Cablegate: Brazil: Infrastructure and More - Treas Das O'neill Visit

DE RUEHBR #0272/01 0601140
R 291140Z FEB 08





E.O. 12958:N/A

REF: A) Brasilia 36 B) Brasilia 196

1. (SBU) SUMMARY: In January 29 meetings with BNDES, Casa Civil,
Central Bank, and Planning and Finance Ministries, Treasury Western
Hemisphere DAS Brian O'Neill advanced discussion of a possible
US-Brazil infrastructure initiative, further explored bilateral
investment and tax treaties (see para 11), and discussed other
issues ranging from the OECD to the IMF. DAS O'Neill welcomed the
establishment of the BNDES infrastructure Project Facility Fund.
Casa Civil indicated MRE may propose a specific infrastructure
project for joint cooperation by early March. DAS O'Neill noted USG
would react soon to projects proposed by the Planning Ministry. END

Casa Civil excited about the PAC

2. (SBU) In a meeting with U/S Miriam Belchior, the ExecSec for the
PAC, and staff, Casa Civil indicated that MRE intends to propose an
infrastructure project for joint US-Brazil cooperation (a
Atlantic-Pacific railway) before the Secretary's visit. The
Ambassador cautioned that any such proposal would need to be
presented well in advance to ensure Washington would have time to
consider the idea, including environmental, political and economic
factors, before USG could welcome any proposal. The Ambassador also
suggested that a Brazilian proposed list of a number of possible
projects, drawing possibly from the energy and transportation
baskets of the PAC (ref B), for USG interagency review, might be the
most helpful way forward.
3. (SBU) Planalto officials provided an overview of proposed and
initiated projects in the three PAC categories (transport, energy
and social/urban) and noted status updates will be published every
four months through 2010 (see ref B). Belchior noted that BNDES (or
sometimes World Bank or IDB) usually carries out the feasibility
studies. Belchior said the studies determine whether government
funding/participation is necessary in a given project. All Casa
Civil participants looked noticeably uncomfortable when DAS O'Neill
suggested that market forces, eg auctions, would demonstrate whether
public, private or a mix was the most appropriate for a given
project. Belchior indicated that the political costs of an "failed"
(ie, insufficient private sector interest) auction would be
considered too high by the government, hence the preference for
studies to pre-determine the project mix. Chief of Staff Antonio
Alves noted that contract security and judicial issues were problems
often highlighted by the private sector. He indicated that the
private sector has expressed frustration that in contracts involving
some public sector money, contract terms are often changed after the
fact to require private sector participants to contribute more than
expected to "rebalance" the project mix.
4. (SBU) Casa Civil explained that PAC is managed by an executive
committee comprised of Casa Civil (exec sec), Planning and Finance
Ministries. Working groups for specific sectors (eg, oil/gas, rail,
road, ports, airports, metro, housing, sanitation) meet weekly in
half-day sessions to review specific project progress. Participants
explained that BNDES is generally involved in a support role, via a
contract to provide operational support in consultation with the
relevant sectoral Ministry (Transport, Mines and Energy, etc) and
the PAC Ministries (Planning, Finance, Casa Civil). BNDES may, in
turn, contract out the operational support/studies it is asked to
provide. New projects advance through the working group process to
Ministers (Casa Civil, Planning, Finance) for approval.
5. (SBU) Ambassador Carlos Texeira, Casa Civil special advisor for
international issues, indicated that GOB would like to arrange a
"roadshow" to the United States to showcase PAC projects and
stimulate US investor interest. He asked that USG engage to make
this proposal a success. DAS O'Neill agreed to help and noted his
view that an infrastructure mission to Brazil would complement this
idea. Casa Civil concluded the meeting by emphasizing that the PAC
is predicated on Brazil's economy continuing to grow and is intended
to strengthen that growth by creating additional jobs and
opportunities. However, Antonio Alves cautioned, any global
slowdown that affects Brazil would impact PAC's potential for
Central Bank -new International Affairs Director
6. (U) In a brief courtesy call with Maria Celina Berardinelli, the
new Central Bank Director for International Affairs, DAS O'Neill and
Berardinelli provided each other a quick overview of their
respective economies. Berardinelli stated short-term volatility
would be high, but CB is "calm" regarding the medium-term, in part
due to Brazil's flexible exchange rate, in part due to high
reserves, and in part because Brazil is an external creditor with
low debt to the United States. Berardinelli, noting she had been in

BRASILIA 00000272 002 OF 003

place only one week, indicated her expected priorities for 2008 to
include: 1) following up on her predecessor's work to liberalize
exchange regulations and ease restrictions on international exchange
markets' use of the real; 2) G-20 chair responsibilities for Central
Bank; and 3) working with Argentina to design the details of the
plan to permit transactions for goods in local currencies rather
than the dollar. She evinced enthusiasm for this initiative, noting
this Mercosul pilot would open up export opportunities for small
firms that do not have the ability to run the hoops required to
transact in dollars.
BNDES - Project Fund Facility for infrastructure projects
7. (U) Luciano Coutinho, President of BNDES, emphasized that BNDES'
role, by law, is to provide operational support to GOB on
infrastructure projects, but that only Casa Civil/Planning
Ministry/Finance Ministry (with sectoral Ministry input) can
actually greenlight specific projects. He described a fifty million
usd Project Facility Fund established at BNDES in December. This
revolving fund will be used by BNDES to contract out project
development modeling. Based on a project study's results, BNDES
will recommend to the government whether a project can be done
entirely privately OR requires public funding OR could be down as a
public-private partnership. Once a bidder is selected for a given
project, that bidder has to pay the fund back for the cost of the
study. Coutinho noted that Brazilian law had to be changed to
permit establishment of such a fund. Coutinho welcomed a similar
fund that Citi and Bradesco are developing, noting a private fund
will be able to react more quickly and flexibly as BNDES is bound by
the rules of public procurement law. Continho emphasized that BNDES
welcomes any additional support for project development, including
further work with USTDA.
8. (U) BNDES is working with IDB to winnow down IDB's lengthy list
of Latin American regional integration logistics and energy project
proposals and identify priority projects for Brazil. BNDES plans to
work cooperatively with IDB, WB, and/or CAF on selected projects,
drawing on an IFC/IDB/BNDES fund that has a small budget.
9. (U) A follow-on meeting with BNDES number two for infrastructure
projects Rodolfo Torres and Planning Ministry Chief economist Luis
Pereira discussed similar themes. Treasury DAS O'Neill indicated
the Washington interagency is considering Planning Ministry's
proposed list of potential projects for US-Brazil cooperation and
will provide a reaction in mid-February. DAS O'Neill agreed with
the Ambassador that a permanent USTDA representative in Brazil would
be helpful as the initiative moves forward.
FinMin COS Melin on Investment, Tax Treaty, OECD, IMF, Debt
10. (SBU) Regarding investment agreements, Luis Melin, Finance
Minister Mantega's new chief of staff (formally the International
Affairs Head), Melin noted executive agencies' extreme caution in
negotiating a first or model agreement based on the CAMEX-discussed
principles. He noted that discussions regarding negotiating
strategy and the principles themselves are on-going. Finance's
priority is to negotiate with Argentina, where Brazilian investors
are clamoring for protection. Finance continues to argue for the
principles to include an explicit reference to an investor-state
dispute resolution mechanism (which he confirmed is not currently
included). On a bilateral tax treaty, he acknowledged the concerns
regarding revenue loss, but underlined that a tax treaty "with the
US is far more complex for us than with other countries" noting in
particular the "challenging factors" of differences in accounting
systems, legal systems, and federal/state relationships in both
countries. Melin suggested the best approach would be "to tackle
tax treaty issues one by one" to see what is achievable in discrete
areas to increase mutual understanding and ascertain mutual gain.
He suggested that both sides discuss accounting issues, legal
issues, revenue loss studies, etc incrementally, "without saying we
need a tax treaty by date X."
11. (SBU) Treasury noted the TFCA confirmation may be ready by the
end of February. Melin welcomed this agreement as significant
economically and important politically for Brazil at a time it is
managing much criticism regarding its environmental stewardship.
Melin was pleased he had succeeded in reversing Brazil's position
regarding voice and vote in the IMF and indicated progress that
Treasury would welcome would now be possible. On OECD, Finance is
interested in finding areas of possible cooperation, mindful of MRE
caution (Finance invited OECD as an observer to the G-20 they chair
this year). On debt relief, Melin noted Brazil's evolving approach,
and continuing controversial discussions with Congress and with MRE
regarding how far Brazil should go. He noted Brazil's actions on
Liberia and Guinee-Bissau, where GOB was able to offer more than
originally planned after much internal negotiation. He cautioned
that Iraq debt relief could be "the straw that broke the camel's
back" in encouraging a more forthcoming Brazilian approach to debt

BRASILIA 00000272 003 OF 003

relief, underlining the enormous political controversy Iraq
generates in the Brazilian Congress and government.
12. (SBU) COMMENT - DAS O'Neill's meetings greatly advanced mutual
understanding regarding Brazil's process and mechanisms for choosing
and designing infrastructure projects as well as US mechanisms such
as USTDA that may be helpful. In addition, Finance Ministry
feedback regarding challenges regarding the bilateral investment
treaty and bilateral tax treaty was useful as USG considers next
steps. In a very positive day of meetings, where the mutual desire
for cooperation was evident, the issue of requested Brazilian debt
relief for Iraq was a noticeable difficult moment. END COMMENT

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