Gateway House » R. Viswanathan

The rise and fall of Petrobras

R. Viswanathan — Thu, 11 Jun 2015 10:30:23 +0000

India’s minister for petroleum Dharmendra Pradhan’s visits to Mexico and Colombia in May were a major part of India’s ongoing strategy to diversify its energy import basket. Not on the itinerary however was Brazil, which is home to one of the world’s largest public sector energy companies.

Petróleo Brasileiro S.A. (Petrobras), the Brazilian national oil company, is at the centre of a major corruption scandal which has been unfolding since March 2014 and sparked widespread protests across Brazil earlier this year. Prosecutors found that bribes of $800 million[1] had been taken by Petrobras executives, private contractors and politicians. The assets and contracts of the firm were inflated and auditors had initially refused to certify its balance sheet in the absence of quantification of the losses caused by the scam.

This marks a considerable fall from grace for Petrobras, which just four years ago launched a $72.8 billion[2] IPO, the largest by any company in the world—and went on to become the fourth-largest global corporation[3], with a market cap of $214 billion[4].

The rise

Petrobras’ transformation from a firm founded as a government undertaking in 1953 that lacked any meaningful oil reserves or expertise, to one that was considered a model for national oil companies globally, was indeed remarkable. In the company’s favour, was a monopoly in the national hydrocarbons sector, which Brasilia opened up in 1997 to the private sector—during the heyday of the Washington Consensus—when neo-liberal policies were viewed with favour. [5]

The company invested in research, and developed deep sea technology, working with local suppliers in much the same way as Brazilian aircraft manufacturer Embraer did. Nationalistic spirit and determination was high. Investments led to discoveries of large off-shore pre-salt reserves.

By 2008, Petrobras had arrived.

It was listed among the top 50[6] companies in the world for its high transparency levels, according to Transparency International. And by 2011, the company had become a giant, producing over 2.5 million barrels per day of oil a day[7], working its way to making Brazil self-sufficient in crude oil. Boasting assets in 17[8] countries across Africa, Latin America and the U.S., Petrobras possessed cutting-edge expertise in deep-sea drilling and production.

But the oil giant was not done yet. It sought to enhance its management and financial information systems by incorporating best practices and technology from the developed countries. So the company decided to make its international debut, through a public listing on the New York Stock Exchange (NYSE). Petrobras kept the controlling 64% shareholding[9], and the rest were sold to foreign investors. All of Brazil cheered when CEO José Sergio Gabrielli rang the bell at the Sao Paulo exchange on September 23, 2010[10], and Petrobras’ shares began to trade simultaneously on the NYSE.

Thus refurbished, Petrobras embarked on an ambitious investment plan—the largest ever corporate investment plan at the time—of $220.6 billion during 2014-18[11]. Its bonds were the benchmark for other Brazilian companies. The Índice Bovespa (Íbovespa), the key stock index, rose and fell with Petrobras’ stock. The company was also the country’s largest patron of cultural and sports institutions, and events, and conservation efforts. Petrobras became the crown jewel of Brazilian industry and its rise was seen by Brazilians and the world as emblematic of the emergence of a New Brazil.

So, what went wrong?

The fall

A massive decade-long corruption scandal was uncovered in early 2014 by Brazilian police investigating a money launderer, linked to Swiss accounts, politicians and Petrobras. Since then, over 30 Petrobras executives and the company’s contractors have been indicted by the courts, and investigations by police and prosecutors have been initiated against 54 politicians[12] and 24 top private building and engineering firms. A senior Petrobras executive Pedro Barusco—who stole and kept money in Swiss accounts—turned approver, and agreed to return around $100 million from his Swiss bank accounts[13].

Unlike Delhi’s bafflingly slow investigation into money laundered by Indians and kept in Swiss accounts, the Brazilian authorities acted fast. They approached the Swiss government which collaborated quickly and froze suspect accounts. The banks promptly returned the money, and $57 million has already been received by Brazilian courts[14]. Meanwhile, some U.S. law firms have filed class action suits on behalf of minority share holders like Wall Street firms and other investors, and the U.S. Security and Exchange Commission has begun an investigation of its own.

In February 2015, Maria das Graças Foster—appointed Petrobras CEO by President Dilma Rousseff—along with five directors, were forced to resign. The state-run Banco do Brasil’s former CEO Aledemir Bendine, who is perceived to be close to the government, succeeded Graças Foster.

The fallout of the scandal and declining oil prices is that Petrobras’ stock in March 2015 was down by nearly 70% over four and a half years[15]. The day Jose Gabrielli rang the bell at the Sao Paulo exchange was a distant memory. In the meantime, the company has lost its investment grade rating, and raising finance from the global market to service its massive debt that now stands at $170 billion[16] will be difficult and expensive.

The construction and engineering firms working with Petrobras that are also involved in the scandal, face a credit squeeze and financial problems. This means that the company’s ongoing exploration and production projects mainly in Brazil’s deep seas will be delayed. So too will the country’s own infrastructure projects like roads, dams and airports that were being undertaken by the same contractors that worked with Petrobras, now hit by the corruption scandal and the credit freeze by banks.

The domino effect of the scandal is touching every aspect of Brazilian life, from political uncertainty to economic recession, water and power shortages. The fall of Petrobras is seen as the fall of Brazil itself. From its go-go growth years of 2003 to 2010 when the country looked as though it had arrived on the global stage, Brazil is beginning to resemble a lesson in overreach.

The factors for the fall

The decline of Petrobras is closely woven into the way Brazilian politics, economics and society function.

The first major factor was corruption—a national disease that Petrobras could not escape. While in the past the company was relatively clean, the multibillion dollar contracts brought out the company executives’ avaricious side.

Secondly, the company became too big and diverse for control. It expanded beyond its core competencies—deep sea prospecting and drilling—and ventured into petrochemicals, fertilisers, biofuels, electricity and wind energy. This massive and diverse structure was exploited by crooked executives who took cuts in contracts and inflated deal prices.

Third, hubris began to set in with the successful discovery of large pre-salt fields and the world’s largest initial public offering that raised around $70 billion in 2010. Swept up in the euphoria, top management and the government neglected to check the books of the company which contained the inflated contracts.

Fourth, the government has caused considerable loss to the company by forcing it to sell petrol at prices far below market prices. Like India, Brazil subsidises retail petrol sales, so the loss to Petrobras has been massive.

The final factor was the incompetence of the CEO, board and auditors who failed to detect, and take action against corrupt practices. Even if they were aware of such practices, it is possible that they did not take action because Petrobras executives had become too powerful and had deep political connections.

The future

Despite these overwhelming problems, Petrobras can recover – for a variety of reasons, both technical and political.

First, it is still one of the largest oil producers in the world with ample reserves—over 16 billion barrels per day (bpd)[17]–and the ability to double production from 2.5 to 5 million bpd[18] in the next decade. This can be done by continuing its investment in technology and production.

Second, Petrobras is a research and innovation-driven company. It earmarks 1% of its $130 billion in revenue (2013)[19] for R&D, outspending Exxon. Petrobras holds the world record in deep-sea production—5,000 metres[20] below the sea—and in addition to in-house development technology, it has obtained numerous patents through smart collaboration with suppliers and subcontractors on technology.

Third, it really is too big to fail. Petrobras is the country’s largest tax payer and the corporate contributor to GDP—6.3% in 2013[21]. Rousseff simply cannot afford to let Petrobras fail.

The company can exit from its loss-making operations and sell some assets such as a few refineries and retail outlets, to recoup finances. The full financial recovery of the company of course depends on oil prices firming up. At prevailing rates, recovery will take longer. And Rousseff must persevere in quickly drilling out the corruption and institutionalising procedures to prevent such a scandal again. Institutionalising a more transparent system with adequate checks and balances will be key.

Lessons for Indian oil companies

The impact of the Petrobras scandal is unlikely to be adverse for the investment by Indian companies like ONGC Videsh which are part of a consortium with Petrobras in some Brazilian oil fields. Petrobras was established around the same time as ONGC was created in India. Despite the joint discovery of a new oil reservoir in the ultra-deepwater Sergipe-Alagoas Basin—off the east coast of Brazil—by Petrobras in a venture partly funded ONGC this month, the Brazilian giant has moved way ahead of its Indian counterpart. Petrobras’ relentless, aggressive and innovative search for oil through the deepest parts of the sea, helped to make Brazil self reliant in oil by 2006, and make it an exporter too.

Besides oil, Petrobras has helped in the country’s goal to reduce dependence on fossil fuel and increase the share of renewable energy. Petrol consumption has been reduced by a third since the introduction of ethanol. Petrobras enthusiastically took to ethanol, bio-diesel and other biofuels and collaborated with car companies and ethanol producers to make the pioneering ‘fuel ethanol’ programme a success. Thanks to this collaborative spirit, Brazil has cut oil consumption, contained pollution, increased the income of sugar cane farmers and strengthened the domestic sugar-alcohol industry.

In contrast, India is becoming more dependent on oil imports. ONGC has not been as aggressive and innovative an explorer as Petrobras. It is likely that India’s imports of Brazilian crude will only increase. Private sector players like Reliance will continue to export diesel to Brazil, where refining capacity is inadequate. These will likely increase since the new refinery projects of Petrobras have been hit and delayed by the corruption scandal.

Indian public sector oil marketing companies have taken the easy route of increasing imports—more imports means more consumption, and higher prices of oil mean more revenue for them. They do not align their business model to the strategic energy policy of the country, to reduce imports, increase renewable sources and cut pollution. They do not play for Team India in energy, happy to remain in their own narrow silos of earnings sinecures, minus a larger vision. New Delhi has also opted not to put much pressure on them, since middlemen and politicians can and do benefit from large imports. As a result, there has been very little investment in research or technology, and even less interest in building an ecosystem of research, as Petrobras did, supporting universities and local innovators.

For the ‘Make in India’ campaign to be truly successful, investment in a research ecosystem is Petrobras’ real lesson for India.

Ambassador Viswanathan is Distinguished Fellow, Latin America Studies, Gateway House. He is the former Indian Ambassador to Argentina, Uruguay, Paraguay and Venezuela, and Consul General in Sao Paulo.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

References

[i] Daily Herald, Brazil marchers hit streets to support Petrobras, president, Lehman Stan, March 2015,

[ii] Bloomberg News, Petrobras Raises $70 Billion as Investors See Growth, Millard Peter, September 2010,

[iii] International Political Economy Series, The Political Economy of an Emerging Global Power: In Search of the Brazil Dream, Casanova Lourdes, Julian Kassum, June 2014, p.50,

[iv] Ibid

[v] Petrobras, Our History,

[vi] Transparency International, Shining a light on the world’s biggest companies, July 2012,

[vii] Petrobras, Sustainability Report, 2010, p.10,

[viii] Petrobras, Sustainability Report, 2010, p.48,

[ix] Routledge, Routledge Handbook of Latin America in the World, Dominguez I Jorge, Ana Covarrubias, January 2014, p.437,

[x] BM&FBOVESPA, BM&FBOVESPA celebrates with Petrobras the largest share offering in history; exchange announces second place in global market capitalization ranking, September 2010,

[xi] Petrobras, 2030 Strategic Plan and 2014-2018 Business Plan, February 2014, p.44,

[xii] Forbes, Brazil’s Two Most Powerful Politicians Saved From Huge Oil Scandal, Rapoza Kenneth, March 2015,

[xiii] Wall Street Journal, Former Petrobras Executive Paying Back Millions in Graft Funds, Kiernan Paul, March 2015,

[xiv] Ibid

[xv] CNN Money, Petroleo Brasileiro Petrobras SA,

[xvi] Forbes, Petrobras’ Debt Burden Getting Costlier,Rapoza Kenneth, March 2015,

[xvii] Petrobras Magazine, Deep Future, Edition 64, < http://www.petrobras.com/en/magazine/post/deep-future.htm>

[xviii] Petrobras, 2030 Strategic Plan and 2014-2018 Business Plan, February 2014, p.14,

[xix] Shareholders’ Foundation, Petroleo Brasileiro Petrobras SA (ADS) (NYSE: PBR) Investor Securities Class Action Lawsuit, August 2014,

[xx] Global CCS Institute, Petrobras Lula Oilfield CCS Project, July 2014,

[xxi] Financial Times, Counting the cost of the Petrobras Scandal, February 2015,

The post The rise and fall of Petrobras appeared first on Gateway House.

The Pacific Alliance & India

R. Viswanathan — Tue, 02 Jun 2015 12:10:07 +0000

The Pacific Alliance (PA) is the latest addition to Latin American regional groupings that include MERCOSUR, Andean Community, ALBA and SICA. Comprising Mexico, Colombia, Peru and Chile, the PA is a vibrant, dynamic and ambitious group, while the other four blocs are struggling with internal political and economic difficulties.

The PA’s dynamism can be linked to the fact that the macroeconomic fundamentals of its members, dubbed the Pacific Pumas, are stronger and more solid than the other Latin American countries. They have higher growth with lower inflation, and projected to grow by 3% or more in 2015, while Latin America as a whole is expected to grow only by about 1%. The average inflation of the PA region is less than , which is half the annual Latin American inflation rate.

The policies and tax regimes of the PA countries are more stable, transparent and predictable, as well as investor-friendly. Unsurprisingly, the four countries lead the region in the World Bank’s ‘Ease of Doing Business’ survey of 2014. Their global rankings (Colombia-34, Peru-35, Mexico-39 and Chile-41) are way ahead of India’s lowly 142nd rank.

They have lower tariffs, more liberal foreign trade policies and among Latin American countries, they have signed the most free trade agreements (FTA). Chile has signed with 60 countries, Peru with 50, Mexico with 44, and Colombia 30. All four have FTAs with the U.S., as well as the European Union. Mexico, Peru and Chile are part of negotiations for the Trans-Pacific Partnership and Colombia is also keen to join. Chile and Peru have FTAs with China and Colombia has just announced its intention to negotiate a FTA with China.

India’s trade with the PA, which accounts for 40% of its trade with Latin America, has been growing rapidly, and has the potential to reach $30 billion in the next four years from $15 billion in 2014. Mexico, Colombia, Peru and Chile are the second, third, fourth and fifth largest destination of India’s exports in Latin America, after Brazil. Mexico and Colombia have become regular source of crude oil, while Chile and Peru are sources of copper and gold imports for India.

India’s private sector, and its public sector utility ONGC Videsh have recognised the lure of the large and growing market of the PA, which has a total population of 214 million, GDP of $2 trillion, trade of $1 trillion and average per capita GDP of $10,000. Accordingly, over 30 Indian companies have invested in the PA in areas such as IT, pharmaceuticals, energy, mining and manufacturing.

Ten companies from the PA have invested in India, most notably, the Aje Group from Peru which has successfully entered the soft drink market in India with its brand ‘Big Cola’.

How can India improve its partnership with the Pacific Alliance?

Signing FTAs with Mexico, Colombia and Peru will enable its exports to compete with those of the PA’s other FTA partner countries. India already has a PTA with Chile which is being widened and deepened. India should open a large line of credit of at least $500 million to the PA bloc to promote and facilitate investment and project exports of Indian companies. India has become an observer in the PA since February 2014. Using this status, India could engage with the group and consider participation in the next summit of the PA to be held in Peru this year.

While the group as a whole may not have direct lessons for India, it could learn from the Pact for Mexico under which a dozen major reforms have been brought about in the last two years under an unprecedented consensus between the ruling and the opposition parties. The success of Mexico in making itself as a manufacturing hub of the Americas can provide a template for the ‘Make in India’ campaign.

Ambassador Viswanathan is Distinguished Fellow, Latin America Studies, Gateway House. He is the former Indian Ambassador to Argentina, Uruguay, Paraguay and Venezuela, and Consul General in Sao Paulo.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post The Pacific Alliance & India appeared first on Gateway House.

Big Cola From Peru, an Inspiration for Indian Entrepreneurs

R. Viswanathan — Wed, 27 May 2015 05:50:00 +0000

There is not a single recognizable Indian cola drink company left in the market after the sweeping entry of big giants Coke and Pepsi. While the Indian companies have surrendered or sold themselves off without a fight, Aje, a cola company from Peru in South America has had the audacity to bet on India, where its Big Cola brand has found a niche.

CLICK HERE TO READ THE FULL REPORT

The post Big Cola From Peru, an Inspiration for Indian Entrepreneurs appeared first on Gateway House.

China in Latin America

R. Viswanathan — Thu, 14 May 2015 10:02:37 +0000

At the China-Community of Latin American and Caribbean States (CELAC) Forum meeting held in Beijing in January 2015, Chinese President Xi Jinping announced that over the next ten years trade between China the region will double to $500 billion and Chinese investment in the region will reach $250 billion .These large targets are reflective of China’s vastly increased economic engagement with Latin America.

Trade has already reached $275 billion in 2013, up from $12 billion in 2000. China has become the top trading partner for three countries, including Brazil, overtaking the European Union as the region’s second largest trading partner with 10% of its exports and 16% of imports in 2013. China has invested about $100 billion in Latin America, majority of that in oil fields and mines.

China extended a $119 billion line of credit to Latin America between 2005 and 2014, according to Inter American Dialogue, a U.S. think tank. In 2010 alone China provided $37 billion, more than the combined total funding by World Bank, Inter-American Development Bank and U.S. Exim Bank.

In addition to loans given to individual countries, China has extended credit for region-wide projects in collaboration with the Inter American Development Bank—of which it is a member.

A Chinese company, Hong Kong Nicaragua Canal Development Investment Group (HKND) is developing the $50 billion Nicaragua Canal project connecting the Atlantic Ocean with the Pacific Ocean, invoking comparisons to the U.S. built Panama Canal.

Chinese banks have now become the principal lenders to countries which have been spurned by western capital such as Venezuela, Ecuador and Argentina.To them, China has extended currency swap facilities, helping them tide over foreign exchange shortage. When Brazil’s oil major Petrobras faced financial issues due to the recent corruption scandal, the American credit rating agencies downgraded its rating. In stepped the China Development Bank with a $3.5 billion bridge loan on 1 April 2015, as part of a two-year cooperation agreement.

China has opened branches of its banks in the region and bought controlling stakes in some local banks to facilitate its growing financial clout within the region. In addition, China’s growing engagement and stature in Latin America is a result of the ‘win-win’ complementarity between China’s capital surplus and resource needs, and Latin America’s surplus resources and investment needs. China’s arrival has coincided with Latin America’s strategy to diversify its economic partnership and reduce its dependence on the U.S and EU, its overbearing traditional partners.

Still, the Latin Americans do perceive China as a potential threat. They impose antidumping duties on Chinese goods and place restrictions on Chinese immigration. Brazil, Argentina and Uruguay have imposed limits on the acquisition of agricultural land by foreigners after being altered to the ambitious proposals of some Chinese companies to buy several hundred thousand hectares.

The U.S. is worried by the Chinese ‘encroachment’ of Latin America, long considered the ‘backyard of U.S.’ since the declaration of the Monroe doctrine in 1823. According to reports, the Head of the U.S. Southern Command said in his Congressional testimony that “While the Pentagon is launching its ‘pivot to Asia’, China is engaged in its own ‘pivot to the Americas”.

The U.S. is also concerned by the defence and nuclear deals being signed by China with Latin America.

It is because of these concerns that the U.S. government tried to stop the Chinese entry into the Inter American Development Bank by blackballing the Chinese application. But later they allowed them in after working out some back room deals.

While China’s growing presence in Latin America is increasingly being viewed as a threat regionally, India, in contrast, is perceived as a business partner.

Indian firms are well-regarded in Latin America. Indian IT firms employ about 25,000 Latin Americans regionally, and are admired. Indian generics have helped reduce healthcare costs for Latin American consumers.

And Latinos are admirers of the Indian practice of yoga, meditation and spiritualism, which helps them acquire a deeper cultural understanding of India. Politically, India’s democratic, pluralistic and open model resonates with Latin Americans more than does China’s communist authoritarian model, which the region has already experienced and rejected.

The news that India’s annual economic growth rate is overtaking China’s, according to the 2015 IMF report, has caught the attention of Latin American businessmen who have begun stopping by Mumbai on their way back from Shanghai.

“Now is the time for India to make a move” was the title of a recent Americas Quarterly blog (January 2015) with the question “Is 2015, the year of India in Latin America?” It is time for Prime Minister Modi to pay closer attention and make a trip through the region, just as Chinese leaders are doing, the latest being Premier Li Keqiang’s visit to Brazil, Chile, Peru and Colombia from 17-29 May

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post China in Latin America appeared first on Gateway House.

Make in India Mexican-style

R. Viswanathan — Thu, 07 May 2015 11:38:03 +0000

Mexico has overtaken China in 2013-14 as the world’s top destination for automobile investment, according to the Financial Times. In 2013, Mexico attracted 12.6% of global FDI in auto-manufacturing as against 12.4% by China. Recent years have seen many global automakers open or announce plans to set up manufacturing units in Mexico—where car production is projected to increase to 4.7 million vehicles by 2020 from 3.2 million in 2014. The country accounts for 20% of the total vehicle production of North America and is the seventh largest producer of cars in the world. As the fourth largest exporter of vehicles in the world, Mexico exports 80% of its total production, which earned the country $85 billion in 2014.

Unlike South America that primarily exports raw materials, Mexico has emerged as a major exporter of manufactured products such as automobiles, electronics and aerospace equipment. Manufactured products account for 83% of the total exports of Mexico, which is the world’s largest manufacturer of flat screen television sets and two-door refrigerators.

Over time, Mexico has become more competitive vis-à-vis China, evident in its average manufacturing labour costs that are almost 20% lower than in China, where labour costs have significantly increased. In fact, in 2000, Mexico’s labour costs were 58% higher than China’s. Furthermore, in its August 2014 report titled The shifting economics of global manufacturing, Boston Consulting Group has estimated that Mexico—referred to in the report as “a rising global star in manufacturing”—now also has lower average manufacturing costs than China on a unit-cost basis.

This trend is also reflected in payscales, with Chinese wages ($5,726 per year) now considerably higher than Mexico’s annual wage of $3,645 for unskilled workers in the auto sector.

There are other advantages that Mexico offers over China, and in doing so, presents opportunities to American multinational corporations, not least of which is its proximity. Apart from being home to a large and growing young population unlike the ageing Chinese society, Mexico also offers better protection to intellectual property rights than China. Unsurprisingly, total U.S. imports from Mexico are growing quicker than those from China, with Mexico being dubbed the “China of the Americas”.

To facilitate this process, Mexico has developed manufacturing clusters: Querétaro for aerospace; central and northern industrial heartlands for automobiles; Guadalajara as a Silicon Valley; and the southern part of the country for manufacturing of goods like clothing and textiles. It also has an ecosystem conducive for manufacturing and exports with an integrated supply chain, reasonably good infrastructure, logistics and transport networks, as well as stable and predictable policies and tax regimes.

As a member of a Free Trade Agreements(FTAs) including North American Free Trade Agreement (NAFTA), Pacific Alliance, Asia-Pacific Economic Cooperation, Organisation for Economic Co-operation and Development and the under-negotiation Trans-Pacific Partnership, Mexico has made itself attractive for export-oriented manufacturing for 44 countries. Most foreign manufacturers use Mexico as the export platform for NAFTA.

The “Make in India” campaign can learn from the manufacturing success story of Mexico, which ranks 39th in the World Bank’s “Ease of Doing Business” index of 2014, as compared to India which is ranked 142nd. Prime Minister Narendra Modi can seek inspiration from President Enrique Peña Nieto, who has brought about a dozen major reforms in such sectors as energy, education and telecommunications, by forging a historic and unprecedented consensus with the opposition parties through 2012’s Pact for Mexico. This national political agreement is a framework of 95 public policy proposals aimed at strengthening the country, democratising its economy and politics, and involving citizens as key actors in designing and executing public policies.

Since the Indian growth model is different from the Mexican one of manufacturing for exports, India should only draw appropriate lessons to forge its own path. India cannot replicate what China has done since the Chinese political system is very different to India’s. Mexico, therefore, provides a more replicable model and Modi should look at expanding the bilateral engagement between the two countries in his second year as prime minister.

Ambassador Viswanathan is Distinguished Fellow, Latin America Studies, Gateway House. He is the former Indian Ambassador to Argentina, Uruguay, Paraguay and Venezuela, and Consul General in Sao Paulo.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post Make in India Mexican-style appeared first on Gateway House.

Brazil: protests and Petrobras

R. Viswanathan — Wed, 18 Mar 2015 13:31:06 +0000

On March 14, several hundred thousand Brazilians took to the streets in major cities around the country in protest against corruption. It was a reminder of the 2013-14 protests that overshadowed the football World Cup.

The provocation for this latest protest is the Operation Car Wash scandal in which bribes of around $800 million were shared between politicians and company executives from Petrobras, the national oil company. Dozens of executives from Petrobras and some private sector firms have already been indicted. A senior Petrobras executive Pedro Barusco, who has turned approver, has agreed to return around $100 million from his Swiss bank accounts. Of this, $57 million has already been returned.

The Supreme Court released a list of 54 politicians who had reportedly received bribes. This list includes 21 federal deputies, 12 senators–including the speakers of both houses of the Congress, a former president, a former governor of a state and two ex-cabinet ministers. The court has authorised an investigation and removed the Congressional immunity. If found guilty, the sitting Congressmen will lose their Congressional seats, beside other punishment ordered by the court.

The accused politicians are mostly from the ruling alliance. The senate leader and the speaker of the lower house are both from the Brazilian Democratic Movement Party (PMDB), the largest political party. The six members of the ruling Workers Party (PT) on this list include the treasurer of the party, two ex-chiefs of staff to the president and the former energy minister. According to the approver, PT had received about $200 million in bribes.

While President Dilma Rousseff did not personally respond to the Sunday protests, her justice minister went on national television to say that the government would propose a series of anti-corruption measures and political reforms.

Some protesters called for the impeachment of Rousseff herself, which is not likely. She is known to be incorrupt and has claimed ignorance of the corruption in the company. But she cannot escape moral responsibility since she was the chairperson of the Petrobras board from 2003 to 2010, during which the bribery occurred.

The scandal has hurt Rousseff’s image whose popularity ratings have dropped below 30%. She will face severe resistance from the leaders of both houses of Congress, who are putting pressure on her to help them clear their names from the bribery charges. They have openly announced that they will not let pass easily any legislation proposed by the government. This is bad news for Brazil which desperately needs a number of political and economic reforms.

The corruption issue has compounded the economic situation of the country which suffered a recession in 2014 and is projected to have negative growth in 2015. Inflation is at a 10-year high of 7.7% and currency depreciation is at a 12-year- low.

The Petrobras case is a symptom of the endemic disease of corruption and impunity entrenched in Brazilian society. In the past such things were taken for granted as part of life. In fact, there is an old Brazilian saying that states, “rouba mas faz” (robs but gets things done).

Not any longer.

The judiciary and the prosecutors have become more independent and bold in their investigations with professionalism and in a spirit of crusade. This was evident in the Mensalao Scandal during President Lula’s term when a number of top leaders of his ruling party were punished with imprisonment, fines and suspension from holding public office. In 2014, Brazil passed a Clean Companies Act under which tougher punishment is to be given even to bribe-givers along with bribe-takers and it holds the companies responsible for acts of corruption by their executives. The public protests help and encourage the prosecutors and judges to do their work even more vigorously and zealously. This is a hopeful and healthy sign.

The western media’s exaggerated reports on the Brazilian corruption scandal should be put in a global perspective. The amount involved in the Brazilian scandal is insignificant in comparison to the multibillion dollar fines charged recently by regulators on banks from U.S. and Europe for fraud. Brazil ranks better (69th) in Transparency International’s Corruption Perception Index of 2014 than India (85th) position and China (100th), among 175 countries. In any case, Brazil has come out of bigger crises in the past and has the potential and resources to bounce back soon, just as India got over the 2G scam.

But the concern for India is that President Rousseff will not be able to pay adequate attention to foreign policy, including the strategic partnership with India in IBSA and BRICS to tackle multilateral and global issues, in which India hopes to work with Brazil, since she will be fully absorbed in tackling the internal political and economic challenges.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post Brazil: protests and Petrobras appeared first on Gateway House.

Mexican inspiration for Bollywood

R. Viswanathan — Thu, 26 Feb 2015 11:53:31 +0000

At the 87^th Academy Awards on February 23, Alejandro Inarritu of Mexico won three Oscars for the Hollywood movie, ‘BirdMan or The Unexpected Virtue of Ignorance’,— best director, best screen play writer and best picture. His recognition marks the high point of a comeback by Mexican cinema and should be seen as an inspiration by the Indian film industry.

Before starting out his film career, Inarrute had worked in Mexican radio stations and composed music for Mexican films. He then went on to co-found ‘Z Films’ which produced short films and commercials. He became famous in Mexico after his film Amores Perros was nominated for an Oscar in the foreign language film category in 2000. He also directed two other Hollywood films Babel (nominated for best director and film in Oscar 2007) and 21 grams. His second Mexican film Biutiful was also nominated for an Oscar in the foreign film category in 2011. He is directing his next Hollywood film ‘The Revenant’ to be released in December 2015.

Another Mexican, Alfonso Cuaron, won an Oscar for the best director for his film Gravity in 2014. He is also a product of the Mexican film industry. Following his first film Tu mama tambien, he shifted to Hollywood, producing and directing films such as Little princess, Harry Potter and the Prisoner of Azkaban and Children of Men; all of which have received critical acclaim.

Inarritu and Cuaron are usually associated with a third Mexican film director, screen writer and producer, Guillermo del Toro. The three consult each other, work closely and are known as the “Three Amigos”. Del Toro has made movies in Mexico as well as in Hollywood and specializes in horror and science fiction themes. His Hollywood films include Hell boy ‘ Blade II and Pacific Rim.

In total eight Mexican films have received Oscar nominations since 1960 in the foreign language film category.

The recent Oscars won by Mexican talent is exciting news for the Mexican film industry which has had a renaissance in the last fifteen years. Its golden age was in the 1940s and 50s, when Mexico was the largest centre of Latin American films. Back then, Mexican films, actors and film talents went on to conquer Hollywood too. However, the Mexican film business went into a long decline from the sixties till the end of the 20^th century. The political and economic instability in Mexico as well as the dictatorships and crisis in Latin America were important factors in the decline.

Thereafter Hollywood dominated Mexican theaters, accounting for over 90 % of ticket sales. The closed network of film distributors and theatre owners controlled by Hollywood dominated, aggressively squeezed out the Mexican films. The film industry also became one of the victims of NAFTA (North American Free Trade Agreement) signed by US, Canada and Mexico in 1994. As a result, the Mexican government had to abolish the law which required theaters to reserve 50% of its screens for national films. This caused a drastic reduction in the production of Mexican films from about 100 per year in the first half of nineties to 25 per year by the end of that decade.

The revival of Mexican cinema began with Alejandro Inarritu’s hit movie Amores Perros in 2000. Since then there have been a number of box-office hits. Creative Mexican directors and producers as well as talented actors have managed to win back the Mexican audience. The turning point came in 2013. The film No se aceptan devoluciones made history by grossing close to $100 million, of which half was generated in Mexico and the other half from the rest of North America. Another 2013 film, Nosotros los Nobles, earned $26 million. The Mexican film director Amat Escalante won the best director award in 2013 in the Cannes Film festival for his film Heli.

Mexico has the fourth largest number of movie-goers in the world after India, China and the US. The Mexican multiplex company ‘ Cinepolis’ operates the largest number of screens in the country and has emerged as one of the top four global players with 3,400 screens in 11 countries including the US and India.

Mexico has two filmy connections to India. Cinepolis operates 193 screens in 31 cities in India— and is targeting to have 400 screens by 2017. It is the only foreign company operating in the Indian market and is the fourth largest multiplex company in India. A Mexican actress, Barbara Mori, has acted in a Bollywood film Kites as a lead cast along with Hrithik Roshan.

The Mexican film industry is tiny in comparison to its Indian counterpart which produces nearly a 1,000 films a year and possesses a large and diverse audience and talent. Indian film producers have large budgets while most Mexican films are small-budget films, many of them only survive because of government subsidies.

Yet, Indian films have received just four nominations in the Oscar foreign language category, compared to eight from Mexico so far. No Indian film director has ever won an Oscar.

Mexican films and talent have done better not only at the Oscars but also in box-office earnings. The Mexican film No se acceptant devoluciones grossed $100 million in revenue worldwide, Indian film PK only reached the same figure ( Rs. 600 crores) in 2014.

While the Indian film industry is a giant compared to the Mexican industry both in terms of size and reach, the Oscar and box-office success of Mexican talents and films should be seen as an inspiration by Indian film industry.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post Mexican inspiration for Bollywood appeared first on Gateway House.

Brazilian Embraer can inspire HAL

R. Viswanathan — Fri, 20 Feb 2015 06:51:58 +0000

At the 10^th Biennale Aero India held in Bangalore this week, among the many global defence giants was Brazil’s Embraer (Empresa Brasileira de Aeronautica) selling both defence and executive aircraft.

Embraer’s story is one that India’s own Hindustan Aeronauticals Ltd (HAL) should emulate. Embraer was created in 1969 by the Brazilian government, just a few years after HAL was established. HAL had a head start over Embraer: it began as privately-owned Hindustan Aircraft in 1940 and made its first aircraft (PC 5 A) as early as 1941. But HAL then fell behind from lack of ambition and vision.

Embraer in comparison, was nurtured by its government, and is now the third largest aircraft manufacturer in the world. At $6.2 billion its revenues are over twice that of HAL’s. Its biggest customers are the airline companies of the U.S. and Europe. It has sold executive jets to the Indian government and private individuals, and has a $2.9 billion order for 50 aircrafts from the new Indian regional carrier Air Costa, whose fleet of four is entirely Embraer aircraft. The company also makes military aircraft, planes for agricultural spraying and is a global pioneer in the use of ethanol as aircraft fuel. In addition to a Sao Paulo listing, Embraer shares are listed on the New York Stock Exchange. Embraer is now a role model for companies from the developing world seeking to debunk the fiction that high-tech products originate only from the developed world.

It took years and nimble innovation and strategic vision for Embraer to get to this position. When it first began marketing its aircraft, the company had a credibility problem vis-a-vis established US and European brands. Even within Brazil, there was skepticism whether Embraer could successfully make a high-tech, high-risk product. Embraer proved them wrong, despite Brazilian manufacturers complaining of high cost of production, high wages and a shortage of skilled people which makes exports less competitive. Embraer has bucked the trend by getting 90% of its revenue from exports and is a national role model and a global player

How did a public sector firm from a developing country transform itself into a competitive, international, high tech manufacturer?

The credit goes to the Brazilian government’s vision and strategy for a national aircraft industry. Although it set up Embraer, it did not control the firm with the usual bureaucratic red tape. Embraer’s management had full autonomy and was free to collaborate with any Brazilian and foreign private sector companies. In 1994, during the neo-liberal wave of privatisations in Brazil, Embraer too was privatized and sold to a consortium of Brazilian and foreign investors – 20% of Embraer shares were sold to a French consortium lead by Aerospatiale Matra, Dassault and Thomson. But the Brazilian government retained its valuable shares and veto power.

Embraer initially benefitted from the captive business of the Brazilian air force. It was provided incentives and tax breaks for production, imports and exports. The state-run bank BNDES (Brazilian Industrial Development Bank) not only gave concessional credit to Embraer, but stayed an important share holder with a significant stake.

Brasila also painstakingly developed an ecosystem of educational institutions and research centers to nourish the aircraft industry in and around Embraer’s headquarters in the city of Sao Jose do Campos (in Sao Paulo State) known as Brazil’s Technology Valley, similar to Bengaluru. There, it set up the Aeronautics Technology Centre (CTA), the Institute of Research and Development (IPD), the ITA ( Aeronautical Technology Institute) and Space Research Centre INPE (Instituto de Pesquisas Espaciais). To attract students, these Institutes offered scholarships, boarding and lodging. Embraer began production in 1970 with 150 staff recruited from CTA. Even now, it absorbs many graduates of these institutes with attractive salaries, and outsources work to the technical institutes.

Embraer, the Brazil government and the Association of the Brazilian Aerospace Industries (AIAB) worked together to develop a cluster of suppliers and to incubate tech companies. The company has a substantial budget for research and development and 300 PhDs on its pay roll, resulting in proprietary technologies. Embraer’s own ex-employees are encouraged to set up units for parts and services.

The company did not attempt self-sufficiency in components or technology. Embraer mastered the basic technologies, design and integration of the more than 28,000 parts and components that make up an aircraft, but it chose to import many of these from foreign and domestic suppliers. Brazil actually facilitated the establishment of production centers by foreign suppliers, close to the Embraer plant. To offset the risks in developing and producing some of the most costly and technologically challenging components, Embraer formed risk-sharing partnerships with those suppliers which make major components such as wings, flaps and engines. This gave the world a stake in Embraer’s success.

Embraer found a niche area for its growth. Its bet on regional passenger jets rather than the bigger aircrafts or military planes paid off. It worked with the hub and spoke aviation model in developed markets, and served emerging markets needs.

Today, Embraer’s brand is so established, it has overtaken rival regional aircraft makers such as Fairchild, Dornier, British Aerospace, De Havilland, Fokker and Saab to become the world’s No 3 player after Boeing and Airbus.

HAL can learn from Embraer. Bengaluru has even a better ecosystem than Sao Jose dos Campos, with more tech companies, research institutes, human resources and a broader range and depth in science and technology knowledge. The scientists who created history by sending the Mangalyaan mission to Mars for Rs. 7 per kilometre, can certainly give Embraer some competition. By creating a similarly conducive environment and bringing private sector participation in HAL, New Delhi can nudge it along the Embraer path so it can be part of Prime Minister Modi’s ‘ Make in India’ success.

This case study was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post Brazilian Embraer can inspire HAL appeared first on Gateway House.

Latin American lessons for AAP

R. Viswanathan — Mon, 16 Feb 2015 04:56:52 +0000

The Aam Admi Party (AAP) swept to power in this week’s state election in Delhi, with the broom as its symbol, capturing global attention as it comprehensively defeated the BJP.

But Latin America has an interesting history of David-Goliath election battles, and some interesting comparisons are listed below.

Brazil

Long before AAP it was a Brazilian political party, the National Democratic Union (UDN), which used the ‘broom’ as a campaign symbol in 1960, promising to sweep away corruption and immorality.

The centre-right UDN party’s presidential candidate, Janio Quadros, won the 1960 presidential elections with a big margin. One of his unforgettable, and rather unBrazilian, moral cleaning acts, was to prohibit the wear of bikinis on the beach. With no previous national political experience, and without a Congressional majority, he was frustrated by the obstructionism of the Congress and dissident voices from his own party.

Quadros was high-handed and inflexible in negotiations with other political leaders and parties. In August 1961, after just seven months in office, he resigned suddenly, expecting that his histrionic gesture would prompt a wave of popular demand to withdraw his resignation. There was no such public wave. The Brazilian Congress quickly accepted his resignation and elevated the vice president in his place. Quadros went into political wilderness, and it was only after many years that he re-emerged, elected as Mayor of Sao Paulo in 1985.

Mexico

In the 2000 elections, Mexicans voted out Institutional Revolutionary Party (PRI), ending its 70-year, one-party regime as the longest ruling party in the world. The Mexicans instead elected Vicente Fox from the centre–right National Action Party (PAN) as president. This was a historic change. But in the same year, the voters of Mexico City elected Lopez Obrador, a fire-brand of the extreme-left Revolutionary Democratic Party (PRD) as the head of the government of the Federal District of Mexico—a city with a population even larger than Delhi’s.

The Fox-Obrador contrast is similar to the Modi-Kejriwal combination in New Delhi.

Obrador was considered a rebellious and unconventional but charismatic politician with radical views. He was eccentric and an anarchist, the underdog in the big business-supported PAN and PRI party fight. Obrador portrayed himself as a crusader against corruption and the collusion between corporates, media barons and political parties. He was personally honest, uncorrupt, a self described leader of the social movements who lead a simple, unostentatious life. He connected with the masses using social media.

As head of the government of Mexico City during 2000-2005, Obrador reduced corruption and implemented a number of pro-poor policies as well as improved the transportation and infrastructure in the city. Despite his anti-big business rhetoric, he collaborated with corporate houses on a project to restore and modernize the historic downtown area and actively encouraged private sector investment in housing sector.

His success as chief of the government of Mexico City did not however help him in his attempts to win the national Presidential elections, losing narrowly in 2006 and then in 2012 by a bigger margin. After losing the Presidential elections in 2006, he paralysed Mexico City for three months with demonstrations against the election results, arguing that they were fraudulent and proclaiming himself the winner. It didn’t work. Obrador left the PRD and formed his own outfit. Alas, his chances of becoming a future president of Mexico have been eroded by his egocentric ways.

Colombia

In the last four national elections, the Colombians elected Alvaro Uribe (for two terms from 2002-10) and Manuel Santos (also twice in 2010 and 2014) from the centre-right parties because of their important national agenda to end guerrilla war and bring peace to the country. However, in 2011 the residents of the capital city Bogota voted for a radical leftist and former member of the M-19 guerrilla group Petro as Mayor. But when Petra contested in the Presidential elections in 2010 the Colombians preferred the experienced centre-right candidate Manuel Santos.

Lessons for AAP, Congress and BJP

The broom politics of Brazil and the experience of the chiefs of the city governments of Mexico City and Bogota, particularly in their failed presidential elections, might have some useful lessons for Kejriwal as the Aam Aadmi Party prepares to go national.

Mexico’s PRI learnt its lesson after being out of power at the national level for twelve years. It reinvented itself and came back to power under the dynamic leadership of Enrique Pena Nieto who won the Presidential elections in 2012 beating the candidates of leftist PRD and conservative PAN parties. The Congress Party may find it useful to study and learn from the resurrection model of PRI.

Nieto worked with the opposition parties and signed the ‘Mexico Pact’ in which four major national-level parties agreed to a consensus for major urgent reforms. Through the pact, the Nieto administration delivered a dozen important reforms in sectors such as energy, education and taxation in the last two years. Mexico has achieved more reforms than any other large democracies in the world in the last two years. BJP could work with the opposition parties for a similar ‘Delhi Pact’ based on the successful model of Mexico Pact.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post Latin American lessons for AAP appeared first on Gateway House.

Uruguayan touch to Indian tech

R. Viswanathan — Thu, 15 Jan 2015 13:25:45 +0000

The new office of Tata Consultancy Services (TCS) in Siruseri, Chennai is a signature building with a spectacular architectural design. This unique edifice has been designed by two Uruguayan architects Carlos Ott and Carlos Ponce de Leon. The building is a welcome change and an aesthetic addition to the city of Chennai, notorious for its culture of giant cut-outs of film stars and the ubiquitous statues of politicians.

The futuristic building complex looks like a butterfly with a 400-metre central spine forming a majestic atrium at a tall 42 metres. The 5 million square feet office complex is spread over 70 acres. There are six blocks on each side of the spine of the atrium forming part of the wings of the butterfly.

The building has won several awards for energy and water management. It uses state-of-the-art technology, advanced materials, solar control and thermal insulation systems designed specially for the heat and humidity of Chennai. This makes building maintenance less expensive, more efficient and environment-friendly.

The Siruseri TCS complex is the largest corporate office in Asia with a capacity for 25,000 staff. The inspiring building and the innovative global work being done there by TCS is a matter of pride for India and Uruguay both.

How did the design contract for this prestigious building go to architects from tiny Uruguay located across the oceans, whose population of 3 million is under half of Chennai’s?

The answer lies embedded in the special connection between TCS and Uruguay. TCS put Uruguay in the global IT map when in 2002, it set up the first Global Delivery Centre in Montevideo, the capital of Uruguay. In return, Uruguay helped TCS find its place in the Latin American map. Gabriel Rozman, a Uruguayan and TCS executive, convinced the TCS Board to set up its first Latin American centre in his country. He got special treatment from the Uruguayan government, which enthusiastically welcomed TCS. From Montevideo, Gabriel Rozman spear-headed successfully the expansion of TCS across eight Latin American countries— Argentina, Chile, Brazil, Mexico, Peru, Colombia and Costa Rica. TCS now employs over 10,000 Latin American staff- including 1,000 Uruguayans- who develop software and provide off-shore services to U.S. and European markets and of course Latin American clients. The company has targeted the region for 10% of its global revenue. When the TCS office in Chennai was inaugurated in 2011, TCS invited the Vice President of Uruguay, Danilo Astori, to cut the ribbon.

TCS knows Uruguay in a way no other Indian does. But there is little other recognition of the country. Indian football fans know that Uruguay created history by winning the World Cup twice, beating Argentina in 1930 and Brazil in 1950 in the finals. They were thrilled with the Kolkatta visit of Diego Forlan, the Uruguayan star in 2011 after he won the Golden Ball award in the 2010 World Cup in South Africa.

But these days, Uruguay is gaining global fame beyond football, and the wider India should pay attention. Uruguay has a unique leadership in President Jose Mujica. In contrast to the many corrupt and pompous Indian politicians, Mujica is uncorruptible – and the poorest president in the world. He lives a simple life in his own ramshackle farm hut, rejecting the presidential mansion and protocol, growing vegetables and fruits and driving his own old Volkswagen Beetle. He was an ex-guerilla fighter who spent 14 years in jail during the military dictatorship.

Uruguay is also internationalising its education in an interesting way. Carlos Ott and Carlos Ponce both studied architecture in Uruguay where, every architecture student has visited India – part of the University of Uruguay architecture school’s tradition of sending their students on mandatory global tours (including 10 days in India).

So both TCS’ Uruguayan architects are thrilled to make their mark in India, a country they admire for its tradition, culture and wisdom. They hope to be able to put their Uruguayan touch to other buildings in India.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

The post Uruguayan touch to Indian tech appeared first on Gateway House.