V - Reducing the "Brazil Cost

Stimulating Exports

Reducing Infrastructure Costs

Lowering Investment Costs

The Brazil Cost is truly a major obstacle to the growth and competitiveness of the Brazilian economy. There is a collective effort among the various government agencies to face this problem.

There are three principal groups of measures already underway: stimulating exports, reducing infrastructure costs, and lowering investment costs.

Stimulating Exports

The following specific, direct measures taken to stimulate exports are worth mentioning:

1. Tax relief. Primary and semi-finished goods represent no less than 40% of Brazil's exports. The ICMS tax on these exports has been eliminated. The government has also eliminated the PIS/PASEP and COFINS taxes on materials used in the production of goods for export or for sale in the domestic market to exporting companies.
2. Regulation of export credit insurance. This measure seeks to protect Brazilian exports of goods and services against commercial, political and extraordinary risks that affect economic and financial transactions linked to export credit operations. In the event of difficulties with the importer of the Brazilian product, the exporter will be "protected" by the insurance.
3. Financing exports and reducing related capital costs. Among these measures are: a) an extensive reformulation of the Export Financing Program ("Programa de Financiamento às Exportações" - PROEX), expanding the list of eligible products and extending financing to the production phase to make it more attractive and effective. Whereas the government paid out US$82 million and US$115 million in 1995 and 1996, respectively, expenditures of no less than US$1 billion are anticipated for 1997; b) the widespread restructuring of the National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social - BNDES) to make it a key element in the financing of Brazilian exports. To this end, an export financing line of R$1 billion was created at the Bank for use by sectors like footwear, autoparts, clothing, and furniture. In addition, the financing term for capital goods exports was increased to 10 years, through Finamex, an export financing line of the BNDES; c) the setting of a zero IOF tax rate on external resources aimed at financing export companies.
4. Other measures, like the creation of the so-called "dry ports" which, by decentralizing customs procedures to the regions in which the goods are produced, decongest the ports and airports, saving time and money.

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Reducing Infrastructure Costs

It is estimated that just the leasing of the Santos port to the private sector will reduce the cost of loading a container from the current R$500 to R$150.

The most general measures to reduce infrastructure costs tend to have a positive impact on every sector of the economy, including naturally the export sector. These measures include the following initiatives:

1. modernizing management of the stevedores;
2. simplifying the structure of port duties (it has already been possible to reduce from 18 to 7 the number of different duties charged);
3. making more flexible the concession, leasing and privatization processes and, especially, breaking up the state monopolies in the fundamental infrastructure areas needing investment, such as railroads, ports, telecommunications, energy, highways and waterways. On this point, it is worth mentioning the benefits that are already visible. The private sector concession of cellular phone services will reduce consumer costs impressively. In the Federal District alone, where the winner of the bidding process has already been decided, the cost of a phone will fall from R$330.00 to R$158.40, a reduction of 52%. The cost for calls will decline, on average, by 30%. Businesses will benefit immediately from the significant decrease in port service costs. In addition, with the soon-to-be-concluded privatization of the railroads, a significant jump in investments in the sector is anticipated, reaching an estimated R$4 billion. The companies that purchased the railroads have committed themselves to guaranteeing that the number of accidents will be reduced by at least 40% by the fifth year of operation. Finally, the investment in the Madeira Waterway (in the Amazon region) is expected to reduce the cost of transporting grains to Roterdam, for example, from R$105/ton to R$70/ton.

It is estimated that just the leasing of the Santos port to the private sector will reduce the cost of loading a container from the current R$500 to R$150.

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Lowering Investments Costs

The third group of measures designed to reduce the Brazil Cost is comprised of direct efforts to reduce the cost of investments. Among them, the following deserve mentioning:

1. reducing to zero the import tax rate for capital goods, computer technology and telecommunications equipment. Capital goods, both domestic and imported, will also be exempted from the IPI;
2. reducing and simplifying, through the Integrated System for the Payment of Taxes and Contributions of Micro-Enterprises and Small Size Business ("Sistema Integrado de Pagamento de Impostos e Contribuições das Microempresas e das Empresas de Pequeno Porte" - SIMPLES), the taxes and contributions paid by small- and medium-sized companies;
3. reducing the rates of the Income Tax on Legal Entities ("Imposto de Renda sobre Pessoa Jurídica" - IRPJ) from 25% to 15% and of the Social Tax on Net Profit ("Contribuição Social sobre Lucro Líquido" - CSLL) from 10% to 8% for business in general and from 23% to 18% for financial institutions and insurance companies;
4. recalculating the TJLP (long-term interest rate based on BNDES loan rates) in order to reduce it;
5. allowing the borrowing of external resources to finance both farm production and activities of industries linked to the sector, as well as reducing the interest rate for the 1996-97 agricultural harvest.

Until recently, no serious effort had been made to reduce the Brazil Cost. Today, three years after the implementation of the Real Plan, it is true that we still have plenty to accomplish. However, it is also true that we have achieved a number of successes.