February 21, 2007 4:08 pm

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

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Jonathan Wheatley, the FT’s Brazil correspondent, recently interviewed Dilma Rousseff, chief of staff to President Luiz Inácio Lula da Silva. Mr Wheatley and Richard Lapper, the FT’s Latin America editor, also spoke with Celso Amorim, Brazil’s foreign minister, and Mr Lapper talked with Guido Mantega, Brazil’s finance minister.

FINANCIAL TIMES: 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?

DILMA ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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.

MS ROUSSEFF: 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.

MS ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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.

MS ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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?

MS ROUSSEFF: 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.

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