: 0.5 to 0.2 Excellent: ≤ 0.2

HUMAN development

Human Development Index (IDH)3

Human Development Reports, UNDP

Data available for over 160 countries since 1970

Critical: ≤ 0.77 Needs improvement: 0.77 to 0.82 Good: 0.82 to 0.86 Excellent: ≥ 0.86

income distribution

GINI index

World Competitiveness Yearbook, IMD4

Published consistently since 1989, currently covers 59 countries

Critical: ≥ 50 Needs improvement: 50 to 42 Good: 42 to 33 Excellent: ≤ 335

DIMENSion

3 External Vulnerability

1. Last three years 2. Last five years 3. Calculated based on health, education and the economy 4. Based on IMD data, a different source from the 2011 Report 5. Maximum and minimum distribution according to the universe of countries available. All other values distributed linearly / P: indicator based on projected data

142 Attractiveness of Brazil as an international investment and business hub

Institutional environment DIMENSion

INDICAtOR

source

Rationale for Selection

Ranking criteriA

Political stability

Political stability and absence of political violence (score)

World Governance Indicators, World Bank

Has consistently covered 230 nations since 1996

Analytical distribution: Critical: ≤ -1 Needs improvement: -1 to -0 Good: 0 to 1 Excellent: ≥ 1

Quality of regulations (score)

World Governance Indicators, World Bank

Has consistently covered 230 nations since 1996

Analytical distribution: Critical: ≤ -1 Needs improvement: -1 to 0 Good: 0 to 1 Excellent: ≥ 1

Rule of Law (score)

World Governance Indicators, World Bank

Has consistently covered 230 nations since 1996

Analytical distribution: Critical: ≤ -1 Needs improvement: -1 to 0 Good: 0 to 1 Excellent: ≥ 1

Labor Market Flexibility (score)

World Competitiveness Yearbook, IMD

Published consistently since 1989, currently covers 59 countries

Critical: ≥ 46 Needs improvement: 46 to 28 Good: 28 to 11 Excellent: ≤ 11

Ease of opening a foreign businesses (score)

Investing Accross Borders, World Bank

Initiative covering 87 countries focusing specifically on FDI (Foreign Direct Investment)

Critical: ≤ 50 Needs improvement: 50 to 64 Good: 64 to 79 Excellent: ≥ 79

Hours required to pay taxes

Doing Business, World Bank

Detailed study of 183 countries since 2002

Critical: ≥ 524 Needs improvement: 524 to 277 Good: 277 to 29 Excellent: ≤ 29

1 Quality of regulations

2 Legal Security

3 Labor market flexibility

4 Ease of opening a business

5 How easy it is for businesses to pay taxes

Attractiveness of Brazil as an international investment and business hub

143

Talent and Human Capital Dimension

Rationale for Selection

Ranking criteriA

UN, ILO, The Economist Intelligence Unit, OECD, Euromonitor

Reflects demographic sufficiency for economic development

Analytical distribution: Critical: ≤ -1 Needs improvement: -1 to 0 Good: 0 to 1 Excellent: ≥ 1

Average between the net enrollment rate in primary and secondary school

UNESCO, IBGE, Ministry of Education and the World Economic Forum Competitiveness Report

Measures the percentage of the school age population actually in school1

Critical: ≤ 75 Needs improvement: 75 to 82 Good: 82 to 90 Excellent: ≥ 90

Average scores in reading, science and mathematics in the international PISA test

OECD

This test provides a unified version of learning around the world, applied every three years to 15 year olds in 65 countries

Critical: ≤ 440 Needs improvement: 440 to 468 Good: 468 to 495 Excellent: ≥ 495

Gross enrollment rate in higher education

UNESCO, IBGE, and the World Economic Forum Competitiveness Report

Shows the percent people of university age enrolled in universities1

Critical: ≤ 27 Needs improvement: 27 to 40 Good: 40 to 54 Excellent: ≥ 54

Score given by executives regarding how well higher education is aligned with what the market needs

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: ≤ 4.9 Needs improvement: 4.9 to 5.6 Good: 5.6 to 6.4 Excellent: ≥ 6.4

World Competitiveness Average flow of students Yearbook, IMD coming into and leaving the country to study, and score given by executives regarding the alignment of language education and market needs

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: ≤ 3.4 Needs improvement: 3.4 to 4.2 Good: 4.2 to 5 Excellent: ≥ 4.8

INDICAtOR

source

CAGR gap between EAP and demand for workers

Quantity of primary and secondary education

Quality of primary and secondary education

DEMOGRaphic CONTINGENTP

Quantity of higher education

4 Alignment between higher education and the market

5 Internationalization of the country’s education (foreign languages and experience)

6 Availability of qualified managers and engineers

Assessment of the availability of qualified senior managers and engineers

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: ≤ 5.6 Needs improvement: 5.6 to 6.1 Good: 6.1 to 6.6 Excellent: ≥ 6.6

Intensity of Research and Development

Number of FTEs (full-time equivalents) in research and development per thousand inhabitants

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: ≤ 3.5 Needs improvement: 3.5 to 4.9 Good: 4.9 to 6.2 Excellent: ≥ 6.2

Attractiveness of the country to international talents

Score given by executives to the attractiveness of the country to international talents

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: ≤ 4.4 Needs improvement: 4.4 to 5.3 Good: 5.3 to 6.2 Excellent: ≥ 6.2

Talent immigration complexity

Score given by executives to the complexity for talents to enter a country

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: ≤ 5.6 Needs improvement: 5.6 to 6.1 Good: 6.1 to 6.5 Excellent: ≥ 6.5

Existence of programs or entities to manage the diaspora in each country

Qualitative BCG analysis based on country websites

There is no secondary data available for this assessment - BRAiN may continue the analysis of several countries in future years

Countries that manage their diaspora are positives, those that do not are negatives

10 Diaspora management

P: indicator based on projected data 1. Brazil data being reviewed by UNESCO. Based on IBGE and Ministry of Education information

144 Attractiveness of Brazil as an international investment and business hub

Physical infrastructure DIMENSion URBAN MOBILITY

1 QUALITY OF THE AIR TRANSPORT

Rationale for Selection

Ranking criteriA

IBM Commuter Pain Index and domestic sources about size of subway network and population

Indicators reflect the urban mobility options available in the economic centers of each country

Critical: < 1.5 Needs improvement: 1.5 to 4.1 Good: 4.1 to 6.7 Excellent: > 6.7

Opinions of executives about the air transport in each country

World Economic Forum Global Executive Opinion Survey in its Global Competitiveness Report

Annual survey of more than 15,000 executives in 139 countries

Critical: < 3.5 Needs improvement: 3.5 to 4.6 Good: 4.6 to 5.7 Excellent: > 5.7

Opinions of executives about the telecommunications infrastructure in each country

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: < 6.6 Needs improvement: 6.6 to 7.7 Good: 7.7 to 8.8 Excellent: > 8.8

Opinions of executives about the current and future power situation in each country

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: < 4.4 Needs improvement: 4.4 to 6.1 Good: 6.1 to 7.7 Excellent: > 7.7

Average % urban population with access to water and sanitation

World Bank

Indicator shows how much of the urban population is served by basic services

Critical: < 80 Needs improvement: 80 to 87 Good: 87 to 95 Excellent: > 95

INDICAtOR

source

Score is a combination of traffic (Commuter Pain Index) and subway availability in the main cities in each country

2 QUALITY AND COST OF TELECOMMUNICATION

3 AVALIABILITY OF POWER

4 BASIC SERVICES AVALIABLE TO THE URBAN POPULATION

Attractiveness of Brazil as an international investment and business hub

145

Financial infrastructure DIMENSion EFFECTIVENESS OF FINANCIAL REGULATIONS

USE OF FINANCIAL RESOURCES

STOCK EXCHANGE

Rationale for Selection

Ranking criteriA

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Analytical distribution: Critical: < 4.0 Needs improvement 4.0 to 5.0 Good: 5.0 to 6.5 Excellent: > 6.5

Market cap of traded companies/GDP

Bloomberg and The Economist Intelligence Unit1

Data disclosed annually based on primary data sources

Analytical distribution: Critical: < 60% Needs improvement: 60% to 90% Good: 90% to 120% Excellent: >120%

Stock of private corporate debt bonds/GDP

Bank for International Settlements (BIS) and The Economist Intelligence Unit

Data disclosed annually based on primary data sources

Critical: < 4.3% Needs improvement: 4.3% to 8.6% Good: 8.6% to 12.9% Excellent: > 12.9%

Stock of business (PJ) credit/GDP

Central banks in each country

Data disclosed annually for most countries. Primary data

Critical: < 35% Needs improvement: 35% to 47% Good: 47% to 59% Excellent: > 59%

% of the volume traded on local stock exchanges from companies based in other countries

Bloomberg data analysis

Primary data disclosed in real time

Analytical distribution: Critical: < 5% Needs improvement: 5% to 10% Good: 10% to 25%

Executive opinions on the availability of financial services in the country

World Economic Forum Global Executive Opinion Survey in its Global Competitiveness Report

Broad qualitative (survey) indicator of the availability of financial services in the country

Critical: < 3.9 Needs improvement: 3.9 to 4.8 Good: 4.8 to 5.7 Excellent: > 5.7

Total volume traded during ye year / total average market cap of listed companies during the same year

World Bank Data Primary. Source: Standard & Poor’s

Indicator showing the vitality of the stock market in 119 countries, data available since 1990

Critical: < 14% Needs improvement: 14% to 40% Good: 40% a 66% Excellent: > 66%

Relative position in 2 of the main IFC (International Financial Centers) rankings

Z/Yen Group Global Financial Centers Index and The Banker International Financial Centers

Thermometers of how the outside worlds views Brazil as an international financial hub are consistently disclosed

Critical: bottom quartile Needs improvement: 3rd quartile Good: 2nd quartile Excellent: 1st quartile

INDICAtOR

source

Opinion of executives on whether or not the Financial Market is sufficiently regulated

2 DEBENTURES

3 BUSINESS (PJ) CREDIT

INTERNATIONAL COMPANY SHARE OF THE STOCK EXCHANGE AVALIABILITY OF FINANCIAL SERVICES

6 STOCK EXCHANGE LIQUIDITY

7 PROJECTION AS AN IFC

1. Source replaced by Bloomberg and The Economist Intelligence Unit data

146 Attractiveness of Brazil as an international investment and business hub

CONNECTIVITY Rationale for Selection

Ranking criteriA

World Trade Indicators, World Bank

Indicators published annually in public sources - calculated by a reputable source

Critical: > 12.5 Needs improvement: 12.5 - 11.0 Good: 11.0 to 9.4 Excellent: < 9.4

Country share of the international trade in goods/country share of world GDP

UNCTADStat

Indicators published annually by public sources

Analytical distribution: Critical: < 0.5 Needs improvement: 0.5 to 1.0 Good: 1.0 to 1.5 Excellent: > 1.5

Different sub-sector share of international agreements for the trade in services (GATS)

World Trade Indicators, World Bank

Indicators published annually in public sources calculated by a reputable source

Critical: < 27 Needs improvement: 27 to 35 Good: 35 to 43 Excellent: > 43

Country share of international trade in services/country share of world GDP

UNCTADStat

Indicators published annually by public sources

Analytical distribution: Critical: < 0.5 Needs improvement: 0.5 to 1.0 Good: 1.0 to 1.5 Excellent: > 1.5

CAPITAL FLOWS

Country share of international capital flows/country share of world GDP

UNCTADStat

Year by year data available for 207 countries since 1970

Analytical distribution: Critical: < 0.5 Needs improvement: 0.5 to 1.0 Good: 1.0 to 1.5 Excellent: > 1.5

AGREEMENTS ALLOWING CAPITAL FLOWS

Number of bilateral agreements signed by the country

International Centre for Settlement of Investment Disputes (ICSID), World Bank

Covers 177 countries, based on official information reported by national governments

Critical: < 0 Needs improvement: 0 to 21 Good: 21 to 48 Excellent: > 48

NATIONAL REGULATIONS SUPPORTING CAPITAL FLOWS

Executive opinions on the availability of financial services in the country

World Economic Forum Global Executive Opinion Survey in its Global Competitiveness Report

Study published annually for more than 30 years, current methodology in place since 2005, covers 125 countries

Critical: < 3.8 Needs improvement: 3.8 to 4.6 Good: 4.6 to 5.3 Excellent: > 5.3

EXPANSION OF THE COUNTRY’S MULTINACIONALS

Countries represented in the list of 100 largest businesses by assets held abroad, considering the sum of all assets held by these companies outside

World Investment Report, Unctad

Ranking published since 1991, global coverage

Critical: Not on list Needs improvement: Below the top 10 Good: Between # 6 and #10 Excellent: Among the top 5

EASE OF ENTRY FOR FOREIGN MULTINATIONALS

Index based on regulatory demands

Investing Across Borders, World Bank

Open source covering 87 countries

Critical: < 50.2 Needs improvement: 50.2 to 64.5 Good: 64.5 to 78.8 Excellent: > 78.8

Immigrants as a percentage of the total population in each country

Indicators published annually by public sources

Critical: <1.5% Needs development: 1.5% to 3.1% Good: 3.1% to 9.2% Excellent: > 9.2%

Number of international flight destinations from country per week (May 2012)

Analysis of OAG database information

Simple indicator of a country’s air transport connectivity

Analytical distribution: Critical: < 10 Needs development: 10 a 40 Good: 40 a 70 Excellent: > 70

DIMENSion international openness for trade of goods

1 TRADE IN GOODS

INTERNATIONAL OPENNESS FOR TRADE IN SERVICES

TRADE IN SERVICES

INDICAtOR

source

Average of tariffs to restrict imports and access to other markets in each country, taking into account the country’s tariff and non tariff barriers

IMMIGRANT RECEPTION

10 PEOPLE MOBILITY

Attractiveness of Brazil as an international investment and business hub

147

image of the country Rationale for Selection

Ranking criteriA

The Ankholt-GfK Roper Nation Brands Index

The best known international indicator of national trademarks

Critical: < 48 Needs improvement: 48 to 42 Good: 52 to 56 Excellent: > 56

# of internet searches in English using the country name and “investment” and “business” originating in all countries

Google

This represents the country’s image in public opinion and is available in real time

Critical: < 115 Needs improvement: 115 to 312 Good: 312 to 509 Excellent: > 509

% international events held in each country

International Congress and Convention Association

Fairs and events reflect business interest in Brazil, published annually

Critical: < 31 Needs improvement: 31 to 97 Good: 97 to 163 Excellent: > 163

2010 Environmental Performance Index

Yale Center for Environmental Law and Policy (YCELP) and Center for International Earth Science Information Network (CIESIN)

Indicator reflects the ecological sustainability of each country based on the impact of all of its activities on the environment

Critical: < 48 Needs improvement: 48 to 53 Good: 53 to 58 Excellent: > 58

Opinions of executives on the quality of life in each country

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: < 5.5 Needs improvement: 5.5 to 6.5 Good: 6.5 to 7.6 Excellent: > 7.6

Executive opinions of how open each country’s culture is to foreign ideas

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: < 6.3 Needs improvement:: 6.3 to 6.9 Good: 6.9 to 7.4 Excellent: > 7.4

PERSONAL SAFETY AND ASSET SECURITY

Opinions of executives about personal safety and asset security in each country

World Competitiveness Yearbook, IMD

A report published annually based on primary data sources and a global opinion survey of executives with some 4,500 respondents

Critical: < 5.6 Needs improvement: 5.6 to 6.7 Good: 6.7 to 7.7 Excellent: > 7.7

IMAGE FOR TRAVEL AND LEISURE

Average of the country’s business related image scores (tourism, culture and hospitality)

The Ankholt-GfK Roper Nation Brands Index

The best known international indicator of national trademarks

Critical: > 56 Needs improvement: 56 to 59 Good: 59 to 62 Excellent: > 62

% world travelers going to each country

The Economist Intelligence Unit

This information is available annually and shows traveler interest in each country

Critical: < 0.7 Needs improvement: 0.7 to 1.8 Good 1.8 to 2.8 Excellent: > 2.8

DIMENSion

INDICAtOR

source

IMAGE AS A PLACE TO DO BUSINESS

Average business related image scores (domestic goods, macro environment, investment and immigration)

FOREIGN INTEREST IN THE COUNTRY’S BUSINESS AND INVESTMENTS

2 ATRACTIVENESS FOR INTERNATIONAL EVENTS

3 SUSTAINTABILITY

4 QUALITY OF LIFE

5 CULTURAL OPENNESS

8 QUANTITY OF VISITORS

148 Attractiveness of Brazil as an international investment and business hub

Attractiveness of Brazil as an international investment and business hub

149