The decision to award the 2016 Olympics to Rio de Janeiro in October crowned a momentous period in the country’s history and left many observers in no doubt: Brazil’s time had come. The country’s Olympic win followed the announcement that the football-mad nation was to host the World Cup in 2014.
In September, another less publicised but nonetheless important award took place: Moody’s upgraded Brazil’s sovereign debt to investment grade. It was the last of the major ratings agencies to give Brazil its seal of approval.
According to Moody’s: “Evidence of strong economic and financial resilience can be seen in the modest and short-lived contraction in GDP, minimal weakening in the country’s international reserve position, moderate deterioration in the government debt indicators and lack of financial stress in the banking system.”
It was a significant vote of confidence in an economy that has long been hamstrung by boom-and-bust cycles. “Moody’s upgrade certainly opened some doors. Some international investors were waiting for it to happen,” says Antonio Felix de Araujo Cintra, capital markets head at TozziniFreire Advogados.
This year, South America’s most populous country emerged from recession in the second quarter, with economic growth of 1.9%. “Unlike many European economies, Brazil has bounced back fast,” says Fabio Perrone Campos Mello, a partner at Campos Mello, Pontes, Vinci & Schiller.
Brazil’s financial sector has held up comparatively well during the downturn as a result of tight government regulations that had kept lenders in check. “Our regulations are stricter than in other places. Banks were shielded from some of the problems. They didn’t have toxic assets on their balance sheets. After the initial shock they started to lend again and lending is increasing,” Cintra says.
This year, the Brazilian stock market has been one of the world’s top performers. The benchmark Bovespa index has increased in value by more than 75%. Equities trading volume hit an all-time high in the autumn. The level of investor confidence was highlighted in October by Spanish bank Banco Santander’s US$8.1 billion initial public offering of shares in its Brazilian subsidiary – the world’s largest IPO this year.
“The IPO market is getting hot again and we have seen a number of debt offerings in the market. Companies are taking advantage of the increase in liquidity,” says Cintra. “The recent activity in Brazil’s financial markets recently suggests it’s about to become a far more prominent global player,” says Maria João Pereira, a partner at Rolim, Godoi, Viotti & Leite Campos. Many analysts predict that Brazil – with GDP forecast to increase by 4% in 2010 – will be one of only a few countries to offer steady economic growth in the next few years.
A host of international law firms have placed their confidence in Brazil’s long-term future and opened an office, despite the fact regulations prevent them practising Brazilian law. In recent months, DLA Piper, Simpson Thacher and Gibson Dunn have been among the international firms to announce plans to open offices in São Paulo.
Oil underpins Brazil’s optimism
The announcement two years ago that Brazil had discovered vast oil and gas fields in the seas off its eastern coast – the largest discovery in the Western Hemisphere for 30 years – underlies the newfound confidence in the country.
Officials believe there may be between 50 billion to 100 billion barrels of oil and gas in the Santos Basin off the coast of São Paulo and Rio de Janeiro states, enough to turn Brazil into a major oil exporter. But the so-called ‘pre-salt’ fields lie beneath up to 7,000 metres of water, rock and a hard-to-penetrate layer of salt.
Many law firms are preparing for the surge in energy, projects and finance work that the presalt fields will generate. “It’s good news for lawyers. The oil discoveries will boost all sectors,” says Rolim Godoi’s Maria Pereira “There will be a lot of legal work. Not only in the oil business but everything that concerns the life of a company in a foreign country,” says Luís Felipe Pellon, the founding partner of Pellon & Associados, who specialises in insurance and reinsurance.
“We are looking at that market and have opened some new departments in Rio where many of the oil companies are based.” But no oil can be extracted, and no deals brokered, until the government establishes new laws regulating the area. At the time of writing these were still being debated in congress.
In September, Brazil’s president Luiz Inácio Lula da Silva proposed rules that would give Petrobras, the government-controlled but publicly traded oil company, a privileged role in developing the vast offshore fields. Petrobras will take at least 30% of any consortium, will be the lead operator in all of them, and may be granted licences on its own for any field at the government’s discretion.
The Brazilian government controversially plans to replace the existing concessions system with production sharing contracts. Under the present concessions system, companies own any oil they produce in exchange for taxes and fees.
But under the new production sharing agreements, the oil remains government property and oil companies are given a share of it as payment for their services. The government also plans to create a new state-run oil company – provisionally called Petro-Sal – to oversee the production sharing agreements and run the pre-salt reserves.
The new company will have half the votes on each consortium’s operational committee and a veto over any decisions, including the rate of oil production. The new rules have met with dismay by many senior figures in the oil industry.
“The opportunity set in Brazil has been reduced, there’s no question of that,” George Kirkland, the vice president for global upstream and gas at Chevron, told Dow Jones in October. “It’s really limited now, frankly, to the present licences that you hold.”
Lawyers fear the new rules will discourage international investment in the oil sector and could result in inefficiency, corruption and overstretch. “Production sharing agreements are not a new thing for the world’s major oil companies. But the contractual regime that has been introduced in Brazil is very peculiar,” says Antônio Luís de Miranda Ferreira, a Rio de Janeiro-based partner at Schmidt, Valois, Miranda, Ferreira e Agel Advogados.
“Hundreds of companies operate in Brazil’s oil industry. But we’re afraid that we’re returning to the past, making Petrobras a state monopoly, and closing our industry to private investment. The oil majors might not want to participate in this situation. I’m pessimistic about this new regime and the changes to the petroleum and gas industry in Brazil.”
The Brazilian government has ideological reasons for seeking greater control of its oil fields and plans to invest the profits in poverty reduction schemes. Other lawyers take a more sanguine view about the changes in regulation.
“The new rules do not encourage foreign investments, but they don’t exactly discourage them either,” says Marcelo Viveiros de Moura, a partner at Pinheiro Neto Advogados.
“Investors in the oil industry are used to operating in much tougher and more difficult countries than Brazil. We have clients that have their entire industrial capacity occupied for the next few years in order to produce equipment for the Brazilian oil industry.”
Infrastructure investment
Brazil’s Finance Minister Guido Mantega says that the pre-salt fields will add 1-2% to the country’s gross domestic product in the coming years. Moreover, Mantega predicts that the Olympics and World Cup will each add 1%.
But Brazil requires massive investment in infrastructure if it is to take advantage of these new opportunities, and the government has thrown its weight behind a slew of projects.
“These circumstances will require huge investments in the national infrastructure. Federal Government investment programmes in the next few years will reach US$30 billion in logistics, $140 billion in electric energy, oil, natural gas and renewable fuels, as well as $70 billion in sanitation, urban and rural electrification, housing and transportation,” says Luís Felipe Pellon of Pellon & Associados.
The city of Rio de Janeiro has suffered from a lack of investment since the national capital was moved to Brasília in 1960. Federal and local authorities see the Olympic games and the World Cup – which will see Rio hosting the final – as a golden opportunity to rebuild and resurrect the city.
“Rio was somewhat abandoned. At the same time São Paulo grew and prospered. The government is committed to holding a games that will rebuild the city. Everybody sees it as an opportunity for Rio to reinvent itself, just like Barcelona did with the 1992 Olympics,” says Fabio Rezende, a Rio-based partner at Vieira, Rezende, Barbosa e Guerreiro.
The reinvigoration of Rio de Janeiro will require a huge amount of work. The city is woefully short of hotel capacity, for instance, and the number of visitors is set to surge. Vieira, Rezende, Barbosa e Guerreiro’s clients include a number of leading players in the hotel and real estate sector.
“There will be a lot of real estate and investment work involving various funds, and real estate companies, in negotiation with the hotel brands,” says Rezende.
Likewise, Rio’s Galeão-Antônio Carlos Jobim International Airport requires a lot of investment to modernise its facilities and increase its capacity. “It’s not going to be an easy task. It will require massive investments from the private and public sector. There have been discussions as to whether the airport should be privatised,” says Rezende.
“In many areas – infrastructure, ports, roads, irrigation – a lot needs to be done. If these projects are not implemented we are going to have a bottleneck in our growth shortly. It’s a huge opportunity,” says TozziniFreire Advogados’ Cintra.
His firm is presently advising a Japanese client in relation to the construction of the $9 billion high-speed rail project connecting Paulo and Rio de Janeiro. The link is expected to be operational by 2014.
Many Brazilian firms are already moulding their strategies to cash in on the surge in work that the Olympics and the World Cup will create. “There will be a lot of work for lawyers in real estate, transportation and infrastructure,” says Fabio Perrone Campos Mello, a partner at Campos Mello, Pontes, Vinci & Schiller, who has created new groups to target certain sectors.
Says TozziniFreire Advogados’ Antonio Felix de Araujo Cintra: “We have a multi-disciplinary group looking at the World Cup and the Olympic games and looking at all the opportunities these events will create. The projects are in a very embryonic period but we believe there will be very good opportunities.” But Brazilian lawyers are also keen to strike a note of caution amid the optimism. The country has had its fair share of false dawns in the past. “There are undoubtedly huge opportunities in Brazil at the moment, but there are also challenges to face to ensure the country progresses,” says Rolim Godoi’s Maria Pereira. “We need to increase trust in the country’s institutions and promote stability. This is crucial if the country is to continue to attract foreign investment.”