TOGY talks to
Local development in BrazilJuly 16, 2018
Alberto Machado Neto, oil and gas executive director for the Brazilian Association of the Machinery and Equipment Industry (Abimaq), talks to TOGY about local content policies in Brazil’s oil and gas industry and how they impact the development of domestic companies and the economy. Abimaq represents and supports 1,500 manufacturing companies in Brazil.
• On local content: “Local content is not protectionism. The government must have a policy to allow the Brazilian industry to develop.”
• On the advantages of working in Brazil: “Brazil has good reserves and the probability of success is high. There might be issues with safety and security here, but they are relative to the problems faced in other geographical areas. There is no risk of terrorism, war or conflict. There is a certain social stability, and Brazil has a tradition of fulfilling contractual terms. You might end up with new rules during the game, but the rules that were agreed upon when the contract was signed will remain.”
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What is Abimaq’s position towards Brazil’s current local content policy?
Every country has some kind of political action at the government level to develop its industries. Norway, the UK and the USA are countries that have used the petroleum industry to internally develop themselves. In Brazil, it seems there is a misunderstanding; each side defends its own interests. Local content is not protectionism. The government must have a policy to allow the Brazilian industry to develop.
Many times when it is said that the Brazilian industry is not competitive, people are confusing productivity with competitiveness. Abimaq can speak with certainty in terms of productivity, because its represents many multinationals with plants here and in other countries, and most of the plants here are more productive.
However, when you add up other factors such as the cost of money in terms of the exchange rate, interest, taxes and tributes etc, you kill overnight the competitiveness generated by better productivity in the industrial process with something outside the control of the producer.
Is there a lack of effort by some international companies to contract local resources?
Local content can act as an inductor. For foreign companies, it is much more comfortable to buy from their traditional suppliers and for them to also make global purchases. When a company comes to explore for petroleum in Brazil, even if local suppliers offer the same prices, the international companies still prefer to buy abroad because they already have a supply chain in place. They can buy in bulk and are able to get better financing abroad.
For example, when Petrobras gets financing from China, it does not comes as cash, but rather as equipment with negative interest because it is below the local inflation rate, while interest rates here are at least 3% above the inflation rate. The mechanism to induce companies to buy in Brazil is to either reward them when they buy from here, or fine them when they do not.
Are Brazil’s local content policies an impediment to attracting more investment to the country?
In the press, the local content aspect is seen as having a big weight for petroleum multinationals considering coming to Brazil, but there are other factors that are more important than local content. For example, the pre-salt is one of the best opportunities in terms of reserves. If the reserves are good, then they interest oil companies, and the main wealth of oil companies in their balance sheets is their reserves and deposits.
Brazil has good reserves and the probability of success is high. There might be issues with safety and security here, but they are relative to the problems faced in other geographical areas. There is no risk of terrorism, war or conflict. There is a certain social stability, and Brazil has a tradition of fulfilling contractual terms. You might end up with new rules during the game, but the rules that were agreed upon when the contract was signed will remain.
These are positive points and local content is just a minor factor when taking all aspects into consideration. That is why I believe that local content does not have the weight it is said to have.
When local content is too high, it might end up preventing the growth of the country’s industry. However, due to the positive economic spillover effects of the industry, to not support the local industry would mean substantial economic losses for the country.
What changes are necessary to improve current local content policies in the domestic oil and gas industry?
There are different types of local content. In 2016, a new model emerged from a model that was much more strict with zero local content.
Practically, all the recent bidding rounds and other proposals, from a production perspective, represent zero local content, because in the business of the petroleum sector, 50% is services, 30% is machinery and equipment, and 20% is materials. If you have 25% global local content, you reach a margin of zero in machinery and equipment. Services cannot be imported; they must be performed here. Therefore, the bidding rounds of 2017 and 2018 all have zero local content, but the bidding rounds between 2005 and 2013 have a local content rate that varies between 55% and 65%.
Abimaq fought and managed to reach a 40% level in machinery and equipment. For us, that is a level that addresses our problems, and one that promotes a very significant internal movement. When you work with the petroleum sector, benefits end up spilling over into other segments, promoting a broader development of the country.
Investment comes not only from oil companies. Investment in Brazil comes from suppliers as well. Abimaq associates invested around USD 30 billion-50 billion just to create Brazilian suppliers in past years because of local content. If you apply zero local content, these companies will close and we will not attract investments in technology or industry.
Our fight is from 2019 onwards. The bidding rounds of next year cannot have the same conditions as those from this year; they must have the conditions of those from 2005-2013. We are showing the government that it is harmful to Brazil if it keeps these policies going forward.
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