Bonanza in Brazil

Resources rich and with Rio awash in cash, Brazil is strutting its stuff on the world stage

By DANIEL ALLEN
Brazil's renowned party city has transformed itself into a great place to do business.
Brazil's renowned party city has transformed
itself into a great place to do business.

From the rooftops of the elevated Cantagalo favela (shanty town), Rio de Janeiro’s Copacabana Beach is a wide arc of golden sand extending toward the horizon.

Below the bun-shaped profile of Sugarloaf Mountain, serried ranks of apartment blocks and skyscrapers face the long rollers of the Atlantic Ocean. Overhead, kites soar on razor-sharp, glass-edged strings in the cloudless sky as kids from favelas engage in deadly serious dogfights.

Cantagalo was until recently a no-go area for police, tourists and the wealthier residents of Rio. The city’s favelas, estimated to house more than a million of Rio’s six million-strong population, were riddled with crime and drug-fuelled violence.

Now “police pacification units” have brought order to the chaos, while the provision of basic amenities and services is helping the people of the slums lead a better and more productive existence.

The pacification of the favelas is something that cariocas – as residents of Rio de Janeiro like to call themselves – thought they’d never witness. Many saw it as a turning point for a city that has endured decades of neglect, corruption and poor government. While serious problems remain, the changing face of Rio’s poorest neighbourhoods is symbolic of a wider, evolutionary process. Today, Brazil’s “marvellous city” is a city on the rise.

“Rio de Janeiro is on the cusp of reinventing itself,” says David Thomas, director of Brazil Access, an Australia-based business consultancy.

“The challenge for local government agencies and businesses is how to encourage and channel the influx of investment, business and trade that is expected to flow into the city between now and 2016. Rio is going to transform itself in the coming years.”

 

Economic growth

Rio's Maracana Stadium under renovation for the football World Cup in 2014.
Rio's Maracana Stadium under renovation
for the football World Cup in 2014.

Brazil has seen its economy soar in recent times, with growth far outpacing the US, Japan and western Europe. Thanks to a diverse manufacturing base and escalating energy sector, GDP surged by an impressive 7.5 per cent in 2010.

Despite a recent downturn thanks to the eurozone crisis, Brazil still managed to overtake Britain as the world’s sixth‑largest economy last year.

A stable economy, a burgeoning domestic market and huge untapped reserves of natural resources have led increasing numbers of foreign investors to the Brazilian doorstep and beyond.

Despite an unsettled world economic outlook, the country witnessed a record number of foreign direct investment (FDI) projects last year, establishing it as the second most popular global destination in terms of FDI value. From 2007 to 2011, the value and number of inward investment projects tripled from US$19 billion (165 projects) to US$63 billion (507 projects).

A recent survey by Ernst & Young of 250 leading global executives found Brazil was rated the most attractive FDI destination in Latin America by more than three‑quarters of respondents. Moreover, 83 per cent believed Brazil’s attractiveness as an investment location would improve over the next three years.

“Brazil has transformed itself from a country with bleak economic prospects in the 1970s to a formidable force in the global economy,” says Jim Turley, chairman and CEO of Ernst & Young.

“Part of that success story has been Brazil’s ability to position itself as an increasingly attractive place to do business. The future has its challenges, but the hosting of high-profile sporting events will contribute to infrastructure development and act as a catalyst to attract significant additional investment.”

 

Investor magnet

Two years after hosting seven matches of the World Cup in 2014 (including the final), Rio de Janeiro will again be the focus of the world’s attention as it becomes the first South American city to host an Olympic Games. As only the second city ever to host both events back-to-back, the international exposure will be huge with more than seven million spectators expected to attend.

Rio: More than just a city blessed with geographical assets.
Rio: More than just a city blessed
with geographical assets.

As clocks count down the hours to the Maracana Stadium’s first World Cup match, Rio de Janeiro and Brasilia are pulling out all the stops to ensure the city presents a thoroughly progressive, modern face. The hosting of two sporting events in close succession is seen as a unique opportunity for Rio to take several steps forward on the world stage, much as Beijing did in 2008.

While some of the city’s new construction and regeneration projects are directly related to the World Cup and Olympics, others are designed to redistribute projected urban growth and drive longer-term economic development.

The state of Rio de Janeiro is increasingly awash with money. A recent report published by the Rio de Janeiro State Federation of Industries predicts public and private investment will pump in more than US$100 billion in the next three years, on top of the city’s US$14.2 billion Olympic budget.

Boosted by its Olympic bid and the discovery of huge quantities of oil offshore, the economy of Rio is booming, far more so than that of São Paulo, its larger neighbour to the south-west.

Companies representing half of Brazil’s stock market capitalisation are now headquartered there and the city is already a hub for the Brazilian petroleum, IT and tourism industries. Rio’s workforce sits atop the Brazilian pile when it comes to professional qualifications, providing investors with a vast pool of local talent and driving the city’s growing role as a research and development base.

In 2010 the state of Rio de Janeiro became the first in Brazil to be granted an investment grade by credit rating agency Standard & Poor’s. That same year FDI in the city of Rio totalled US$7.3 billion, a sevenfold annual increase and more than twice the amount invested in São Paulo. The city accounts for a quarter of all Brazil’s FDI.

“Rio de Janeiro has been, and will continue to be, Brazil’s best opportunity for the savvy international investor because of the tremendous need to improve infrastructure,” says Jonathan Kendall, co-founder of Rio Investment Consulting, a Rio-based trade and investment consultancy.

“Ports, roads, railways, construction – these are the low-hanging fruit and all need rapid improvement. The US, Europe and China will not be down forever; everything cycles and now is the perfect time to execute projects in Brazil so when the rest of the world is ready to buy commodities, Brazil is ready to sell and deliver them.”

With prestigious and highly marketable sporting events on the calendar, an almost unlimited supply of oil and gas close at hand (oil fields off the coasts of Rio de Janeiro and São Paulo states may contain more than 50 billion barrels of crude), and the city repositioning itself as an international business hub, Rio’s “investability” is currently sky-high. Many development projects may have already been tendered, but for those companies and investors willing to get involved, the returns could be substantial.

 

Trade boon for APAC

Rio de Janeiro’s rapid development and healthy investment climate are boosting trade ties with companies across the Asia-Pacific (APAC) region. China is already Brazil’s largest export partner (buying mainly commodities) and second‑largest import partner (selling manufactured goods). According to HSBC, trade growth is expected to remain strong over the next five years, with Brazilian exports to China to rise by nearly 12 per cent, and imports to grow almost 11 per cent.

“We’ve seen a lot of investment in Rio by Chinese firms already,” says Antonio Carlos Dias, commercial director of business development agency Rio Negócios.

Destination Rio: resources, riches and revitalised trade.
Destination Rio: resources, riches and revitalised trade.

“For example, State Grid Corp., one of the world’s largest electric utilities companies, had 10 employees in its Rio office two years ago,” Carlos Dias says. By the end of this year it will have more than 1000.” Established in 2010 by Rio de Janeiro’s mayor, Eduardo Paes, Rio Negócios has already attracted US$1.6 billion worth of investment to the city.

China is also accumulating a significant stake in Rio’s offshore oil deposits. Located deep in the ocean, they will require huge capital expenditure to exploit.

Last year China’s second largest state-owned company, Sinopec, spent US$5.2 billion on a 30 per cent stake in the Brazilian assets of Portuguese Galp Energia Group, following a US$7.1 billion investment in the Brazilian assets of Spanish oil and gas company Repsol YPF.

The trade and investment relationship between Australia and Brazil also continues to strengthen, and Australian companies are already involved in a number of Rio-based contracts for the World Cup and Olympics. During the Rio+20 meeting in June, Australian Prime Minister Julia Gillard and Brazilian President Dilma Rousseff agreed to take the Brazil-Australia relationship to the level of a strategic partnership, highlighting progress achieved in the energy sector and increasing bilateral investment in agribusiness.

“There is increasing potential for Australian companies to invest and do business in Rio de Janeiro,” says Fabio Nave of the Australian Trade Commission in Brazil.

“The increase in infrastructure spending in Brazil, growing focus on high performance sport and major events ahead of the 2014 World Cup and 2016 Olympic Games, a booming resources sector, and an expanding middle class of new consumers, all represent potential opportunities.”

One of Rio’s most urgent urban development priorities is to upgrade its transport infrastructure. Olympic preparations include extending its subway and building dedicated bus lanes, including one linking the international airport to the city centre. In addition, many competition venues will be a long way from the new Olympic Village in western Barra da Tijuca District, which is currently linked to the rest of Rio by a pair of traffic-choked highways.

The Brazilian Government has also committed to modernising Rio de Janeiro’s woefully inadequate airport by 2014.

Largely on the back of Rio and Brazil’s infrastructure development requirements, Japanese conglomerate Hitachi recently announced plans to strengthen its Brazilian investment and operations, aiming to quadruple its consolidated revenues in the country to US$1.5 billion by 2016. The group is particularly interested in a proposed high-speed train project between Rio and São Paulo.

From hotels and transport through to mining and hydrocarbons, Rio de Janeiro city and state now offer companies from across the APAC region a golden opportunity to become involved and strengthen their positions in the Brazilian market.

“While Rio’s biggest player is the oil and gas sector, with a huge budget extending well past the World Cup and Olympics, the expansion in real estate and construction industries – including commercial offices and hotels – continues to offer lucrative possibilities,” Kendall says.

“Trade and investment between the APAC region and the Rio de Janeiro business community starts with commitment. Foreign companies and investors must come here and commit to the market for the long term.

“They must bring their best ideas and products, bring their business acumen and ability, and be prepared to adapt them to the local market.”

Marco Aurelio Cardoso, undersecretary of finance at Rio’s City Hall, adds: “Right now, Rio de Janeiro needs the Asia-Pacific and the Asia‑Pacific needs Rio.

“We are faced with a unique moment in this city’s history. In two years’ time, in four years’ time, in a decade from now, those that can forge productive business ties will certainly reap the reward. This city can be marvellous on many levels.”

 

Port progress

While Brazil’s Olympic athletes competed in London this year, a team of businesspeople and politicians discussed ways of ensuring that Rio delivers in 2016, when its turn comes to host the Games.

One of the largest and most ambitious infrastructure projects already under way in the city is the Porto Maravilha (marvelous port) development. Similar to urban regeneration projects in other Olympic host cities, the US$3 billion-plus facelift is designed to revitalise Rio de Janeiro’s extensive port area. While the neighbourhood was very lively in the 1920s and 1930s, many buildings now lie abandoned.

“The idea of the project is to improve local services, increase access to water and sewage systems, alleviate traffic congestion and offer additional leisure options to tourists who will visit in 2016,” says Marco Aurelio Cardoso, undersecretary of finance at Rio’s City Hall.

Development will focus on residential and commercial properties, with the landmark Pier Mauá set to become the focal point of a new leisure complex. The project also includes the construction of a media centre for the Olympics and two museums – the Rio Museum of Art and the Museum of Tomorrow.

A separate project, called “21st Century Port of Rio,” will see Guanabara Bay dredged to accommodate larger ships, the construction of a pier to expand the passenger terminal, and the renovation and construction of highways, railways and cargo terminals in the port area.

According to Brazilian transport secretary Julio Lopes, the government plans to double cargo handling capacity at Rio de Janeiro’s port by 2015.

 

This article is from the November 2012 issue of INTHEBLACK magazine.

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