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ZNR UUUUU ZZH
P 071500Z JAN 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 0794
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5653
RUEHSO/AMCONSUL SAO PAULO 1426
RUEHRG/AMCONSUL RECIFE 7571
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000036 
 
SIPDIS 
 
DEPT PASS USTR FOR KATE DUCKWORTH 
DEPT PASS DOC/ITA/MAC/OLAC ANNE DRISCOLL 
DEPT PASS TREASURY LUYEN TRAN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EFIN ECON EINV BR
 
SUBJECT:  BRAZIL: TREASURY DAS O'NEILL MEETS WITH GOB AND MDBs ON 
INFRASTRUCTURE AND OTHER ISSUES 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY 
 
¶1. (SBU) Summary:  Treasury Deputy Assistant Secretary Brian O'Neill 
had economic meetings in Brasilia on December 12-13, 2007 with 
officials from the Brazilian Central Bank, Ministry of Finance, 
Ministry of Planning, as well as the World Bank and the 
Inter-American Development Bank.  The meetings focused on the recent 
abolishment by the Brazilian Senate of the 10-year-old "Contribuicao 
Provisoria sobre a Movimentacao ou Transmissao de Valores e de 
Creditos e Direitos de Natureza Financeira" (CPMF - a tax on 
financial transactions); sovereign wealth funds; and continuing 
development and infrastructure challenges faced by the country.  DAS 
O'Neill's visit was in conjunction with the Economic Partnership 
Dialogue reported septel.  End Summary. 
 
------------ 
Central Bank 
------------ 
 
¶2. (SBU) DAS O'Neill, accompanied by Treasury Attache Bill Block and 
Brasilia Econoff, met with officials of the Central Bank to discuss 
general economic trends in the country, the demise of the CPMF, and 
whether or not Brazil would be implementing sovereign wealth funds. 
The Central Bank interlocutors (Marcio Barreira de Ayrosa Moreira, 
Head of the International Reserves Operations Department; Ariosto 
Revoredo de Carvalho, Deputy Head of the Department; Daniela Silva 
Pires, Chief of Division of the External Debt and International 
Relations Department; and Luiz Sampaio Malan, Advisor to the latter 
Department) expressed optimism about future growth and development 
of Brazil's economy, including Brazil's emerging investment sector. 
They did not think the CPMF's expiration would have much impact on 
or hinder Brazil's growth, and also did not feel that sovereign 
wealth funds were going to be a factor in the country's growth and 
development.  Central Bank officials stated that they had no 
information about the possible establishment of a sovereign wealth 
fund other than what they have read and heard publicly.  Few if any 
discussions have taken place between the Finance Ministry and 
Central Bank about key issues, such as initial financing or asset 
allocations, involved in establishing such a fund. 
 
¶3. (SBU) Separately, Central Bank officials stated that they believe 
long-term currency diversification of Central Bank foreign reserves 
made financial sense.  Although the U.S. dollar will continue to 
play a dominant role in foreign reserve assets, its share is likely 
to decline in the future.  Central Bank officials also stated that 
they are watching developments in the U.S. sub-prime market very 
closely.  While sub-prime developments have increased risks to 
Brazil's economy, Brazil's base case outlook for 2008 remains that 
of continued strong growth and a rising, though well-contained, rate 
of inflation. 
 
------------------------------------- 
Brazilian Treasury Expresses Optimism . . . 
-------------------------------------- 
 
¶4.  (SBU) O'Neill then met with Luiz Eduardo Melin, now Secretary of 
International Relations of the Ministry of Fazenda (Brazil's 
Treasury equivalent).  Melin downplayed any potential impact of the 
CPMF vote, saying that the fiscal accounts would remain strong and 
investment growth should increase in 2008.  Melin cited two factors 
that would help to offset foregone CPMF revenue: (1) 
higher-than-expected revenue-to-GDP elasticity that is expected to 
continue in 2008 (and which will help to boost federal revenues), 
and (2) a modest reduction in the rate of health care spending. 
That said, he said the CPMF not being renewed would mean cuts in the 
areas of social benefits and that the GOB would be unable to develop 
as quickly as desired in such areas as public health and education. 
"Approximately half of what we lose with the CPMF will be regained," 
Melin said, and indicated that eventually he thinks the GOB will end 
up in precisely the same position as before, primarily due to what 
he characterized as the enormous relatively recent increase in 
private investments.  Melin stated that the Senate's rejection of 
the CPMF renewal was politically motivated, and that the opposition 
of some senators was motivated by a desire "to score a political 
point against President Lula." 
 
¶5.  (SBU) DAS O'Neill indicated to Melin that Treasury would like to 
be helpful with regard to infrastructure assistance.  As O'Neill 
pointed out, Treasury's view is that in Brazil, the challenges are 
more micro rather than macro; that is to say, identifying the 
projects and securing the financing are less problematic than the 
ongoing execution, logistics, and regulatory impediments.  Once 
those challenges are overcome, projects should successfully progress 
 
BRASILIA 00000036  002 OF 003 
 
 
from conception to implementation. Melin offered that Brazil "has 
had a hard time dealing with the fact that you can't monkey around 
and mismanage public finance," characterizing this as not just a 
federal government problem but a state government issue over the 
past 20 years.  Nevertheless, he said that both institutionally and 
culturally Brazil is getting back on track to support the idea of 
growth, with much better expectations for the next year and beyond. 
Melin stated that Brazil has lost a substantial amount of its 
technical capacity to implement large infrastructure projects since 
the 1990's, and that it has taken longer than expected to rebuild 
this capacity.  However, he believes Brazil's ministries are now 
well-positioned to launch projects on a much more accelerated time 
frame, and that a substantial increase in infrastructure investment 
will begin to be seen starting in 2008. 
 
¶6. (SBU) Melin said Brazil will host workshops at the upcoming 2008 
meeting of the G-20 on 1) competition and financial markets (the 
OECD will attend and will possibly be a presenter); 2) climate 
change from the perspective of finance ministers and central banks, 
which he characterized as a planned "very focused" workshop in 
London; and 3) the role of fiscal space in promoting growth and 
development, a workshop at which he expects some countries will 
share experiences.  Melin said Brazil will talk about their 
experience leaving infrastructure by the wayside for too long; 
success and "not-so-success" stories will be presented as well, 
although he thought the meeting would "not be so best-practices 
oriented as the OECD."  Regarding the Tropical Forest Conservation 
Act debt swap initiative (TFCA), Treasury officials stated that 
Treasury expects to complete its internal review of Brazil's TFCA 
request soon, and that a letter addressed to Finance Minister 
Mantega indicating approval was likely within the next 30 days. 
 
------------------------------------------- 
. . . But the World Bank is Less Optimistic 
------------------------------------------- 
 
¶7.  (SBU)DAS O'Neill, Treasury Attache Block and Econoff also met 
with John Briscoe, Country Director for the World Bank in Brasilia, 
who provided a pessimistic view of the current state and future of 
infrastructure development in Brazil.  Briscoe said virtually no 
planning pipeline exists in Brazil, and that "capacity planning and 
process at the government level has almost disappeared."  He stated 
that efforts by outsiders to accelerate infrastructure investment in 
Brazil by "fixing Brazil's government" will never work.  Instead, he 
recommended working more selectively and closely with state 
governments who are, in his view, more capable and dedicated to 
implementation of infrastructure projects. 
 
 
¶8. (SBU) Briscoe said Minister Dilma Rousseff (chief of staff to 
President Lula in the Casa Civil), in a recent meeting with the head 
of the World Bank's International Finance Corporation (IFC), flatly 
stated that she "no longer believes in PPPs" (public-private 
partnerships).  In Briscoe's view, this lack of confidence from the 
top leadership, combined with tensions among ministries (for 
example, Finance and Transportation), makes federal projects very 
difficult to implement.  Briscoe used the example of the Rio Madeira 
hydroelectric project, saying it is needed and would benefit Bolivia 
as well as Brazil, but bureaucratic and regulatory challenges have 
drastically delayed the project's implementation.  Due to 
difficulties working at the federal level, the World Bank in Brazil 
works primarily with state-level partners with the hope of 
eventually working up to success at the federal level.  Separately, 
Briscoe asked that the U.S. Treasury do what it could to limit USAID 
funding for certain, in his view, allegedly "not well-intentioned" 
NGO groups (not specifically mentioned by name) in the Amazon 
region.  He stated that the World Bank has attempted to work 
constructively with NGOs in achieving developmental and 
environmental goals in that region and had worked effectively with 
many. 
 
--------------------------------------------- ----- 
IDB Receptive Regarding Infrastructure Cooperation 
--------------------------------------------- ----- 
 
¶9. (SBU) Jose Luis Lupo, head of the IDB Brazil mission, noted his 
office is developing the Brazil country strategy paper and, after 
talking to Brazilian business and government sources, he predicts 
that Brazil is not going to take advantage of its positive macro 
environment to put tax reform, labor reform or other reforms in 
place.  IDB believes Brazilian reforms will be indefinitely 
postponed for political reasons.  Lupo also felt the PAC was 
problematic - Brazil has money, but not the expertise to develop 
 
BRASILIA 00000036  003 OF 003 
 
 
programs and projects.  IDB can offer technical assistance loans to 
prepare programs.  IDB could help Brazil invest in projects, 
particularly, given its regional expertise, in cross-border PAC 
initiatives.  Lupo noted that IDB enjoys an almost zero percent 
default rate on its loans, while BNDES has a high default rate and 
is constrained in cross-border project participation (since BNDES 
can only fund Brazilian parts).  While the high-speed Rio/Sao Paulo 
rail project is the only PAC initiative IDB is currently working on 
with the government, IDB has requested Brazil provide its top five 
priority PAC projects where the country would like IDB help (no 
response yet, per Lupo).  Lupo noted that energy, followed by 
transportation, were the top regional infrastructure priorities. 
 
¶10. (SBU) Lupo noted Dilma Rousseff said in a recent meeting that 
Brazil would proceed with the Madeira project, but without planned 
IDB participation.  The government was prepared to handle local NGO 
opposition, but felt IDB participation would draw international NGOs 
the government did not want to face.  In that same meeting with IDB 
and BNDES, when BNDES reported a planned 2008 allocation of 4.5 bn 
reais for public-private partnerships, Dilma reportedly said the 
government now believes PPPs do not work and would not do any more; 
future projects would be either all-private, all-public or 
concessions.  Lupo noted that previously, Brazil was the only IDB 
country that would not accept funding for feasibility studies, based 
on resistance to outsiders' advice, but the government seemed more 
receptive in the current environment to working with World Bank and 
IDB, provided the cooperation was not too public. He attributed this 
development to government realization that PAC was only going to 
succeed if the private sector were willing to participate and the 
private sector would only participate if the bottlenecks and redtape 
were eliminated.  Like World Bank, IDB strategy has been to work at 
the state level with hopes to build more productive cooperation at 
the federal level over time. 
 
¶11. (SBU) COMMENT: DAS O'Neill's visit was a productive opportunity 
to advance development of an infrastructure initiative.  The 
similarity in substance, if not tone, of the IDB and World Bank 
meetings was striking.  Lack of technical expertise in project 
planning and implementation in the sectoral ministries clearly needs 
to be addressed.  Addressing over-bureaucratization and 
unpredictability at the federal level, among other factors, will 
also be important in attracting private sector foreign investment in 
infrastructure.  END COMMENT. 
 
This message includes input and clearance from Treasury Attache 
based in Sao Paulo. 
 
SOBEL