Renewable Energy in Brazil Essay

Brazil is the biggest country in South America with a population of roughly 200 million (Central Intelligence Agency [CIA], 2008) and with abundant natural resources and land and water to use for renewable energy. With a high demand for energy and little supply, Brazil is the perfect place to conduct energy related businesses. In 1999, Brazil consumed 353. 7 billion kilowatt hours of electricity (Solarbuzz, 2008). With growing concerns about sources of energy nowadays, renewable energy is a booming business to enter since renewable energy use worldwide is expected to increase by 53% between 1999 and 2020 (ibid). Brazil has been reevaluating its plans to meet growing energy needs in the country after a crippling power shortage in 2001 and a change of government in 2003 (Aruvian Research, 2008). Reforms and privatizations have been undertaken by the Brazilian government to solve its power shortage and with the expected continuous climb in the country’s energy use in the coming years; the rising need for energy needs to be addressed (ibid). In addressing this problem and with the pervasive problem of global warming and environmental degradation, renewable energy is the way to go these days. Renewable energy in Brazil is classified into different business types: renewable energy export businesses and import businesses, renewable energy manufacturers, renewable energy non-profit organizations, renewable energy retail businesses, service businesses, and renewable energy wholesale suppliers (Momentum Technologies LLC, 2008). One of the companies in the energy business in Brazil is global company BP, which has just started its solar energy operations in the country in 2000 and recently brought biofuels to Brazil. A brief description of the company, its business variables and options for success will be given. The legal framework, target market and facilities will be mentioned together with the cultural, political and economic background of Brazil. The country’s laws regarding environmental businesses, banking systems, personnel management and investments will be stated. The economic and political risks and the security climate will also be stated to give further understanding on how to establish a business in Brazil. BP and the Brazilian Market BP is a century old global company that is into the exploration, production, refinement and marketing of various energy resources all over the world and carries the brands BP, Castrol, Arco, Aral, am/pm and Wild Bean Cafe. Its main product is oil and it targets various markets from the manufacturer to the distributor down to the consumer (BP, 2008). In Brazil, BP has been around for 50 years and they are involved in every stage of the oil business. It started with the Castrol lubricant and it has expanded ever since. They sell lubricants to the shipping industry and its Castrol Offshore supplies high-quality control fluids to the offshore oil and gas production market. Since 1998, BP Brasil Ltda has been involved in oil and gas explorations and in 2002 the company launched its Air BP in the country, which distributes aviation fuels and lubricants. In 2000, the company started its solar power business operation and in 2003 it completed its largest solar project in the history of the country by installing systems for 1,852 schools in remote off-grid communities across 11 different states in Brazil (ibid). Its Biofuels business is the latest to start in Brazil and participates directly in the growing market by building a commercial platform for the integration of the technology and bioscience research in the area. It makes use of ethanol production from cane sugar and will support the development of new low carbon fuels such as butanol, which has lower carbon emissions (ibid). The company in Brazil is currently based in Rio de Janeiro and Sao Paulo with over 400 people in its workforce. It has also been involved in business ventures in the last five years in the exploration and production with state oil giant Petrobras, Shell, ENI, TFE and Exxon. With regard to its corporate social responsibility program, BP Brasil supports education in community schools through voluntary work, funding new facilities and by teaching computer skills to underprivileged children. Also, the company has been providing energy to remote villages by giving the diesel generators to produce no more than four hours of energy a day and by providing solar energy systems to the 800 residents of the village of Sucuriji (ibid). The company aims to bring new energy in everything they do in Brazil. One of the factors of success for BP Brasil is having the established global brand of Castrol. It also entered the Brazilian market during the years when the country was being industrialized; hence, it started early and entered the market ahead of other players. The company also had the financial backing of its mother company BP which was already global at that time. The vast oil resources in Brazil has also made it a great site for exploration and manufacturing for the company and since BP has been in the country for 51 years, it has benefited from the reforms of the energy policies of Brazil and has allowed the company to gain access to the oil resources in the past decade, which helped make Brazil move from a crude oil importer to exporter (Business Wire, 2008). In the renewable energy market, the company is succeeding because it identified early on the potential of Brazil in producing biofuels and it gave an option to the power crisis of the country by providing solar energy. It started the solar power business in 2000, which was one of the perfect solutions to the power crisis which struck the country in 2001. It gave an alternative and saw early on the problem in the country. It is also successful because it leads the joint ventures with other big companies; thus, saving on financial investments and allows them to use more resources. The global co-head of research at Allianz Global Investors says that â€Å"Alternative energy and solar energy are a very compelling growth opportunity†¦it’s going to be something on a par with volume growth of flat panel screens, PCs and handy phones† (Wynn & Kuehnen, 2008). This growth has been seen by BP and they have led in the research of alternative energy and are supplying solar energy to the country. They are supported by the Brazilian government and this is a very important factor for success. Governments in other countries even subsidize solar power as part of their fight against climate change (ibid). Solar energy prices have also declined in the market because of growing competition and increase in conversion efficiencies and manufacturing economies of scale because of the demand for solar panels (Solarbuzz, 2008). 20 million Brazilians live in remote communities and do not have access to reliable electrical power (Business Wire, 2008), and this is a big market for the solar business. The renewable energy market in Brazil is estimated at $25 billion and business opportunities here are limitless (ibid). Since the government cannot meet the demand for off-grid energy alone, resources that are available support highly-subsidized programs (ibid). Economic, Cultural and Political Situation of Brazil The government of Brazil stemmed from the overthrow of the Portuguese colonial power in the late 19th century and was replaced by a Republican military coup (infoplease, 2008). A dictatorial government took over in 1930 and was overthrown by a military coup d’etat in 1964 and the military forces remained in power until 1985. It was only in 1988 that a democracy was re-established and the Federal Constitution was promulgated during this year (Wikipedia, 2008). The Brazilian Federation is based on three autonomous political entities: the States, Municipalities and Federal District; power is divided into the Executive, Legislative and Judiciary branches which are all governed by the checks and balances system (ibid; infoplease, 2008). Government programs in the recent years have been targeted at increasing the exports of the country which led to the Export Culture Program 2004/2007 in the Brazil for Everyone Pluri-annual Plan (Brazilian Government, 2005). The program encourages the participation and support for the export potential of small businesses; skills training; tuition and guidance on the export business through Agent Network Project; edition and distribution of technical material guidance for export businesses. The government has also encouraged a culture of competitiveness by privatizing some government owned businesses. The Industrial, Technological and Foreign Trade Policy (PITCE) is also a government initiative that joins financial, technological, logistic, commercial and structural support programs for innovation and future projection (ibid). It was launched in 2004 and BP Brasil benefits from this program and the Law of Innovation of the Brasilian government since they are undergoing research for their biofuels and they are in a joint venture with state owned Petrobras. The law of innovation aims to provide a suitable environment for strategic partnerships between universities, technological institutions and businesses; to encourage the participation of science and technology in the innovation process; and to encourage innovation in businesses. This is all geared towards a competitive Brazilian market since in the past monopoly by state owned corporations where common. Being the 10th largest energy consumer in the world and the largest in South America, Brazil have made the National Alcohol Program, which is a nation-wide program financed by the government that replaces automobile fuels based from fossil fuels in favor of biofuels (Wikipedia, 2008). This has made Brazil a bio-energy superpower because of its ethanol fuel production, which has reduced the number of cars running on gasoline to 10 million and reduced the country’s dependence on oil imports (ibid). The country is also the third largest producer of hydro-electrical power in the world (ibid). The GDP-purchasing power parity of the country is at $1. 83 trillion, its per capita is at $9,700 and the services sector comprises 64% of the GDP, the agricultural sector 5%, and the industrial sector 31% (CIA, 2008). The economy is characterized by large and well-developed agricultural, mining, manufacturing and service sectors; the country outweighs all the other South American countries and it is expanding its presence in the world market (ibid). In addition, the country has the largest and most diversified system of science, technology and innovation in Latin America, which is a result of the accomplishments of the country in the last 50 years that includes prospecting oil and the ability to build aircrafts (Brazilian Government, 2005). The demand for modernization and infrastructures are made urgent in the social agenda of the government and are accomplished through initiatives known as Public-Private Partnerships (ibid). The transport sector is investing and modernizing passageways, integrating airports, railways and waterways; R$61. 5 is also being invested in 65 airports in the country due to increasing tourism. Poverty in city centers such as Rio de Janeiro and Sao Paulo are common and wealth is in the hands of a few but there is a big middle class in Brazil. The people are diverse and came from the waves of immigrants from all over the world but most are of Portuguese and African descent (IPACOM, 2008). Time is also a flexible concept for Brazilians and they are laid-back (ibid). The official language is Portuguese and is spoken by 97% of the population (de Noronha Goros, 2003) and it is the language to conduct business in, hence, global companies who open a business in Brazil have a Brazilian partner (Myers, 2003). They will conduct business in English if it is insisted since they recognize it is the international language for business but to be successful in Brazil, the national language must be spoken (ibid). First impressions are important for Brazilians and networking through word of mouth is very powerful in Brazil, especially in Sao Paulo; relationships are also valuable to Brazilians (ibid). Legal Framework and Business in Brazil Brazil is ranked as the 122 country in terms of ease in doing business and in starting a business (World Bank, 2007). Doing business in Brazil requires 18 procedures that take 152 days and costs 10. 38% of GNI per capita to start a business in the country (ibid). The normal procedures are: check company name, pay registration fees, register with Commercial Board, register for federal and state tax, confirm INSS enrollment, receive state tax inspection, get authorization to print receipts from state, register with Municipal Taxpayers’ Registry, pay TFE to Municipal Taxpayers’ Registry, get the authorization to print receipts from Municipal tax authority, get company invoices, obtain fire Brigade License, receive inspection, apply for operation license, open a FGTS accounts, register the employees in the social integration program, notify the Ministry the employment of workers and register with the Patronal Union and Employees Union (ibid). BP opened a company in Brazil by submitting an application to the Brazilian Government for approval, which is granted in the form of a decree of the federal executive branch (Sao Paulo Chamber of Commerce, n. d. ). Corporate entities are regulated by Law No. 10406 of January 11, 2002 and by Law No. 6404 of December 15, 1976 or the Corporation Law (ibid). Companies must have at least two partners, who do not have to be residents in Brazil but non-Brazilian residents must have an attorney-in-fact in Brazil with powers to represent as a partners. All partners, whether foreign or local must also be enrolled in the Federal Revenue Office, which regulates taxes (ibid). Taxes are based on the size of the company irrespective of the type of company (ibid) but normally it is computed at 15% on adjusted income and annual net income in excess of r$240,000. 00 is subject to a surtax of ten percent (Baker & McKenzie, 2006). A Social Contribution Tax on Net Income or CSLL is required from most companies and it is a true corporate income tax surcharge that is at nine percent, which makes the overall income tax rate at 34% and makes Brazil a country with one of the highest income tax rates (ibid). There is also no minimum corporate capital requirement in Brazil (Sao Paulo Chamber of Commerce, n. d). There are two reforms being undertaken by the Brazilian government in terms of businesses in its country and these are paying taxes and enforcing contracts (World Bank, 2007) because of the high income taxes (Sao Paulo Chamber of Commerce, n. d. ) and oral contracts are common in businesses because relationships are highly valued in the country (Myers, 2003). One of the reforms on tax is the contribution for the Intervention in the Economic Domain or CIDE; the CIDE on Fuels is assessed on imports and sales of oil and byproducts, natural gas derivatives and fuel alcohol and it is charged per cubic meter (Baker & McKenzie, 2006; Sao Paulo Chamber of Commerce, n. d. ) BP Brasil was the local office of BP Global and it initially involved importing Castrol to Brazil. Imports in Brazil are subject to government control from at least three levels of authority: the secretary of Foreign Trade, which supervises registration and licensing; the Central bank of Brazil, which approves payments for financed imports; and the Federal Tax Authorities who supervises valuation for customs purposes (Baker & McKenzie, 2006). Also, both the exportation and importation of crude oil and all its by-products should be performed in strict compliance with certain objectives and principles of the Petroleum Law such as the protection of the consumers and the Brazilian Treasury (ibid). Banking Systems in Brazil The main banking regulatory agencies in Brazil are the National Monetary Council (CMN), which is a policy-making and regulatory body that is responsible for establishing the credit and currency policy of the country, and the Brazilian Securities and Exchange Commission (CVM) (ibid). All financial systems are regulated by the Brazilian Banking Law of 1964 and states that financial institutions shall only operate with permission from the Central Bank or by decree of the Executive Branch, if foreign (De Noronha Goros, 2003). Commercial banks’ transactions involves granting of loans, holding of checking and investment accounts, receipt of cash deposits, receiving and processing of payments and collection of drafts and other credit instruments; savings banks have similar roles to the commercial banks but are state-owned institutions (Baker & McKenzie, 2006). Investment banks in Brazil are primarily for conducting investments and for financing operations in medium and extended terms for the private sector (De Noronha Goros, 2003). Banks with multiple portfolios was also created under the 1988 financial system reforms and its main purpose is to enable a single financial institution to maintain different types of portfolios; almost all banks in Brazil are authorized to act as a multiple bank and the state-owned Banco do Brasil S. A. is the largest multiple bank (Baker & Mckenzie, 2006). Bank secrecy laws are strictly applied in Brazil and client information may only be revealed upon judicial order and the money laundering rules of 1998 lists all transactions that are defined as crimes (ibid). Employment in Brazil Labor laws is Brazil include the right to protection against arbitrary dismissal, unemployment insurance, maternity and paternity leave, occupational accident insurance, prohibition on employment discrimination on the basis of sex, age, race and marital status (De Noronha Goros, 2003). The maximum work hour in a week in Brazil is 44 hours and a 13th month salary is required by the government; the minimum wage varies depending on the category of the employee but generally it is R$280 or US$80 per month (ibid; Sao Paulo Chamber of Commerce, n. d. ). A formal agreement is also not required under Brazilian law; oral employment is fully valid but employment contract should be recorded in the Work and Social Security Card of the employee within 48 hours of employment. Overall, Brazil has one of the most numbers of processes and regulations that must be followed in starting a business and is ranked at 119 out of 130 countries with regard to benchmarks in labor laws (World Bank, 2007). Its energy market and financial systems are strictly governed by the government and state-owned companies such as oil firm Petrobras has monopoly in some areas however companies are allowed to have joint ventures with state-owned firms, which BP Brasil is leading in with Petrobras. Taxes in the country are high and numerous but the Brazilian market is very big and profitable. The renewable energy market in Brazil is a fast growing market and BP Brasil has expanded its operations in this industry and is taking advantage of it. Strict compliance with importation and exportation of products as well as with environmental laws is also needed to succeed in this area of business. The business culture of the Brazilians and their language must also be mastered to fully succeed in the market, which BP Brasil has done. Economic and political risks are also little in the country right now and it is the perfect time for establishing a business there. References Aruvian Research. (2008). Analyzing the Energy Industry in Brazil. UK: Report Buyer. Baker & Mckenzie. (2006). Doing Business in Brazil. Latin America: Baker & McKenzie. Brazilian Government. (2005). Economy and Business. Retrieved April 29, 2008from http://www. brasil. gov. br Business Wire. (2008, February 25). 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