US embassy cable - 05RIODEJANEIRO19

UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000019 
 
SIPDIS 
 
BUENOS AIRES FOR M.HAARSAGAR 
STATE PASS OPIC FOR RGREENBURG, DMORONESE 
STATE PASS EXIM FOR NATALIE WEISS, COCONNER 
STATE PASS USTDA FOR AMCKINNEY 
TREASURY FOR FPARODI 
 
E.O. 12985: N/A 
TAGS: EINV, ECON, EFIN, BEXP, BR 
SUBJECT:  Brazil - Bahia State Growing Faster but Interior 
Still a Problem 
 
Ref:  2003 Rio de Janeiro 1773 
 
Summary 
------- 
 
1.  While the State of Bahia has the sixth largest GDP in 
Brazil and expected growth of 8.6% in 2004, the concentrated 
nature of Bahia's economy - both in terms of geography and 
industry - is a challenge for state authorities.  In 
response, the State has developed several special programs 
designed to attract investment and address issues such as 
poverty and infrastructure bottlenecks.  The most obvious 
success story to date is the Ford plant in Camacari; most 
believe the state-conceded incentives were more than worth 
it for the positive impact on the State's image alone, 
allowing Bahia to attract future investments at a much lower 
cost.  As for the future, several new investments are 
expected to come on-line in 2006 and tourism - while still a 
relatively small part of the state's economy at 4% of GDP - 
is on the rise.  However, while these programs and 
investments may help the coastal region, curing the ills of 
Bahia's interior - and its consequent poverty - will not be 
easy. 
 
A Concentrated Economy Poses Challenges 
--------------------------------------- 
 
2.  While the State of Bahia has the sixth largest GDP in 
Brazil (4.7% of the national GDP in 2002) and an estimated 
growth of 8.6% in 2004, the concentrated nature of Bahia's 
economy - both in terms of geography and industry - is a 
challenge to overcome.  The developed coastline relies on a 
few sectors such as petrochemicals and agribusiness; 
cellulose, petrochemicals and the automotive industry 
account for 40% of the State's GDP.  In the far western part 
of the state, the economy resembles that of Brazil's center- 
west - where soy is king - and is doing well; Cargill has a 
presence there and irrigated fruit farming is on the rise. 
However, Bahia's largely semi-arid interior is very poor and 
is sustained primarily by transfer payments from the federal 
and state governments, e.g., retirement payments and 
automatic transfers to municipalities. 
 
3.  Curing the ills of Bahia's interior will not be easy 
and, according to Bahia's State Development Agency 
(Desenbahia) President Vladson Menezes, there is no 
consensus among state economic authorities on an approach. 
Menezes told Rio econoff that he thinks that the State 
should try to stimulate what little economic activity 
already exists in these places, i.e., fruticulture, 
irrigated crops, cotton and castor oil.  Castor oil could 
take on more importance as Bahia's biodiesel program 
(sponsored by the state and federal government) gets up and 
running (Note:  Bahia is the largest producer of castor in 
Brazil, accounting for 80% of Brazil's national production.) 
 
Long-Term Development Plans 
---------------------------- 
 
4.  Bahia's sound financial situation (ref A) and fiscal 
adjustment program have enabled the State to develop several 
programs designed to attract investment.  The first program 
was "Pro-Bahia," which began to offer fiscal incentives, 
such as reduced or prolonged payment of ICMS taxes, as early 
as 1991; at the time, Bahia was one of the few states that 
could afford to engage in this so-called "fiscal warfare." 
The Pro-Bahia program, combined with Bahia's proximity to 
the southeast consumers, helped to attract various 
investments throughout the 1990's.  Over the last few years, 
the program has progressed from a generic incentive program 
to a targeted sectorally based program, and was used to 
differing levels of success in developing an informatics 
pole in Ilheus and an automotive sector in Camacari. 
 
5.  The State currently has a plan called Bahia 2020, which 
is a statewide program for meeting certain Human Development 
Index goals.  Another key plan for the State's economic 
development is "the State Plan for Transport Logistics," 
which is based on a study on the flow of goods throughout 
the state and is meant to be a basis on which state economic 
authorities can rationalize scarce resources to better 
target infrastructure projects that will benefit the State 
most.  The idea is that the private sector would most 
readily partner with the State in these priority areas, with 
or without public-private sector partnerships (PPPs); Bahia 
also has approved a law regulating PPPs. 
 
Ford Plant Was Worth Every Penny... 
----------------------------------- 
 
6.  The most obvious example of the success of Bahia's 
incentive programs is the location of the Ford plant in 
Camacari, Bahia, after negotiations broke down with the 
state of Rio Grande do Sul and then Governor Olivio Dutra. 
Most interlocutors in Bahia told econoff that the financial 
sacrifice that Bahia made to attract the Ford plant was well 
worth it for the positive impact on the State's image alone, 
which should allow the State to attract future investments 
at a much lower cost.  In addition, the USD 1.9 billion 
operation, which opened in Camacari in October 2001, has had 
a considerable socioeconomic impact on the surrounding area, 
exceeding initial expectations and creating 7,000 direct 
jobs and 70,000 indirect jobs.  (Reftel)  The State also 
received a Ford Design Center as a result of contractual 
commitment for engineering services, bringing 400 engineers 
from Sao Paulo and abroad.  (Note:  This is Ford's only 
design center in Latin America; there are only four others 
in the world.) 
 
7.  However, Bahia did "spend" a lot to attract the Ford 
plant to Bahia, including conceding Ford a state-constructed 
private port for 20 years, leveling the land, guaranteed 
interest rate stability, some direct financing and tax 
deferments, in addition to several public works required by 
Ford for a minimum quality of life for its workers.  The 
burden got to be too much with the unforeseen spike in 
interest rates in 2002 and 2003 and Bahia was forced to 
"renegotiate" with Ford in 2003, essentially doing a bit of 
number juggling and adjusting the payment calendar, which 
allowed the State to evade mandatory spending and transfers 
to municipalities with the stroke of a pen. 
 
New Investments on Horizon 
-------------------------- 
 
8.  Indeed, Bahia's "business friendly" attitude seems to be 
paying off in other areas, with several new investments 
coming on-line in 2006.  A newly announced Bridgestone tire 
plant, which represents an initial investment of USD 270 
million, should come online in 2006; a cellulose investment 
in southern Bahia by Veracel in conjunction with a Swedish 
company also is expected to come online the same year. 
Additionally - to the annoyance of Rio state authorities - 
Bahia will get a brand new shipyard 300-400 km south of 
Salvador courtesy of the Bahian construction company 
Odebrecht, which has won several contracts for the 
construction of deep-water production platforms for 
Petrobras. 
 
9.  That said, Menezes confided that he thinks that the 
State still lacks a deliberate articulation of its 
priorities.  Jobs are a high priority for the State, yet 
many of the large companies installed in Bahia do not create 
a lot of local jobs; the State's principal industries 
contribute 40% of the GDP but only 17% of the jobs in the 
market.  Menezes thinks the State needs to focus on the 
creation of local Small and Medium Enterprises (SMEs) around 
these "anchors" to employ more Bahians, adding that Salvador 
has the highest unemployment (15.8%) of Brazil's six 
principal metropolitan areas, according to the IBGE. 
 
Despite Focus, Tourism Still in Initial Stages 
--------------------------------------------- - 
 
10.  State and city authorities alike also are focusing hard 
on the potential economic impact of increased tourism, 
despite the fact that it still represents a relatively small 
part of the state's economy -- estimated at 4%-8% of the 
State's GDP.  (Comment:  Menezes estimates the real number 
is closer to 4% and blames the lack of English speakers and 
qualified workers for the industry, as well as a lack of 
advertising.  End Comment.)  That said, tourism is 
definitely on the rise; spending by tourists was up 10% year- 
over-year in the first 9 months of 2004 and there has been a 
significant increase in the number of tourists traveling to 
Bahia in the last 6-8 years.  A number of joint ventures 
between local and international hotels have raised the 
overall quality level of lodging available; Menezes also 
sees this as positive because he opines that Bahia will get 
more attention from tourists as part of the information 
channels of big hotel chains. 
 
11.  State authorities recently decided that the State 
tourism agency was too focused on Carnival, to the detriment 
of general tourism, and are refocusing efforts to attract 
tourists all year round.  Authorities also are focusing on 
the Unites States' African-American community as a target; 
Bahia has one of the most vibrant Afro-derived cultures in 
the world and has a multimillion-dollar marketing campaign 
aimed at African-Americans who want to get closer to their 
African roots but may find Africa too distant, expensive or 
dangerous.  Bahia's state tourism agency estimates that 60% 
of the 45,000 Americans who visited the region in 2002 were 
African-American. 
 
Atkins