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FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 1081
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5827
RUEHSO/AMCONSUL SAO PAULO 1650
RUEHRG/AMCONSUL RECIFE 7728
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UNCLAS SECTION 01 OF 03 BRASILIA 000272 
 
SIPDIS 
 
DEPT PASS USTR FOR KATE DUCKWORTH 
DEPT PASS DOC/ITA/MAC/WH/OLAC ANNE DRISCOLL 
DEPT PASS TREASURY IA LUYEN TRAN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EINV EFIN ECON BR
SUBJECT: BRAZIL: INFRASTRUCTURE AND MORE - TREAS DAS O'NEILL VISIT 
 
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 
SUMMARY 
 
-------------------------------- 
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 
success. 
---------------------------------- 
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 
 
Treasury has cleared this message. 
SOBEL