UNCTAD - WORLD BANK TRADE FACILITATION SEMINAR GENEVA, MAY 13th, 2004 Brazil Programmatic Loan for Sustainable and Equi

1. UNCTAD - WORLD BANK TRADE FACILITATION SEMINARGENEVA, MAY 13th, 2004Brazil Programmatic Loan for Sustainable and Equitable Growth Paulo Guilherme Correa Team Leader Finance, Private Sector and Infrastructure Latin America and the Caribbean World Bank

2. UNCTAD/World Bank -Trade Facilitation Seminar The Country Assistance Strategy Provide support towards a more equitable and sustainable Brazil, built on a foundation of good governance through … … four sets of programmaticadjustment loans supporting each of these areas. The Programmatic Adjustment Loan: • No fiscal Impact • (Some) External Financing • Supports the design and implementation of a specific agenda of policy reform (technical advice & consensus building) • International Reptuation • TALs

3. Source: Sima Source: Sima Source: Sima Source: PPI Database -World Bank UNCTAD/World Bank -Trade Facilitation Seminar • Significant progress in: • The Social Areas -- Education and Health – through important policy changes; • Structural reforms in Infrastructure Industries; • Macroeconomic Stabilization ... Background: The FHC years (1994-2001)

4. UNCTAD/World Bank -Trade Facilitation Seminar Background ... And yet a difficult heritage. High debt to GDP ratio High real interest rate Source: IMF Source: Brazilian Central Bank Low GDP Growth High unemployment levels Source: Sima Source: Loayza, Fajnzylber and Calderón (2002)

5. UNCTAD/World Bank -Trade Facilitation Seminar Background: Lula election in 2002 (53 million votes) expressed: • The need to grow and generate employment (2.7 million unemployed) … • … within a tight fiscal situation and poor external financing conditions (high risk by external markets)… ... leading to: • Superavit (2002) - R$ 52.4 bi(4.06% GDP) • Domestic Interest Rate: 25.5% p.y. • Pension Reform Bill • Tax Reform Bill Elections Source: JP Morgan

6. UNCTAD/World Bank -Trade Facilitation Seminar Growth and the FPLSEG: The Growth Agenda Despite structural reforms, low trade integration, poor business environment, limited financial intermediation, and insufficient technology performance. Source: Sima, Brazil Jobs Report, Foreign Inestment Advisory Service and USPTO.

7. UNCTAD/World Bank -Trade Facilitation Seminar Growth and the FPLSEG (contd) Patents Low investment Patents Granted in the US Source: Sima Source: USPTO Low Productivity Source: Sima

8. Loan Overview • This adjustment loan of US$ 505 million is part of a broader program to support an specific set of microeconomic measures and institutional reforms, that will foster growth and employment generation in Brazil through increased investment and productivity. • This first loan will support four main objectives: • reducing logistics costs, encompassing multi-modal transport planning, customs, ports, and roads; • improving the business environment, including infrastructure regulation, competition policy, barriers to entry, and the framework for corporate insolvency and creditor rights; • enhancing financial system efficiency and depth (including long-term credit, insurance, and venture capital), and • improving Brazil’s capacity to transform knowledge into productivity gains (through the innovation system). • Subject to progress in the implementation of these measures, a second and loan and third loan are envisaged adding to US$ 1 billion in the next 4 years.

9. UNCTAD/World Bank -Trade Facilitation Seminar Loan Overview (Architecture) • The reforms supported represent a coherent set of measures of sufficient breadth and depth to have a significant impact on growth, stability, and poverty reduction. • The package is focused on win-win reform areas to leverage the impact of the remaining political capital. • These form a robust subset of a longer list of growth-oriented measures on which the Government is acting, including measures to reduce tax distortions, improve contract enforcement, deepen trade integration, and strengthen labor markets.

10. UNCTAD/World Bank -Trade Facilitation Seminar Growth, Trade and Logistics Costs in BrazilPoor trade integration although improving in recent years … Source: Sima

11. . … even though tariffs have not being particularly high (un-weighted tariff rates in percentage terms)

12. Logistics Costs as a share of GDP Source: Sima UNCTAD/World Bank -Trade Facilitation Seminar Logistics Cost in Brazil Logistics costs in Brazil are estimated at about 20 percent of GDP, almost twice the level in OECD countries… ….affecting trade integration and regional development within Brazil.

13. Source: Sima UNCTAD/World Bank -Trade Facilitation Seminar Logistics Cost in Brazil • Inventory and Warehousing costs are the main individual cause for the high logistics costs ... • ... accounting for almost 40 percent in the region. • Inventory costs are proportional to interests rates, which have remained high in the region, particularly in Brazil. But inventory levels in Brazil and many other developing countries are typically twice as high for final products and three times as high for raw material as in the United States.

14. Table 2Modal Shares in Total Output and Expenditures in 1999 Output billion tku % Expenses $million % Rate $/000’ tku Air 2.2 0.1 292 0.8 130 Costal shipping 100.0 6.5 753 2.2 8 Pipes 33.1 2.1 102 0.3 3 Rail 140.8 9.1 1,111 3.2 8 Truck 1,271.2 82.1 32,766 93.6 26 Total 1,547.4 100.0 35,025 100.0 19 UNCTAD/World Bank -Trade Facilitation Seminar Logistics Cost in Brazil • Transport and transshipment costs represent about a third of logistics costs in Latin America. • Brazil’s domestic freight transport market has in recent decades been dominated by the trucking industry ... • ...which accounts for almost 80 percent of the demand for transport and is essencially unregulated. Source: de Castro, N., (2001) “Freight Transportation and Logistics in Brazil: An Overview.” • Following privatization, railways have been increasing their share of traditional markets (particularly the grain market) but still unable to compete with trucks.

15. Brazil China India Malaysia Imports: Average 13.8 7.5 10.4 3.4 Longest 32.4 12.2 21.6 7.4 Exports: Average 8.4 5.5 5.1 2.6 Longest 16.9 8.1 9.3 5.1 UNCTAD/World Bank -Trade Facilitation Seminar Logistics Costs in Brazil Table 1Port transit times compared (days) • The ongoing reform of the ports system has led to significant reductions in the port cots and tariffs…. But labor costs in many Brazilian ports remain high… Source: World Bank, Investment Climate Assessments … as well as transit times.

16. Source: Os Problemas da Empresa Exportadora Brasileira - CNI UNCTAD/World Bank -Trade Facilitation Seminar Logistics in Brazil • Customs and related administration costs represents more than 10 percent of operating costs average. • Including losses and insurance, customs and administration account for 30 percent of the firms’ logistics costs in the region. • Brazil’s customs procedures and practices are reported as the single most important obstacle for the expansion of Brazilian exports, according to the business community .

17. Days to clear customs-- Imports Brazil China India Bangladesh Average 14.0 7.9 7.1 11.7 Longest 32.0 12.5 12.8 23.2 Days to clear customs --Exports Average 8.7 5.4 5.4 8.8 Longest 16.8 8.0 8.0 14.0 UNCTAD/World Bank -Trade Facilitation Seminar Logistics in Brazil • Customs (Based on a diagnostic prepared for the project - full report in Project Files) • Outdated Customs procedures (further simplification needed, as for example consolidating export declaration and export register). • Insufficient equipment (software and hardware), despite recent progress with Siscomex and Radar (further automation still needed) • Excessive number of inspections, despite some recent progress (rationalization through risk management needed). • Poor training of inspectors. • Excessive emphasis on tax collection to the detriment of trade facilitation.

18. UNCTAD/World Bank -Trade Facilitation Seminar Logistics in Brazil • Customs-Selectivity System for Custom Release (Siscomex) • On line system for custom release (import and export). Customs releases are processed in Siscomex and results communicated to the trader. The system offers 4 modalities of customs release --immediate, document review and/or physical inspection and fraud. • The selection process takes place during specific periods of time depending on the customs port, varying from every two hours to four times a day (not 24 hours). The built-in time frame gives the customs officers time to perform their own analysis independent of the system’s results, increasing arbitrary decisions. • There is no link yet to the Radar System -- that collects importer/exporter profile data and inspection results -- nor to the Merchant Marine System (to capture vessel transportation data), making it more difficult to develop modern risk management systems. • In 2002 (first quarter), at least 27% of imports were physically inspected and only 51% of exports were automatically released.

19. Roads, paved (% of total roads) 1994 1999 var Brazil 8.1 9.6 19% Chile 13.8 18.9 37% Latin America & Caribbean 23.8 24.3 2% Indonesia 53.8 46.3 -14% Korea, Rep. 77.8 74.5 -4% Philippines 16.6 20.0 20% Thailand 94.7 97.5 3% OECD -- High income 86.0 88.0 2% UNCTAD/World Bank -Trade Facilitation Seminar Logistics in Brazil • Road network is relatively poor … • … and in bad conditions: • 3.4% of the production of non-exporting and 1.6% of exporting firms’ are lost annually due to transport failures , • while 1% of sales of non-exporting and 1.2 % of sales of exporting firms are annually lost in breakage. (Brazil- ICA, 2004)

20. Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Macroeconomic Management and Overall Growth Program Definition - Adequate macro-economic framework - Satisfactory Growth Program and Publication of White Paper Reduce Logistics Costs 1. Improve Customs - - - - Customs Reform Strategy Selectivity level cut from 40% to Clearance systems and Average gross release time Effectiveness approved 30% procedures streamlined and decreased from 5 to 3 days adapted to expanded Customs’ (imports) and from 2.0 days to 1.0 mission and selectivity cut to 20% day (exports) - Average net release time cut by 20% 2. Reduce Port Costs - - - Productivity improvement plan Port authorities restructured and Average cargo transit time and Delays approved productivity plan implemented through port cut from 13.8 to 10 days for imports and 8.4 to 5 days for exports; average container handling cost cut by 10% 3. Reduce Transport - - - - Law reorganizing Federal Output based Road network classification law 50% of road network in good Costs on Federal Road Transport Administration approved maintenance/rehab contracts on approved condition (as evaluated by the Network and implemented 30% of federal road network International Roughness Index), - - - - 9% of non-trunk roads on Further 12% of non-trunk roads In addition to road concessions Average road transport costs remaining federal network on remaining federal network existing in 2003, further 5% of the decreased 5% transferred to state management transferred to state management remaining federal network under concession - Total of 25% of non-trunk roads on remaining federal network transferred to state management 4. Foster Multi-modal - - Geographical restructuring of 10% increase in non-road Transport railway concessions underway transportation share UNCTAD/World Bank -Trade Facilitation Seminar The First Programmatic Loan for Sustainable and Equitable Growth (FLSEG) – Reform Program (1of 4)

21. Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Improve the Business Environment · · · · 1. Strengthen Infrastructure Creation of land and water transport PPP Law approved by Congress Law on Career Development Plan 5 Public-Private Partnerships Regulation regulatory agencies (ANTT and for Regulators approved by Congress projects approved ANTAQ) · · PPP Law submitted to Congress Draft law on Career Development Plan for Regulators submitted to Congress · · · 2. Enhance the Competitive Amendments to Antitrust Law Amendments to Antitrust Law Increase in number of “hard-core” Environment reviewed by inter-ministerial committee approved by Congress cartel cases with national impact successfully prosecuted · Pre-merger notification made mandatory · · · 3. Simplify Entry and Business Constitutional amendment approved Law regulating the unification Time needed to register a firm Operation to, inter alia, unify tax collection at of tax collection approved by decreased to 76 days in pilot cities federal, state and municipal levels for Congress micro and small companies · Simplified procedures for companies’ registration adopted in some cities · Export norms simplified by MDIC · · · · 4. Strengthen Corporate Insolvency New Bankruptcy Law and Tax Code Bankruptcy Law enacted Bankruptcy law becomes effective Increased speed of recuperation / Framework Amendment passed by Lower House resolution and higher recovery value of insolvent enterprises · · Amendment to Tax Code enacted Reduced spreads in financial intermediation · Preparation program initiated for judiciary and courts for new law UNCTAD/World Bank -Trade Facilitation Seminar The FLSEG – Reform Program (2 of 4)

22. Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Enhance the Efficiency and Depth of the Financial System · · · 1. Increase Financial Draft Complementary Law, Effectiveness of Banking Examination of market Competition extending application of Competition Law conduct issues in banking sector Antitrust to Banking, submitted by competition authority to Congress initiated · Reduced bank administrative costs components in bank spreads · · · · 2. Sound Fundamental Constitutional Amendment Key legal initiatives for Key legal reforms in financial Legal framework and Legislation and Systemic (Article 192) approved financial reform presented to system voted by Congress physical infrastructure for Risk Control Congress financial system modernized; risks reduced and access to · · · New large value payments Evaluation of residual risk in Second phase (retail) financial services expanded. system installed and operating the payments system completed payments system reform successfully launched. · Blueprint prepared for second phase payments reform (retail payments) · · · 3. Mobilize Long-Term Regulations strengthened on Extend permission for Accelerated expansion of Resources in Insurance asset allocation, eligibility, provision of reinsurance to new insurance industry assets on Sector registration, custody and audit entrants sound basis requirements enhanced · Enhanced service providers in reinsurance · · · · 4. Improve Efficient Provisional law and Evaluate impact of new Passage through Congress of Bank accounts Financial Access for the Resolutions passed to expand microfinance measures in terms new factoring law. (sight+savings) expanded from Poor and for SMEs financial access at banks of cost, outreach and impact. 95 (end 01’) to 103 million by 2006. · · · Introduce small claims courts Enhanced use of positive Increased credit availability for small credits information for credit reporting on sound footing to small borrowers · · Establish interlinkage of Reduction of tax write offs credit registries for uncollected small claims UNCTAD/World Bank -Trade Facilitation Seminar The Reform Program (3 of 4)

23. Area/Policy Prior Actions Key Next Steps Medium-Term Actions Expected Outcome Indicators Increase Innovation Capacity to Transform Knowledge into Productivity Gains · · · 1. Increase Public R&D Innovation Law sent to Innovation Law approved by Number of technology Effectiveness Congress Congress transfer contracts between public universities/research centers and the private sector increased by 20% · · · 2. Foster Private Innovation Regulation of Fundo Verde- Evaluation completed of 10 percentage point increase Amarelo and other mechanisms operations and management in privately funded R&D share to support private R&D procedures of Sector Funds and in total R&D expenditures introduced FINEP · · · 3. Create Innovation in Kyoto protocol ratified, ICCC ICCC approval and US$100 million in sales of Environmental Markets operational, and CDM project monitoring systems financially carbon credits approval mechanism published self-sustaining UNCTAD/World Bank -Trade Facilitation Seminar The Proposed Loan (4 of 4)

24. Implementation Arrangements • A US$ 12 million “Programmatic” TAL started to be negotiated this morning in Brazil, evolving three main counter-parts: Ministry of Finance; Ministry of Transport and Ministry of Science and Technology. • Creation/ revitalization of three inter-ministerial commissions/ working groups: • Economic Policy; • Infrastructure; • Science and Technology • Increased dialogue with the Private Sector through the National Council of Social and Economic Development (created in Lula’s Administration) and traditional business associations such as CNI. Possible creation of an informal steering committee.

25. Final Remarks:Documents that could be shared: Loan Document (with an annex on logistics). A Detailed Diagnostic of Brazilian Customs. EMAIL: PCORREA@WORLDBANK.ORGThank you.