GRAB BAG OF GOB INDUSTRIAL POLICY MEASURES

UNCLAS SECTION 01 OF 04 BRASILIA 001307

SIPDIS

NSC FOR M DEMPSEY
USDA FOR FAS/FAA/ITP, U/S PENN AND FAS ADMINISTRATOR TERPSTRA
USDOC FOR 4322/ITA/MAC/WH/OLAC/WBASTIAN/JANDERSON/DMCDO UGALL/
ADRISCOLL
USDOC FOR 3134/USFCS/OIO/DDEVITO/EOLSON
TREASURY FOR OASIA/SEGAL
PLS PASS TO EXIM FOR A FOLEY
PLS PASS TO USTR FOR SCRONIN, LYANG, BPECK

SENSITIVE

E.O. 12958: N/A
TAGS: EIND ECON EINV ETRD KIPR PGOV BR
SUBJECT: GRAB BAG OF GOB INDUSTRIAL POLICY MEASURES

Refs: A) Brasilia 1098 B) Brasilia 661

SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY.


1. (U) Summary: As promised, Minister of Development,
Industry and Trade (MDIC) Luis Furlan unveiled a huge composite
of measures under the umbrella of Industrial, Technology and
Foreign Trade Policy (PITCE in the Portuguese acronym) on March

31. A grab bag of recycled programs, financing and tax
incentives as well as new councils and government agencies, the
PITCE comes with promises to modernize, restructure, and
streamline the broken pieces of government that hamper
industrial growth. Attractively wrapped in technological
innovation, the PITCE offers something for everyone (plus a
little extra for the four strategic sectors of semiconductors,
software, pharmaceuticals and capital goods) while attempting
to appear sufficiently different from the discredited
industrial policies of Brazil's past. Fiscal constraints
necessarily limit the viability of the various options, but the
GoB has already budgeted R$ 550 million (US$ 183.3 million) for

2004. Furlan and his deputies insist that PITCE is not static
and will be altered when necessary to fit the country's
development needs. Their assertion parallels Itamaraty's often-
voiced reluctance to commit to any multilateral trade
obligations that would limit GoB flexibility in this sphere.
End Summary.

Everything But The Kitchen Sink
--------------


2. (U) On its web site, MDIC defines over 50 industrial policy
measures under the headings of a) industrial modernization, b)
foreign markets & competitiveness, c) product, process, and
management innovation, d) strategic options for semiconductors,
e) software, f) capital goods and g) pharmaceuticals, h)
harbingers of the future, i.e. biotech and nanotech i)
strengthening small and medium enterprises, j) strengthening
the national system of innovation, and k) creating a favorable
environment for industrial development. Each listing includes
a definition of the measure, a goal and a responsible
government entity to lead the effort. With such broad
parameters, existing programs are easily folded, or slightly
modified to fit, into the PICTE.


3. (U) Under foreign markets and competition, export-promotion
publicity campaigns executed by the Ministries of Tourism,
Culture and Foreign Relations constitute a specific measure.
The program "Brazil Exporter," launched in November 2003 by
MDIC and also a PICTE measure, is itself a collection of
assistance efforts aimed at getting small businesses to export
via training, improvements in product design, and greater
access to credit. The PICTE broadens the Brazil Exporter
program to include specific measures for Brazilian states
underrepresented in the export market as well as a new drawback
system that would partially reimburse import duties on goods re-
exported or used in manufacture of exported goods. Expanding
the application of special computerized customs procedures to
include semiconductors, and efforts to reinvigorate the
metrology network and certification programs under the
supervision on INMETRO (The National Institute of Metrology,
Standards and Industrial Quality) for paper, cellulose and
furniture industries, exemplify the relatively low-cost PICTE
goal of redirecting the efforts of bureaucratic structures to
accommodate sectors the GoB believes have greater export
potential.


4. (U) Modernizing customs policies and procedures,
facilitating the opening and closing of businesses, creating
MDIC-led competitiveness forums for biotechnology and
franchising, as well as development of a broad extension
service designed to assist smaller businesses to export their
products, typify the horizontal measures that account for much
of the PICTE's efficiency and transparency goals. The plan
also calls for installation of foreign trade and investment
attraction kiosks within the international branches of the Bank
of Brazil, as well as the creation of five distribution and
logistics centers overseas to support the efforts of small and
medium-sized export businesses.


5. (U) The PICTE spawns more policymaking, calling for the
development of specific industrial-policy programs for
nanotechnology and biomass. The PICTE prioritizes the passage
of several bills including innovation legislation, which would
create a legal framework for privately conducted research to be
funded through government resources and, in some cases, using
government labs. Passage of a bill (1787/96) protecting the
intellectual property of lay-out designs of integrated
circuits, a TRIPS requirement that has lain dormant in the
Brazilian Congress for several years, is now an objective of
the Lula administration. Digital inclusion and the free
software movement also figure in the policy. Incentives will
be designed for the development of software solutions using
open code, and the GoB plans to add 30,000 to the network of
computer-using small businesses by 2007.

Potentially Affecting the Bottom Line
--------------


6. (U) At least eight of the PITCE measures are concrete tax
or concessional financing incentives, the most broad being the
"Modermaq" program which offers fixed-rate 5-year financing for
up to 90 percent of the sale price of industrial-equipment
purchases. In addition to Modermaq, the PICTE includes a
reduction of the import tax on some capital goods without
locally or Mercosul-produced equivalents. (Note: Brazil
grants case-by-case reduced tariff rates on specialized capital
goods not produced locally.) This reduction of the exceptional
tariff rates from 4 to 2 percent for goods produced within
Mercosul and to zero for goods not produced within Mercosul
began with the implementation of a resolution in February 2004.
The GoB characterizes the equalization of the COFINS (social
security system contribution) tax on imports and exports
(reftel A) and the gradual elimination (starting with a 30
percent rate reduction in 2004) of the industrial production
tax (IPI) on equipment destined for productive activity as
PICTE measures as well. A Presidential decree (no. 4,928/03)
of December 2003 permits reductions in the calculation of the
net profit taxes (CSLL) for businesses that invest in
technological research and product development.


7. (U) The meat of the benefits for the four strategic sectors
are Brazilian Development Bank (BNDES) lines of credit for
software marketing and export; pharmaceutical production,
research activities, business incorporation, acquisition and
fusion; and the purchase or production of made-to-order capital
goods. The line of credit for semiconductor production will
come from the Ministry of Science and Technology's (MCT) FINEP,
the Ministry's financing arm for studies and projects linked to
sector specific funds. 2004 financing under these credit
schemes ranges from R$ 10 million for chips to R$500 million
for pharmaceuticals and capital goods.

More or Less Bureaucracy?
--------------


8. (U) The PICTE calls for the creation of a National Council
of Industrial Development as well as a Brazilian Agency for
Industrial Development. While both are to be organized by MCT
and MDIC, the Council would bring together government, business
and labor to help define policy directives, and the Agency
would concentrate the execution of policy objectives in one
government organ. In addition, the PICTE envisions a one-stop-
shop for potential investors that would also develop the agenda
for sector-specific investments. Called the "Special Room for
Attracting Investment," this permanent group directly linked to
the Presidency would bring together representatives of the
Ministries of Development, Foreign Relations, Finance,
Planning, Mines and Energy, Agriculture, Science and
Technology, Tourism, and the Civil Household.

Government-run Labs
--------------


9. (U) Several PICTE objectives aim to create new public
laboratories, and to modernize existing ones. While several
are specific to the pharmaceutical sector, including a new
national factory for the production of blood tests and vaccines
and a laboratory for nuclear medicine research and production,
others would focus on metrology and biotechnology. A planned
national public laboratory for chemical metrology would
establish a certification framework to judge the purity of
chemical products, and a national laboratory for material
metrology would set national standards for building materials
such as ceramics and carbon fiber products. The National
Laboratory of Industrial Technology will develop projects and
promote research in applied micro and nantechnology in
partnership with businesses and the function of the
Biotechnology Center of the Amazon, inaugurated in 2002, will
be strengthened to better assist businesses with sustainable
harvesting of biotech production for commercial purposes. The
policy recognizes that bringing successful innovations to
market will require strong intellectual property protection,
especially in the target areas of pharmaceuticals, software,
nanotech, and biotech. Therefore, the restructuring of the
Brazilian Patent Institute (INPI) and improving the regulation
of ANVISA, the Brazilian Sanitary Surveillance Agency, are key
PICTE measures that require further elaboration (septel).

Comment
--------------


10. (SBU) The PICTE is nothing if not ambitious in scope, and
it endeavors to encompass parts of the GoB's total development
agenda, even social priorities in health and education through
digital inclusion and expanding production at public labs.
Inclusive, modern, nationalist, populist, this policy offers
something to every constituent. By promoting industrial growth
and efficiency via incentives to invest in new technology and
export, particularly high-value added goods and services, the
real prize the Lula administration seeks is job growth.
Fostering cutting-edge technological development in the
innovative sectors of the future and correcting bureaucratic
bottlenecks is the icing on the cake that appeals more to the
business than labor crowd.


11. (SBU) Above all, the set of measures which Lula's GoB is
cumulatively presenting as its industrial policy is manifestly
crafted to avoid significant new budget outlays or adverse
policy impact. The designers of the PICTE creatively aim to
accomplish its specific goals with minimal fiscal distress,
chiefly by re-modeling existing structures and supplementing
the energy of the private sector. While there are some clear
import-substitution goals, especially in pharmaceuticals,
petroleum and gas production, the plan introduces no overtly
protectionist quotas or tariff hikes. Those measures that
require substantial public investment like the creation of new
public laboratories may necessarily be longer-term goals,
despite Brazil's world-class research capabilities, due to the
tight fiscal environment. MDIC's Secretary for Production,
Carlos Gastaldoni has frankly characterized the PICTE to us as
part standard operating procedure and part wish list. He
considered the Modermaq program as the most significant in
short-term impact, characterizing the access to capital at a
fixed rate as one of the biggest hurdles small Brazilian
businesses face. He noted that the strong emphasis on
technological innovation should help guarantee a dynamic policy
that can respond to industry's evolving needs.


12. (SBU) The GoB's industrial-policy ideology has a trade-
policy dimension. Lula's administration considers its freedom
to intervene with government supports as potentially essential
for Brazil's industrial progress. Any proposal - presented in
the context of free trade or not -- that might hem in this
ability is rebuffed as an effort to deny an indispensable
right, a right that, GoB interlocutors often remind us, more
developed economies have freely exercised in the past.
Brazilian recognition that the positives and negatives of
globalization have significantly altered governments' toolkit
of viable options plainly influenced this leftist GoB's
supposedly improved version of national `industrial policy.'
The result aims to be a hybrid applicable to Brazil's local
realities, but also compatible with existing trade commitments.
In practice, its impact in the internal sphere is likely to
remain muted. There is far too little in GoB coffers to
significantly subsidize chosen industries and too much reliance
on trade earnings for this GoB to repeat wholesale the statist
policy errors of the nation's 1950s'-1970s' past. For current
and future trade negotiations, however, industrial policy goals
will continue to limit what the GoB views as in its interest
for further liberalization in sectors such as services,
government procurement, investment and IPR.

HRINAK