Identifier
Created
Classification
Origin
05RIODEJANEIRO19
2005-01-04 17:17:00
UNCLASSIFIED
Consulate Rio De Janeiro
Cable title:  

Brazil - Bahia State Growing Faster but Interior

Tags:  EINV ECON EFIN BEXP BR 
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UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000019 

SIPDIS

BUENOS AIRES FOR M.HAARSAGAR
STATE PASS OPIC FOR RGREENBURG, DMORONESE
STATE PASS EXIM FOR NATALIE WEISS, COCONNER
STATE PASS USTDA FOR AMCKINNEY
TREASURY FOR FPARODI

E.O. 12985: N/A
TAGS: EINV ECON EFIN BEXP BR
SUBJECT: Brazil - Bahia State Growing Faster but Interior
Still a Problem

Ref: 2003 Rio de Janeiro 1773

Summary
-------

UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000019

SIPDIS

BUENOS AIRES FOR M.HAARSAGAR
STATE PASS OPIC FOR RGREENBURG, DMORONESE
STATE PASS EXIM FOR NATALIE WEISS, COCONNER
STATE PASS USTDA FOR AMCKINNEY
TREASURY FOR FPARODI

E.O. 12985: N/A
TAGS: EINV ECON EFIN BEXP BR
SUBJECT: Brazil - Bahia State Growing Faster but Interior
Still a Problem

Ref: 2003 Rio de Janeiro 1773

Summary
--------------


1. While the State of Bahia has the sixth largest GDP in
Brazil and expected growth of 8.6% in 2004, the concentrated
nature of Bahia's economy - both in terms of geography and
industry - is a challenge for state authorities. In
response, the State has developed several special programs
designed to attract investment and address issues such as
poverty and infrastructure bottlenecks. The most obvious
success story to date is the Ford plant in Camacari; most
believe the state-conceded incentives were more than worth
it for the positive impact on the State's image alone,
allowing Bahia to attract future investments at a much lower
cost. As for the future, several new investments are
expected to come on-line in 2006 and tourism - while still a
relatively small part of the state's economy at 4% of GDP -
is on the rise. However, while these programs and
investments may help the coastal region, curing the ills of
Bahia's interior - and its consequent poverty - will not be
easy.

A Concentrated Economy Poses Challenges
--------------


2. While the State of Bahia has the sixth largest GDP in
Brazil (4.7% of the national GDP in 2002) and an estimated
growth of 8.6% in 2004, the concentrated nature of Bahia's
economy - both in terms of geography and industry - is a
challenge to overcome. The developed coastline relies on a
few sectors such as petrochemicals and agribusiness;
cellulose, petrochemicals and the automotive industry
account for 40% of the State's GDP. In the far western part
of the state, the economy resembles that of Brazil's center-
west - where soy is king - and is doing well; Cargill has a
presence there and irrigated fruit farming is on the rise.
However, Bahia's largely semi-arid interior is very poor and
is sustained primarily by transfer payments from the federal
and state governments, e.g., retirement payments and
automatic transfers to municipalities.


3. Curing the ills of Bahia's interior will not be easy

and, according to Bahia's State Development Agency
(Desenbahia) President Vladson Menezes, there is no
consensus among state economic authorities on an approach.
Menezes told Rio econoff that he thinks that the State
should try to stimulate what little economic activity
already exists in these places, i.e., fruticulture,
irrigated crops, cotton and castor oil. Castor oil could
take on more importance as Bahia's biodiesel program
(sponsored by the state and federal government) gets up and
running (Note: Bahia is the largest producer of castor in
Brazil, accounting for 80% of Brazil's national production.)

Long-Term Development Plans
--------------


4. Bahia's sound financial situation (ref A) and fiscal
adjustment program have enabled the State to develop several
programs designed to attract investment. The first program
was "Pro-Bahia," which began to offer fiscal incentives,
such as reduced or prolonged payment of ICMS taxes, as early
as 1991; at the time, Bahia was one of the few states that
could afford to engage in this so-called "fiscal warfare."
The Pro-Bahia program, combined with Bahia's proximity to
the southeast consumers, helped to attract various
investments throughout the 1990's. Over the last few years,
the program has progressed from a generic incentive program
to a targeted sectorally based program, and was used to
differing levels of success in developing an informatics
pole in Ilheus and an automotive sector in Camacari.


5. The State currently has a plan called Bahia 2020, which
is a statewide program for meeting certain Human Development
Index goals. Another key plan for the State's economic
development is "the State Plan for Transport Logistics,"
which is based on a study on the flow of goods throughout
the state and is meant to be a basis on which state economic
authorities can rationalize scarce resources to better
target infrastructure projects that will benefit the State
most. The idea is that the private sector would most
readily partner with the State in these priority areas, with
or without public-private sector partnerships (PPPs); Bahia
also has approved a law regulating PPPs.

Ford Plant Was Worth Every Penny...
--------------


6. The most obvious example of the success of Bahia's
incentive programs is the location of the Ford plant in
Camacari, Bahia, after negotiations broke down with the
state of Rio Grande do Sul and then Governor Olivio Dutra.
Most interlocutors in Bahia told econoff that the financial
sacrifice that Bahia made to attract the Ford plant was well
worth it for the positive impact on the State's image alone,
which should allow the State to attract future investments
at a much lower cost. In addition, the USD 1.9 billion
operation, which opened in Camacari in October 2001, has had
a considerable socioeconomic impact on the surrounding area,
exceeding initial expectations and creating 7,000 direct
jobs and 70,000 indirect jobs. (Reftel) The State also
received a Ford Design Center as a result of contractual
commitment for engineering services, bringing 400 engineers
from Sao Paulo and abroad. (Note: This is Ford's only
design center in Latin America; there are only four others
in the world.)


7. However, Bahia did "spend" a lot to attract the Ford
plant to Bahia, including conceding Ford a state-constructed
private port for 20 years, leveling the land, guaranteed
interest rate stability, some direct financing and tax
deferments, in addition to several public works required by
Ford for a minimum quality of life for its workers. The
burden got to be too much with the unforeseen spike in
interest rates in 2002 and 2003 and Bahia was forced to
"renegotiate" with Ford in 2003, essentially doing a bit of
number juggling and adjusting the payment calendar, which
allowed the State to evade mandatory spending and transfers
to municipalities with the stroke of a pen.

New Investments on Horizon
--------------


8. Indeed, Bahia's "business friendly" attitude seems to be
paying off in other areas, with several new investments
coming on-line in 2006. A newly announced Bridgestone tire
plant, which represents an initial investment of USD 270
million, should come online in 2006; a cellulose investment
in southern Bahia by Veracel in conjunction with a Swedish
company also is expected to come online the same year.
Additionally - to the annoyance of Rio state authorities -
Bahia will get a brand new shipyard 300-400 km south of
Salvador courtesy of the Bahian construction company
Odebrecht, which has won several contracts for the
construction of deep-water production platforms for
Petrobras.


9. That said, Menezes confided that he thinks that the
State still lacks a deliberate articulation of its
priorities. Jobs are a high priority for the State, yet
many of the large companies installed in Bahia do not create
a lot of local jobs; the State's principal industries
contribute 40% of the GDP but only 17% of the jobs in the
market. Menezes thinks the State needs to focus on the
creation of local Small and Medium Enterprises (SMEs) around
these "anchors" to employ more Bahians, adding that Salvador
has the highest unemployment (15.8%) of Brazil's six
principal metropolitan areas, according to the IBGE.

Despite Focus, Tourism Still in Initial Stages
-------------- -


10. State and city authorities alike also are focusing hard
on the potential economic impact of increased tourism,
despite the fact that it still represents a relatively small
part of the state's economy -- estimated at 4%-8% of the
State's GDP. (Comment: Menezes estimates the real number
is closer to 4% and blames the lack of English speakers and
qualified workers for the industry, as well as a lack of
advertising. End Comment.) That said, tourism is
definitely on the rise; spending by tourists was up 10% year-
over-year in the first 9 months of 2004 and there has been a
significant increase in the number of tourists traveling to
Bahia in the last 6-8 years. A number of joint ventures
between local and international hotels have raised the
overall quality level of lodging available; Menezes also
sees this as positive because he opines that Bahia will get
more attention from tourists as part of the information
channels of big hotel chains.


11. State authorities recently decided that the State
tourism agency was too focused on Carnival, to the detriment
of general tourism, and are refocusing efforts to attract
tourists all year round. Authorities also are focusing on
the Unites States' African-American community as a target;
Bahia has one of the most vibrant Afro-derived cultures in
the world and has a multimillion-dollar marketing campaign
aimed at African-Americans who want to get closer to their
African roots but may find Africa too distant, expensive or
dangerous. Bahia's state tourism agency estimates that 60%
of the 45,000 Americans who visited the region in 2002 were
African-American.

Atkins