Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 2 - Evidence - Meeting of October 5, 2011
OTTAWA, Wednesday, October 5, 2011
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:15 p.m. to examine and report on the political and economic developments in Brazil and the implications for Canadian policy and interests in the region, and other related matters.
Senator A. Raynell Andreychuk (Chair) in the chair.
[English]
The Chair: Honourable senators, we are under a time constraint. The Standing Senate Committee on Foreign Affairs and International Trade is here continuing its examination of the political and economic developments in Brazil and the implications for Canadian policy and interests in the region.
Before I turn to our first panel this afternoon, we have been told that if we wish to continue being televised for this study, for tomorrow only we will have to move to room 9 in the Victoria Building. There is a recommendation that we continue having these televised, so it would mean tomorrow's meeting at 10:30 would be in room 9 in the Victoria Building for that session only. I am bringing it to your attention because if you are like me, you will run to this room at 10:29 only to find that the meeting is not here.
We are very pleased today that we have representatives from the Brazil-Canada Chamber of Commerce. The mission of the chamber of commerce is to be a liaison between Brazil and Canada, representing the private sector by showcasing the multiple opportunities both countries have to offer to each other. Their goal is to offer access to resources and network opportunities for anyone interested or active in investment or trade among Canada or Brazil.
This afternoon we have Mr. Eric Bonnor, chairman, and Mr. Eduardo Klurfan, vice-chair. I must add that Mr. Bonnor is also Senior Vice-President of Brookfield Asset Management and Mr. Klurfan is Vice-President of Trade Finance for Scotiabank.
You are precisely the type of witnesses we have been waiting for. We have had some background and previous history, but you are at the forefront of possibilities for Canada and Brazil.
Our process usually is you can determine who goes first. If you can make your interventions as crisply as you can, we then like to get involved in a question and answer period. We are under a time constraint because we have to be back in the chamber for a vote at 5:30. When the bells start at 5:15 we will be obliged to terminate this session, unfortunately. We hope we can accomplish everything in one hour.
Gentlemen, the floor is yours.
Eric Bonnor, Chairman, Brazil-Canada Chamber of Commerce: Thank you very much for the invitation. We really appreciate the opportunity to come and talk about concerns that our members have in terms of trade and other issues with Brazil and Canada.
Since we have already had the introduction, I will not spend any time on what the BCCC, the Brazil-Canada Chamber of Commerce, does; but just to let everybody know, the members include large multi-nationals such as Brazil's Vale Inco, Gerdau and Votorantim, and Canadian companies such as Brookfield, RIM, almost all the Canadian banks, including Scotiabank, and many Canadian service providers, including Heenan Blaikie, Goodman's and large institutional investors like Ontario Teachers' Pension Plan, OTPP, and Canada Pension Plan Investment Board, CPPIB.
We have a very active board, with 15 directors, including honorary members for Brazil such as the Brazilian ambassador, the consul general and a member of Parliament. With over 120 members, it is a very strong representation, including from small and medium enterprises. Our goal is to become the thought leader for Canadian business and Brazilian commercial and academic interests, with activities in both countries.
We were asked to provide our members' input for this Senate study and to help the committee to answer questions regarding the future direction of Canada-Brazil relations and related policies. While many of the questions that we went through relate to broad issues, such as how global institutions should be restructured to accommodate the size and global importance in countries like Brazil, we will generally limit our comments and input to commercial issues of importance to our members.
There are four broad categories that we would like to bring up. The first is tax issues; the second is barriers to trade and investment; the third is structural and organizational issues; and the fourth is impediments to movement of trade and goods.
Starting with the tax issues, the first issue is really regarding double taxation and the issue that Brazilian tax authorities published, in 2000, a normative ruling, meaning that income earned by a non-resident country from services rendered to a Brazilian company from abroad cannot be considered profits. In that case the Brazilian government would withhold taxes on those services rendered and then the Canadian or foreign company would have to pay taxes to their domicile country. In that case we would look to see some kind of opening of a dialogue with the Brazilian tax authorities so that they could revisit its interpretation of article 7 of the bilateral tax treaty.
The second tax issue is regarding IP and tax deductibility limitations. For non-resident companies that licence their IP to an unrelated party in Brazil, there is a limit on tax deductibility of royalty payments if it exceeds 5 per cent of net sales. If it is a related party the tax deductibility does exist, but there is also a prohibition of the payment. You have some serious issues there regarding whether you are a foreigner in the company and your IP licence is to a related or an unrelated party. That is an issue that we think needs to be resolved as well by opening up a dialogue with the Brazilian tax authorities.
The third issue is regarding the general complexity of the Brazilian tax structure and system. Many of our members, including the small and medium enterprises, have a difficulty obviously because of the language difference. Portuguese is not a language that most Canadians speak or understand. Setting up operations in Brazil is difficult because of that. Added to that is the complexity of the Brazilian tax regime, so it makes it a formidable barrier for Canadians companies to go and set up operations in Brazil.
Finally, the last tax point is on corporate tax rates in Brazil. At 34 per cent, they are the second highest in Latin America.
Going to the barriers to trade and investment, there are five issues that I would like to raise, the first being the recent buy-in-Brazil initiative that is making imports more expensive and promoting domestically produced goods. This was originally related to Petrobras requiring 50 per cent of content to be Brazilian made and has now been expanded to import duties on cars, car parts and, in some cases, having increased that to 30 per cent or more.
Second is the tax on foreign capital. It is a 6 per cent tax called the IOF tax on incoming foreign capital, which makes it difficult for investors to get decent returns in Brazil because you have to pay this tax up front when you send capital to Brazil.
Third is regarding oil and gas and the pre-salt development investments. Recently the government in Brazil has said that in that sector you can only be a junior partner in any JV with Petrobras.
The fourth issue is land ownership restrictions. This is a resurrection of a law limiting the amount of rural land that foreigners can buy and own. Brookfield is a large land owner in Brazil; we have owned land there for a while. That is not an issue for us, but it is an issue for a lot of organizations. The Ontario Teachers' Pension Plan was trying to make an acquisition of $400 million in a timber deal and they were not able to proceed because of this restriction on land ownership. While it has not been enacted yet, it is still under review, it is an issue in that it has basically turned off the taps of FDI going to that sector, whether it is agriculture or timber.
Finally, the last issue in terms of barriers to trade and investment include reforms being proposed to mining legislation and regulations that would likely increase cost to foreign-owned investments and operations in Brazil. This is related to environmental costs, but we feel that in the case of investing in Brazil that is a strong barrier because it just increases a company's operating cost significantly. Similar to the land ownership restriction that I mentioned earlier, this is also under review and has not been enacted. It is likely going to be on a slower pace than the land review question, but still an issue. Many of our members are from the mining sector and are concerned about having to pay additional fees and increase their operating costs.
The next points I would like to raise are on the structural and organizational issues. There are two key points here. First, that Brazil is not a member of the WTO information technology agreement, which results in higher customs duties; and, second, that Brazil is not subscribing to global norms or, more to the point, that Canada and Brazil do not have an agreement on patents. In that case the issue is that if you have a patent registered in Canada, it is not recognized in Brazil. Many of our members are looking to get some relief in that aspect.
The final issue that I would like to bring up is related to impediments to free movement of trade, travel and goods. As I am sure many of you are following, we have visa requirements in place for travel to Brazil that are very onerous in terms of restricting people coming back and forth. I know there has been lots of talk and things have been moving forward — we have new trade offices opening up in Brazil that are allowing Brazilians to get visas more easily — but we still have a visa in place at the end of the day. That always will be an impediment to movement of people if there are visas. By not having any, one has free movement.
Finally, the Brazilian goods importation customs clearance process is very decentralized. If there is a way we could put pressure on the Brazilian government to look at centralizing the customs processing, it would be helpful. As it is very decentralized, you do not have any sense of whether a product coming in will be slapped with the same duties in one state or another. There is a lot of variability within the country, state by state, depending on where you import goods. The problem is the lack of clarity and whether anyone who wants to influence the process of importing a product can get in and look for some kind of action to prohibit your product from coming in.
To wrap up, there have been many initiative that have been recently announced, particularly with Ed Fast, the Minister for International Trade's trip to Brazil in June; and the Prime Minister's trip in August. We should be looking to the agreements and the understandings that were made between those parties at those trips to try to move our agenda forward, particularly in the areas of science and technology, innovation, exploration of deep sea oil reserves, new technology and infrastructure.
I know there have been a number of MOUs signed, including things like Olympics best practices cooperation and they are looking for Canada's help to help them implant best practices in infrastructure and other areas where they are falling behind in terms of their schedule.
With that, we have been active at the chamber to provide a forum for the different parties. In September, we held a sustainable development seminar. In October, in a couple of weeks, the former head of the central bank will do an address on infrastructure. We will have a panel seminar as well.
The type of activity that we promote and look to have members come to is to provide a forum for people to better understand how to do business with Brazil and look to make investments in Brazil.
With that, I would like to say thank you.
Eduardo Klurfan, Vice-Chair, Brazil-Canada Chamber of Commerce: Thank you very much for the opportunity to address the standing committee. As I planned my comments in the days before this presentation, and as I was reading the transcripts from previous witnesses, I have been cutting down a lot to avoid repetition. I see you have had witnesses with strong credentials.
I would like to express some of my views formed after 30 years of doing business with Brazil, always working for financial institutions looking at trade, trade finance and the financial sectors, and having lived eight years in Brazil when I opened the representative office for Scotiabank in 1999.
I have to say that Brazil has come a long way. Following military government, Brazil really started to flourish. Democracy suits Brazil very well. The process has given Brazil the opportunity to reform its structures and its government, and to be able to flourish as a major world economy.
Brazil and Canada had a rough time in the past, but those events never left deep scars. I was living in Brazil when we had the meat embargos and I was there at the height of the airplane dispute. I have to say that it is all forgotten; it is all gone. The relationship is strong. Thanks to Brookfield, which has been in Brazil for over 110 years, Canada has always been a model in that country.
We have a lot of Brazilian government officials who have done postgraduate studies in Canada. I was present at a presentation the current President Rousseff did when she was minister of mines and energy. She was not short of praise for her experience with Hydro-Quebec and the technology that it was able to bring on hydro generation, which is very important for Brazil. Even at that level, the image of Canada is a strong and friendly one for Brazil.
We have seen it on the recent visit of Prime Minister Harper. Brazil received Canada with open arms, with a lot of agreement and a lot of looking forward to a new and enhanced relationship.
All that being said, picking up on the point that I saw in one of the transcripts, Brazil and Canada are not really competing economies. They are both very large economies. Brazil has been increasing in size, and it has ambitions for a permanent seat at the UN and to become a major player in the markets, but still they are complementing economies.
Both economies are oriented toward resources, but different resources. When we look at agriculture, the issues that Brazil or Mercosur had with the European Union or even in negotiating an agreement with the U.S. have always involved agriculture, but agriculture between Canada and Brazil is not competing. We produce wheat; they produce soya. We produce a lot of fertilizers that Brazil needs. They produce orange juice; we do not. They are strong on the production of poultry, but we buy from them as well.
They are complementary economies. We have technology, and they need the technology. Even when we go back to the issue of the airplanes, Embraer itself buys a lot of parts from Canada. We, in Canada, buy their airplanes as well. We have to remember and always keep in mind when companies are in dispute and when their countries are in dispute. The airplanes dispute was a dispute between companies, not countries.
However, the structure of Brazil is still evolving. It is not a fully emerged economy, as we like to think. There are still structural problems. Mr. Bonnor referred to one of the issues raised by our members — the complexity of the taxes. There are probably, at last count, 57 different taxes that apply in Brazil.
When we look at some of the comments that were made regarding the minimum salary in Brazil, and what influence it has on the economy, the pension system of Brazil is indexed to the minimum salary. Every time that the government adds one real to the minimum salary, it costs a lot of money to the public finances because the government has to raise all the pensions.
Labour laws also are quite complex. The need for labour reform in Brazil has existed for a long time. This is a reaction of Brazil to many years when the workers needed protection. Now they are overprotected and the country has very inflexible laws that are difficult to deal with for foreign investors.
The public accounts are still very bloated. The deficit is quite large and the government needs to take further control of that.
When we look at the structure, Brazil is not an economy that can compete head to head with Canada because we are much more advanced in many aspects. When we make these comments and our membership raises issues that are very technical in nature, it is because we are looking to continue to improve the relationship between the two countries. We are looking to improve the relationship on investments, on trade and on cooperation. It requires a lot of work between the two countries, both from the private sector and the public sector.
We believe that the relationship between the two countries will flourish once Canadian investors and exporters realize that there is life beyond the U.S. I think we are seeing that happening now. Brazil could be a sizeable partner for Canada and Canadian companies. At the chamber, our objective is to be able to demystify Brazil in Canada and make sure Canadians understand Brazil better. Our sister chamber of commerce in Sao Paulo, which I had the honour of heading for four years when I was there, has the opposite challenge — to try to bring the Canadian image to Brazilians.
I will close there. We are ready for questions.
The Chair: Thank you for your opening comments.
Senator Finley: You have encapsulated many of the questions that we have either been asking or intend to ask.
One thing that intrigues me a little — worries me, I suppose — is last week we had Robert Wood of the Economist Intelligence Unit here, and I asked him at that time about a recent trend of protectionism. The Economist described it as a "siege mentality." Mr. Wood stated at the time:
I think at the margin you will see more of these protectionist measures, which, to a certain extent, will raise eyebrows and will raise concerns among foreign investors.
Not just the fact that it is protectionism, but the speed. I believe in the car import case, they gave about a day's notice that they were going to do it.
How do you see Canadian businesses — your businesses, for example — reacting and adapting to this protectionist trend? Do you see this as a real threat to Canadian businesses that would wish to do business in Brazil?
Mr. Klurfan: Historically, Brazil had managed its external policy on a corporate basis. It has always been raising protectionism as a way of allowing the economy and the local companies to evolve and develop. It created inefficient companies; companies with outdated products. It was not until that protectionism started to simmer down that Brazilian companies were called to compete. "Compete" means modernize themselves to become more efficient and to bring new technology. That happened.
It is part of the culture that the government will bring in protections to companies so that they do not lose jobs. There is a social side to it. The companies do not reduce their revenues. Protectionism is embedded in the DNA; it happens.
I have not seen yet — and I am not sure if Mr. Bonnor has experienced this — the effect on Canadian companies because I do not believe the Canadian companies were affected by many of these protectionism rules. However, there are anecdotes. You mentioned the car industry. Many years back, overnight, the government raised the tax on the import of cars from 40 to 70 per cent. Within hours, the price of Brazilian cars went up the same percentage. You can see why the government puts in protectionism and how that corporate mentality was embedded in the government. We will continue to see that, but sporadically. It will diminish probably in time.
Senator Finley: Do you think it is a cyclical thing?
Mr. Klurfan: Yes, it is cyclical. When you look at the car industry in Brazil, it is probably the largest car manufacturer in the world, with about 14 different car manufacturers. We do not have that in Canada. They produce over two million cars a year in Brazil; they probably surpass that number. Most of them are very small cars.
These same companies are the ones that are probably affected by the imports. Toyota, Honda, Ford, Chrysler, GM, Volkswagen, Mercedes Benz and Volvo are all there. Part of the imports could be their own products because as they produce the small cars, bigger cars have to be imported; there are not enough. They could be affected by them as well, but they prefer to protect local production.
Senator Finley: It is not the specific industry really that concerns me. As you said, this element of protectionism is built into the government DNA. As a government or as a country trying to do this trade, to encourage and facilitate Canadian companies to invest in Brazil, Mr. Bonnor mentioned one of the highest corporate tax rates in Latin America. I think Forbes ranked them recently as twenty-third in the world as a place to invest vis-à-vis Canada being first.
Do you see this high corporate tax rate continuing at that level in the future, or is there an effort on the part of the Brazilian government to reduce that?
Mr. Klurfan: There is consciousness that the tax must be reformed and that the public sector has to reduce the cost to the public sector. However, there continues to be a dispute between the social and economic sides. This government — that is, the continuation of the previous government — had a focal point on the social side and on the labour side and would continue to play with protectionism, or taxes, as long as they could maintain the level of employment. That is, the number of people coming out of the poverty line into the middle class, as defined by Brazil.
You will see that, but I think you will see that reducing in time. It is part of the growth and the maturity that the country is reaching. They will have to do so. There is a total consciousness that the finances of the country must be cleaned up. The level of borrowing of the country is high because of that. Mind you, it is all domestic borrowing, not international borrowing. The public debt is very high because they are financing this government's expenditures.
Mr. Bonnor: To add to that, we have to keep in context where currencies are. The Brazilian real has appreciated dramatically against other currencies, particularly the U.S. dollar. Therefore, that reaction is partly a reaction to bring their producers on a more even playing field with other foreign producers.
There is likely to be something temporary, because you need to keep in mind that there is a serious high-quality labour shortage in Brazil today. They need trained people. They have a huge infrastructure build that needs to take place with the PAC, the Olympics and the World Cup. They have railroads and ports that need to be built. Everything needs to be done quickly. They do not have the trained personnel to do it.
I think we will see some reactions like this, but they will be in sectors that are fairly limited. We have seen some labour reduction costs on taxes in sectors like furniture, textiles and software recently, which is to some degree a tariff. They are more competitive because they have lower taxes than other sectors and other producers.
The government is trying to walk a fine line because they know they need to do all these things. They also know that they have producers domestically that are in difficult shape. The currency, as you have seen, has gone from 1.85 or 1.90 to the U.S. dollar recently. That is automatically back into a better territory than where it was before.
Senator Finley: I have other questions, chair.
The Chair: On the second round.
Senator Wallin: Given what you have just said in the last few moments, I will pose them both and then you can comment on that.
Is Canada really well situated to be the partner or the answer to Brazil's needs at this point, when they need to get themselves up to speed for Olympics and infrastructure, or can they just as easily go to the U.S., or to China, or to anyone else and do that? Is there anything that sets us apart?
Without putting you in a conflict of interest here, we have prime ministerial visits. Ed Fast goes and our foreign affairs department is saying Brazil that is a priority area. That means we will pay attention to it. There is then the Canada-Brazil business forum that Rick Waugh co-chairs.
Is that actually a mechanism to work? We have to make recommendations at the end of all of this, so we are looking for some pragmatic things. Do this, it will help this problem and we will be able to move forward. In that context, both of you can take a crack.
Mr. Bonnor: Concerning the first question about what sets us apart in terms of being able to step in and be a partner with Brazil, particularly from the Olympics and large sports events, we have a great example in the Vancouver Olympics. We have fantastic people who worked on that. They are willing and the governments are willing. An agreement was made between the two heads of government recently to provide that kind of assistance.
You have different circumstances at different times. Given that the Vancouver Olympics is so recent, it is a great leveraging point for us to take our know-how to Brazil and help them out.
If I understand your question about the CEO forum correctly, it is about what can they hope to achieve?
Senator Wallin: Where do we put our energy? When we are thinking about what to recommend, governments embrace this. We have had the Prime Minister go; there will be a return visit. Our foreign affairs and trade people are focused on this; we have declared it. We now have this forum. What is the best vehicle for actually getting stuff done?
Mr. Klurfan: I think we have to look at multi-facets. If we could multi-task, that would be the approach. The CEO forum is critical because it will really bring in when the rubber hits the road. It will be exactly the companies that need to influence both governments on what needs to be done to allow for better cooperation, investment and trade between the two countries.
We were involved with the chamber in the original drafting of this forum, together with the present Minister of Foreign Relations, Ambassador Patriota, from Brazil. This was his project when he was secretary-general of foreign affairs. He was embraced by the private sector. The CEO of Scotiabank, Mr. Waugh, is definitely very keen on this. We just took a position on Monday in a new bank we bought in Brazil. The Brazilian flag is flying high on the Scotiabank map today. We are keen on that. We are one of the more active Canadian banks in Brazil. My personal view is that the private sector is one of the points of attack that is very important.
Mr. Bonnor: An important distinction is that Murilo Ferreira has been named as the co-head for the Brazilian side. Never before has a person at the CEO level been put in a co-head position in a forum like that. They have other forums with the U.S. and other countries. That is a good indication from the Brazilians that they have an interest to use this as a means to improve relations, identify problems and look for solutions to those issues.
Having a small number of CEOs together is a great way to sharpen and focus minds. These individuals typically have a great ability to parse through to the problems. Hopefully that will be a way to funnel any issues to a point and then take them to government.
Senator Wallin: That was very helpful.
Senator Segal: I will ask one multi-faceted question. I worry that we have CEO forums, prime ministerial visits and presidential return visits, all of which is happening at one level, and at the granular level we have taxes on incoming capital. I do not know whether that means there is also a tax on repatriating profits. No one would know better about that than Brazilian Light and Traction and successor companies, so I would be interested in your perspective on that.
Do they apply the same rules on JVs? Are they using the tax system to encourage Canadian companies to operate through joint ventures as opposed to as just investors from afar? Do the land ownership issues and constraints also deal with land purchased for the purpose of development? That is something that Mr. Bonnor would understand better than most.
I take it that the visa issue is a Canadian problem. We are the ones insisting that, before our Brazilian friends come to this country, they have to have a visa. I wonder whether the chamber of commerce views that as an anxiety that we have about illegal immigration or people who purport to come as tourists who secretly want to stay because they aspire to being a cab driver somewhere. Is there something we are missing about that economy?
Finally, should we be looking, as a real goal, at trying to get real movement on a new tax treaty, a coherent tax treaty that is supportive of the economic and fiscal goals of both governments as well as financing and encouraging trade?
Mr. Bonnor: Those are all great questions. Breaking it down to the various parts, on taxes to repatriate Brazil has set up structures that are quite favourable. Typically, 15 per cent is the withholding tax on capital gains for those types of investments. I would say that puts Brazil on a fairly good par with other countries. Certainly we have spent a lot of money and time figuring this out, and that type of structure was put in place in 2006 through legislation in Brazil and continues to be protected. The IOF tax that I mentioned earlier, the 6 per cent, is a 2-per-cent tax on investments coming through those types of investment structures. It is not as onerous, and I think the Brazilian government recognizes the need for FDI, particularly in long-term investments. They are trying to cut out the hot money and make it more expensive for capital to come in and out on a short-term basis.
Talking about taxes for investors, that would cover your question about repatriating or investing in Brazil.
In terms of the land issue and whether it applies to development property, as I understand it, it applies to rural properties. It does not apply to real estate, per se, in cities. It does not apply to Canadian investors looking to invest in Brazilian real estate.
Senator Segal: So our laws in P.E.I. would be more onerous than their laws with respect to their land?
Mr. Bonnor: Probably. Certainly other jurisdictions in the world have more onerous laws than they normally would.
On the visa requirements, you are absolutely right. It is a Canadian imposition and so the Brazilians are saying it is a quid pro quo: You take it off; we will take it off. It is as simple as that.
Finally, on whether there is a movement toward a coherent tax treaty between the two countries, I sure hope so. It would be great if we could focus attention on that category of issues, because it does affect many things in terms of investment and trade, and there are many things wrong with it.
[Translation]
Senator Robichaud: At the beginning of your presentation, you listed some of the obstacles or challenges when doing business with Brazil. Is doing business with other South American countries a more attractive prospect for Canadian companies?
[English]
Mr. Bonnor: I cannot speak from the chamber's perspective, but certainly from Brookfield's perspective. There are other countries in Latin America that are great places to do business. One example is Chile. Chile has very transparent institutions, laws and regulations and is very attractive for capital to invest in infrastructure and other parts of their economy.
Two other countries that are fairly interesting for investors are Colombia and Peru, for a number of different reasons. At the end of the day, you have to consider that Brazil is a huge engine of growth. Its population demographics are very attractive, and that trend will likely continue for 30 or 40 years. They are a powerhouse in terms of energy and agricultural production.
When you put it all together, there are pockets in Latin America with attractive components for investing, but Brazil has a lot going for it. In spite of the issues of taxes and all of that, it is a magnet for capital, at least today.
I hope that answered your question.
[Translation]
Senator Robichaud: Yes, perfectly.
Mr. Klurfan, would you like to add anything?
[English]
Mr. Klurfan: I agree with what Mr. Bonnor said. There are many very good economies. We at Scotiabank operate in many of those economies. However, Brazil offers good size, potential and growth and it continues to evolve in the global economy. As well, Brazil and Canada have a history in relationships that goes back a long time, and I think that is a very important component of the continued entry of companies into Brazil. I believe that we will see in the near future that we can work together on any of the issues that we have raised.
[Translation]
Senator Robichaud: You said that Brazil was in serious need of skilled and professional labour. Brazil also has infrastructure needs, the construction of roads and ports and so forth. In addition, an agreement on the Olympic Games issue was reached.
You also mentioned Hydro-Quebec and the fact that it had done a lot in terms of helping Brazil with its hydroelectric development. Do we have competition? And if so, who is our competition when it comes to building the infrastructure Brazil needs?
[English]
Mr. Bonnor: Can I ask what the question is about?
Senator Robichaud: Who is our competition?
Mr. Bonnor: For those businesses? For building the infrastructure?
Senator Robichaud: Yes.
Mr. Bonnor: You have a global marketplace today. If you go back 10 years, the Spanish government gave very attractive terms for Spanish construction companies to make investments overseas. That regime allowed for many Spanish companies to make investments in infrastructure, ports, toll roads, et cetera, in places like Brazil. Today that regime does not exist, so they do not have that advantage anymore. It depends on what point of time you are looking at. Are you are looking at today?
Senator Robichaud: I am looking at today. We cannot do anything about the past, can we?
Mr. Bonnor: Some of these companies have had advantages in that they have built out positions and established local operations. That is an advantage in itself, particularly if you are dealing with a country like Brazil with a different culture and different language.
Mr. Klurfan: We have to keep in mind that with the slowdown in the economy, companies in Europe have built up capacity that has not been utilized. They are looking for new markets to use the capacity, and Spanish construction companies in particular are very desperate. The construction industry in Spain has almost stopped dead in their tracks. Some of these construction companies are coming to Canada for some of these infrastructure projects and bridges we are building because they need to find new sources of work and labour. With that said, I believe that there is Canadian technology and know-how that is second to none that Brazil needs.
I do not have certainty that Hydro-Quebec is supporting this, but I know there has been an exchange of technology in the past where Brazil has been able to experience some of the advanced technologies that Hydro-Quebec has. The president at the time was able to praise Hydro-Quebec's technology and know-how.
Mr. Bonnor: Close to home in Quebec, we have SNC-Lavalin, which is a fantastic organization and is globally recognized. They have an ability to go and compete. I would highly expect them to be there at some point.
Senator Robichaud: You would expect them to be there at some point. Are they not there now?
Mr. Bonnor: They do have a presence, but I do not think they have a huge scale in Brazil today.
Mr. Klurfan: We do not know everything that has been negotiated these days, but I think we will know pretty soon what is coming, because the Olympics and the World Cup of soccer are soon. The timetables have also been pushed in Brazil.
Mr. Bonnor: Just taking your thoughts about where we can compete, Canadians are at the forefront of 3P types of investments, which are private public partnerships. Ontario, British Columbia, Alberta and Quebec have great programs. Those four provinces have programs in place to make investments through 3P processes. The rest of the world is looking at it. Other countries do it as well, including Australia and the U.K. Our neighbour to the south, the U.S., is nowhere in that process. They go forward one step and go back one. They have one toll road they put on for tender and then they pull it. There is a high degree of uncertainty within the U.S. until they decide they really need to invest in infrastructure. They do not have a process that works, but Canada does. We can take that expertise to the Brazilians and say, "This is how you do it."
From process and financing perspectives, we have great abilities, know-how and experience and should use that to the benefit of investing in places like Brazil.
[Translation]
Senator Fortin-Duplessis: I would like to tell the witnesses how informative their statements were. I found the answers to my colleagues' questions very revealing. I will try to keep it brief, as per the chair's request. I have two questions.
First, Brazil has an inflation problem. And to curb that inflation, aside from the steady raising of interest rates by the central bank, one of the first decisions that new president Dilma Rousseff made was to implement a $31-billion austerity plan.
Do you think the goal of having lower interest rates will be reached?
[English]
Mr. Bonnor: To make sure I understand the question, are you wondering if Rousseff will be able to tackle inflation, particularly with regard to an austerity plan of $30 billion that was recently put in place? There are a lot of different factors in play.
I was at a conference recently in Calgary, a CFA wealth management seminar, and a U.S. consultant came forward and said she is playing a tight game. The issue really is that they have a shortage of labour. They have all these investments that need to be made, and agricultural products and commodities at a relatively high price. You have the question of whether they can direct the capital that is coming into the country in an efficient manner.
Because their structures are not well-organized in terms of getting that capital deployed within the country, there is a lot of leakage. Because of the confusion in the financial market with what is going on in Europe, they see this as an opportunity to take inflation down a notch. They are looking to reduce interest rates, but the jury is out. I think it is a question that many people are preoccupied with. I think in the minds of many investors and analysts, inflation is likely to increase with the actions that they are taking about. A lot of different factors are in place today. It is difficult to say where it will go.
Mr. Klurfan: It has been the policy of Brazil, since the government of Fernando Cardoso and the fiscal discipline legislation, that inflation will be dealt by the central bank by using interest rates. This was a big dispute between the Labour Party and the parties right of centre during the Lula government. They wanted more populist measures, and that was reducing interest rates so consumers could spend more. The government had to live with that philosophy. Mr. Meirelles, as president of the central bank, had put a very tight line that they will continue to manage inflation by interest rates. Interest rates are high in order to reduce inflation, because consumption is a big part of the Brazilian economy and a component of GDP and a player on inflation.
Mr. Bonnor: The reduction of interest rates that has recently taken place would go contrary to that and inflation likely would increase. I believe what they are hoping is that the world will be so distracted with other things going on that there will not be the pressure they might have had in a different circumstance if everything was going well. We will probably see that play out in the next six months, and that is a question I certainly will probably ask Henrique in the next couple of weeks when he comes up to Toronto.
[Translation]
Senator Fortin-Duplessis: My second question is this: We know that Brazil's growth rate was revised downward. Brazil's finance minister projected a growth rate of 4 per cent, but according to Morgan Stanley analysts, the country will not exceed 3.5 per cent. Last year, Brazil's growth rate hit 7.5 per cent.
At the same time, India's and China's growth rates are supposed to reach 7.4 per cent and 8.7 per cent, respectively.
What do you make of the rates? Does 3.5 per cent strike you as sufficient for the new president to carry out all the projects she has planned?
[English]
The Chair: We are coming to the time for the bells to ring — and it is not my agenda; it is the Senate's agenda — and we are going to be cut off in a few minutes. Perhaps while you are contemplating the answer, Senator De Bané could put his question to you. Then you will have whatever time is left to answer both.
Senator De Bané: In view of the constraints, I will go with one question.
This committee has been, with your help and a great number of witnesses, doing our study. I can give you one summary that I got myself from all the numerous experts. Brazil desires deeper relations with Canada and is seeking Canada's counsel on several issues. The appointment by that country of consistently strong and high-quality ambassadors to Canada is notable in this respect. They desire that, and they look to Canada as a departure point for assessing the U.S. market.
Then we have a very long list of obstacles to deeper engagement with Brazil. It goes from lack of media coverage of Canada in Brazil, lack of substance and past initiatives, poor track record of implementation, and our stronger presence in Colombia, Peru, Chile, et cetera.
There are a great number of obstacles, yet it is a country that we should look at more as equal to us and where we should do business with them, where both countries would mutually benefit. Essentially this is the overall picture. Would you agree with that assessment? I am giving it in stenographic form.
The Chair: It would be helpful if you could say yes or no.
Senator De Bané: In stenographic form, we should not look to them as a developing country but equal partners and let us have joint ventures together. Would that be the right approach?
Mr. Klurfan: I will address the first question.
Brazil has grown in GDP on average for the last 20 years, before this the last 10, at 2.3 per cent per annum. It is very slow growth. It has increased its growth at the levels we have seen, and we are in the midst of a global or what we can call a crisis of the northern countries, and it has not affected Brazil that much, but Brazil is a trading country and depends on the other economies. It will feel the effects and slow down on its growth.
China is feeling the same. It will not grow at 10 per cent; it will grow at 8 per cent. India is the same. The growth will slow down a bit, but for Brazil it could be a blessing in disguise because the infrastructure has to be there to absorb that growth. The install capacity at the factories is coming to their limitations and they need to be able to invest more to be able to live with that growth and continue with that growth. Right now it may not be a bad thing if things slow down, cool down a little bit, the infrastructure projects will maintain the economy also up, and I will see a further period of growth in Brazil that will go to levels above the 4 per cent.
I am not an economist, so I do not have to say on one hand and on the other hand.
Senator De Bané: I would like you now to answer my question, because that answer was not related to me.
The Chair: Senator De Bané, there were two questions. One was answered first for Senator Fortin-Duplessis. Mr. Bonnor is going to answer yours, I understand.
Mr. Bonnor: I would say that yes, I agree with your statement. I would say that the chamber probably would also agree with it, and the question really is that we have an opportunity on the table today in terms of a relationship that is now moving forward that has been stuck for 10, 15 years going nowhere. We need to take advantage of it and do exactly what you say. We need to take those points where they are looking for help. We need to come back to them and say we have some issues we need to resolve as well and go to it. I think there is goodwill on both sides to make that happen.
The Chair: Mr. Bonnor and Mr. Klurfan, thank you for coming. You can see you have got to the essence of our study — the practical side of how we can further the relationship.
I regret that we are being cut off due to senators being called to the chamber for a vote, which is mandatory for us. We hope we can follow up with you, and we hope that, as you have helped us, perhaps our study will help you in your work and in the bilateral relationship. Thank you for coming.
Mr. Klurfan: Thank you. It was a pleasure for the chamber of commerce to help on these endeavours.
(The committee adjourned.)