NEW INVESTMENTS IN BRAZIL: REGIONAL AND SECTORIAL ASPECTS* DENISE ANDRADE RODRIGUES** ABSTRACT The transformation that the Brazilian economy is currently undergoing may be discerned by analyzing announcements of investment plans in the media during 1996 and 1997, which highlight heavy investments in infrastructure and the consolidation of sustainable economic growth. In 1996, investment levels were notable not only in the infrastructure sector, but also in the mechanical, electrical/electronic, and food and beverage industries as well as in services related to leisure. In 1997, there were notable investments in the petrochemical, chemical, steel and paper and pulp industries, most notably in the expansion of capacity for supplying raw materials. In addition, 1997 confirmed the trend observed in the preceding year, towards decentralization of investments away from São Paulo, and the extension of production and distribution corridors towards the North East and South of the country. 1. Introduction An analysis of investment plans made public by companies and institutions

through the media is, in the absence of censuses and surveys, an interesting

way of accompanying the development of the Brazilian economy. Over the

course of 1996 and 1997, we collected and analyzed such information from a

sectorial and regional viewpoint, and found evidence to support many of the

recently published hypotheses regarding decentralization away from the city of

São Paulo, as well as the capacity of Brazilian companies to adapt to

international standards of competitiveness.

The results of the study on investment intentions in 1996 [Rodriguez (1997)]

showed a resumption in investment that, unlike preceding periods, was * Agradeço os comentários e sugestões de Lídia Goldenstein, Laércio Gonçalves e Walter Rodrigues e o apoio de Helio Hermeto. Muitas idéias desenvolvidas neste artigo, porém, são originárias de pessoas com conhecimentos profundos de alguns setores econômicos que, no entanto, não são responsáveis pelos erros e imprecisões aqui cometidos. Agradeço especialmente a Maria Lucia Amarante de Andrade, Dulce Corrêa Monteiro Filha, Ricardo Montenegro, Paulo Cesar Siruffo, Angela Macedo e Antônio Carlos Valença, todos do BNDES, aos consultores Sebastião Soares e José Clemente de Oliveira, bem como a Edmundo Klotz e Denis Ribeiro, presidente e assessor da Abia.

distributed across various states, with the consequent extension of the

production and distribution corridors towards both the North East and South of

the country.

From a sectorial point of view, an increase was observed in the propensity to

invest in infrastructure, most notably in highways, railroads and energy, both in

the private and public sectors. At the same time, there were notable cases of

investment in industrial and service sectors related to the increased purchasing

power of the population, such as the electrical/electronic and food industries, as

well as in leisure-related activities such as hotels, shopping malls and theme

parks.

Having reached the end of the first phase of the Real Plan, whose principal

results were economic stabilization, a fall in inflation, and the establishment of

conditions for economic growth, a new phase began, characterized by the

consolidation of conditions for sustainable economic growth through

administrative and welfare reforms, both of which are fundamental indicators, not

only of a stable environment for decision-making, but also of the state’s capacity

for adhering to strategic plans.

Over the same period, the global economy has been characterized by a severe

financial crisis originating in the Asian economies. It is not yet possible to

evaluate the impact of this crisis on the Brazilian economy, but the deliberate

raising of interest rates, aimed at defending the Real, and the lack of confidence

shown by foreign investors has produced an extremely uncertain outlook for

future investment.

It has also become very difficult to determine to what degree announcements of

new investments have been discouraged, even if it can be said that from

November 1997 onwards, there have been new, if timid, announcements. In

** Economista da Representação Regional Sul do BNDES.

addition, cancellations of investments planned prior to October have been

insignificant, with the cases in question not even subject to previous

announcements. It is nevertheless probable that investments that were under

consideration but not yet announced, have been postponed until the international

scenario stabilizes.

Another problem that must be tackled in the short term is the mood of frustration

resulting from the privatization of companies and concessions, both among the

concessionaires, who have perceived the realities of the companies they took

charge of, as well as among the general public, who have realized that their

expectations would not be fulfilled as rapidly as they had imagined. It appears

that actual investments have been less than was necessary, both because

demand exceeded expectations, and because problems encountered were

worse than initially thought.

2. Investments Announced in 1997: Sectorial Aspects

The changes underway within the Brazilian economy may be judged from 1997

data1. Investments in infrastructure projects have been consolidated and have

matured, but the main targets for investment have been basic industries, such as

petrochemicals and chemicals, as well as paper and pulp, representing a change

from the preceding year, when announcements of investments in consumption-

related sectors predominated. This fact is interesting in that it shows that

investment intentions for the next few years are already reflecting a scenario of

sustained economic growth (Table 1).

TABLE 1

Investment Intentions by Sector over the Period 1997/2002 Announced in 1996 and 1997

SECTORS INVESTMENTS

1996 (US$ Million)

% INVESTMENTS

1997 (US$ Million)

% 1997/96

(%)

Infrastructure 27,097 25.2 46,667 38.1 72.2

Mechanical/Metallurgy 15,539 14.5 12,234 10.0 -21.2

Telecommunications 9,851 9.2 8,531 7.0 -13.4

Food, Beverages, Tobacco 9,559 8.9 6,754 5.5 -29.3

Petrochemicals 8,980 8.4 11,186 9.1 24.6

Steel 5,897 5.5 5,928 4.9 0.5

Paper and Pulp 4,067 3.8 4,770 3.9 17.3

Tourism, Shopping Malls &

Leisure

4,063 3.8 4,033 3.3 -0.7

Electrical/Electronic 3,741 3.5 2,218 1.8 -40.7

Services 2,917 2.7 1,946 1.6 -33.3

Financial 2,860 2.7 2,471 2.0 -13.6

Mining 2,721 2.5 1,776 1.4 -34.7

Chemicals, Plastics,

Fertilizers &

Pharmaceuticals

3,147 2.9 3,791 3.1 20.5

Trade 1,911 1.8 3,574 2.9 87.0

Transport 696 0.6 1,235 1.0 77.4

Textiles & Apparel 654 0.6 921 0.8 40.8

Health & Hygiene 644 0.6 366 0.3 -43.2

Footwear 146 0.1 155 0.1 6.2

Agriculture 117 0.1 55 0.0 -53.0

Misc. Industrial 2,788 2.6 3,748 3.1 34.4

Total 107,395 100.0 122,359 100.0 13.9

Sources: Coluna Angela Bittencourt (Investnews), newspapers and magazines, state planning departments.

The leading sector for proposed investments is infrastructure, with some US$ 54

billion announced in coming years, of which 43% in energy. By comparison with

1996, there was a 49% increase in investment intentions for the sector (which

includes telecommunications).

The results of the acceleration of the privatization program, due to the start of

programs in individual states after 1995, may already be observed from its

effects on private investments, which are particularly notable in the electrical

sector, in which the utilities Escelsa, Light, Cerj, Coelce, Coelba, CEEE, CPFL,

Enersul, Cemat, Energipe, Cosern, CEG and Riogás had all been sold by

December 1997, and in which 37% of announced investments came from the

private sector, notably: CEEE (Dona Franciscana hydroelectric plant),

Riogás/CEG (distribution of natural gas), Coelba (modernization and expansion),

Enersul (expansion), and Light (expansion and modernization of the Ilha dos

Pombos plant).

Private groups have undertaken independent generation projects, as is the case

with the associations between Alcan and Fiat, Belgo Mineira and Samarco, and

CSN/Odebrecht/Camargo Corrêa, as well as thermal generation projects such as

those of BHP (Paraná and Rio de Janeiro), CSN (Rio de Janeiro), Copelmi (Rio

Grande do Sul), Magistra (Rio Grande do Sul), PQU (São Paulo) and

Rhodia/Solvay/Oxypar (São Paulo).

State-owned utilities have also scheduled investments, although this study only

considers those projects that are at a more advanced stage of decision-making,

such as the hydroelectric plants of Machadinho (an association between Alcoa,

Eletrosul and Celesc), Miranda, Queimado, Porto Estrela (Cemig), Três Irmãos

(Cesp) and the Rivers Iguaçu and Tibaji (Copel), as well as Celesc’s thermal and

wind-powered plant.

The Federal Government and Eletrobrás are undertaking a number of

investments in a transmission line from Itaipu to the North of Brazil, from Urucu to

Manaus, and from Tucuruí to Fortaleza.

The importance of public sector investment in infrastructure as a way of

promoting economic growth is widely recognized: increases in the volume and

quality of energy supply of transport, telecommunications and sanitation services

raise final output, raise the productivity of private factors, and reduce the unit cost

of raw materials, and consequently stimulate investment and job creation

[Rigolon and Piccinini (1997)].

In addition, the implementation of infrastructure projects demands sophisticated

equipment and heavy construction work, both available from the domestic sector,

which still has spare capacity, and which uses domestic technology that is

internationally recognized. Such projects also produce goods and services such

as electricity, telephone services and sanitation that benefit the entire population,

promote a more equal distribution of incomes2 and are highly efficient at creating

employment.

During the whole of 1997, the telecommunications sector was at the center of

media attention. At the same time, while it announced significant investments,

representing some 7% of the national total, this number could have been even

higher if the optimism observed at the start of the privatization process had not

been dampened by the impact of a legal discussion on the validity of the process,

as well as the criteria for qualifying private companies as concessionaires, most

notably in the state of São Paulo, which has a tendency to make an impression

on the rest of the country. Of the 10 B Band cellular concessions, 5 were put out

to tender by September, after which point the privatization process was halted to

await a court decision on the concession for the interior of the state of São Paulo

(Area 2) which is expected by June.

At the same time, conditions have changed due to a shift in expectations:

companies that won concessions have recognized that demand was in xcess of

expectations, and that there is still no guarantee of agreements that give local

systems a national reach (roaming). In addition, the possibility of private service

concessionaires has led state-owned companies to make significant investments,

as is the case of Telemig and Teleceará, not only due to future competition but

also because of a need to show that such companies are viable and attractive to

the private sector as and when they are sold.

Another sector that developed positively after the privatization of concessions

was the railroad sector, which in 1997 announced planned investments of US$

1.8 billion. It is nevertheless possible that such investments would be even

greater were the deterioration of the system’s asset base not so great. This is

invariably the main frustration of a private sector group that takes on the

management (or ownership) of a former state-owned company. Several directors

of such companies have declared that even with prior information regarding the

poor financial conditions of such companies, as well as their debt structures, they

subsequently found their condition to be far worse than predicted, most notably

with regard to their physical and operational aspects.

The determination and efficiency with which the railroad system was sold has not

been repeated in the case of the road network, which involves some far more

complex problems, from a freight system dependent on the network (and the

implications of privatization in terms of costs to transporters, fuel distribution, as

well as road repair, maintenance and patrol systems) to the need for investment

by the public sector in order to make concessions financially attractive. It is

perhaps for these reasons that the road network ranks second among

infrastructure subsectors in terms of planned investment, with the public sector

alone (Federal, State and Municipal) announcing US$ 12.2 billion of investments

in repairs to highways and roads. The states of Paraná, São Paulo, Minas

Gerais, Rio Grande do Sul, Rio de Janeiro and Ceará have announced

particularly heavy investments in their road networks.

The privatization of the port system has followed a model of its own, with

management of the sector tending to remain in the hands of state-owned

companies, with the private sector restricted to leasing port areas. Announced

investments in terminals in the main ports amounted to US$ 649 million.

With regard to air transport, plans for total investments of some US$ 1.3 billion

were announced, consisting principally of expansion projects for the airports of

Campinas, Porto Alegre, São Paulo, Belém and Rio de Janeiro, as well as plans

for a new airport for Guarujá. Having said this, the transfer to the private sector of

services currently carried out by Infraero has been ruled out, at least in the short

term.

In the sanitation sector, investment plans are limited by comparison with the

needs of local authorities, with only US$ 2.7 billion announced by all the Brazilian

state governments. Plans announced by local authorities to transfer concessions

to the private sector have not led to significant investments, both because there

is still no consensus regarding the modelling of transfers, and thus the regulatory

system, and because each local authority has imposed specific conditions with

regard to its concession area as well as its current and future requirements, that

in many cases make the related project uneconomic.

For its part, the industrial sector represented 44% of proposed investments

announced in 1997. Despite a reduction in this amount from US$ 58 billion in

1996 to US$ 54 billion in 1997, a change in the relative shares of each sector

show a rise in investment in the petrochemicals, steel, paper and pulp and

chemical sectors (see Table 2).

TABLE 2

Proposed Investments in Industry Announced in 1996 and 1997 (In %)

INDUSTRY 1996 1997 Mechanical 21.0 20.1 Food, Beverages & Tobacco 16.5 12.6 Petrochemicals 15.6 20.7 Steel 10.2 11.0 Paper & Pulp 7.1 8.9 Electrical/Electronic 6.5 4.1 Metallurgy 5.9 2.5 Mining 4.6 3.3 Chemicals, Plastics, Fertilizers & Pharmaceuticals

4.1 7.0

Textiles & Apparel 1.1 1.7

Health & Hygiene 1.1 0.7 Footwear 0.2 0.3 Other 4.8 7.0 Total 100.0 100.0

Sources: Coluna Angela Bittencourt (Investnews), newspapers and magazines, state planning departments.

Over the course of 1996, there were a large number of announcements by the

durable consumer goods industries, most notably in the mechanical sector

(especially by automobile manufacturers), as well as the non-durable consumer

goods sectors, such as food, beverages and tobacco, driven largely by the

improvement in real wages, as well as the expansion in payrolls due to the Real

Plan. After an initial growth phase, however, a downturn was observed in

immediate consumption, due, on the one hand, to households’ inability to service

their debts (related to a rise in unemployment), and on the other, to the

satisfaction of repressed demand from those sections of the population whose

incomes benefited from the Real Plan. There was also a sharp rise in demand for

housing, revealing a shift in consumption patterns, with the construction materials

industry (excluding glass and cement) announcing some US$ 890 in planned

investments.

The resumption in investments by the petrochemical, steel, paper and pulp and

chemical industries is extremely important, as it will lay the foundations for

sustainable economic development. Investments carried out at the start of the

1990s did little to expand production capacity, and showed the inability on the

part of Brazilian industry to adapt to the growth in national income and the surge

in consumer demand that was observed immediately after the launch of the Real

Plan.3

The vast majority of such investments are in the expansion of capacity within the

sector as a whole4. Of the total investments announced by the paper and pulp

sector, 80% referred to expansion of installed capacity, with corresponding

figures of 81% in the petrochemical sector, 90% in the chemical sector and 79%

in the steel sector. In such sectors, production is almost at the level of installed

capacity, a situation that has remained virtually unchanged since 1986 [see

Chami (1998)].

In the case of the chemical (and petrochemical) industry, analyzed in a recent

BNDES study [see Montenegro and Monteiro Filha (1997)], imports grew sharply

from 1995 onwards, while exports did not, largely due to the need to satisfy the

demands of domestic producers. Imports of PET resin, polystyrene,

polycarbonate, synthetic fibers, nylon and fertilizers are all high relative to

internal production and apparent consumption, with these subsectors among

those that require investments.

In the light of the above, the following investments announced by sector

companies are urgent priorities: Copene’s plans to install a new refinery and a

paraxylene plant (BA); Copesul’s plans to install an ethylene cracker; Perez

Companc’s plans for a styrene and polystyrene plant (RS); OPP and Petrobrás’

agreement to build a polypropylene plant in Paulínia (SP); Suzano’s plans for a

polypropylene plant (SP); and Trikem’s for a polyethylene plant (BA).

Petrobrás has also announced investment plans that concentrate on expanding

capacity. Due to the high costs of building new refineries, however, and the

global industry trend5 towards increasing cracker productivity, this expansion will

be limited, and when it is realized, will immediately meet with demand for all its

output. There is thus hardly any spare refining capacity, and due to the rules of

co-ordination of the market, the chemical industry’s growth plans are still tied to

Petrobrás’ own investment plans, even if the sector’s export policies require an

expansion in the production of raw materials. Table 3 below, shows several

products with the necessary capacity expansion in the case of the sector opting

for export growth strategies.

TABLE 3

Changes in the Trade Balance of the Petrochemical Sector – 1992-96

MAIN PRODUCTS

TRADE BALANCE

IMPORTS (Tonnes)

EXPORTS (Tonnes)

INSTALLED CAPACITY

Thermoplastic Resins Polyethylene (PE) HDPE (+) Rising Falling Inadequate LDPE (+) Stable Falling LLDPE (+) Stable Falling Inadequate Polypropylene (PP) (+) Rising Falling Inadequate Polyvinyl Chloride (PVC) (+) Rising Falling Inadequate Polystyrene (PS) (-) Rising Falling Inadequate ABS Resin (-) Rising Falling PET Resin (-) Rising Stable Inadequate Thermostable Resins Phenolic Resins (-) Stable Stable Melamine Resins (-) Rising Non-existent Epoxyresins (-) Rising Rising Urea-based Resins (+) Low Volume Low Volume Alkyl Resins (+) Rising Stable Polyurethane (-) Rising Stable Polycarbonates (-) Rising Falling Fibers Artificial Fibers (-) Rising Stable Inadequate Synthetic Fibers (-) Rising until

1995 Stable

Nylon (-) Rising until 1995

Stable Inadequate

Elastomers

++SBR++ (+) Rising Rising ++EPDM++ (+) Rising Rising ++NBR++ (+) Rising Falling Polybutadiene (-) Rising Falling Fertilizers (-) Rising Stable Inadequate The pharmaceutical industry has announced US$ 1.6 billion of investments in

São Paulo and Rio de Janeiro, of which 79% relate to new plants: Glaxo

Wellcome and Smithkline in Rio de Janeiro; TRB Pharma in Campinas; and

Hoechst Marion Roussel in Suzano. Despite the fact that the fertilizer sector is a

heavy importer and has inadequate installed capacity, it announced a mere US$

116 million in investments.

Almost all the companies in the paper and pulp sector announced investments in

1997, with a cumulative total of US$ 4.8 billion, corresponding to 8.9% of total

industrial investment. The most significant among these were the reactivation of

Jari’s (pulp) power station, the laying out of eucalyptus plantations by the Celmar

(MA) project, the installation of Vera Cruz Florestal, and the doubling of the Bahia

Sul JV (both projects in Bahia). According to a BNDES study [see Macedo et al.

(1997)], the sector urgently needs some US$ 10 billion of investment by 2005 if it

is merely to satisfy domestic paper demand, and maintain its current share of the

world market.

The growth in domestic demand that was an immediate result of economic

stabilization (a 41% increase in apparent consumption of paper, of all kind,

between 1993 and 1996) not only interrupted the rising export trend, but also led

to a sharp increase in paper imports (215% between 1993 and 1996), a trend

that was maintained during 1997. In similar fashion to the petrochemical sector,

production within the paper and pulp sector is almost at the level of installed

capacity.

The level of investments announced by the steel sector in 1997 remained stable

with regard to 1996, pointing to continuous planning. The Steel Sector

Technology Modernization Program had previously planned US$ 6 billion of

investment to 2000, with a view to increasing competitiveness and improving

environmental conditions. It can be seen that the sector is continuing to pursue

these objectives.

The sector’s trade balance is in heavy surplus, with Brazil the world’s second-

largest exporter of steel products. From 1995 onwards, however, steel exports

have declined due to domestic demand, while imports have increased [see

Andrade et al. (1997)]. The Mining and Metallurgy Department of the BNDES has

projected a gently declining trade balance due to the fall in profitability of exports,

not only as a result of the fall in competitiveness (due to financing costs, a high

tax burden and deficient infrastructure), but also because of currency

appreciation. Should this situation deteriorate, then Brazilian import tariffs for

steel products will be among the lowest in the world.

The sector must improve its competitive position by the increasing use of

automation, as well as by reducing the number of steps in production processes,

most notably with regard to pollutants, and by concentrating on the production of

more differentiated, value-added steels in lower physical volumes. The use of

Nucor process technology eliminates the steel shop (blast furnace) stage by

using pre-reduced pellets (spongiform iron). This allows a reduction in the

minimum size for new steel plants (mini-mills). At the same time, such production

requires an upgrade in the productive chain, involving the mining sector,

something that is being undertaken by Companhia Vale do Rio Doce (CVRD),

which is installing a pelletizing and ore reduction plant at Conselheiro Lafaiete

(MG). The vertical upgrading of the steel production chain involves the

improvement of alloys and the development of special steels, while the horizontal

upgrading includes the development of transport logistics as well as of systems

for managing clients’ inventories.

It may nevertheless be observed that there have been positive achievements in

the post-privatization period, due to reductions in headcount, rationalization of

administrative and financial structures, as well as increased fund-raising. These

developments have allowed the sector to improve both its competitive position

and its environmental conditions.

Announced investments by the mechanical/metallurgy sector remain high,

despite having decreased with respect to 19966. Manufacturers of automonbiles

and pick-ups (BMW, Fiat, Ford, General Motors, Hyundai, Mercedes-Benz,

Mitsubishi, Peugeot, Toyota, Chrysler and Subaru) as well as trucks (Skoda,

Agrale and Kia Motors) have announced investments of US$ 5.3 billion in new

plants alone, consolidating the trend for companies to establish new subsidiaries

in Brazil. In line with such projects, the auto parts sector has announced

investments of US$ 2 billion.

The food, beverage and tobacco, electrical/electronic goods and health and

hygiene sectors also experienced a slowdown in investment relative to

announcements made in 1996, an exceptionally encouraging year for consumer

goods industries. In the case of the food and beverage industries, it can

nevertheless be said that the true degree of restructuring can only be partially

detected from such information, which only considers investments in new fixed

assets, and not the purchase of existing assets. The strategies of such sectors

include the initial purchase of companies, with a view to acquiring market share

and testing the market. It is only at a later stage that expansion projects are

implemented.

The deceleration in investment announcements has not been observed in the

textile and footwear sectors, both of which have been restructuring visibly

following the serious crisis caused by trade liberalization. The process of

competitive readjustment of such sectors has entailed the closing of plants in the

South and South East of the country, and the opening of others in the North East.

Despite irreversible job losses in the former regions, the movement towards the

North East illustrates the refocusing of production within the sector. The two

sectors have together announced investments of over US$ 1 billion, most of

which is in new plants.

The service sector also suffered a reverse relative to 1996, despite an apparent

stablization in investments in tourism, shopping centers and leisure at around

US$ 4 billion per year. Investments in transport services have nevertheless

increased considerably, driven by new levels of consumption and air traffic (both

of freight and passengers).

Investments in retail amounted to US$ 3.6 billion, with several large chains

announcing plans principally for the expansion of their networks. This appears to

be the case with Supermercados Bom Preço, Carrefour, Cândia, Eldorado, Pão

de Açúcar, Sé, Lojas Arapuã, Renner, Ponto Frio, C&A, Wal-Mart, Saraiva, the

gasoline retailers Esso, Shell and Texaco and the automobile dealers for BMW,

Chrysler, Mercedes Benz and Renault.

3. Investments Announced in 1997: Regional Aspects An analysis of announcements of proposed investments in 1996 pointed to

the possibility of a regional development paradigm that differed from that of the

1980s, when, following the end of an expansion cycle which was spread across a

relatively large number of states, there emerged a tendency towards the

concentration of economic development in a few centers close to São Paulo [see

Diniz (1995)].

The effect of an expanding domestic market with an increase in real wages,

and the economic stability and reduction in uncertainty conferred by the Real

Plan, combined with a resumption in investment in infrastructure, modified the

conditions that had previously favored the concentration of economic activity in a

polygon centered on the state of São Paulo.

There were announcements of intentions to make significant investments in

the states of Rio de Janeiro, Espírito Santo, Minas Gerais, Paraná, Santa

Catarina, Bahia and Ceará, that could cause important changes in the location of

production, as well as in its distribution axes, assuming that all such plans are

implemented. Heavy investments in infrastructure will nevertheless be necessary

in order to sustain this reorientation of industry.

Rio de Janeiro could halt the process of deindustrialization that has been

occurring there for several decades, and recover its former prominence in the

national economy. Espírito Santo is continuing to maintain its growth trend, and

could benefit from the recovery of Rio de Janeiro, the ongoing development of

Minas Gerais, and the recent development of Bahia. Minas Gerais deserves

special mention, since it is likely to achieve growth over the next few years that is

not concentrated in its capital, in similar form to São Paulo’s experience over the

last decade. Paraná could also show strong growth, albeit with a model that

remains centered on Curitiba. Santa Catarina should also grow continuously in a

decentralized way, receiving important investments in infrastructure.

Disparities between various states of the North East could nevertheless

increase, since the recent growth of Ceará and Bahia has been rapid, even if this

could be reflected in the more moderate growth of adjoining states. It is also

possible that a number of cities in the North East are undergoing fundamental

changes. Investments centered on Salvador, Recife, Fortaleza and Natal could

underpin above average growth rates in job creation. In addition, new kinds of

industry are looking to establish operations in the region with a view to exploiting

its potential for tourism, as well as its consumer market.

In 1997, the states that distinguished themselves by levels of investment

were Paraná, Bahia, Rio Grande do Sul, Amazonas, Rio de Janeiro and Ceará.

The most surprising of these was Paraná, which is set to receive an announced

US$ 13.1 billion of investment, corresponding to almost 11% of the national total.

Such investments are distributed across 17 municipalities, but are most heavily

concentrated in Curitiba, most notably mechanical sector projects: BMW/Chrysler

(motors), Chrysler (pick-ups), the VW/Audi JV (trucks) and Multibrás. Also

notable are the investments in infrastructure within the state, required to underpin

strong economic growth, that amount to US$ 10.2 billion, and that reflect 78% of

intended investments within the state. These relate to highway concessions, new

highways, and energy, most notably the construction of a gas-fired generating

plant by BHP, as well as the hydroelectric plants on the Rivers Iguaçu and Tibaji.

TABLE 4

Intended Investments by State Announced in 1996 and 1997 STATE INVESTMENTS

1996 (US$ Million) % INVESTMENTS 1997

(US$ Million) % 1997/

96 (%)

São Paulo 23,681 22.1 24,534 20.0 3.6 Minas Gerais 12,935 12.0 11,451 9.4 -11.5

Rio de Janeiro 7,407 6.9 10,650 8.7 43.8 Rio Grande do Sul 5,164 4.8 8,420 6.9 63.1 Paraná 5,119 4.8 13,116 10.7 164.0 Santa Catarina 4,104 3.8 768 0.6 -81.3 Bahia 3,858 3.6 7,270 5.9 88.4 Pará, Rondônia, Acre and Tocantins

3,099 2.9 219 0.2 -92.9

Espírito Santo 2,770 2.6 845 0.7 -69.5 Pernambuco 1,948 1.8 440 0.4 -77.4 Ceará 1,915 1.8 2,382 1.9 24.4 Alagoas, Maranhão, Paraíba, Sergipe and Rio Grande do Norte

1,510 1.4 569 0.5 -62.3

Amazonas 1,319 1.2 2,125 1.7 61.1 Mato Grosso and Mato Grosso do Sul

1,231 1.1 915 0.8 -25.7

Goiás and Distrito Federal 1,061 1.0 1,037 0.8 -2.2 Total (excl. São Paulo) 50,957 49.8 60,207 49.2 18.1 Other (Simultaneous) 24,109 22.4 27,969 22.9 16.1 Undefined 8,643 5.7 9,649 7.9 11.6 Total 107,390 100.0 122,359 100.0 13.9

Sources: Coluna Angela Bittencourt (Investnews), newspapers and magazines, state planning departments.

The predominant sectors in Bahia are petrochemicals, paper and pulp and

infrastructure, precisely those sectors that most distinguished themselves at

national level in 1997. In addition to the investments in the petrochemical and

paper and pulp sectors mentioned above, there were also projects in the

mechanical and electrical/electronic sectors, a novelty for the region, such as

Hyundai’s project for a van plant, Skoda’s plans for an automobile plant, and

Semp-Toshiba’s plans to transfer its activities to the metropolitan region of

Salvador.

In the study of investments announced in 1996, emphasis was placed on

the growing importance of sectors directly associated with the rise in living

standards of the population of the North East, in addition to the evident incentives

to establish new industries offered both by state governments and local

authorities, and the cost of labor below those of the South and South East.

Such conditions continued visibly to hold in 1997: in the food sector with

Ace Aquafarms (fish farming in Paulo Afonso), Avipal (general agroindustry) and

Agronave (a vegetable oil processor based in Feira de Santana); with the

installation of footwear factories in Alagoinhas, Juazeiro do Norte, Jequié and

Serrinha, and an apparel plant in Itabuna; and in the leisure sector, with the

construction of the Sauípe Complex by the Odebrecht group in Salvador, as well

as shopping malls in Salvador (Aero Plaza Show), Feira de Santana (Iguatemi)

and Juazeiro do Norte (Cariri Shopping).

The efforts undertaken by Rio Grande do Sul to promote its own

development may be observed from the announcement of investments in 1997 in

a variety of sectors. Despite the fact that these remain concentrated in the

metropolitan area of Porto Alegre, other municipalities have also received

investments. In addition to investments in the petrochemical sector mentioned

above, the following are of note: in the steel sector, the construction of a new

plant by the Gerdau group, and the expansion of capacity of Piratini; in the

mechanical sector, two automobile plants built by Ford and General Motors

respectively, a medium and heavy truck plant by Agrale (in Caxias do Sul), and

consequently, investments in auto parts by Arteb, Goodyear and Pirelli (in

Gravataí) and Zamprogna (in Porto Alegre); in the food, beverages and tobacco

sectors, investments by Elegê Alimentos (milk), Isabela (biscuits), the Josapar

group, Souza Cruz and Coca-Cola.

Despite registering an increase in investments relative to the preceding

year, when the construction of a natural gas plant and its link to Manaus is

excluded, the state of Amazonas shows a sharp fall in investment. This highlights

the precarious position of the Manaus Free Trade Zone in the face of a

redirection of investments from consumer durables towards infrastructure and

basic products. In constituting a special regime for the electrical/electronic goods

industry, the Free Trade Zone has become dependent on this sector, and thus

vulnerable to its cycles.

In Rio de Janeiro, proposed investments are principally concentrated in:

infrastructure, with programs to improve generation and increase electricity

supply, such as BHP’s gas-fired plant at Macaé, the expansion of CEG/Riogás’

gas distribution network by the private groups, Enron Corporation (United

States), Gás Natural (Spain), Iberdrola (Spain) and Pluspetro (Argentina), the

construction of a thermal co-generation plant using waste gases from CSN, and

the installation of the Angra II nuclear plant. Investments to improve urban

transport are also planned, with the expansion of the subway as far as the Barra

da Tijuca, the construction of the Yellow Line and the Ring Road. There are also

plans by Cedae to invest in sanitation, as well as plans to expand Rio de

Janeiro’s international airport. No less important are announcements by the

petrochemical sector of plans for a cracker at the Reduc refinery, as well as the

Rio Polímeros project (mentioned above), and by the chemical sector, most

notably in the area of pharmaceuticals, with Bayer planning to double capacity,

and Glaxo Wellcome, Smithkline and Schering-Plough all planning new factories.

Most notable in the mechanical sector is the installation of an automobile plant in

Porto Real by Peugeot, as well as a shipyard by the Libra group. Within the steel

sector, both CSN and the Gerdau group are developing expansion and

modernization projects.

Investment projects are also planned in leisure and tourism: The Andrade

Gutierrez group is developing a hotel complex at Ilhas Perynas in the Lagos

region; the Suarez group is developing a resort to be managed by the Marriott

chain in Angra dos Reis; the Rio Palace Hotel will be restructured, and a further

US$ 240 million will be invested in the expansion and/or construction of five

shopping malls in the city of Rio de Janeiro.

Investments in infrastructure are also significant in the state of Ceará. Most

notable among these are the construction of the Castanhão dam, the Fortaleza

subway, the expansion of Teleceará’s network, and the installation of wind-

powered generators. Also of note is the completion of a steel mini-mill by CSN

(previously announced in 1996), as well as the duplication of steel capacity of a

unit belonging to the Gerdau group, and the installation of an automobile factory

by Subaru. The textile sector (Marisol, Nylorend and Vicunha), the food and

beverage sector (Kaiser and Parmalat) and the footwear sector (Grendene) are

also proceeding with their plans to establish operations.

Announced investments in the state of São Paulo were virtually stable with

regard to 1996, although those projects that were announced were extremely

large. Spread over 46 cities, despite the fact that the majority were concentrated

in the metropolitan area (around US$ 10.1 billion), these investments continued

the development trend prevalent within the state since the end of the 1980s,

namely the transfer of industry to the interior of the state, albeit in piecemeal

form, in some cases to small towns. Along the São Paulo-Rio de Janeiro axis

alone, some US$ 4.5 billion of investments were identified. It should be noted

that the transport infrastructure between these two cities is likely to prove

inadequate given the probable increase in freight volumes resulting from

investments of this size. The same may be supposed for the São Paulo-Curitiba

axis, since Paraná has become one of the states that is proposing to invest most

heavily in transport infrastructure (around US$ 6.8 billion).

In addition to the mechanical and petrochemical sectors, the service sector

is also of note. In the city of São Paulo alone, US$ 1.5 billion of investments are

planned, supporting the hypothesis that the city’s main activities are shifting

towards the service sector.

The state of Minas Gerais suffered a very slight fall in investment

announcements with relation to 19967. In similar fashion to São Paulo, a process

of piecemeal transfer of industry to the interior of the state may be observed.

Such investments are spread across 24 local authorities and cover almost all

sectors of the economy, including, most notably: infrastructure, of which energy

is the most important subsector (US$ 1.8 billion), transport (US$ 840 million),

telecommunications (US$ 620 million), steel (US$ 2.7 billion), mechanical goods

(US$ 1.4 billion) and paper and pulp (US$ 1 billion).

Investment intentions in Goiás and the Federal District remained at 1996

levels, with a total of US$ 1 billion planned in the textile sector (Vicunha, Hering

and Pingo de Gente), the food sector (Perdigão, Parmalat and Sakura), the

mechanical sector (Mitsubishi and Thermadec) and tourism (the Orla project in

Brasília and Gutheil, the Posada do Rio Quente and White Water projects in

Goiás).

All other states showed sharp decreases in announced investments with

respect to 1996. Santa Catarina and Pernambuco were both in the glare of the

media during this period, due to financial scandals. Either these states were too

busy with the resolution of their internal problems8 to announce new investments,

or did not, in fact, have many new investments to announce.

In Espírito Santo, excepting investments by CST (to install a hot-rolled strip

mill), by Kobrasco (a JV between CVRD and the South Korean Pohang to build

an iron ore pelletizing plant) and Escelsa (to build a thermal plant in conjunction

with Petrobrás), there were practically no announcements of significant

investments, unlike in 1996, when Aracruz, Belgo Mineira, Degussa, Garoto,

Andrade Gutierrez and Kia Motors all unveiled new projects.

In the North, planned investments are still at an initial stage, with a greater

volume announced in 1996, due to projects unveiled by CVRD that were not

matched in 1997. In Mato Grosso and Mato Grosso do Sul, investments are

planned in energy infrastructure and in agroindustry, the latter of which are

significant, including most notably, Agrovale and MPE (hog breeding projects)

and the Saint Germain group (wheat and corn milling).

Finally, in the North East, in addition to the states mentioned above, the

following investments are of note: the Artex/Coteminas JV in João Pessoa; the

Iguatemi shopping mall in Campina Grande; Samello’s footwear plant in Santa

Rita; the SpeedCross/Quinggi JV to assemble motor cycles in Conde, all of

which are located in the state of Paraíba; the installation of a biscuit factory by

Parmalat in Natal (RN) and the expansion of Fafen (chemicals) in Sergipe.

With regard to municipalities, a number of cities are listed below, together

with projected investments, and the principal sectors in which these are expected

to occur. A number of these deserve special mention, given the scope for

developing within them and around them, networks of small- and medium-sized

companies that will benefit indirectly from larger-scale investment. Such cities will

consequently diminish the migratory pressure on larger urban centers, and

include Uberlândia, São José dos Campos, Taubaté, Fortaleza, Juiz de Fora,

Volta Redonda, Campinas, Jacareí, Capuava, Ribeirão Preto, Londrina, Mogi

Mirim, Americana, Bragança Paulista, Ponta Grossa and Feira de Santana.

TABLE 5 Investments by Municipalities and Principal Sectors - 1997

CITY STATE INVESTMENTS (US$ Million)

SECTOR 1 SECTOR 2 SECTOR 3 SECTOR 4

São Paulo SP 8,279 Transport Services Mechanical Hygiene Rio de Janeiro RJ 3,973 Chemicals Transport Petrochemicals Services Curitiba PR 1,822 Mechanical Services Auto Parts Chemicals Duque de Caxias RJ 1,500 Petrochemicals Eunápolis BA 1,500 Paper & Pulp Uberlândia MG 1,494 Services Food Tobacco Cachoeirinha RS 1,440 Tobacco Ipatinga MG 1,380 Steel Porto Alegre RS 1,372 Mechanical Transport Services Mataripe BA 1,328 Petrochemicals Triunfo RS 1,200

Petrochemicals

São José dos Campos

SP 1,002 Mechanical Petrochemicals

Porto Real RJ 1,000 Mechanical Três Lagoas MG 1,000 Paper & Pulp Taubaté SP 966 Mechanical Chemicals Fortaleza CE 959 Transport Textile Mechanical Services Juiz de Fora MG 895 Mechanical Transport Pecém CE 700 Steel Angra dos Reis RJ 685 Energy Services Salvador BA 683 Services Mechanical Transport Indaiatuba SP 613 Mechanical Sete Lagoas MG 575 Mechanical Metallurgy Food

Ouro Branco MG 548 Steel Volta Redonda RJ 547 Energy Steel Belo Horizonte MG 508 Transport Mechanical Services Cubatão SP 501 Steel Chemicals Conselheiro Lafaiete

MG 500 Mining

Campinas SP 466 Mechanical Logistics Services Jacareí SP 462 Paper & Pulp Beverages Paulínia SP 425 Energy Petrochemicals Candiota RS 400 Energy Vitória ES 397 Steel Caldas Novas GO 390 Services Niterói RJ 380 Mechanical Gravataí RS 367 Auto Parts Pindamonhangaba SP 360 Metallurgy Joinville SC 332 Energy Electrical/Electronic Metallurgy Mogi das Cruzes SP 306 Mechanical Paper & Pulp

(continued)

CITY STATE INVESTMENTS (US$ Million)

SECTOR 1 SECTOR 2 SECTOR 3 SECTOR 4

Rio Verde GO 306 Food

Macaé RJ 300 Energy Simões Filho BA 280 Mechanical Sumaré SP 272 Chemicals Metallurgy Capuava SP 270 Petrochemicals Energy Manaus AM 265 Electrical/Electronic Ribeirão Preto SP 265 Services Trade Telecommunications João Monlevade MG 260 Steel Santos SP 251 Logistics Lapa PR 250 Construction

Materials

Rio Grande RS 245 Construction Materials

Logistics

Timóteo MG 243 Steel São Carlos SP 230 Mechanical Sorocaba SP 220 Mechanical Tubarão ES 215 Steel Caxias do Sul RS 200 Mechanical Congonhas MG 200 Steel Palmas PR 200 Energy Santo André SP 200 Telecommunications Telêmaco Borba PR 200 Paper & Pulp Camaçari BA 195 Petrochemicals Londrina PR 180 Auto Parts Telecommunications Mauá SP 162 Petrochemicals Campo Grande MS 156 Energy Cuiabá MT 155 Food Mogi Mirim SP 150 Mechanical Beverages São Mateus ES 150 Energy Brasília DF 130 Services Valinhos SP 130 Mechanical Uberaba MG 128 Chemicals Betim MG 117 Transport Mechanical Suzano SP 117 Chemicals Paper & Pulp Guarulhos SP 115 Services Aratu BA 110 Petrochemicals Anápolis GO 108 Textile Pacatuba CE 106 Beverages Jaguariúna SP 105 Electrical/Electronic Guarujá SP 100 Logistics

(continued)

CITY STATE INVESTMENTS (US$

Millions) SECTOR 1 SECTOR 2 SECTOR 3 SECTOR 4

João Pessoa PB 100 Textile Otacílio Costa SC 100 Paper & Pulp Pederneiras SP 100 Food Americana SP 92 Chemicals Textile Auto Parts Montes Claros MG 90 Textile Belém PA 81 Logistics Bragança Paulista SP 80 Food Paper & Pulp Tailândia PA 80 Food Paranaguá PR 78 Logistics Pelotas RS 77 Food Nova Friburgo RJ 75 Energy Barretos SP 72 Food Alfenas MG 70 Textile Itaguaí RJ 70 Logistics Ponta Grossa PR 68 Food Auto Parts Itu SP 65 Mechanical Palotina PR 65 Food Charqueadas RS 60 Steel Itabuna BA 60 Textile Itajubá MG 60 Electrical Materials Três Barras SC 60 Paper & Pulp Feira de Santana BA 54 Services Araxá MG 52 Chemicals Almeirim PA 50 Paper & Pulp Cabo Frio RJ 50 Services Campina Grande PB 50 Services Campo Mourão PR 50 Food Cantagalo RJ 50 Construction

Materials

Conde PB 50 Mechanical Guaíba RS 50 Paper & Pulp Sources: Coluna Angela Bittencourt (Investnews), newspapers and magazines, state planning departments. 4. Conclusion Despite the uncertainties caused by the Asian crisis, new investments in Brazil

point to sustained growth of the Brazilian economy following the Real Plan. After

an initial period when economic stabilization and the fall in inflation provided a

favorable environment for the implementation of investment projects, most

notably in industries and services associated with the general increase in

incomes, the economy entered a phase in which the conditions for sustainable

growth were consolidated.

In this way, 1996 was characterized by announcements of investment plans in

the mechanical, electrical/electronic, food and beverage sectors, as well as in

service sectors related to leisure, such as hotels, shopping malls and theme

parks. Most notable in 1997 were intentions to invest in petrochemicals,

chemicals, steel and paper and pulp, most notably in capacity expansion,

removing the risks that economic growth within Brazil will be impeded by

bottlenecks in the supply of raw materials.

Above all, however, the sharp rise in investment in infrastructure will underpin the

changes in the structure of production and distribution, and will guarantee the

competitiveness of Brazilian products against foreign ones. Proposed

investments in energy, transport and sanitation increased by 72% by comparison

with 1996, already a year with extremely promising growth prospects, on the part

of both the public and private sectors.

From a regional point of view, proposed investments announced in 1997

strengthen the conclusions drawn from an analysis of announcements made in

1996. The hypotheses that industry is decentralizing away from the city of São

Paulo, and that the production and distribution axes are being extended towards

the North East and South are in agreement with the sharp increases in

announced investments in the states of Paraná, Rio Grande do Sul, Bahia and

Ceará. To this outlook may be added the possibility of economic recovery in the

state of Rio de Janeiro, and the continuing growth of Minas Gerais.

Many small- and medium-sized municipalities also face a probable increase in

their local economies, since the direct and indirect effects of investments of over

US$ 5 million are highly significant, given that 185 municipalities were mentioned

in the announcements. In addition, many infrastructure announcements involve

several municipalities at once.

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