IE Insights Vol

INTERNATIONAL ENTERPRISE SINGAPORE IE Insights Vol. 12/ Oct 2013

Brazil: Beyond the World Cup and Olympics Despite emerging market instabilities in the interim, there are important investment opportunities in Brazil over the long term. Pre-salt oil discoveries have prompted Petrobras’ capital expenditure in the oil & gas sector to reach nearly S$300 billion over the next four years. The government is also planning to resolve infrastructure bottlenecks with estimated spending expected to exceed S$100 billion over the medium to long term. Meanwhile, an expanding middle class will drive growth in consumer markets. These positive long term trends indicate that Singapore companies can capitalise on public and private spending in Brazil’s key industries – oil & gas, infrastructure and consumer goods.

By Anchit SOOD, WOO Wei-Li Americas Group [email protected] Contents

03 10 Summary Long-term Business Opportunities for 05 Singapore Companies Emerging Market Challenges - Singapore’s investments in Brazil - Systemic issues - Where to invest - Much-needed public sector - What to invest in reforms - Oil & gas support services - Infrastructure 08 - Consumer products Longer Term Positives - Natural resource endowments 25 and technological spin-offs Conclusion - Strong domestic consumption - Vibrant private sector

Disclaimer While every effort is made to ensure that the information in this document is accurate, the information is provided by IE Singapore to you without any representation or warranty. Any reliance on the information in this document is at your own risk. IE Singapore does not accept any liability for any errors, omissions or misleading information. IE Singapore and its employees shall not be held responsible for any consequence arising from your reliance on any information provided by us. You are advised to consult your own professional advisors. 2

Summary

• Recent socio-economic and political events have exposed Brazil’s emerging market risks. These, together with the high cost of doing business as a result of high taxes and hefty social security obligations have decreased the competitiveness of companies doing business in Brazil.

• Recent public outcry and upcoming elections in 2014 may serve as catalysts for the government to re-focus on key issues such as the infrastructure gap, poor education and the high cost of doing business.

• Nonetheless, International Enterprise (IE) Singapore remains positive about Brazil’s long-term potential. Rich natural resource endowments and related technological spin-offs, a growing middle class with a young population, and a vibrant private sector will underpin the nation’s growth going forward.

• For the next three to five years, the focus of investments will be on Brazil’s three pillar industries - oil & gas, infrastructure and consumer goods - thanks to a combination of private and public sector spending.

• In the oil & gas sector, Petrobras is expected to spend S$293.9 billion between 2013 and 2017 to exploit its pre-salt oil discoveries. In addition to opportunities for Singapore’s large-scale shipyards which are well-known specialists in the construction of rigs, floating production storage and offloading vessels (FPSOs) and conversion projects, other sub-sectors along the value chain - offshore supply vessels as well as equipment and engineering services suppliers - will also benefit.

• To plug the infrastructure gap, the Brazilian government has announced a slew of projects covering sea, land and air transport worth more than S$100 billion over the next five to 25 years, which will lay a firm foundation for the country’s longer term development. Singapore companies involved in the investment and management of airports and ports will benefit. Companies engaged in the provision of electronic systems and solutions for urban transit, logistics and urban planning also stand to gain.

Summary

• Unique characteristics of the Brazilian consumer market suggest that the best way to capture the consumer dollar would be through supplying manufacturers of consumer goods rather than those in consumer services. IE sees opportunities for Tier 2 suppliers in the automotive sector especially those in tooling, plastic moulding and electronic systems.

• IE recommends focusing on South and Southeast Brazil. The states in these two regions account for more than 70% of Brazil’s GDP and have more established business practices and governance systems. Other than the states of São Paulo and Rio de Janeiro, Singapore companies can consider emerging states in these two regions, such as Minas Gerais, Espírito Santo, Rio Grande do Sul and Santa Catarina as investment destinations. Investment costs are lower due to less competition and pressure on infrastructure. Local governments are also more proactive in offering incentives to attract investment.

4 Emerging Market Challenges

Systemic issues have emerged as the economy cools. Brazil’s robust GDP growth in the previous decade, averaging about 4.5% per annum, has slowed dramatically. In 2012, the economy grew just 0.9% as commodity prices slumped and external demand weakened. Ilan Goldfein, the chief economist of Brazil’s largest private bank, Banco Itaú, predicts growth rates as low as 2.0-3.0% going forward1.

Systemic issues The slower growth has exposed systemic emerging market issues in the Brazilian economy such as inadequate infrastructure, bureaucracy, over-regulation and a lack of skilled labour. The country also faces challenges more commonly associated with developed economies – a low savings rate, high taxes and hefty social security obligations. These factors have markedly increased the country’s cost structure and stifled its labour market, making companies less competitive. Figure 1 provides perspective on the cost of doing business for companies in Brazil, labelled “Custo Brasil” (or “Brazil Cost”) and its implications. Meanwhile, increasing costs of living, with the Consumer Price Index (CPI) forecast at 6.0-5.3% between 2013 and 20152, was one of the triggers of recent widespread protests and dissatisfaction with the current administration.

1 “Brazil economy needs rebalancing”, BBC, 17 July 2013 2 “Brazilian Automotive Market Analysis”, PricewaterhouseCoopers, July 2012 5 Emerging Market Challenges

Figure 1: Illustrating “Custo Brasil”

Business Environment • Ranked 130 out of 185 countries by The World Bank, in terms of ease of doing business. • Placed between Bangladesh and Nigeria • Below China (91), Russia (112) and Indonesia (128) • Above India (132)

Tax Burden • The World Bank estimates that 67% of corporate profits end up with the government • Compliance is burdensome • Takes 2,600 man hours for an average company to file and pay taxes, versus 84 hours in Singapore and 347 hours in Mexico

Cost of Production • National Association of Machinery estimates “Brazil Cost” to contribute 36% to cost of goods sold • A Brazilian-made Volkswagen Fox costs 32,000 reais (S$20,480) to make but sells at 21,317 reais (S$13,642.90) overseas

Logistics • Transporting soya costs US$170 (S$212.50) per tonne from the main soya growing regions to the port of Santos, 43% more than transportation costs over the same distance in the US

Labour Cost • Wages can be higher than other emerging markets especially for skilled and semi-skilled labour such as engineers, welders and marine crew • Social security contributions can often double the wage bill • Lawsuits against employers, while small, are common and often favour the employee

Figure 2: Consumer price index (2005 - 2015 forecast)3

% 7 6.5 6.2 5.9 5.9 6.0 6 5.7 5.3 5.1 5 4.5 4.3 4

3.1 3

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

3 “Brazilian Automotive Market Analysis”, PricewaterhouseCoopers, July 2012 6 Emerging Market Challenges

Consumer credit has expanded rapidly in recent years resulting in debt accounting for 43% of average individual incomes4. Credit growth is forecasted to continue, albeit at a slower rate, hence delinquency ratios need to be monitored given the near term domestic and international economic uncertainties.

Much-needed public sector reforms Ironically, slower growth may serve as a catalyst for the government to re-focus on key issues, such as the infrastructure gap, education, “Custo Brasil” and fighting corruption, some of which were part of the policy agenda of the current administration. The upcoming Presidential, Congressional and State-level elections in October 2014 may also help spur government action over the country’s public sector inadequacies.

President Dilma Rouseff has earned much-deserved credit since her election in 2011 for her tough stance on corruption, macroeconomic management and determination to initiate reforms. However, much more needs to be done, particularly against the backdrop of weak macroeconomic conditions. For instance, the government may need to cede more control and equity stakes in some state enterprises through the privatisation of state assets. This will attract more private participation, which will generate much needed investments, create competition, and ultimately, lower overall costs.

4 “Fitch: Brazilian consumer credit expected to expand”, Reuters, 20 May 2013 7

Longer Term Positives

Despite emerging market woes and slower growth, Brazil has long term potential. Natural resources aside, the country has a relatively young population and rising middle class which will underpin domestic consumption, as well as a vibrant private sector.

Natural resource endowments and technological spin-offs Brazil is endowed with many natural assets – extensive arable land, ample fresh water, favourable climate, substantial mineral deposits (including iron ore and pre-salt oil) and limited exposure to natural disasters. Brazil has combined these endowments with the application of technology, especially in agriculture, to become a leading commodities producer. In the last decade, its agribusiness exports jumped 500% from US$16 billion (S$20 billion)5 in 2001 to more than US$80 billion (S$100 billion)6. Brazil ranks as the largest or second largest exporter in a wide range of commodities, such as sugar (first) and coffee (first). Brazil is also endowed with mineral wealth, especially iron ore, making Vale one of the top three mining companies worldwide. In 2007, Petrobras, the national oil company, discovered nearly 50 billion barrels of new oil reserves in the pre-salt layers off the southeast coast, transforming Brazil from a net energy importer into a future oil exporter and a major player in offshore oil production.

5 US$1 = S$1.25 6 “Record Brazilian Agricultural Production Spurs Further Export Gains”, United States Department of Agriculture Foreign Agricultural Service, 24 January 2012 8 Longer Term Positives

Strong domestic consumption Brazil is the fifth most populous nation in the world with 195 million people. Its population is relatively young; 40% of the population is less than 25 years old7.The Brazilian government’s strong welfare state ethos has successfully redistributed wealth through conditional cash transfer programmes, elevating millions into the middle class for the first time; more than 50% of the population is now considered middle class. Consumer credit is also readily available across different socio-economic classes and for many types of goods, from one-off expensive purchases like automotives to groceries and clothes. This has been a strong driver of domestic consumption.

Vibrant private sector Brazil’s private sector has taken advantage of these strengths and successfully dealt with the country’s systemic challenges. In 2013, 31 Brazilian companies were featured in the top 2,000 global public companies list identified by Forbes Magazine. The list included companies beyond commodities, in the consumer products and financial services sectors, in which Brazil also has truly global players. Figure 3 highlights some of the Brazilian multinationals that Singapore has been engaging in Brazil across its key sectors. Brazil has had a long tradition of private enterprise, including manufacturing. This has created strong home- grown companies that have scaled up to match the size of the domestic market. Brazil has also been open to foreign investments in selected sectors for a long time. Multinationals such as Arcelor, Fiat, Monsanto, Nestlé and Volkswagen have been active in the market for many years. With government support through institutions such as the National Development Bank of Brazil (BNDES), several Brazilian multinationals are increasingly active in Asia. Of this group, key companies such as Brasil Foods, Braskem, Embraer, Petrobras and Vale have set up operations in Singapore to access markets in Asia.

Figure 3: Brazilian multinationals

Sector Examples of Firms

Commodities Copersucar (sugar, ethanol), CSN (mining), Gerdau (steel), Klabin (pulp & paper), Marfrig (animal protein), Petrobras (NOC), Raizen (sugar, ethanol), Vale (iron ore), Votorantim (mining, pulp & paper, orange juice)

Consumer Goods Alpargatas (FMCG), AmBEV (food & beverage), Brasil Foods (animal protein, food & beverage), Natura (FMCG)

Engineering & Embraer (aerospace), Marcopolo (heavy vehicles), Odebrecht S.A. (construction, Construction infrastructure, oil & gas, agriculture), WEG (engines),

Financial Services Banco do Brasil (banking), Bradesco (banking), BTG Pactual (investment banking), Itaú BBA (banking)

7 “Distribuição da população por sexo, segundo os grupos de idade”, Brazilian Institute of Geography and Statistics, 2010 (latest census) 9 Long-term Business Opportunities for Singapore Companies

Singapore’s investments in Brazil According to the International Monetary Fund, Singapore’s direct investment in Brazil amounted to US$1.4 billion (S$1.75 billion) as of end 2011. The trade and investment numbers may not accurately reflect Singapore’s corporate footprint in Brazil however, as transactions are being booked indirectly through third countries. Keppel and Jurong’s shipyard investments alone are estimated to total 1.5 billion reais (S$1 billion)8. Other recent and significant investments have been made by Temasek Holdings in Odebrecht Oil & Gas of US$400 million (S$500 million) and GIC’s 15% stake in BTG Pactual, which was estimated at US$2.4 billion (S$3 billion) at the time of investment in 2010.

About 60 Singapore companies operate in Brazil, spanning various sectors including oil & gas (Keppel Offshore & Marine and Sembcorp Marine), transport & logistics (APL, Goodpack and Pacific International Lines), and agriculture (Olam and Wilmar International). Together, these companies employ more than 10,000 Brazilians.

8 1 Real = S$0.64 10 Long-term Business Opportunities for Singapore Companies

Where to invest Brazil’s 27 states are in very different stages of socio-economic development. Although the states in the North and Northeast have very high growth rates (7-9%), this is mainly because of a low base. Business practices and governance also differ. Most economic activity is concentrated in the Southeast (São Paulo, Rio de Janeiro, Minas Gerais and Espírito Santo states are responsible for 55.4% of national GDP) and South (Rio Grande do Sul, Santa Catarina and Paraná states are responsible for 16.5% of national GDP)9. São Paulo dominates the country with nearly a third of the country’s GDP and a fifth of its population. Rio de Janeiro is the hub for the country’s petroleum, shipping, media and tourism sectors.

Other than the traditional economic centres of São Paulo and Rio de Janeiro, IE sees increasing interest and opportunities in emerging states in the South and Southeast, including Minas Gerais and Espírito Santo in the Southeast, and Rio Grande do Sul and Santa Catarina in the South. These states, which are in close proximity to the existing centres of commercial activity, often have lower investment costs, less competition, and less pressure on infrastructure. State governments are also proactive in providing incentives, expediting licences and other approvals and even helping to identify local state-based partners. In addition, these states are supported by federal investment policies. For example, the biggest benefactor of the recent ports package is Vitória in Espírito Santo rather than Santos in São Paulo state or the port in Rio de Janeiro. The Brazilian Government launched the “Investment Programme in Logistics: Ports” in December 2012. This programme announced, among other specific measures, upcoming investments of 54.2 billion reais (S$34.7 billion) in new leases and Private Use Terminals, of which 13.4 billion reais (S$8.6 billion) will be in the port of Vitória, in Espírito Santo. At present, IE recommends staying focused on investing in Brazil’s South and Southeast.

9 “Contas Regionais do Brasil 2010” Brazilian Institute of Geography and Statistics, 2010 (latest available) 11 Long-term Business Opportunities for Singapore Companies

Figure 4: Principal economic activities of key states

Belo Horizonte Vitória

Rio de Janeiro São Paulo

Florianopolis

Porto Alegre

12 Region: Southeast Region: South

São Paulo Rio Grande do Sul Key City : São Paulo Key City : Porto Alegre Population (National %) : 41 million (21.6%) Population (National %) : 11 million (5.6%) GDP (National %) : 1.4 trillion reais/ S$900 billion (33.1%) GDP (National %) : 252 billion reais/ S$161.3 billion (6.7%) Economic Activity: Economic Activity: • Largest state by GDP • Heavy Vehicles: Home to bus and truck makers such as • Industry: Automotives, electronics, heavy machinery, Guerra, Marcopolo and Randon pharmaceuticals and aerospace • Steel: HQ of Gerdau S.A. • Transport & logistics: Home to major passenger • Agriculture: Poultry and pork and cargo airports, ports for the country • Large port and marine offshore hub near the city of Rio • Agriculture: Strong producer of coffee, sugar and ethanol Grande to service the south of Brazil • Financial services hub for country and increasingly South America as a whole • HQ of most large Brazilian companies Santa Catarina • Regional HQ for many MNCs Key City : Florianopolis • Companies present: HQs of AmBEV, Embraer, Itaú BBA, Population (National %) : 6 million (3.3%) Natura, Odebrecht S.A, Telefonica S.A, Volkswagen S.A. GDP (National %) : 152 billion reais/ S$97.3 billion) (4.0%) Economic Activity: • Agriculture: Major producer of poultry and a significant Rio de Janeiro supplier to Singapore Key City : Rio de Janeiro • Transport & logistics: Ports of Navegantes and Itajai Population (National %) : 16 million (8.4%) are significant container terminals; Itajai is operated by GDP (National %) : 407 billion reais/ S$260.5 billion (10.8%) APM terminals. Economic Activity: • Companies present: Brasil Foods, WEG • Industry: Oil & gas, shipping & maritime, media, telecommunications and tourism • Site of the 2016 Olympic Games; one of the 14 cities hosting the 2014 World Cup but expected to receive the most visitors • Companies present: HQs of BNDES (National Development Bank), O Globo, Petrobras, Vale

Minas Gerais Key City : Belo Horizonte Population (National %) : 20 million (10.3%) GDP (National %) : 351 billion reais/ S$224.6 billion (9.3%) Economic Activity: • Mining: State with high density of iron ore and other mines. • Automotives: Long established HQ for Fiat in Brazil • Agriculture: Sugar, coffee and dairy • The state is keen to diversify into: - ICT: Large techparks being planned. Main campus for Infosys - Transport & logistics: Main recipient for spending on railways. Confins airport in Belo Horizonte is a key cargo airport, and national hubs of Gol and Azul airlines - New investments in aerospace expected

Espírito Santo Key City : Vitória Population (National %) : 3.5 million (1.8%) GDP (National %) : 82 billion reais/ S$52.5 billion (2.2%) Economic Activity: • Transport & logistics: State provides port access to iron ore produced in Minas Gerais, Vitória port key container port for the country • Pulp & paper: Fibria • Oil & gas: Petrobras regasification facilities • Engineering for mining and port sectors • The state has a long coast facing the pre-salt basins, making it a suitable spot for new investments in marine-offshore and offshore supply

13 Long-term Business Opportunities for Singapore Companies

What to invest in IE sees opportunities in investing in three pillar industries - oil and gas, infrastructure and consumer products - not least because it dovetails with Brazil’s natural strengths, reform policy and long-term growth, but also because Singapore companies can leverage their expertise in a number of these industries, most notably in oil and gas support services, and can contribute to the Brazilian economy. Going forward, as Brazil becomes less foreign and more familiar to our companies, Singapore’s commercial engagement will deepen and diversify across sectors.

Oil & gas support services Market size and potential The discovery of pre-salt oil in 2007 more than quadrupled Brazil’s total oil reserves, which added at least 50 billion barrels to Brazil’s total reserves. Brazil is expected to be among the top five oil producing countries by 2020.

To commercialise pre-salt deposits, while meeting demanding local content requirements, Petrobras is making unprecedented investments. Specifically, Petrobras has recently announced in its 2013-2017 Business & Management Plan that it expects to make investments of US$237 billion (S$296.3 billion). US$148 billion (S$185 billion) will be allocated to exploration and production (E&P). In addition, approximately US$10 billion (S$12.5 billion) of capital expenditure will be allocated for the expansion of natural gas logistics and chemical transformation.

In addition to its own investments, Petrobras will need to contract production platforms and supply vessels over the next three to five years. Based on its own projections made upon discovery of the pre-salt basins, Petrobras will have to double the size of its deployed fleet within 10 years. In this process, it will be procuring nearly 200 vessels and 50 production units. Petrobras admits that securing a global supply chain and access to relevant engineering and technology to meet the demand of its E & P programmes is its biggest concern. Given that the timeline for procurement is the next three to five years and finalising and establishing a yard can take up to one and a half years, there remains urgency for Singapore companies interested in entering the market. The Federal government also estimates that US$400 billion (S$500 billion) will be invested in equipment and services, expansion and maintenance of production before 2020.

14 Long-term Business Opportunities for Singapore Companies

Figure 5: Petrobras’ projected growth in demand from 2010-202010

65 Drilling Rigs (Above 2000m) 37 15

568 Supply and Special Vessels 479 287

94 Production Platforms 61 44

2020 0 100 200 300 400 500 600 2015 2010

A point to note is local content requirements, which range from 40% to 80%, depending on segments (exploration or development; deepwater or shallow-water) and the product or good supplied. Local content requirements in the pre-salt oil extraction and production segment will progressively increase to cover most aspects of the supply chain and are expected to reach 85-95% for some items by 2020. Higher local content also results in more attractive interest rates when obtaining funding from the Brazilian Marine Merchant Fund (FMM) for shipbuilding finance.

In segments of interest to Singapore companies, which are the supply of tankers, offshore supply vessels and rigs, applicable local content is approximately 70.8%, 61% and 64.2% respectively. This essentially makes provision of rigs and supply vessels from shipyards outside Brazil unfeasible in the long run - even though vessels built in Brazilian yards today continue to cost substantially more than those built in competitor yards in Singapore or South Korea.

The huge demand arising from the oil & gas sector has created large-scale opportunities for Singapore companies in three broad categories:

• Large-scale shipyards (constructors of rigs, FPSOs, ships, conversion projects); • Offshore supply vessels (OSV) owners/ constructors/ operators; and • Equipment & engineering services suppliers.

10 “2011 – 2014 Business Plan”, Petrobras, 26 July 2011 15 Long-term Business Opportunities for Singapore Companies

Opportunities for Singapore companies Large-scale shipyards With their track record in the marine offshore sector, Singapore companies possess many of the capabilities required by Brazil to develop its pre-salt oil fields. Given the scale and scope of Petrobras’ needs, most Singapore companies are interested to participate in this market, despite the entry barriers. Keppel Offshore & Marine and Sembcorp Marine are well-entrenched in the market and own two of the seven large-scale shipyards in Brazil. They are respected partners in Petrobras’ supply chain and have received orders amounting to nearly S$10 billion to supply rigs for the pre-salt basins.

Offshore supply vessels (OSV), equipment and engineering segments Singapore’s cluster of OSV companies (which construct, own and operate) have just started to participate in both the short and long term markets.

The short term market is that of chartering foreign flagged vessels for Petrobras. As local yards are unable to meet demand (Brazil’s shipbuilding sector is still not fully operational), a majority of Petrobras’ current fleet of offshore supply vessels are foreign flagged. At the end of 2012, there were 429 offshore support vessels working in Brazilian waters – 196 Brazilian flagged and 233 foreign flagged11. Approximately 87% of this fleet is under long term charter to Petrobras. To compete, Singapore companies must have good contacts with the existing cluster of Brazilian shipping companies (locally called Empresa Brasileira de Navegação “EBN” which indicates they are registered to operate vessels in Brazilian waters) and ship brokers. The opportunities are attractive; Pacific Radiance and Ezra Holdings partnered with EBNs in 2011 and won vessel chartering contracts from Petrobras worth approximately S$75-90 million.

11 “The Brazilian Market”, Farstad Shipping, 2012 16 Long-term Business Opportunities for Singapore Companies

As our ship owners and operators successfully secure chartering contracts and build familiarity with the market, their success can be scaled up. Given that Petrobras is expected to need another 192 more vessels by 2015 (most of which will be domestically built), we estimate that Singapore companies can capture 5% of this market. This amounts to about ten charter contracts in the next three years. At US$70 million (S$87.5 million) per charter, this represents a potential market of US$700 million (S$875 million) by 2015.

As a result of Petrobras’ recent difficulties in late 2012 and the first half of 2013, IE saw a slowdown in new orders coming to the market. As internal restructuring in Petrobras is being finalised, analysts expect the company’s position and performance to revive in early 2014, with Petrobras keen to catch up with the delivery of new production units. While 2012 was a slow year for the vessel sector, two rounds of tenders under Petrobras’ EBN programme – orders for platform supply vessels and anchor handling tug supply vessels to be built in Brazil – have been placed in the first half of 2013 itself, the second round as recently as July 2013. IE expects a revival of activity in this sector moving forward.

In the long term, Singapore companies need to establish their own subsidiaries in Brazil and obtain qualification as EBNs - thereby becoming eligible to charter boats with Petrobras directly. Our companies will also need to buy or lease shipyard sites to conduct vessel repair, maintenance and building activities in Brazil.

17 Long-term Business Opportunities for Singapore Companies

Engineering and equipment This category refers to companies which specialise in the provision of equipment (such as pumps, valves, pipes, lifeboats and modules) used for petroleum exploration, production and refining. Companies in this segment must be competitive in pricing while being able to handle clients’ on-site installation and maintenance needs. As Brazil’s offshore shipbuilding sector is still in the early phases of its resurgence, several engineering and technology solutions are currently unavailable domestically – creating opportunities for Singapore’s companies.

Through engagements with Petrobras, the offshore sector in Brazil and Singapore companies, IE has identified immediate opportunities in certain products where strong capabilities in Singapore are matched by demand in Brazil.

• Heating, Ventilation and Air Conditioning (HVAC) Units • Chemical Injection Units • Offloading Systems • Offshore Cranes • Life Boats and Davit • Electrical & Instrumentation (E&I) Systems • Accommodation Units

This represents just a small segment of the overall technologies and services required by Petrobras in the next few years to be able to successfully explore its pre-salt bonanza.

Despite local content regulations, the lack of domestic supply and other bottlenecks in Brazilian production capacity mean that in the short term, Brazilian yards may have to source critical technologies from overseas. In the long run, however, domestically based production, especially for products that involve installation and maintenance, will be critical. Figure 6 gives a summary of the main yards in Brazil and their current projects.

18 Long-term Business Opportunities for Singapore Companies

Figure 6: Summary of main yards in Brazil and current projects12

28 drilling rigs: 6 in Pernambuco, 6 in Bahia, 7 in Espirito Santo, 6 in Rio de Janeiro and 3 in Rio Grande do Sul

Atlântico Sul Shipyard 6 rigs P-62 P-55 – hull

São Roque Shipyard P-59 P 60

Enseada do Paraguacu Shipyard (under construction) 6 rigs

Jurong Shipyard (under construction) 7 rigs P-68 and P-71 – modules and topside

OSX Shipyard (under construction) P-67 and P-70 – modules and topside

Inhaúma Shipyard P-74 and P-75 – hulls P-76 and P-77 – hulls

Brasfels Shipyard P-57 (Jubarte) P-56 (Marlim Sul) P-61 6 rigs P-66 and P-69 – modules and topside

Techint P-76 – modules and topside

Rio Grande Shipyard P-55 – modules and topside P-66 and P-67 – hulls 6 replicants – hulls 3 rigs

QUIP Shipyard

Action completed/ operation P-63, P-75 & P-58, P-77 Running Brasil Shipyard (under construction) Already auctioned P-74 – modules and topside

12 Adapted from the 7th balance of PAC 2, 2013 19 Long-term Business Opportunities for Singapore Companies

Infrastructure Market size and potential The infrastructure bottleneck is hitting home at the federal and state government levels, particularly in the critical area of transport and logistics. Brazil’s government has announced a series of infrastructure investment covering sea, land and air transport (see Figure 7 for the estimated investment amounts).

Figure 7: Proposed infrastructure investments13

Sector Amount Timing Remarks

Airports Estimated US$7.3 billion By 2014 S$3.6 billion directly related to the (S$9.1 billion) World Cup host cities and S$2.2 billion for 19 airports

Ports 4.2 billion reais Expected Growth Acceleration Programme 2 (S$2.7 billion) as public from (PAC 2) and port privatisation plans. investment, another 2014-2020 54.2 billion reais (S$34.7 billion) by private sector

Urban Bus and Metro System 45 billion reais Expected 30 billion reais (S$19.2 billion) in metro (S$28.8 billion) from and 9.4 billion reais (S$6 billion) in São 2012-2015 Paulo State’s commuter rail (CPTM)

Logistics Investment Programme: 133 billion reais By 2037 Split into two tranches - Within five Roads and Railways (S$85.1 billion) years; subsequent 20 years for roads and 25 years for railways

These create short to medium term opportunities for Singapore companies in transport & logistics. A number of Singapore companies, such as CWT, Goodpack, Keppel Seghers, Singapore Airlines and VT Systems (a wholly-owned subsidiary of ST Engineering) are already involved in this sector.

13 Source: Secretariat for Social Communication, Presidency of the Federative Republic of Brazil 20 Long-term Business Opportunities for Singapore Companies

Opportunities for Singapore companies Airports Infraero (Brazilian Company of Airport Infrastructure) has a schedule of investments to modernise and expand the capacity of airports that are directly linked to the 12 host cities for the World Cup. By 2014, these airports will receive the entire investment of 5.6 billion reais (S$3.6 billion). In addition to these plans for the World Cup, Infraero will invest over US$1.76 billion (S$2.2 billion) in 19 airports. Projects for 12 of the airports - Santarém, Macapa, Parnaíba, Teresina, Ilheus, Vitória, Santos Dumont, Congonhas, Joinville, Florianópolis, Foz do Iguaçu and Goiânia - involve Passenger Terminal, Patios Aircraft, Runway & Takeoff, Control Towers and Cargo Terminals. Providers in engineering and services will find opportunities as Infraero refurbishes these airports.

Ports Reforms in the ports sector were announced in August 2012, with an investment plan targeting main choke points in the country worth 54.2 billion reais (S$34.7 billion), of which 13.4 billion reais (S$8.6 billion) will be used for the port of Vitória in Espírito Santo. The administration has also started the process to prepare and launch tenders for terminals in major public ports – with Santos, South America’s largest port, included in the first phase of tenders expected in October 2013. Other key Brazilian ports such as Paranaguá and Antonina in the state of Paraná are expected to be included in the second phase in 2014, Suape in Pernambuco in the third phase expected in late 2014 or 2015 and Rio de Janeiro in the fourth phase in 2015-2016.

Under the Growth Acceleration Programme 2 (PAC 2) to be implemented in 2011-2014, investments of approximately 1 billion reais (S$0.6 billion) have been planned for the National Dredging Programme, 2.8 billion reais (S$1.8 billion) for port infrastructure and 350 million reais (S$224 million) for logistics optimisation14. In addition to the projects included in PAC 2, the Federal Government will invest in the modernisation of the seven Brazilian ports that will receive passenger ships as floating hotels during the 2014 World Cup and the 2016 Olympics. The government will invest a total of 740.7 million reais (S$474 million) in various cities.

The Provisional Measure 595 (Ports) announced in mid-2013 clarified the port privatisation laws. Up until then, there were uncertainties in a number of areas such as the entity leading the privatisation and the criteria. In addition, rules for private ports were relaxed to encourage investment in the sector; the previous provision that stipulated private ports had to have “substantial own cargo”, making it difficult for private ports to handle entirely third-party cargo difficult, has been removed.

14 “Programa de Aceleração do Crescimento – PAC”, Secretariat of Ports 21 Long-term Business Opportunities for Singapore Companies

Urban bus and metro systems State governments are increasing investments in urban metro systems – with new lines being planned in the cities of São Paulo, Rio de Janeiro and Salvador, in Bahia state. Specifically in São Paulo:

• 45 billion reais (S$28.8 billion) in investment planned in 2012-2015 • 30 billion reais (S$19.2 billion) in metro and 9.4 billion reais (S$6 billion) in commuter rail (CPTM) • At the end of 2014, São Paulo will have 402.7km of train tracks - 101.3km of metro and 301.4km of CPTM

Beyond extending the current metros in São Paulo and Rio de Janeiro, there are metro projects being planned in other key cities such as Belo Horizonte (Minas Gerais), Salvador (Bahia) and Porto Alegre (Rio Grande do Sul). Brazilian cities are also looking at expanding bus systems, including the bus rapid transit system that was developed originally in Curitiba (Paraná). All of these are potential opportunities for companies in large- scale electronics systems and other solutions for urban transit and security.

The recent demonstrations in Brazil were sparked by a 20-cent increase in bus fares in the city of São Paulo, which brought attention to the lack of sufficient public transport in Brazilian metropolises, especially São Paulo, given its population and geographic spread. IE expects that projects in public transport will become a top priority for the administration moving forward.

22 Long-term Business Opportunities for Singapore Companies

Logistics and urban planning Under the Logistics Investment Programme: Roads and Railways, the Brazilian government aims to lay a firm foundation for the development of the economy for the next 50 years. This will see government spending of some 133 billion reais (S$85.1 billion) for the next 20 to 25 years (see Figure 8).

Figure 8: Spending on roads and railways under the logistics investment programme15

Total investments: 133 billion reais (S$85.1 billion) Within the next five years: 79.5 billion reais (S$50.8 billion) Within the following 20 years for roads and 25 years for railways: 53.5 billion reais (S$34.2 billion)

Roads (7,500 km) 42 billion reais (S$26.8 billion) Within the next five years: 23.5 billion reais (S$15 billion) Within the following 20 years: 18.5 billion reais (S$11.8 billion)

Railways (10,000 km) 91 billion reais (S$58.2 billion) Within the next five years: 56 billion reais (S$35.8 billion) Within the following 25 years: 35 billion reais (S$22.4 billion)

These reforms create opportunities for companies such as CWT and Goodpack. In November 2012, Singapore’s Global Logistics Properties announced an investment of US$1.4 billion (S$1.8 billion) in Prosperitas, a Brazilian manager of industrial and warehousing assets. As privatisation and public-private partnership models stabilise at the federal level and filter down to state and municipal levels, opportunities exist for Singapore companies in municipal infrastructure projects (sanitation, water treatment, planning) in the medium to long term.

Public sector management (including eGovernment) Brazil’s public sector institutions at the federal and state level recognise that reforms are required to maintain Brazil’s long term growth. These institutions are starting to take an interest in Singapore’s approach to governance. These reform agendas present opportunities for Singapore companies in education, eGovernment, urban planning and public sector management.

At this stage, governments are interested in understanding alternative models and reference cases, particularly Asian ones. The Brazilian state governments play a key role in urban infrastructure and eGovernment projects.

15 Source: Secretariat for Social Communication, Presidency of the Federative Republic of Brazil 23 Long-term Business Opportunities for Singapore Companies

Consumer products Market size and potential Brazil’s expanding middle class is the key driver of consumption and a crucial pillar for growth. This will create opportunities for Singapore companies in the consumer products and service value chain. IE has been supporting consumer goods businesses, especially in apparel, in their efforts to supply to large Brazilian buyers.

The Brazilian government is increasingly introducing measures to encourage domestic production, partly in response to competition from lower-cost manufacturing destinations. In fact, MNCs in industrialised consumer goods – especially the automotive and electronics sectors – have been investing in Brazil for a long time, but are under fresh pressure from the administration to increase local content of their products and source from Brazil. Given this reality, we recommend investing in the manufacture of consumer goods rather than in consumer services (e.g. retail and food services), which IE considers premature.

Singapore players in the value chain of these sectors benefit as Brazil still lacks local companies that can provide several technologies and foreign investments will be needed to meet these requirements. Unlike other more open economies in the region with a large presence of US and European firms in the supply chain, competition in Brazil is still low as the playing field is relatively new. In 2013, the focus will be on the automotive industry as new companies enter the manufacturing sector in Brazil and current ones expand their facilities. Brazil is already the fourth largest automotive market in the world, with production of 3.4 million autos in 2012, worth nearly US$94 billion (S$117.5 billion). Expectations are that production of autos will rise by 4.5% in 2013 and sales by 3.5% in the same year. The National Association of Automotive Manufacturers (ANFAVEA) also expects Brazil to export nearly 20% of its production by 2017, mostly to other countries in South America.

Opportunities for Singapore companies IE sees potential for Tier 2 suppliers, especially providers of tooling, plastic moulding and electronic systems; these technologies are traditionally absent in local Brazilian production. In 2012, Sakura Tech opened a facility in Itu in São Paulo state to supply plastic moulding to an international consumer electronics company and is exploring diversification into other verticals. Fiat and Magneti Marelli’s senior Brazilian executives visited Singapore suppliers during Latin Asia Business Forum 2012 and have invited some companies to consider supplying them in the market. Singapore companies have begun to explore this market and are working with IE to talk to potential clients and partners.

24 Conclusion

Overall, our outlook for Brazil is positive although global commodity markets will cool and economic growth will probably moderate to 3.0-3.5% per annum in the medium to long term.

Systemic challenges will negatively impact growth rates but the federal government has recently begun to put in place strong policy measures to address these. Despite lower commodity prices, Brazil is likely to remain one of the chief beneficiaries of a structural shift where industrialisation and rising consumption in the developing world will keep a floor to how much prices will fall. Brazil’s diversified economic base, including its growing manufacturing industry, will cushion the impact of softening commodities prices. Finally, the deep sea pre-salt oil bonanza has the potential to be a major economic driver over the next few decades. The challenge for the government will be to channel resources effectively to deal with the chronic infrastructure and skills gap and to improve the overall ease of doing business.

We believe that Singapore and our companies possess very relevant capabilities to address the opportunities generated by pillars of Brazil’s long term growth: oil & gas, infrastructure, public sector reform, growth of Brazil’s multinational companies and middle-class consumption. IE also sees opportunities beyond the traditional high growth states of São Paulo and Rio de Janeiro, in other states in the South and Southeast regions of the country, including Minas Gerais, Espírito Santo, Rio Grande do Sul and Santa Catarina.

Singapore companies have been engaged in the Brazilian market for some years now, initially focused on commodities and oil & gas, with some success. Going forward, as Brazil becomes less foreign and more familiar to our companies, Singapore’s commercial engagement of the country will deepen and diversify across sectors. There has been increasing interest from Singapore companies in the infrastructure, retail, engineering, electronics and financial services sectors. IE expects this to continue and expand in the immediate future.

25 International Enterprise Singapore International Enterprise (IE) Singapore is the government agency driving Singapore’s external economy. We spearhead the overseas growth of Singapore-based companies and promote international trade. Our vision is a thriving business hub in Singapore with Globally Competitive Companies (GCCs) and leading international traders.

Trade has always been the backbone of Singapore’s economy. In addition to promoting export of goods and services, IE Singapore also attracts global commodities traders to establish their global or Asian home base in Singapore. Today, Singapore is a thriving trading hub with a complete ecosystem for the energy, agri-commodities and metals & minerals trading clusters.

GCCs are a critical growth engine for the next phase of Singapore’s development. GCCs compete on the global stage against the very best in their industries. They contribute to Singapore’s economic resilience, develop Singaporeans into global business leaders and strengthen the Singapore brand. Through our Global Company Partnership, we work with Singapore-based companies in their various stages of growth towards being globally competitive. We customise total solutions in capability building, market access and financing for these companies as they internationalise.

Our global network of overseas centres in over 35 locations provides the necessary connections in many developed and emerging markets. In Latin America, we have two offices, in Mexico City (Mexico) and São Paulo (Brazil), as well as four honorary business representatives: in Mexico City (Mexico), Miami (US), Panama City (Panama) and Santiago (Chile).

Visit www.iesingapore.com for more information. Our Offices in Latin America

Mexico City International Enterprise Singapore Paseo de las Palmas 405 Office 1002 Colonia Lomas de Chapultepec C.P. 11000. Mexico, D.F. Mexico Tel : +52 55 9150 2560 Email : [email protected]

São Paulo International Enterprise Singapore Alameda Santos, 700 cj 91 01418-100 Cerqueira Cesar São Paulo – SP Brazil Tel : +55 11 3050 2121 Email : [email protected]

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