By Jonathan Wheatley and Richard Lapper, FT.com site

Published: Feb 21, 2007

Jonathan Wheatley and Richard Lapper, speak to Brazil’s foreign minister Celso Amorim who insists Brazil is not about to adopt 21st century socialism.

FT: What changes are taking place in relations in South America? Mercosur today seems much less cohesive that in the past and there seems to be a new axis developing from Argentina through Brazil and Bolivia to Venezuela.

I don’t know how cohesive Mercosur was before. If relations are superficial it can give the impression you are cohesive, but as relations deepen some differences may appear. The kind of unhappiness now being shown by Uruguayfirst appeared duringthe previous administration in Brazil. Take the agreement with Mexico, in which in reality there was a kind of authority for each country to go its own way, which in practice was against the customs union. Of course Mexico isa member of Aladi, so in a way it may be easier in the long run to seek convergence. It’s certainly more difficult if any member seeks to have a free trade agreement with any major commercial power. It’s not a question of the US, it might be the US, the EU or China, but if a member state hasan FTA with amajor trading partner which departs from the TEC [Mercosur's common external tariff] then of course there is a problem. Uruguay did this with Mexico at that time and it was a problem. So did we, but under the Aladi umbrella.

So these kinds of difficulties have appeared before. Lula is the first to admit it, but this is not something that happened in this government, it has been happening for a long time. We are the first to admit that Mercosur hasn’t fulfilled its promise to the smaller economies.

To put it simply, their exports to Brazil didn’t increase. Actually they decreased in the past eight years or so – very abruptly after the devaluation under [former Brazilian president] Fernando Henrique Cardoso [in 1999] and never picked up to their previous level.

FT: You recently mentioned a Uruguayan manufacturer of mineral water that was finding it difficult to export to Brazil…

In one of our first Mercosur ministerial summits, in 2003, the second actually, the question of asymmetry was put very strongly by them, and we did absolutely everything that was asked of us. But it was not enough for them to attract investment. Maybe for different reasons. One reason is technical barriers, bureaucratic barriers of different kinds. We’re not denying it, it may be true in some cases, sometimes for well-intentioned reasons I must say.

But even allowing them some preferential treatment in terms of exceptions to the TEC, so that they can buy inputs at lower prices – that was not enough. In any economy you also have externalities, so somebody who wants to invest in Uruguay or in São Paulo must look at where they can import capital goods more cheaply. But there are other factors, too.

But it took time to reach the conclusion that this was not enough. So in my opinion it required some kind of affirmative action. This is not because we are or want to be a very generous partner, it’s not a matter of favours. It’s in the interests of Mercosur. Mercosur has given a new personality to the region that it didn’t have before, so this is in our interest. That’s why we are trying to interest our development bank, the BNDES, to reach agreements on investment. But all this is starting now. And we are acting on other fronts such as in the case of the mineral water, but it’s not only that.We are financing investment, joint ventures. Of course if a Brazilian company is involved that makes it easier but it doesn’t have to be a 100 per cent Brazilian investment.

So there is a much clearer consciousness on the part of the Brazilian government that we need to do more. It’s not enough that the president is an integrationist or that the foreign minister is, you have to have customs officers and police at the border who are integrationists too. They have to do their jobs with a different kind of mindset. All these instruments of protection were created at a different moment, not when Brazil was trying to aim at broader integration.

Recently we had the launch of the PAC [the government's programme to accelerate economic growth] and as far as I can remember this is the first time that there has been a programme in Brazil with a list of criteria for selecting projects in infrastructure, where South American integration is mentioned as a factor. So this view, this consciousness that we have to somehow include the idea of integration in our internal policies is finally happening. It takes time and it is not easy. But for example, the bilateral commissions on trade are led by the trade ministers and have been very successful. So there is a change in mentality, not only by the foreign minister but by others too. More broadly, we are now making a contribution of $200m to the CAF development bank, so we are getting more and more involved in the integration process.

FT: Can you rule out that Uruguay might go its own way?

I can’t say that. It’s their choice of course. Every Brazilian would respect that. But you can’t have your cake and eat it. You can’t be part of Mercosur and at same time not be part of the customs union. It is one thing is to have exceptions for a transition period. Brazil has exceptions, we had them for a long time, I believe they are still there for pharmaceutical goods, which don’t pay the full TEC. Argentina has exceptions on capital goods, Uruguay and Paraguay have more. I’m not saying this is ideal. In reality the TEC is like virtue, it is its own reward, because to have a TEC you have to get rid of bureaucrats and have a real common market working.

FT: The Uruguayans might argue that if Mercosur can adapt to allow in Venezuela and Bolivia, shouldn’t it also adapt in favour of its original members?

In the case of Venezuela, speaking broadly, not product by product, Venezuela had agreements with Colombia for example, and some of these will involve zero tariffs, which is different from the TEC. That’s not a problem because we also have an agreement with the Andean countries. So a convergence is possible. The difficulty would be if Venezuela had an FTA with the US, the EU or Japan, as then it couldn’t change, it becomes an international obligation. If for example Bolivia needs a cost of living exception as it needs to buy something more cheaply – if it needs that as a transition, OK, but if they negotiate that with the EU it can’t change, ever.

I agree that Mercosur should adapt to improve conditions. When we made our agreement with the Andean countries – and for Brazil, South America is now more important that the US as an export market, and imports are increasing too – all the advantages or exceptions that we offered to Ecuador were automatically extended to Uruguay and Paraguay. So I don’t see these problems happening. Of course you have to take into account that Bolivia is much poorer than Uruguay. And we don’t have the money that the EU has to compensate everyone for the common agricultural policy and so on. We don’t have those funds. So we have to give exceptions here and there. But one thing is to do this as a transition, the other is for a country to be involved in negotiations that would make that immutable.

We don’t have the funds, but we do recognise the need to correct asymmetries and we have already spent $70m on projects in Uruguay and Paraguay, which is a form of compensation. I’m not saying it solves all the problems but it puts us in the right direction.

FT: Why is it so important for Venezuela and Bolivia to join Mercosur?

If you look at Mercosur from a purely commercial angle you won’t understandit, and it would probably not justify itself fully. When talks about Mercosur started, people said Why are you talking to Argentina, you should be talking to the US. Of course, now trade in Mercosur is very important, it has gone from $4bn to nearly $30bn, so it is not negligible. But you can’t look at it from that point of view alone. Also, the EU is not purely commercial, or it would never have gone beyond free trade, it would never have become a customs union.

Of course the two countries you mentioned, especially Venezuela, have huge energy resources. And in the case of Venezuela it gives us an opening to the Caribbean, which is very important geopolitically – not because we want political influence but because it is part of our trade routes.

Bolivia has the largest border with Brazil, so for us it is very important that things go well there. In recent years it has always been in crisis and though I’m not saying the crisis can be solved there is always a chance. The government represents a part of the population that has always been repressed. And in Bolivia we are in discussions on the border region, on the joint use of river resources that are important to us, plus the connection to the Pacific, so it is absolutely essential for Brazil that things are stable in Bolivia.

FT: Is open regionalism still there, driven by trade, or is the emphasis now more on resources?

I don’t disagree with that analysis [that resources are more important than trade]. There have been many changes and I quite agree that the emphasis on resources and interconnectivity is much greater now. But the purpose at the start of Mercosur was mainly political, to consolidate democracy. At the time we were in a new era of liberalism. As a negotiator, as I was at the time, I was seeing two countries aligning very quickly, Argentina and Brazil, and that’s what happened, and it was good. Maybe there has been a change of emphasis, but…

The world at large was going through unilateralism, the Uruguay round, maybe the perception was that this was the main thing, but I never thought it was the main thing, the main thing was political unity in the region. But of course trade is absolutely necessary. That’s why sometimes we disagree, we have discussions with Chávez and others, because they think they can belittle trade, and although I think trade is not the ultimate goal, it is an essential means.

FT: What is the main thing now?

Trade continues to be important. For Bolivia it will be much easier to get compensation in Mercosur for what they are losing in the US because the Andean trade preference act will not be renewed. People say, Aren’t you afraid Venezuela will become an autarchy? Well, it’s not to us as we exported $600m in 2003 and almost $3.6bn last year, so trade is there and is increasing at a rhythm not common in the world, except for China.It’s not an autarchy, it’s buying from us and not from the US or the EU, which is not our problem. People talk a lot about the state but 90 per cent of life in Venezuela is governed by private activities.

FT: Is there a new ideological alignment in the region led by Brazil, Venezuela and Bolivia?

Did you hear Lula’s speech the other day? We are not interested in growth if it is not accompanied by democracy or social justice. If you call that ideology, fine. Ideology has become a dirty word. Nowadays it is only identified with the left. If ideology is having growth with democracy and social justice, I’m fine with that. I’m not denying that we have affinities with some people that may help, although in the area of social reform they may not have the same identical way of seeing the political process. I don’t need to go into details, you can see if you followed the elections in Brazil, how much Lula was attacked in the press and how he didn’t move one finger to prevent it.

But we have excellent relations with Colombia and Chile, where our investment is also growing. Chile is a very open economy, and Colombia has an agreement with the US. Sometimes people say Uribe is a conservative, but we have excellent relations. And Colombia was essential in the deal between Aladi and Mercosur that enables us to talk about the South American Community of Nations based on the reality of free trade. We now have a free trade area covering the whole of South America. And it enables us to talk about infrastructure, although these things may not be as advanced as we would like.

The only thing about free trade in South America is that it’s not multilateral. But we have free trade agreements between all the groups, so in practice all the groups are linked. One of the ideas is to have convergence and in practice this is already having results. And there have been a lot of advances in physical connectivity. We are starting in a very pragmatic way. The agreement with Venezuela for example is not the big gas pipeline for all of South America which may come one day and we think it should, but a very precise pipeline from Venezuela to north-eastern Brazil. And we have an agreement on exploration of oil and gas in Venezuela. This is separate from the agreement no a refinery in the northeast.

FT: Does building the refinery get you access to the Orinoco fields?

Yes, the refinery is linked to the oil fields and the pipeline is something different, but in a way everything combines in an energy agreement. Not only this, our trade with Venezuela is extraordinarily high, of all kinds. There are many foodstuffs, capital goods, machinery – it’s very varied.

We have agreements like this with Bolivia, with Chile, with Ecuador, with Colombia, and with Argentina. It’s hard to find somewhere we don’t have an agreement with. One of the most important projects put into operation was the interconnection between the Peruvian Pacific and the border with Brazil. This is very important for development. Last year for the first time the state of Acre exported more to Peru than to the east, even before the road is ready. The connection between the North Atlantic and the Pacific took place in the 19th century. We are a hundred years behind but we have to catch up.

The world of the 21st century is a world governed by big blocks. China is a block in itself, the EU became a block. But even a country as big as Brazil is not a block that can face these real giants, so integration of South America is important for Brazil but it’s even more vital for the other countries in South America as otherwise they won’t even be noticed. So of course somebody can come and reach a trade agreement with the small countries if they want to annoy us or create a problem for Mercosur.

FT: So are energy resources your big priority?

Certainly the most obvious single thing is resources and energy in particular, but I would not underestimate trade and I would not underestimate stability. Why did the EU incorporate Bulgaria or Rumania or the Czech republic, is it because they are big markets or because of stability in the region?If the region is unstable that will have a big impact on us.

We have to make the best of liberalisation and make sure it is happening more quickly and deeply here than in relation to the rest of the world. The first time the four countries were together was not to discuss their own integration but to coordinate policy for the Initiative of the Americas by president Bush senior.

Liberalisation is certainly a big priority in world trade and that is why we are so interested in finalising the WTO. And don’t get me wrong, we give big priority to that. There are nuances between the different countries and all kinds of investment are welcome. The participation of private investment is very important and the government is trying to invest in areas where the private sector is less interested. There is no attempt to get the Brazilian state involved in manufacturing, there is no going back in that respect. So there are nuances, this is not generalised. On the other hand there are areas where without the inducement of the state, nothing will happen. I mentioned infrastructure. In 200 years, nobody has decided to build a railway between Rio and Chile or Peru.

Brazil and even Argentina for that matter may have taken measures that are seen as protectionist, but I would hesitate because any simplified analysis in that direction might give the idea that we want to go back to the time of the big state company. This is not the case. We have CVRD growing as a big private company, Petrobras is influenced a lot by its private stock holders.

FT: Yet the companies that benefit from regional integration are primarily big companies in resources and construction.

But take AmBev, which produces beer. It is present in every country in South America except Suriname and Guiana. Textiles companies are investing in Peru to sell to the US. Of course it’s proportional and the big companies may be more involved, but I would need a detailed analysis of our exports.

FT: How much concern is there over the clear drive in Venezuela to go towards a more centralised, more executive-driven model with fewer checks and balances?

It’s certainly not our way, for many historic reasons. We follow Churchill’s model that democracy is flawed but is the best regime yet invented. And our model is certainly to have checks and balances and a free press, which I think we have proven.

Don’t ask me to be very specific. I can say we value freedom of the press and of criticism very much. We prefer it that way, for us, and we prefer others to follow the same route, but I can’t go into legal specifics. Whether we would make the same statements is something different. During the process of the referendum all the decisions were taken by the Venezuelan government and people, but whenever we can use our positive influence in situations like that, we do. Which doesn’t mean it’s always effective. And the Venezuelan opposition has made huge mistakes in the past.

FT: Is there concern at what might happen in Venezuela if the price of oil fell?

Even if that happens it won’t be immediate. President Chávez is aware that they can’t live only on oil revenues, they have to diversify their production and some of the things that they discuss with us to do with agriculture and industrial production, even some of their concerns about the timetable of Mercosur, show they are aware of this. I think he is concerned.

Things are not easy anywhere, and of course if we were to take the kind of line that other countries have taken in the past, of trying to influence the results of elections, that doesn’t work, in fact it backfires. Sowhat we can do is try to help in the dialogue in Venezuela between the government and the opposition. I talk a lot to Chávez but I also receive people from the Venezuelan opposition here. And if we can help in any other situation, like the one in Bolivia…

But all these things are very delicate. The principle is non-intervention, but we also follow the guideline of non-indifference. If we can help we try to help, in many situations in different degrees, and I don’t want to put too much value on this, but in Ecuador we were there, in Bolivia in previous situations also, but the conditions have to be there, sometimes you have to create confidence, and to do so involves not only political conditions but also economic and social conditions. It takes time.

FT: Has this approach enabled you to have influence in Venezuela?

You have to judge. Our objective is not to have influence, to make Venezuela part of the Brazilian sphere of influence, but if you mean to have dialogue… The meeting of the South American Community of Nations here was totally new. People pointed to disagreements and there were for sure, but the leaders of the South American countries had never talked so freely among themselves. And of course you only heard part of it, therewas a retreat just for the presidents. This creates an atmospherethat is helpful not for intervention but for good work – tomake the dialogue more fluid, and this atmosphere is something new. In the past whenever we held discussions it was under the eye of the north, at the summit of the Americas, but not among ourselves. And now we are meeting among ourselves.

FT: Has this been true of the Bolivian crisis?

If you had taken the attitude that many did in Brazil – and today I don’t think they would, but that they claimed they would take – then you would have had a history of radicalisation. You say words and you are stuck with them. We discussed, we reacted, we didn’t overreact, we defended our interests in a pragmatic away and also defended Bolivian interests. The potential for problems between Brazil and Bolivia is very big. We have a big border that was a dead border and is now a live border. We have gas pipelines, we have Brazilians in Bolivia and Bolivians in Brazil, we have resources – what we are trying to do is work on these things seeing them more as opportunities for cooperation than taking unilateral decisions that precipitate other unilateral decisions.

FT Interview: Dilma Rousseff, Brazil president’s chief of staff

FT: There seems to have been a change of emphasis in economic policy in Brazil, towards a more state-led model. Is that a fair assessment?

We in the government of President Lula believe that the hard work done over the past four years to create a stable macroeconomic environment allows us today to go after faster economic growth. This acceleration of economic growth will not come about in detriment to what we have achieved – stable prices, fiscal discipline and a good position vis a vis international markets. But we believe that the past four years of hard work enabled us to change the reality that we inherited and to widen our room for manoeuvre. So what is the order of the day? It is an investment programme that will increase economic growth, increase employment and create a better quality of life for the Brazilian population.

So, this programme that we call the PAC has measures to encourage private investment, to increase public investment in infrastructure and to remove bureaucratic, legal, judicial and legislative barriers to growth. This is why it is a programme that depends on the participation of the executive, of the legislature, of businesses, of all society. The most significant element is that it puts the stress on the variable of investment as the determining variable for increasing the rate of economic growth.

The fundamental thing is that it is based on a tripod, on a set of measures that works on three axes. There is tax relief on investment, the reduction of the tax burden that falls on investment. Especially at this moment in the national situation, I would give as an example the measure that reduces to zero all taxation on construction of buildings, which will benefit big construction projects, capital intensive projects. This is on one side.

On the other side, we are building and expanding on the alternatives for finance in Brazil, and making these alternatives better suited to the needs of long-term investment, with high capital intensity. This goes from the conditions of finance available from the BNDES [the government's national development bank], which is the big source of long-term capital in Brazil, where the maximum period has been extended from 14 to 20 years, and where we have increased the percentage of a project that can be financed by the BNDES to 80 per cent, from only 60 per cent previously. At the same time we have reduced the very significant risk spreads to be charged on these projects. And at the same time we have given relief from income tax on funds that invest in infrastructure.

And we are also increasing public investment as a way of unblocking the bottlenecks that we recognise that exist in Brazilian infrastructure. So we have designed a project for growth based on public investment in infrastructure that is also based on three axes: logistical infrastructure, including roads, railways, ports, waterways and airports; energy infrastructure, including generation and transmission of electricity, and fuels – petroleum, gas, and renewable fuels like ethanol and biodiesel; and third, amplification of social and urban infrastructure where services are deficient. First, in electricity, we have a programme that brought electricity to 5m people up to 2006, and we will replicate this programme from 2007 to 2010 to reach another 5.3m people. And in sanitation, we are expanding the coverage of water, sewerage, electricity and rubbish collection for the Brazilian population. And there is social housing, for those parts of the population where there is a housing deficit – 96 per cent of the deficit is in people earning up to five minimum wages [the minimum wage is currently R$350 a month]. So we are not only using public money but also expanding the availability of finance for sanitation and housing.

In addition, in Brazil there is a semi-arid region on the north east and even in the south east, and we are doing a programme of irrigation for these regions, as well as a water treatment programme for the interior regions. And we are building metropolitan railways in five big metropolitan regions.

This all comes to R$504bn, from the following sources.

A small part, about R$67bn, is from the national budget. The second part comes from public sector companies, the Eletrobras system and Petrobras. Another part is from finance using public funds and the FGTS and FAT [two unemployment and welfare funds financed by workers and employers], as well as finance from public banks – the BNDES, Caixa Econômica Federal and Banco do Brasil. And, lastly, all the institutional structures that exist in Brazil to allow public-private partnerships. We are amplifying all the partnerships that Petrobras has with private companies – in this period there will be about R$24bn in partnerships between Petrobras and private investors. And we are doing concessions, R$22bn from private investors in partnership with Petrobras in oil and gas, and in electricity on generation and transmission.

This is standard in Brazil, these partnerships. In roads, rail, ports, waterways and airports, we are doing concessions. We are preparing seven highway concessions and three in railways.

FT: Are those road concessions the ones that were recently put under review?

They are being reviewed because of the rate of return on capital [guaranteed to concession holders]. The values that are in the formula reflect a different Brazil with different interest rates. As interest rates are falling it isn’t appropriate to have a rate of return of 26.6 per cent. We are reviewing this as we think it is a bit excessive.

All this has a big strategic focus, which is that we view the question of development of infrastructure as a crucial instrument for reducing regional imbalances. We are focussing significantly on the north and north-east, without forgetting the south and south-east. We are working to reduce social imbalances in Brazil.

On the environment, our first focus is on changing the legislation as it stood at the start of our first government, when you could begin a construction project without an environmental licence, so you would put a project out to tender without knowing its environmental impact. Now you must have a licence in advance. In the case of hydroelectric generation you have to have an integrated environmental licence, so that you evaluate the impact on the whole water system, not just the local impact.

And we have a new emphasis on renewable fuels. Brazil is playing a big role in the world in renewable fuels, in ethanol and biodiesel. We expect significant expansion, about 77 new ethanol refineries, plus 46 new biodiesel plants. They will produce 3.3bn litres of biodiesel and 23.3bn litres of ethanol. Plus we will build about 1,150km of ethanol pipelines. Total investments in this area will be R$27.4bn. That is a conservative estimate, only considering those projects ready to start now. We believe a more accurate prediction would be an additional 40 per cent to the end of 2010.

So the state is doing its part. It is supplying finance for the private sector to invest, providing stable conditions for investment, solving the problems of bottlenecks and providing the conditions for a big acceleration in economic growth.

FT: Is that the change of line, then, that the state is taking a new lead in stimulating growth?

The change of line is that at the moment when we came to power, this reality did not exist. I would say that it is not a change of line, it’s a change of reality. We created a better reality, in which we can now accelerate growth in a stable and appropriate way. The previous situation didn’t allow us to do this. We have a floating exchange rate, inflation targeting, and we are doing something a little similar to what was done in the UK, if I’m not wrong, by Gordon Brown, on the treatment of investment and current expenditure. We consider that only specific investments, to be approved by the president of the republic, can be deducted from the primary budget surplus [before debt repayments]. No current expenditure can be discounted in this way. And we also created some rules that favour expansion of the fiscal room for manoeuvre. We are creating a limit on the increase in public payroll in the three branches of government, of inflation plus 1.5 per cent per year.

FT: But doesn’t this merely control the expansion of spending rather than reducing it?

Look, we don’t have what I would call a static position. We are treating the variable of payroll spending in a dynamic way. It will grow up to a limit year on year, of 1.5 per cent in real terms. In this sense it is in line with our gradualist policy. What we are saying is the expansion will be 1.5 per cent, as we’re expecting faster growth in GDP of 4.5 to 5 per cent. So this is an increase below the rate of GDP growth. This is the analysis, from a dynamic point of view the proportion falls, from a static point of view this isn’t possible.

FT: Under [former finance minister] Antônio Palocci, there was an agenda of reforms. Under the second Lula mandate there seems to be the PAC, a package of public works, but no agenda for constitutional reform, of the pensions system, labour laws and so on.

In the case of the pensions system, the government recognises there is a need for reform, which cannot be satisfied at just the first stage. You have to systematically revisit the parameters of the pensions system to make it fit the demographic reality of Brazil. So we have set up a forum. In the first mandate we began the government with a pensions reform. And we saw that it did not produce the results we wanted. So we are opening the discussion again through the forum. It’s in this sense that I say that we have had a big change in reality.

When the first government began, inflation was in two digits, the external situation was so unstable that we needed a loan from the IMF, and Brazil risk [the difference between interest on Brazilian sovereign bonds and US treasuries of similar duration] was at more than 2,000 points. Now it is less than 190. So it’s not a change of policy but of reality. We constructed this reality, we created great stability, and I believe that in terms of indicators these results are significant from any point of view.

There has been a profound change in the way things are done in Brazil, not only in institutional reform. We did part of the pensions reform, at that time we weren’t able to take it further forward. Today we have already done a series of reforms and other improvements, such as the general law for the electricity industry, and for sanitation, and now we are doing one for gas, we have done a law for small and medium sized companies, we are unifying the tax and pensions collection systems, we have privatised the reinsurance industry, created a new bankruptcy law – so, a series of institutional instruments that have produced institutional changes that create a new environment for investment. We have repaid the IMF, we have a $46bn trade surplus, which is extremely significant, our international reserves have gone from almost zero to $90bn today, so we really have a situation that allows us after four years of government to bring in a programme to accelerate growth. The PAC isn’t the result of manoeuvring or magic or wishful thinking, it is the result of policies being pursued for four years.

FT: There is a view in the market that other reforms are needed, to cut current expenditure, to reduce the tax burden, to reform the labour laws and so on.

To enact pensions reform it is fundamental that you should have a consensus in society. This is what we intend to construct through this forum.

FT: Isn’t that the job of Congress?

The last reform that went to Congress was approved only in part. And we learned from this. The role of the forum is to create a consensus around a reform that will be sent to Congress. The forum will create the proposal. We can’t do that by hiring consultants. It involves different policies, various interests. So we want to arrive at a common interest. But I’d like to say this, we are in favour of a gradualist policy. The government would like to reduce taxes further, but as we are committed to a primary surplus of 4.25 per cent, we have a certain room to cut taxes that we would like to expand over time. In the first phase of the PAC, we are introducing a set of tax breaks on investment, tax reductions on digital television, semiconductors – there are a series of sectors that we’d like to include but can’t. But we have the horizon and the commitment to do so.

FT: What is the logic of reducing taxes sector by sector instead of across the economy?

As we can’t do it for everybody, the priority was to do it for two sectors. We have introduced tax reductions and institutional reform for the civil construction industry, and for capital goods and buildings. We are trying to take all the existing taxes off new investments. And we have done the same for the cesta básica [the basic basket of family shopping] and for software and digital products.

The logic is that there isn’t room to reduce tax for all sectors of the economy, in that we are still in the middle of a big fiscal adjustment. And we need money to pay our debts. So in the PAC we are predicting that we will arrive in 2010 with a ratio of debt to GDP that will have fallen to 40 per cent from 50 per cent today. And we are working on the basis that the nominal deficit will tend to fall to zero by 2010. So that over the next four years we will be able to consider other tax reductions. But this is a gradual process, we don’t want to run any risk of instability from introducing measures that go beyond our possibilities.

FT: There is an argument, though, that you could attack the problem of excess current expenditure at its roots.

In the past when we tried to do this we learned a few things. From the point of view of the hierarchy of expenditure in the Brazilian budget, the order is first pensions, then interest payments, then payroll, and then other current expenditure, including health and education. So when we tried to make a linear reduction in expenditure we came up against a certain inflexibility from the presence of payroll expenditure as part of the total. That’s why we have sent this proposal for an upper limit, as we have discovered this is a more efficient means of control. This puts a limit on the rate of growth, this is the idea. Because other expenditure isn’t relevant, it can’t be reduced as much as necessary, to do so doesn’t produce the desired result. That’s what we found out trying to do it. We learn from our mistakes.

FT: What about the quality of spending, such as on education?

The government has done a lot of work in improving the quality of spending. We consider that in the case of the Bolsa Família [an income transfer programme for the very poor] we were very successful. The PAC introduces significant controls over the quality of spending. We are now working on two fronts, health and education. It is important to improve the quality of spending in health, too, so through the planning ministry we are doing a series of studies to define performance indicators to control the efficiency of public spending.

FT: Is labour reform part of this?

This is not on the government’s agenda, it’s not on this agenda now. We don’t do everything that people say we should. We believe there are bigger priorities for this government. We think that dealing with pensions reform, the negotiations with the state governors on tax reform, this is complex enough and demands all our attention.

FT: What will be the timetable of tax reform?

This doesn’t depend only on us. It demands deep and complex discussions with the states. There will have to be compensations… The timetable can’t be our concern. We need to concern ourselves with the attempt. We presented a proposal for tax reform and it hasn’t even been considered yet. So we have learned, from trail and error. Not that our pensions and tax reforms were wrong, but that they weren’t possible in that format. So we are building a new political situation that may lead to their approval.

FT: How are you doing that?

It’s a complex process. It’s all being done to accelerate growth, to give the country a stronger institutional structure to allow the country to reach the level that we think is appropriate.

FT: Part of the institutional structure is the regulatory agencies. Critics of the government say these have been politicised. How do you respond to that?

I think in fact they were politicised, but not by the government, it was part of the political dispute in Brazil. We don’t have a vision of the agencies as something that is not strategic. They are strategic, first because we privatised a lot of sectors. Other sectors have somewhat concentrated structures. The agencies are strategic in establishing clear rules for long term investment, to ensure that there is competition between different agents to guarantee competitive prices for the consumer, and to oversee the quality of services. The government has used clear technical criteria in nominating directors to the agencies, and to see that the agencies are not responsible for government policy but for its execution. They don’t devise policy as they did in the past and, as we know, with bad results for the agencies themselves.

We nominated people who were rejected by Congress, and in some cases this explains it. The government took great care over the names it chose and it caused great embarrassment for those people that they were rejected. But I think this is in the past and I’d like to say that we have little tradition with regulatory agencies but some of those acting in Brazil are doing their jobs with great maturity, such as ANEEL in the electricity industry and the ANP in the oil industry. These are agencies that have performed excellently and on a technical basis, with clear autonomy but with respect for the decisions of long-term policy, applying the law in the correct manner. Other agencies are still going through and suffering the consequences of their youth. But all are on the way to consolidation. It would be very hard for us to implement this PAC, to ensure competitiveness and productivity, without the agencies. They can and do bring efficiency to the system. They bring security, they guarantee stability in regulations and they are responsible for setting tariffs at the right levels. So without them Brazil would not have advanced as it has done in consolidating the investment environment. Brazil is a stable country today in this respect.

FT: Has there been any change in regional energy policy?

Under the PAC, one piece of good news is that Brazil intends to ensure an increase of 55m cubic meters of gas per day between 2007 and 2010, of which 39.2m cubic meters are from the Santos, Campos and Espírito Santo basins, and the other 15.8m from gas that is extracted from Petrobras oil wells that produce gas along with the oil. In addition, Petrobras expects an additional 20m cubic meters per day from 2008 in LNG. So that adds up to 75m cubic meters. As we buy 30m cubic meters per day from Bolivia, in four years we will have more than doubled that supply from local sources. One of our strategies is to increase Brazil’s independence from any one source of supply, and we are making good progress. It doesn’t mean we will stop importing gas from Bolivia, we will continue to do so, not least because we have a contract to 2009, and because we believe our relations with Bolivia are fundamental. Plus there is the planned gas pipeline from Venezuela to Brazil. We know perfectly well the importance of natural gas to industry, to thermal power, and other uses. Venezuela and Brazil have partnerships in gas exploration and we will bring to Brazil gas that Petrobras is involved in extracting. At the same time we have this clear policy of increasing domestic production of gas and diversifying our sources of supply.

The fact that we want to see the integration of South America is not contradictory with our aiming for independence of supply. Brazil assumes the responsibility of the role that it has in integration, but that doesn’t mean we won’t develop our own resources. With our own 55m cubic meters per day we are still interested in the 30m that come from Bolivia and the 55m that will come from the Southern Gas Pipeline [from Venezuela]. Brazil is a country where demand for gas grows much more quickly than supply.

FT Interview: Guido Mantega, Brazil’s finance minister

FT: Tell us a bit about your interest in the British process and about the new accelerated growth plan you launched recently.

I met Gordon Brown at the G-8 – three or four times since I became minister. Our interest is in the way New Labour adopted an accounting concept which provides for an unorthodox way of valuing investment. Investment is something that generates wealth, it’s different from general spending, and also reduces costs for the private sector. We have a similar philosophy – we are implementing a growth plan that puts the emphasis on investment. What we need now for Brazil to become stronger is faster growth and to do this we need more investment. It is not enough just for consumption to increase. And in order to increase investment we are going to give up a bit of the primary fiscal surplus. This is what brings us close to Gordon Brown’s ideas. We don’t use the same methodology, but the concept is the same. In the Washington Consensus, investment is the same as spending. In our approach investment creates an asset, not a liability. It is not the same methodology – the British government permits indebtedness to allow investment. We can’t do that. Our objective is to stimulate private investment.

Public investment will occur to the extent that the private sector can’t do it. To build a road in the north-east that is still not profitable, for example. But from five to eight years ahead it will be. It will stimulate tourism, for example. The government makes investment and passes [the completed project]to the private sector through a concession. This will be productive – it will stimulate tourism.

FT: Won’t you affect debt sustainability by doing this?

Today the central bank will announce the public sector’s primary surplus [before debt repayments] for 2006. It will be higher than the 4.25 per cent target – 4.36 per cent or 4.38 per cent, something like that [it was 4.32 per cent]. We have designed priorities for our investment projects. Even the IMF has accepted that it is worth making this particular kind of investment and that we can deduct the cost from the primary surplus. We are increasing the volume of these priority investments from 0.15 per cent of GDP (in 2006 we achieved only 0.14 per cent) and are aiming to spend 0.5 per cent of GDP on these priorities. The primary surplus therefore could be lower than 4.25 per cent – but if the economy grows more quickly, the same could happen as in 2006 and the surplus might only fall by 0.25 per cent rather than 0.5 per cent. The worst case is that the primary surplus could fall to 3.75 per cent. The dynamism of the economy will make investment rise more.

For each million that the government spends in investment we expect that the private sector will follow with more money and that this will increase the total investment. We’ll increase growth to 4 or 4.5 per cent. It could reach 4.5 per cent. Also, if growth is faster, tax collection will rise.

With the economy today, with inflation under control, we are attracting foreign investment. Today we have more autonomy vis a vis the external market. We suffer the same as other countries. Today we suffer with $90bn of reserves. In 2002 we suffered with $15bn.

Interest rates are falling, big companies have access to international credit, the internal market is growing and the international economy is quiet. The Fund is always conservative but it admits that the economy is doing well. If in this scenario you increase investment by 0.5 per cent – the economy has to grow more at least by between 3.5 and 4.5 per cent.

FT: How are you choosing these priority projects ?

First we assess the economic impact that they are going to have. Let me give you an example. The centre-west zone is producing alot of soya and alot of meat, at least in volume terms. The problem is that the producers have difficultyin exporting. There is a road – the BR163 – that takes the produce to the ports. It is a priority to improve it because it will reduce costs. There are various ports and roads that will be improved.

The second criteria concerns environmental licenses. This is especially important for the two hydroelectric plants planned on the Rio Madera. Seventy per cent of our energy is hydroelectric, and we have to increase the supply of energy. Brazil is a big country and the energy is a long way from where it is needed. Today the energy is on a concession system. These two together will produce 6,600 megawatts, about half the amount produced by Itaipu. It is a bigger project than China’s Three Gorges. This will be big business for Brazil. There will be a tender, and the project will cost between $12bn and $15bn – it could be more, it could be less. They are going to need foreign banks to finance this. We expect a lot of competition for the construction contract. We have reduced taxes for construction companies to reduce building costs and the BNDES [the government's national development bank] has created a special financing linewith spreads of only 0.5 per cent on loans.

All this will mobilise a construction industry that was paralysed for a number of years. This can dynamise the economy – it will be a great work of engineering. We are also promoting housing. Today we have credit lines at fixed interest rates that have never existed before in Brazil. The amount of credit for housing between 2005 and 2006 has doubled. We know there is alot of foreign potential.

FT: There has been a lot of criticism about the package in Brazil. It is obviously good that you are attacking the infrastructure problem. Latin America in general isn’t investing enough in infrastructure. But in Brazil they say you are not doing enough to advance an entrepreneurship agenda, not enough, for example, to improve the business environment for small and medium-sized companies, not enough to reduce the weight of bureaucracy that can suffocate small business. Also they say – these critics – that you ought to reform the labour laws. How do you respond to these criticisms? Shouldn’t you be doing more to liberalise the Brazilian economy?

In the first case we are increasing the amount of investment in technology. There were never more resources for areas like venture capital than there are now. To renovate small business. Secondly, we have just approved a general law for small and medium sized companies that will do a lot to reduce bureaucracy. This does a lot to simplify the life of a lot of companies. Companies have to fill out various forms to pay taxes at the federal, state and municipal levels. Each one needs teams of accountants to do this. With thisnew law they won’t need to do this. It’s just one set of forms.And we are reducing the time it takes to open a firm. If a company has all its debts in order it can open in 72 hours. You can go onto the internet if you have the certidao negativa[certification of creditworthiness]and you can open your company – the objective is to be able to open it in 24 hours. We can only do this when we have the federal, state and municipal government working together, as is already the case in São Paulo. We are going to spread this throughout Brazil.

There is also a great degree of simplification for companies with turnover of up to R$2.4m per year. The lower the income, the lower the tax rates. For the company, this means debureacratisation. It can do everything on one simple form on the internet. Brazil has the quickest income tax system in the world. It will reduce business costs. It’s a big step towards simplification.

The revenue service wants to simplify the tax system by unifying all registrations to produce a single data base. We have done this with São Paulo state. This makes things a lot easier for businesses. It is also computerised. We have a pilot project with 35 companies, including foreign companies. It reduces bureaucracy and eliminates paper.

This is happening independently of the PAC. This modernisation, this reduction of the time taken to get things done, all this is being simplified. The finance ministry, that is doing all this, carrying these programmes through, we will make agreements with the majority of the states so that the majority of national GDP will be captured by this programme.

In tax reform, we will merge all our indirect taxes into a single national value added tax. Then the proceeds will be divided up so that the federation, the states and the municipalities all get their respective parts. We have an agenda of work whereby all these things are to happen and on March 6 we have the first meeting with the governors. This will be the first step in the tax reform. It will increase tax collection, and simplify everything. Those companies that don’t pay will have to pay. It’s a great step forward that will increase the formalisation of the economy. If everyone pays taxes we can reduce the tax rates, meaning that we can increase the efficiency of the system.

FT: What levels are you taking it to?

We have to take Brazil to the level of its competitors. We can’t have a rate that is higher than those of competing countries. This is our philosophy.

FT: And by when?

It has to be gradual. All the states have differential taxes – there are 50 different rates of the sales tax on services. We have to homogenise these rates. After we unite all the rates, once we have done this in the general law, this will mean the end of the fiscal war between the states. Today businesses move from one state to another and everything changes. We will put an end to this confusion, and end up with a more organised approach. Computerisation will allow us to know exactly what each state is getting now, and what it will lose.

Thereis a schedule to unify the data bases for all the states. This will create the objective conditions for a reform of the tax system, so we can know how to divide up the cake more effectively, because obviously states won’t want to lose their benefits. This system will increase collection for everybody – the government guarantees it.

FT: You’ve talked a lot about this before but nothing much has happened. Is it because interest groups are opposed ?

It didn’t happen because we didn’t have the technical conditions. With this technological advance we have a better grip on the numbers that will permit a better reform. It is more possible now because we will have a technical base we didn’t have before. The federal government already has agreements with the state of Bahia and the state of São Paulo. We want to do this with all Brazilian states and we are offering finance so they can do this modernisation. There is going to be a technical base. Obviously there are interests and we have to guarantee that states won’t lose out. We will have to compensate states that practice fiscal war. We will have to create a fund to compensate. This is possible.

The chronogram is that in the next two years the majority of Brazil’s GDP will be covered by these agreements. The majority of our GDP is covered by six states.

The super-simples [a simplified tax regime for smaller companies] unifies all these taxes at different levels. The simples was approved by Congress at the end of last year. It will come into force in July. It demands operational changes at the level of the states.

FT: How are people at the IFC receiving this. They must see it as very positive?

I imagine they are following this. It is very positive. It is a great advance.

Another is the super-receita, a unification between the revenue service and the pensions collection system. Oversight is being unified in the revenue service, part of the finance ministry. This will diminish bureaucracy. It has been approved by the Senate but not by the lower house yet but we will throw our parliamentary base behind this.

FT What about labour law? The government looks as if it is not interested.

The general law [for small and medium sized companies] simplifies and reduces labour costs for small and medium sized companies. At a more general level the discussion still has to take place. We have to have a discussion inside and outside government. Congress is open to pressure.

FT: Would you like to see a labour reform?

I would like to see a project to reduce costsfor companies, without harming the workers. The skill will be this, to reduce the contribution paid by companies on their wage bill, to allow them to be more effective. But we have to make sure we don’t unbalance the public accounts. We must take a lot of care about this. We can compensate with a stronger level of activity. Today we have a lot of workers that are outside the formal sector. I’d prefer that people pay less but more people pay.

We want to give the self-employed the chance to pay less than 20 per cent but they would in turnreceive less rights .

FT: Has there been any advance on concessions and public-private partnerships?

Concessions in the electricity sector have worked well. On highways, Brazil has tenders almost ready for a series of concessions. We delayed the launch because the profit rates built into these concessions were really very high. It’s just because of that that we blocked them. Profit rates were above 20 per cent per year. They will be tendered. It’s just that the rate was too high.

Public-private partnerships have taken time to be regulated. This is a new thing in Brazil. It took three years to be regulated. We are learning. The first PPP will come out soon.

Tags: , biodiesel, Celos Amorim, Dilma, Economy, Energy, Environmental, ethanol, FT, gas, houses, IFC, Income, Itaipu, Lula, oil, PAC, Palocci, Paraguai, Paraguay, Petrobras, PPP, textil, Trade, Uribe, uruguai, Uruguay, Venezuela