Regulating Investments in Brazil: Too Much of a Good Thing?

Fabio Losso is currently the CEO at the Banco de Desenvolvimento Do Paraná S.A. (BADEP S/A). Since 1999, he has been a founding partner at Losso, Tomasetti & Leonardo Sociedade de Advogados, a Brazilian law firm with offices in Sao Paulo and Curitba. Over the past decade, Dr. Losso has played an important role in developing start-ups in Brazil and South America, with multibillion-dollar allocated investments. Dr. Losso holds a PhD from the University of Sao Paulo (USP) and received his law degree from the Pontificia Universidade Catolica do Parana (PUC/PR). He is also sits as a member of the Dean’s International Council at the Harris School.

Brazil seemed unaffected by the financial crisis. Why was this the case?

It was a mix of strong state regulation, which I personally believe is not optimal to the scale in which Brazil overregulates, and other factors. At the time, Brazil was receiving several foreign investments. With these investments Brazil was able to promote the decrease of unemployment rates. Secondly, Brazil was exporting agricultural products at good prices; we actually had record agricultural production during this time. Thirdly, the overregulation in the markets and huge profits from financial institutions in Brazil allowed Brazil to seem virtually unaffected by the worldwide financial crisis in 2008.

Despite overregulation, financial institutions in Brazil have always offered loans only to the borrowers that have or used to have an amazing or above level of guarantees. Even though we had a high tax rate during 2008 for a personal loan, we took collateral. With collateral, rates were around four to five percent; without collateral, the bank would charge around 10 percent in interest. There was always risk analysis, but the banks really had a great scenario there.

It sounds like some of the financial regulations that helped Brazil could be adopted in other countries. Would you agree with this?

In my opinion, this kind of behavior by public banks is necessary to support some of the most risky projects, for instance, infrastructure projects, but not for regular ventures. Those development banks were and are supporting regular operations, which I believe is the role of private banks. Today the Brazilian Development Bank (BNDES) is six times bigger than the World Bank. So the Brazilian government is sometimes having too big of a role in things they should not have a role in.

Consequently, we have some problems with this preference to support every kind and sort of business. The BNDES should be focused on the government projects, such as infrastructure, and other needs of the federal government. They have actually changed their focuses. Since last week the president of the BNDES said to the press that the era of huge Brazilian companies is over. Why? Because the political pressure of public banks is to serve one or two interests. In our system, who earns more from the government? The ones that support the executives.

The BNDES now lost a lot of money in some of those enterprises. For instance, they were supporting some mid-companies and one of the companies they were heavily supporting went bankrupt. They were having huge losses with this company. In this case, Eike Batista, one of the richest men in the world, lost a lot of money due to the crisis. The BNDES was directly and mostly indirectly the ones that supported him, and as a result, lost money from their investment. It’s an important model, but I believe this model should be applied in a very specific way, particularly to infrastructure projects.

What attracts foreign investors to Brazil despite overregulation? What sorts of industries are of particular interest to foreign investors?

Financial industry is over-regulated and financial regulations are very strong. In other sectors, it’s not so overregulated; the free market applies, except for telecommunications. What attracts investors to Brazil is our growing middle class. President Fernando Henrique Cardoso created the foundations for the middle class. He was the one that enacted change. The world was seeing Brazil as the next China, as a haven for investors. Foreign and direct investors were buying Brazilian stocks. Now our stocks are in a bad situation today and in my opinion it is because it’s easier for companies to go to the BNDES to get direct money rather than expose themselves directly to the market.

When you’re in the stock market, you should be ready to fight, to be transparent, and convince shareholders that your company is a worthwhile investment and you’re doing well. It’s the way it happens in the US with the IPO, companies show their face to the market. In Brazil it’s easy to go to the BNDES if you have good contacts. With that being said, the BNDES does a good job. The point is that this way of operating is convenient. However, I personally prefer the stock market model to finance the companies.

In terms of emerging markets, there is a lot of attention on China, while Brazil seems neglected. Why do you think this is the case?

I believe that one main reason is the strong hand of the state in China. China can say there will be a plant in this location in one year, and it will happen. Brazil is a young democracy. It has all the pros and cons of a democracy. Our institutions are in power. So if there is an environmental issue – any licensing issue – it will take two years, not one. Our legal system, despite that it works, is inefficient. We have the rule of law, but it takes too long. America’s legal inefficiencies pale in comparison to the inefficiencies that exist in Brazil.

People without education tend to go after and support the people that tend to play for the audience (in a bad way). They tend to vote for populists. These populists destroy the state because they will put only their electoral supporters into commissioned jobs. You can contract without public tests. It’s not a career; you can hire for only a specific period of time. We have too many commissioned jobs in the government.

You are currently the CEO at the Banco de Desenvolvimento Do Parana S.A. (BADEP S/A). What is BADEP S/A? How did you get there and what type of duties do you hold as CEO?

My background is law. I helped bring several startups to Brazil. They were interested in Brazil due to the growing middle class consumers and due to the strategic position to offer products and services to the Mercosur, similar to NAFTA in the US, Mexico, and Canada. It is a free trade zone. We Brazilians can export without taxes; they can buy without import taxes, and vice versa. So it’s important to South America. They were also looking for opportunities in infrastructure. There is a lot to be done in Brazil, in every sector. At the same time we have good products and services there, but our culture is open to foreign suggestions or models. We are versatile due to the large mixture in heritages. We don’t have too much prejudice there.

I specialized in M&A (Mergers & Acquisitions) and represented foreign companies. We had a huge case with GVT, a telecomm carrier, and since then I have been a personal strategic consultant for the CEO. I became very interested in financials because I had to deal with M&A. At the same time I had a good team working with me in this operation. I don’t like to not be aware of every detail, so I started to look for ways to understand the numbers. Not only the objective meaning, but also what they’re hiding. Half of this experience was based on actual experiences, and half on my own personal research.

I started to work as an external consultant for banks for investment banks. I helped some to start up in Brazil. There were several invitations for me to join the banks, but it was more profitable for me to stay a lawyer. I could manage several different clients even though I have a particular firm. I don’t want to have a huge law firm; we lose quality control. I’d rather have a few good people I can trust.

What other important policy issues are you working on in Parana and Brazil?

In October of last year, the governor, a good friend of mine, was appointed Secretary of Public Safety. Public safety is one of the most problematic issues in Brazil: kidnappings, robberies, armed robberies; you can get killed because of your watch. Many used armored cars in Brazil. The point is, I was invited to develop and execute a public safety fund, and it is very interesting, even more so than the bank.

The coolest thing I’m working on is the public safety fund. I am a member of the board and am responsible for the fund; the fund is my child. What we are doing there, I can say is the beginning of a revolution. In two months we were able to invest about $100 million from this fund, just in equipment (1400 special police cars). Now we are integrating the systems. It is so absurd that the military police system didn’t talk to the civil police system. Civil police do the investigation; military police take action when the situation is developing, and they go there and fight. After only six months we already felt the difference simply with management changes. This fund is not just a mere fund; it became like the superior board of public safety. As a result of the fund the Chief of Police, Chief of Military Police, Chief of Firefighters, the Secretary, and the General Director started discussing real problems face to face, something that had never happened in six years.

The statistics already show we have reduced crime rates in 6 months. Now we are integrating the systems. We are developing a very interesting program. In the US, it is very common to have the integration of cameras, for instance, which is supported by very good software and a strong IT base. In Brazil, we are now integrating cameras from the municipalities and the private buildings. It’s so simple, but nobody ever talked about this. Sometimes the best solutions are the simple ones.

Feature Photo: cc/(jACK TWO)