The Custo Brasil - President Rousseff, tear down this wall!
by Matthew Gleason, Berners Consulting São Paulo
Brazil is an extremely attractive market given the large population and growing consumer class, but the Custo Brasil represents a significant barrier to entry. Custo Brazil is a common term for the “Brazil Cost” – costs that exist only in Brazil, putting the country at a competitive disadvantage internationally. In this article, we take a look at the causes, manifestations, and consequences of the Custo Brazil.
With low GDP growth in 2012 of just 0.9% and inflation of around 5.8%, the Brazilian economy continues to underwhelm. With other South American countries like Chile, Peru, and Uruguay seeing growth rates of 5.5%, 6.1%, and 3.6% respectively, Brazil’s sluggish economic performance cannot be blamed on the overall global economy. Even as the Rousseff administration attempts to stimulate the economy through narrow and temporary tax cuts to selected industries, investors and entrepreneurs operating inside the country are beginning to focus their blame on one thing: the “Custo Brasil”.
The Custo Brasil or Brazil Cost is well known throughout the country as that which raises the cost of doing business. The Custo Brasil is why the country ranks 130th out of 185 countries in the World Bank’s Doing Business Report (it is ahead of only India among the BRICS). It is why everything from consumer goods and electronics, to cars and heavy machinery costs so much more than in the rest of the world. It can be defined differently depending on who you ask, but it is essentially a result of Brazil’s extremely poor infrastructure, excessive bureaucracy, and infamous tax code.
Poor Infrastructure
According to a study produced by the Federation of Industry in the State of São Paulo, companies spend an extra USD 8.5 billion per year as a result of poorly maintained infrastructure such as dilapidated freeways and ports with insufficient capacity. According to the ILOS institute, 30% of the price of soybeans produced in the Matto Grosso and shipped through the Santos port is a direct result of transportation. Goods can sit for weeks before they are finally shipped.
Besides poor infrastructure in terms of the country’s roads and ports, Brazil suffers from high energy costs even though 70% of its energy is derived from hydropower, generally considered a cheaper form of energy. A study put out by the Federation of Industry of Rio de Janeiro found that the average cost of energy in Brazil is 50% higher than the global average and more than double that of other emerging economies.
To her credit, Rousseff has begun attacking the country’s infrastructure problems through a series of concessions. These concessions will allow private companies to bid on projects and allow them to operate large swaths of the country’s roads and rail lines as well as managing a number of the country’s ports and airports for up to 30 years in some cases.
The government has also reduced taxes on energy which account for a hefty 45% of the total costs according to a report by research institute, Acende Brasil. These changes, though positive, amount to only a fraction of the overall Custo Brasil.
Excessive Bureaucracy
In Brazil, starting a business can take an average of 119 days, which is outrageous when considering the average for Latin America and the Caribbean is 56 days and a mere 12 days for OECD countries. The time combined with various visits and payments to numerous bureaucratic agencies can give even the most motivated entrepreneur pause. Once a business is up and running, the bureaucracy continues to impede. Construction permits take around 470 days to obtain and both enforcing contracts and resolving insolvency can take years according to the World Bank’s Doing Business Report.
Cumbersome Tax Code
Brazil also ranks poorly (156 out of 185) in terms of its tax code. The corporate income tax rate is 34%, but depending on the industry, companies can see almost 70% of their profits eaten away in total taxes and contributions.
The cost of maintaining labor is significant with companies paying around 40% in taxes and contributions for each employee. Simply complying with the Country’s complicated system can take on average 2600 man hours, which is significant given that the average for Latin America is 367 days. The costs are considerable given that companies have to maintain a significant staff to oversee their compliance (Petrobrás, for example, maintains a staff of around 900), or spend money hiring firms to oversee their compliance for them.
If President Rousseff is really serious about returning the country to the growth rates of the last decade she will have to reform the tax code, and not merely cut a few rates for favored industries. She will have to expend political capital by slashing bureaucracy, which won’t be easy given the country’s powerful public unions. Finally, she must continue to put the country’s management of infrastructure into private hands.
Some changes will be painful and politically expensive given the groups and powerful interests that benefit from the Custo Brazil, but the country’s future growth will depend on Dilma’s willingness to bring down this wall.
Sources: World Bank, Exame, Terra
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