FIESP AND CIESP HEAL RIFT, UNANIMOUSLY ELECT PAULO SKAF

UNCLAS SECTION 01 OF 04 SAO PAULO 000639

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E.O. 12958: N/A
TAGS: ECON ELAB ETRD EFIN EIND BR
SUBJECT: FIESP AND CIESP HEAL RIFT, UNANIMOUSLY ELECT PAULO SKAF
PRESIDENT OF BOTH SAO PAULO INDUSTRIAL ASSOCIATIONS


SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY


1. (U) SUMMARY: The Sao Paulo State Federation of Industries
(FIESP) almost unanimously reelected Paulo Skaf to a four-year term
as President. The Sao Paulo State Industry Center (CIESP) also
overwhelmingly chose Skaf to lead it, ending a three-year breach
between the two organizations. Skaf's election had the support of
122 out of 124 FIESP sectoral employer associations and 97 percent
votes of CIESP-affiliated small and medium-sized industrial
companies. Skaf is convinced that a minimum agenda for Brazil's
development should include structural adjustments that cannot be
postponed any longer. The agenda specifies fiscal and tax reform
that will lower public debt and reduce the tax burden on the
productive sector, reduce interest rates drastically, increase
infrastructure investments, and expand exports in a sustained
manner. Skaf expressed concern about the risk of repeat blackout in
the absence of adequate investment for electric generation. FIESP
is preparing a plan to produce energy from an alternative source
within two to three years. This energy is expected to come from
abundant sugar cane bagasse available at the sugar and alcohol
mills. Pressure from FIESP will continue on the Lula administration
for the implementation of a developmental policy not only of
interest to the productive sector but also to the society as a
whole. End Summary.

BACKGROUND
--------------


2. (U) Sao Paulo's powerful industrial associations, which account
for more than 40 percent of Brazil's industrial production and
nearly 34 percent of the country's GDP, are represented by two
bodies, FIESP and CIESP. The organizations have a symbolic
relationship, sharing the same board of directors, support staff,
and building. FIESP, a federation of 124 sectoral employer
associations founded in 1942, is the most influential industrial
organization in the country and is active in lobbying the GoB and
the Brazilian Congress to advance members' interests. FIESP also
acts as the bargaining agent for management in virtually all
sectoral labor negotiations. FIESP's budget for 2007 is estimated
at USD 500 million, contributed by the sectoral employer
associations. These funds also maintain and run two
industry-sponsored organizations: the National Industrial
Apprenticeship Service (SENAI),an educational organization for the
training, development and specialization of both semi-skilled and
skilled workers; and the Social Welfare Services (SESI) for industry
workers and supplementary health and education services for workers
and their families.


3. (U) The SENAI-SP system's 150 units enroll 700,000 students a
year. These students get free training in 45 technical-level
careers and 31 Industrial Apprenticeship courses. The system also
maintains four college-level courses, as well as continuing-studies
courses in the fields of graphics, mechatronics, fashion, and the
environment. The SESI-SP system includes 215 schools that boast an
enrollment of 190,000 students. It also promotes the so-called
"Global Action" initiative in partnership with Globo TV Network and
the Roberto Marinho Foundation. SESI-SP health services include
dental clinics, doctors' offices, infirmaries, laboratories and
mobile units. SESI manages programs on "School Health" and "Company
Health." It also promotes workers safety, health and rehabilitation
activities.


4. (U) CIESP, founded in 1928, has over 9,600 affiliated small and
medium-sized industrial companies. With an annual budget of about
USD 35 million, CIESP operates 42 regional offices that provide
associates with services in the areas of foreign trade, social
responsibility, technology, and infrastructure. CIESP also provides
regional support, legal advice and technical assistance to its
member companies.

HISTORIC VOTING AND REUNIFICATION OF FIESP AND CIESP

SAO PAULO 00000639 002 OF 004


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5. (U) On May 29, Paulo Skaf, 50, was re-elected President of the
Federation of Industries of the State of Sao Paulo (FIESP) and
elected for his first term as President of the Sao Paulo Industry
Center (CIESP) from 2007 to 2011. His new term will begin on
September 28. This time Skaf will serve as President for both of
Sao Paulo's most important industrial bodies after three years of
unprecedented internal mistrust and separation. Skaf's election was
not challenged by any other candidate for the job. FIESP'S
Electoral College, consisting of 124 sectoral employer associations,
voted almost unanimously for Skaf, giving him 96.7 percent of valid
votes. His victory in CIESP was even stronger, with 3,659 company
votes representing 99 percent of total valid votes. Although FIESP
and CIESP conduct separate elections with different sets of
electors, the two have always elected the same President, the only
exception being in 2004.


6. (U) Traditionally, the voting has been pro-forma, ratifying a
single, agreed candidate for President of both entities. However,
in 2004, the two associations elected potentially antagonistic
leadership. Paulo Skaf, who at that time was friendly to the Lula
administration, was elected to head FIESP, while Claudio Vaz,
favored and supported by the most of the business elite, was elected
president of CIESP, thus dividing the leadership and weakening the
voice of Sao Paulo industry. Friction between the two entities was
such that for a time, post was unable to organize meetings involving
both groups and had to engage with each separately. However, in the
course of the past three years, the business community as a whole
concluded that Skaf had been working assiduously in defense of the
industrial sector by leading a movement to meet the expectations of
the productive sector. Skaf expressed concern about the heavy tax
burden, high interest rates on borrowed money, an unfavorable
exchange rate, and an unresponsive bureaucracy. The current
president of CIESP, Claudio Vaz, congratulated Skaf on his
impressive electoral victory and emphasized "the level of maturity
that both associations had gained" in the course of past three
years, and that the convergence around the name of Skaf for his next
term is vital for industry. "There isn't room for controversy or
division. Skaf conquered the trust of the business community,"
observed Vaz.


7. (U) FIESP is the more significant of the two associations. Like
the industrial federations of other Brazilian states, FIESP, in
theory, is part of, and subordinated to, the Brazilian National
Confederation of Industries (CNI). In practice, however, FIESP,
which includes companies representing forty percent of half of
Brazil's Industrial production and thirty-six percent of the
country's GDP, is the most influential industrial representative
body in Brazil.

THE SHAPE OF THINGS TO COME
--------------


8. (U) Paulo Skaf, 50, the self-made son of a Lebanese immigrant
was former President of the Brazilian Textile Industry and Garments
Association (ABIT). He said that his reelection with unanimous
support from both FIESP and CIESP members strengthens his hand to
pressure the GOB to adopt a tax policy that encourages instead of
hindering economic growth and productive activities. He said that
the true and effective solution to taxation problem is a
wide-ranging reform of the tx system, one that includes key fiscal
issues. Government expenditures are growing faster than government
revenue. It is up to the population to define what they expect the
state to do, how large it will be, how much it will cost, and how it
will be financed.


9. (U) Skaf is convinced that a minimum agenda for development
should include four structural adjustments that may not be postponed
any longer: (1) fiscal and tax reform that will lower public debt
and reduce the tax burden on the productive sector; (2) A credit

SAO PAULO 00000639 003 OF 004


policy that includes lowering interest rates drastically; (3)
infrastructure improvement; and (4) A trade policy that may increase
exports in a sustained manner. Skaf also referred to a study by
FIESP that increased his concern about the public debt, fiscal and
tax issues. He noted that the GOB collects almost 40 percent of
everything the Brazilians are able to produce. The usual
explanation the government authorities is that "we're preserving the
primary surplus." He said that since 1995 the public debt jumped
from 30 percent to more than 50 percent of GDP. More serious still,
expenses continued expanding at a 5.5 percent yearly rate.


10. (U) According to Skaf, infrastructure is one of Brazil's
bottlenecks and the freight transportation system, such as it stands
today, generates significant economic and competitiveness losses and
increases the so called "Brazil Cost." He said it was imperative
that the country must urgently invest in ports, railroads, and
terminals. These investments would reduce operating costs and boost
efficiency, making Brazilian exports more competitive and cheaper in
foreign markets. He warned about the risk of a repeat "blackout" in
the absence of investment for electricity generation, transmission
and distribution. According to FIESP estimates, Brazil needs to add
between 6 percent and 7 percent to its energy matrix every year in
order to be able to adequately promote growth.


11. (U) In a visit to Washington earlier this year, Skaf said that
the protection of IPR is in Brazil's interest. According to him,
the Brazilian economy is a "victim" of thousands of illegal and
counterfeit products. Imports of Chinese products, besides their
artificially lower prices, often disrespect internationally
established brands and patents.

CHALLENGES
--------------


12. (U) Addressing the FIESP audience after the reelection victory,
Skaf said that it will be up to the Brazilians to decide what kind
of a future awaits not only them but their children. It goes
without saying that to consistently achieve public account
surpluses, control inflation, honor both domestic and external debt
payment schedules, and keep commitments made to multilateral credit
organizations are all essential. However, a country that boasts the
fifth largest population in the world cannot afford to assess
economic performance only on the basis of tables and numbers that
relate to some index oscillation or the other. "We need to reach
for more, much more, and correct past mistakes as well as economic
policy concepts that both the past and the current Brazilian
administrations have stubbornly held," concluded Skaf.


13. (U) Skaf said he will provide the federal and state governments
with a proposal to intensify investments in alternative sources of
energy to avoid a crisis in 2010. The plan consists of increasing
investments in the production of energy from sugarcane bagasse
collected from sugar and alcohol mills. Skaf believes that in two
or three years, this source could produce double the amount of
energy then that expected to be produced by the two hydro energy
plants projected to be built on Madeira river. These hydro plants
are expected to become operational only in 2012. FIESP President's
plan would cost around USD 5 to 6 billion and he believes he can
mobilize the business community to make these investments provided
the GOB would provide tax incentives.

COMMENT
--------------


14. (SBU) Skaf earned a second four-year term after uniting FIESP
and CIESP into a single body as was the case before 2004. He
received unprecedented support from the business community as a
whole and also from the outgoing President of CIESP, who
acknowledged Skaf's resourcefulness and ability to defend the
country's productive sector. He's been given a mandate to continue
pressuring the federal government to announce a development agenda

SAO PAULO 00000639 004 OF 004


to establish an efficient credit policy to finance both businesses
and the consumer, as the economy's major source of fuel. His
critical posture in FIESP is expected to be more politically
oriented in defense of not only the industry but also of the society
in general.


15. (U) This cable was coordinated with Embassy Brasilia.

HELLING