BRAZIL'S STATE OF GOIAS: RIDING THE AGRICULTURAL

UNCLAS SECTION 01 OF 05 BRASILIA 000790 SIPDIS SENSITIVE NSC FOR DEMPSEY, CRUZ USDA FOR FAS/ITP/BFREEMAN AND FAS/COTS/PPACKNETT USDA FOR FAS/OA/BIG/PJOSEPH TREASURY FOR OASIA/SEGAL FED BOARD OF GOVERNORS FOR ROBITAILLE USDOC FOR 4322/ITA/IEP/WH/OLAC-SC SOUTHCOM FOR POLAD E.O. 12958: N/A TAGS: ECON EAGR SOCI EFIN EINV ETRD TBIO PGOV BR SUBJECT: BRAZIL'S STATE OF GOIAS: RIDING THE AGRICULTURAL BOOM This cable is Sensitive but Unclassified, please protect accordingly. ¶1. (U) Summary. The central Brazilian state of Goias, from which the Federal District of Brasilia was carved 47 years ago, has grown above the average for Brazil over the last several years. The state's economy, fueled primarily by agriculture and an emerging agribusiness, has a growing awareness of the importance of exports. Business reps welcomed the market opening that FTAA would represent, but were wary of U.S. competition and of perceived U.S. protectionism, particularly of agricultural products. Beyond agriculture, the state is searching for a new strategy to attract out-of-state businesses, since tax exemptions are supposed to be phased out shortly under national level tax reform. While the state is heavily in debt to the federal government, above-average revenue growth has cushioned the burden of debt service. In conversations with Econoff, even working-class Lula voters lauded second- term governor Marconi Perillo, from the centrist PSDB party. Perillo's youth and popularity give him potential for a future political role on the national level. Lula's trademark Zero Hunger ("Fome Zero") program has no resonance here, as effective state-level programs seem to be adequately addressing such social needs. Despite discomfiture by some over squatter land invasions by landless activists (MST),the most commonly cited social issue was the need to deal with immigrants from other parts of Brazil to this island of relative prosperity. End Summary. ¶2. (U) Econoff traveled March 16-17 to Goiania (population 1.2 million),the seventy-year-old capital of the Brazilian state of Goias, an agricultural state in central Brazil. Goias, while one of the larger Brazilian states in land area, has a population of only 5.3 million, much of it rural. Its booming agriculture and agribusiness based economy, however, is exemplary of one of the fastest growing sectors of Brazil's economy, and one that is beginning to affect world markets. Goias' efforts to deal with its state debt while finding creative ways to finance infrastructure investment and deal with social issues also reflect debates and trends at the national level. Goias is also (in)famous as the source of a significant proportion of Brazilian illegal immigrants to the U.S. Economy -------------- ¶3. (U) Goias is riding the wave of Brazil's agricultural boom. In about twenty years, according to state Planning Secretary Humberto Tannus, Goias has become an agricultural SIPDIS powerhouse, introducing a multitude of new cash crops into what had been a sleepy rural economy dominated by family farms. The state is now Brazil's leading producer of sorghum and tomatoes and among the leaders in soy, pineapples, corn, beans, chicken, beef, dairy and grains production. Tannus put the state's growth rate last year at about 3%, according to preliminary data. This compares very favorably with national GDP growth of minus 0.2%. In fact, state data show growth rates consistently above the national average, with a recent peak of 5% in 2000. ¶4. (U) According to the President of the Agriculture and Animal Husbandry Association (FAEG),Macel Caixeta, there is a growing diversification of agricultural production into other tropical fruits as well. Tannus said exports, primarily of agricultural products, reached USD 1.1 bn last year, up from a few hundred million dollars just two years before. The state's biggest export market is now China, which just overtook the Netherlands as the primary destination for the state's soybeans and other exports. Goias' overall economy as a whole is becoming more diversified, with industry (much of it agribusiness, but including mining and manufacturing) making up about 34% of the economy, agriculture accounting for about 18% and services accounting for the remainder. The state is now the third leading producer of clothing in Brazil, primarily for the domestic market. ¶5. (U) Investment Department head Sergio Castro explained that Goias has been an aggressive user of tax incentives to lure business to the state and claimed that the program has had particular success in attracting agribusiness and distribution operations, as well as some heavy industry: Mitsubishi has an assembly plant in the state, and Daewoo reportedly is considering establishing a plant as well. Commerce Secretary Ridoval Chiareloto explained that the Secretariat was busy negotiating 500 11th-hour tax incentive SIPDIS agreements before the deadline for their elimination imposed by last year's tax reform. ¶6. (U) Chiareloto and Castro claimed success in attracting players in the pharmaceutical industry to a pharmaceutical "development pole" in the city of Anapolis, not far from Brasilia. They said U.S. multinational Johnson's was moving its distribution center for all of Brazil to centrally located Anapolis, attracted in part by the creation of a "dry" port, complete with airport, railroad and truck terminals and bonded warehousing facilities. Brazilian pharmaceutical companies are already producing generics in Anapolis, they said, and European firms are also considering operating there. Planning Secretary Tannus hopes that the Brazil's to-be-announced federal-level industrial policy, which lists pharmaceuticals as one of four priority areas, will also benefit Anapolis. FTAA -------------- ¶7. (U) State Commerce Secretary Chiareloto told Econoff that farmers and businesses in the state welcome the opening of new markets that an FTAA would represent, but said Goianians are wary of U.S. protectionism in agriculture, the state's principal exports. FAEG's Caixeta was more positive, saying that his association sees the U.S. as a "partner" in the FTAA process; he predicted that the FTAA would become a reality soon. "O Popular" editor Cordeiro, perhaps a more detached observer, said his paper's polling indicates that there is not yet a fixed opinion on the FTAA among the broader public, because most Goianians are just awakening to the importance of exports. Public-Private Partnerships -------------- ¶8. (U) Most interlocutors are looking at the federal level public-private partnerships (PPP) effort as a useful tool to attract private investment in infrastructure. Planning Secretary Humberto Tannus noted that PPP-type arrangements SIPDIS have existed in Goias for some time on a piecemeal basis, primarily in the form of concessions. The new federal bill on PPPs would provide an organizing framework and useful guarantees. Goias has its own bill ready to be presented to the state legislature, which would combine into one framework these existing concessions, the state privatization committee (Conselho de Desestatizacao) and the new federal PPP effort. Tannus acknowledged that, under the Fiscal Responsibility Law, Goias' high debt level prevented it from giving budgetary guarantees to PPP projects, but claimed there are several potential workarounds. These include pledging to the PPP effort existing state assets (he mentioned two different stadiums), contributions in kind such as real estate, and commitments to construct complementary infrastructure (roads, power lines, etc). Tannus claimed some interest from companies that work infrastructure projects. FAEG's Caixeta welcomed any effort that improved rural infrastructure, citing railroad development in particular as a key way to bring down transportation costs. ¶9. (U) Transportation Agency chief of staff Valdir Marques told Econoff that the lack of investment by the federal government in maintaining federal highways was causing dramatic increases in traffic on state roads. State roads, however, were designed primarily as feeder roads and were bearing up poorly under the increased loads, particularly of heavy trucks laden with the state's agricultural produce. The state began in 2002 a seven-year, USD 240 million-road repair program with an Inter American Development Bank (IADB) loan. The program will rehabilitate 3000 kilometers of paved roads and pave an additional 1000 km of currently unpaved roads. Using private contractors to build and maintain the road network, a relatively recent innovation, has reduced costs by 50%, according to Marques. Marques claimed only several hundred kilometers of state roads are in bad condition (with several thousand more in fair condition). Anecdotally, taxi drivers complained to Econoff of a plethora of "awful" stretches of highway, both federal and state, and noted that unusually heavy rains this summer had washed out a key bridge, requiring a one hundred kilometer detour in one case. GMOs and Free Range Cattle -------------- ¶10. (U) State Commerce Secretary Chiareloto and Investment Department Head Castro said the state is following closely the national debate on GMOs. Since much of the state's soybean and grain crops are sold to European markets, there is a fear of losing market share to other countries or regions that can claim to be GMO-free. They suggested that Brazil, given its continental size, could solve the problem using a regional approach. Some regions could adopt GMOs while others do not, thus maintaining market share in both segments. Extensive pasture in Goias means that ranchers have long raised free-range cattle, which are not given animal feed, according to both Chiareloto and FAEG's Caixeta. They saw demand for the state's free-range cattle (boi verde) jump since the BSE scares in the UK and the U.S. They expect continued strong demand in this market niche. Debt and Budget -------------- ¶11. (U) Although Goias is the fourth most heavily indebted Brazilian state, with an income to debt ratio of 240%, to a surprising extent this was a non-issue during conversations with the state finance secretariat. As was the case with many other Brazilian states, the Federal Government took over responsibility for most Goianian debt (and receives monthly payments from the state.) The state's revenue stream has been growing overall, reducing the sting of required debt repayments to the Federal Government. Indeed, the state has elected to repay 50 million Reals a month (15% of revenue),two percentage points above the minimum debt repayment level of 13% of revenue. The finance secretariat claimed that Goias was current on its debt payments and did not see any obstacle to continuing to pay down debt levels. Finance Secretariat Chief of Staff Guilherme Souza claimed further that much of Goias' indebtedness was not due to state fiscal mismanagement, but because it chose, as part of the negotiation with the federal government, to take on debt owed by state-owned parastatals (sewage and power companies were cited). This decision has left the parastatals free to take on new debt and thereby continue making critical infrastructure investments. Social Issues -------------- ¶12. (U) Almost to a person, Econoff's interlocutors cited immigration from other parts of Brazil as one of the state's most pressing problems. Dealing with this immigration has stressed social programs and budgets. The state nevertheless needs immigrants with skills to fill some of the jobs being created in agri-business. The editor of "O Popular", Isanulfo Cordeiro, cited the case of busloads of job-seekers that arrived after a story (in a competing newspaper) on vacant agribusiness jobs in Rio Verde, which hosts a large food-processing business, led by Brazilian company Perdigao. Cordeiro labeled the report 'irresponsible' for having omitted to state that the vacancies were for skilled workers. He said penniless local authorities in Rio Verde had to seek donations to "repatriate" the desperate unskilled jobseekers, many of whom had borrowed money to get to Rio Verde and had none to return home. Cordeiro assessed the quality of the state's educational system as reasonable, but noted it was of insufficient size to meet demand for skilled workers. Some private vocational training programs, funded by business associations such as FAEG, help address the problem, but are targeted at specific sectors. (Note: Rio Verde also hosts an Amcit Mennonite community.) ¶13. (U) FAEG's Caixeta said association members were alarmed at squatter invasions by the landless movement (MST) in some parts of Goias. He alleged that the "leftist" Lula government was openly supporting the MST. By contrast, he lauded Gov. Perillo's policy of not tolerating MST squatter invasions while trying to help the legitimately needy find housing. Perillo has an eye for social issues without being a socialist, said Caixeta. Planning Secretary Tannus enumerated a series of state-level social programs that combat hunger (a food-targeted stipend for families, and a people's restaurant, which provides balanced meals for one Real),help families keep their children in school (a targeted stipend),fight diseases with sanitation improvements at the household level, retrain unemployed workers, and provide micro-credit. One other program aims ultimately to reduce squatter invasions by helping the rural poor to build or improve their own housing, so long as they can prove their ties to the given region. "O Popular" editor Cordeiro lauded these programs to Econoff, noting that his newspaper's culinary column had published a favorable review of the one-Real restaurant. ¶14. (U) Lula's trademark "Fome Zero" program, Cordeiro added, has no resonance in Goias, because the existing state level program has been much more effective. Separately, Planning Secretary Cannus, implying some reluctance, said the state is still negotiating with the federal government how to marry up "Fome Zero" with the state's "Renda Cidada" (Citizen's Income) program, which provides food stipends as well as exemptions from water and power bills for the most needy. ¶15. (U) In a meeting with an association of small and micro entrepreneurs, several small business owners told Econoff that they struggle daily to deal with bureaucracy and inability to obtain credit. Expressing frustration, the owner of a small business involved in telecommunications said he often feels the time spent trying to obtain credit would be better spent simply on better managing his business. The president of the association complained that the government's micro-credit program for loans of 2000 - 3000 Reals, while available at excellent interest rates (6% annual),still required guarantees equal to 50% of the borrowed amount. A government-sponsored consultant to the association, Rodolfo Monteiro, said a study of small and medium enterprises (SMEs) showed that 40% of SMEs that could obtain credit never bother applying. Other obstacles to SME development cited by the group include the Byzantine requirements of the labor law and bureaucratic hassles. The association is thinking creatively about joint purchasing arrangements among members (e.g. for office equipment) to reduce costs through large volume purchases, as larger companies do. Comment -------------- ¶16. (SBU) Goias's economy, thanks to agriculture and agribusiness, is doing better than much of Brazil. It is clear, however, that the state is already coming up against infrastructure constraints that require substantial investment to de-bottleneck. The state's debt levels make that an impossible task for its public sector. And so, while it was clear that there is no love lost between PSDB Governor Perillo and Lula's PT-led federal government (which the PSDB on the national level opposes),Goias needs federal initiatives such as future PPPs and incentives for pharmaceuticals under the new industrial policy to attract new private investment in these areas. HRINAK