Latin America’s RegionsDoing Business in Brazil’s Northeast

Energy boostPetrobras refinerycreates 40,000jobs but costsescalate sixfoldPage 2

Inside »

Retail boomNew middle­classconsumers provideopportunities forinvestorsPage 2

Tourism woesInfrastructurebottlenecks prove aproblem too farfor foreign visitorsPage 3

Soccer kickstartWorld Cup arena inPernambuco statewill be part ofwider regenerationPage 4

FT SPECIAL REPORT

Thursday March 27 2014 www.ft.com/reports | @ftreports

As the bus enters the site ofthe future industrial zone,an expanse of civil construc-tion works stretches as faras the eye can see.

The vastness of the scene and thestrong winds whipping up dust fromthe extensive earthworks recall thegrand projects of China, a countrynormally associated with ambitiousinfrastructure schemes.

This is a long way from Asia, how-ever. The 140 sq km port industrialcomplex of Suape in Brazil’s north-eastern state of Pernambuco willhouse a huge refinery and petrochem-ical project, the southern hemi-sphere’s largest shipbuilding facility,

a port and numerous other activities.It is not only Suape but the entire

northeast region of Brazil that ofteninvites superlative comparisons withChina. Once known only as the coun-try’s poorest region, an exporter ofdestitute farmers and manual labour-ers to the industrialised south in amovement immortalised in master-pieces such as “Os Retirantes” bypainter Candido Portinari, today thenortheast is recognised for its highgrowth, with some states expandingas fast as China itself during theboom year of 2010. The question forthe region and its politicians is how tosustain these high levels of growth ata time when Brazil’s economy as a

whole is slowing down. “We seeemerging regional players,” says Hec-tor Gomez Ang, country manager inBrazil at the International FinanceCorporation, the private sector invest-ment arm of the World Bank. “Youreally see companies from the regionor that were born in the northeastthat are becoming global or nationalplayers.”

Comprising nine states clusteredtightly together, curling along theBrazilian seafront as it juts out intothe Atlantic, the northeast is one ofthe country’s oldest centres of Euro-pean civilisation. It is also a centre ofBrazilian culture thanks in part to itsstrong roots in the country’s Africanheritage. Northeastern musiciansinclude bossa nova singer João Gil-berto and his daughter, the contempo-rary Brazilian singer Bebel Gilberto;and Caetano Veloso and Gilberto Gil,known for the Tropicália culturalmovement. Other famous sons of theregion include former president Luiz

Inácio Lula da Silva, whose familymoved from Pernambuco to São Paulowhen he was a boy.

The nine states – Maranhão, Piauí,Ceará, Rio Grande do Norte, Paraíba,Pernambuco, Alagoas, Sergipe andBahia – together represented 28 percent of Brazil’s population of 191mpeople as of 2010, but they contributedonly 13.4 per cent of national grossdomestic product in 2011, according tothe latest figures available from thenational statistics agency.

In the 10 years between 2002 and2012, poverty declined more rapidlyin the northeast than on average in

Continued on Page 2Cause for celebration: poverty is on the retreat in the northeast Reuters

‘You really see companiesfrom the region that arebecoming global ornational players’

Big projectsfuel region’spush to keepmomentumThe once neglected northeast has beenoutgrowing the rest of the country but faces ahuge task to stay on track, writes Joe Leahy

2 ★ FINANCIAL TIMES THURSDAY MARCH 27 2014

For Gilson Alexandre, a 42-year-old truck mechanic,there is nothing better thanspending an afternoon atthe local shopping centre.

“It has everything youcould want,” he says,browsing the food court ofShopping Recife, one of thelargest retail centres in thenortheastern Brazilian city.

With more than 450shops, 19 restaurants, 10cinema screens and plentyof benches on which to takea nap in the comfort of thebuilding’s air conditioning,Shopping Recife attractsabout 65,000 people a day.

Visiting shopping centreshas become a national pas-time in Brazil. Aside frombeing somewhere to meetfriends and family, they area relatively safe place tohang out in otherwise dan-gerous cities, thanks toheavily armed guards onthe doors.

Demand for new shoppingcentres is strongest in thecountry’s poorer northeastregion, which until recentlyhad been largely neglectedby developers. As consumerspending begins to slowacross the rest of the coun-try, the region’s nine statesremain a bright spot forretailers, as millions of Bra-zilians enter the middleclass for the first time.

As of December last year,32 shopping centres wereunder construction acrossBrazil’s northeast, up from30 at the end of 2012, saysLuís Augusto Ildefonso daSilva, institutional directorof the national retail associ-ation Alshop.

The number of shoppingcentres being built nation-ally decreased to 153 from157 over the same period.

“Many of the new shop-ping centres [in the north-east] are in smaller citiesthat don’t already haveone,” says Mr Ildefonso daSilva. “It is hard to gowrong when you are build-ing a city’s first shoppingcentre.”

To a large extent, thenortheast is simply catch-ing up with the rest of Bra-zil. Lumbered with a vast,barren hinterland andlocated thousands of kilo-metres from the country’ssouthern centres of power,the northeast has longranked as the poorest andleast developed region.

Despite the recent growth,development indicators insome parts of the region arestill comparable with thoseof African countries.

However, this is whatmakes the northeast one ofthe country’s most promis-ing consumer markets, saysRenato Meirelles, presidentof the Instituto Data Popu-lar, a consultancy.

“The ownership of televi-sions, mobile phones, com-puters, washing machinesand other goods is lower inthe northeast than acrossthe rest of Brazil, so there isa lot of pent-up demand,”Mr Meirelles says.

“Like the rest of Brazil,the northeast will growat a slower rate than in thepast decade, but the regionwill still grow faster than

the rest of the country.”However, the northeast’s

consumer boom is also aresult of concerted effortsby the federal governmentto accelerate the region’sdevelopment.

“In spite of the necessityof [public investment in thenortheast], the decision tofocus on the region hasbeen a political one,” saysOtto Nogami, an economicsprofessor at São Paulo’sInsper business school.

The Bolsa Família welfareprogramme, a cornerstonepolicy of the ruling Work-ers’ Party (PT), has beenresponsible for lifting mil-lions out of poverty overthe past decade and hashelped keep the PT in powersince 2003.

Mr Meirelles estimatesthat more than 40 per centof families in the northeastreceive the stipend, makingthe region a loyal base ofpolitical support.

Other government pro-grammes have boosted con-sumer spending, such as“Minha Casa Melhor” (“MyBetter Home”), which giveslower-income families afour-year loan of up toR$5,000 ($2,174) to buy homeappliances and furniture.

Families are only eligiblefor it if they bought theirhome via the

government’s “Minha CasaMinha Vida” (“My Home,My Life”) programme.

The region’s consumerboom has encouraged manyfirms to build factories inthe region. O Boticário, oneof the country’s most popu-lar cosmetics chains, is toopen a production plant anddistribution centre this yearin the state of Bahia at acost of R$535m. The factorywill serve as a base for thewhole of northeast andnorth Brazil.

International consumergroups have also venturedinto the region. In 2011,Kraft opened a factory inPernambuco – its first inthe northeast – to producechocolate and powdereddrinks. Upmarket brandssuch as Pernod Ricard’sChivas Regal whisky havealso found success, as theregion’s new middle classesstart to spend. In 2012, thecompany ranked Recife asthe top market in the worldin terms of per capitawhisky consumption.

“This is a sign of socialmobility, which in Brazil isshown through the capacityto consume,” says Insper’sProf Nogami.

However, for producers ofhigher-value durable goodssuch as home appliances, itstill does not make sense tobuild a factory in the north-east, he says.

“You will find strongdemand in the state capitalsbut not outside the cities –the market is not matureenough,” Prof Nogami says,adding that the northeast’slogistical problems and lackof skilled labour can alsodrive up companies’ costs.

“The region has hugepotential, but it is still onlythat,” he says.

Retail boomacts as stimulusfor investmentConsumer markets

Companies targetshoppers from newmiddle class, reportsSamantha Pearson

’Social mobility inBrazil is shownthrough thecapacity toconsume’

Few projects betterillustrate the frustrationsof Brazil’s efforts todevelop infrastructure thanthe urban railway underconstruction in thesprawling northeastern cityof Salvador.

Since work began 14years ago, the multibillion-dollar plan has been besetby difficulties. Yet over thepast few months therehave been signs that asaga of incompetence andmismanagement isreaching a conclusion.

It is possible that a 6km

stretch will be open intime for the World Cupmatch between Spain andthe Netherlands on June13. That should pave theway for the completion ofthe 36km metro schemeover the next four years.

Delays to Brazilianinfrastructure projects arecommonplace, but thosethat have doggedSalvador’s metro have beenparticularly mind-bogglingand frustrating, given theabysmal state of publicprovision in one of Brazil’spoorest and most sociallydivided cities.

For the conservativeadministrations thatpresided over the city’srapid expansion in the1970s and 1980s, uglymulti-lane urban highwaysdesigned to meet the needsof middle-class car owners

were a priority. Myriadlocal business interestscontrolled the competingbus companies that tookresidents from the poornorthern suburbs to workin the better-off south ofthe city.

As Rui Costa, chief ofstaff of the leftwing stategovernment of Bahia, putsit: “Public transport hasnever been on the agendabefore.” The metro hasbeen flawed since itsconception. The firstplanned line covers anarrow area towards thecentre of the city, and evenwhen complete would leavemost commuters dependenton overcrowded buses.

Management of theproject was handed over tothe Salvador citygovernment, a body thatcould not hope to assemble

the financial resources fordevelopment.

During the 2000s, workwas interrupted repeatedlyby financial and politicalproblems.

Although the Lapa-Retirostretch was finished in2008 and bright new trainsdelivered in 2010, themunicipality could notafford to meet the runningcosts of the line.

Consequently, railsdeteriorated and rollingstock was mothballed. Astand-off between apopulist mayor and thepro-government stateadministration led tofurther delays. It was onlylast year after a newimage-conscious rightwingcity government came toan agreement with MrCosta’s colleagues in thestate government that

progress has accelerated.In October, CCR, a

Brazilian toll road builderand operator, won a build-and-operate contract tocomplete the work. It haspromised to double thelength of the first line andis pledged to complete asecond line by 2017, whichwill link Salvador’s centrewith its internationalairport 25km away.

It would be easy to becynical, however. Some ofthe progress is certainlydue to the World Cup.After all, Brazil is prettygood at the short-termmobilisation of resourcesfor sports events,international conferencesor carnivals. But longer-term sustainableimprovement has beenmuch more challenging.

During the 1980s and

1990s, it was mainly aquestion of budgetaryconstraints on publicinvestment.

Under the leftwinggovernments of Luiz InácioLula da Silva (2003-10) andDilma Rousseff (2011-present) infrastructure hasbeen a priority, butprogress has been patchy.

Projects become mired inbureaucracy, environmentallicences can be hard toobtain and it can takeconsiderable time to

acquire land. Publicprosecutors and governmentauditors often stop worksapparently on a whim.

Although public-privateco-operation is now theorder of the day, leftistofficials have sometimesresisted change.

For example, Brazil’sinefficient publicly ownedrailway company retains akey role in the project tobuild much needed freightlines that could transportsoya and mineral exportsmore efficiently to port.Almost no progress hasbeen made.

There have been someadvances. however. Severalreasonably efficientprivately owned, publiclylisted infrastructureconcession companies –such as CCR – haveemerged.

Ms Rousseff hasprivatised five of thecountry’s largest airportsover the past two years.After bowing to businesspressure for better terms,the government hasauctioned off contracts tobuild and operate morethan half a dozenhighways over the pastyear.

Dozens of statesand municipalities havebeen making reasonableprogress too, with anumber of metro, monorailand bus rapid transitschemes, in whicharticulated buses circulatealong dedicated trafficlanes, under construction.

The writer is principal ofFT Confidential, anemerging marketsinvestment research service

Public­private partnerships help transport get back on track

Six years ago this month, Bra-zil’s former president LuizInácio Lula da Silva and hislate Venezuelan counterpart,Hugo Chávez, were pictured

shaking hands at the site of Brazilianenergy group Petrobras’ new refineryin Suape, Pernambuco state.

The red dirt of the construction siteof the Abreu e Lima refinery was sup-posed to be ground zero for a closerenergy relationship between the twoneighbours and their populist govern-ments, with Venezuela supplying theoil and Petrobras doing the refining.

However, it was not to be, and latelast year, Petrobras took over fullresponsibility for the project, whichwill cost an estimated $17bn (up froman original $2.7bn).

“The unit’s products will be des-tined predominantly for the northeastmarket,” the company’s website said.“At the moment, the project is gener-ating 40,000 jobs directly and is beingconstructed with 86 per cent localcontent.”

The sheer size of the project, which,once completed, will provide 230,000barrels a day, and the fact that it isBrazil’s first new refinery in years,have increased enthusiasm in thenortheast for the petroleum industry.

The plant is also acting as a stronganchor tenant for the Suape portindustrial complex, with a petrochem-ical unit also planned to come onstream, and shipbuilder EstaleiroAtlântico Sul constructing vessels forPetrobras’ oil exploration and produc-tion arm.

“The northeast is growing from alower starting point but it is the fast-est-growing part of the country andthe main entry point is the port ofSuape,” says Peter Gyde, Brazil man-aging director for Maersk Line, theworld’s largest container carrier.

Half of the refinery’s capacity willbe delivered in November this year,with the other half due to come onstream in May 2015. The refinery will

be Petrobras’ largest producer of die-sel, with 70 per cent of its plannedcapacity able to process the fuel.

Once fully operational, the plantwill represent 11 per cent of Brazil’stotal refining capacity and it is hopedit will help reduce the country’sdependence on refined fuel imports.

As demand in the country hasgrown for petrol, led by the growth inthe number of trucks and cars on theroads, the ability of its refineries tosupply this fuel has lagged behind.

According to the US Energy Infor-mation Administration, total primaryenergy consumption in Brazil hasgrown by more than a third in thepast decade because of sustained eco-nomic growth. At the moment, thecountry has 1.9bn bpd of refiningcapacity spread across 13 facilities, 11of them operated by Petrobras.

“Petrobras plans to increase its Bra-zilian refining capacity to more than3.2m bpd by 2020 to meet burgeoningdomestic demand,” the EIA says,adding that this includes plans forfive new refineries, including Abreu eLima.

The other vital aspect of Petrobras’presence in Pernambuco is EstaleiroAtlântico Sul, which is a big part ofthe government’s programme toincrease the oil producer’s use ofdomestic content in equipment.

This policy was boosted by Petro-bras’ discovery of huge oilfields offthe country’s southeast coast. Theexpected production increase fromthese fields should provide the cash tosubsidise domestic production ofequipment, which is generally muchmore expensive than imports.

President Dilma Rousseff, who in an

earlier role was energy minister underher predecessor President Lula daSilva, visited Suape in December toattend the inauguration of one of theEstaleiro Atlântico Sul’s most prizedproducts to date, the P-62 floating oilplatform. Built by 5,000 workers overthree years at the shipyard andweighing 60,500 tonnes, it cost R$2.6bn($1.1bn) and has a processing capacityof 180,000 bpd of crude oil.

Suape has contributed to rapidgrowth in Pernambuco, ironically forMs Rousseff and her Workers’ Party,boosting the career of the state’s gov-ernor, Eduardo Campos, who willstand against her in presidential elec-tions this year.

But the exorbitant cost of some ofthe government projects, such as theAbreu e Lima refinery, has alsoattracted critics, who believe the gov-ernment is squandering taxpayers’money on bloated public projects.

Responding to such concerns on itsblog, Petrobras said the Abreu e Limarefinery exceeded initial cost esti-mates because these were made when

the project was in the very initialphase of evaluation. It said that as theproject developed, a clearer estimateof costs emerged.

The budget for the project was alsoswollen by “exchange rate adjust-ments and the overheating of theequipment market, among others,that caused the value of the invest-ment to increase during the evolutionof the project”, Petrobras said.

“Various factors contributed to thechanges in estimated delivery times,among them the necessity to holdnew tenders because of excessiveprices. Other factors were strikes,environmental conditions and theconstruction of infrastructure toaccess the project,” Petrobras’ blogcontinued.

Politics too played its part, as Vene-zuela – in spite of Mr Chávez and MrLula da Silva’s apparently warm rela-tionship – failed to live up to its prom-ise of investing alongside Petrobras,leaving the already heavily financiallyburdened Brazilian company to takeup the slack.

Suape refinerywins politicalsupport despiteescalating costEnergy Petrobras project cost soars sixfold butplant creates 40,000 jobs and attracts otherindustry to port complex, reports Joe Leahy

Liftingexpectations:Petrobras now hasfull control of theSuape project

Getty Images

It is hoped the plant willreduce Brazil’s dependenceon refined fuel imports

Doing Business in Brazil’s Northeast

ColumnRICHARD LAPPER

Public prosecutorsand governmentauditors often stopworks apparentlyon a whim

Brazil. The region’s middleclass grew from 22 per centof the population to 42 percent, compared with growthin the national averagefrom 30 to 52 per cent dur-ing the period, according togovernment data. This wasthanks partly to a steadyincrease in householdincome per head of 3.9 percent a year in the two dec-ades to 2012, according togovernment research insti-tute Ipea.

Even as Brazil’s economyhas slowed down, parts ofthe northeast have contin-ued to outperform. Pernam-buco, for example, grew2.3 per cent in 2012 – morethan twice the national rateof 0.9 per cent.

But the region still suf-fers from the country’sworst illiteracy rates, atmore than 15 per cent of

Continued from Page 1 those aged 15 and over –although this is improving– and has most of thenation’s extremely poorpeople (classified as thoseliving on up to R$70 ($30) amonth). As of 2010, 9.6m ofa total of 16.3m extremelypoor Brazilians lived in thenortheast.

“In general, we see thatthe northeast is [still]poorer. Its [social] indica-tors are worse, but theyhave improved muchmore,” said Marcelo Neri,minister and head of Ipea –and known as Brazil’s fore-most specialist on the mid-dle class – during a presstrip to the region last year.

The northeast’s threeengines of growth are Bahiastate and its capital Salva-dor, Pernambuco and itscapital Recife, and Cearáand its biggest cityFortaleza. Part of theirsuccess has been based onthe Chinese-style model

of setting up industrialzones to attract clusters ofcompanies.

In Suape, for instance,Petrobras, Brazil’s state-controlled oil company, isinvesting about $17bn in its230,000 barrel per dayAbreu e Lima refinery.There will also be a petro-chemical complex to pro-duce petroleum derivatives.

Nearby is the EstaleiroAtlântico Sul, a shipbuildercontrolled by Brazilian con-struction groups CamargoCorrêa and Queiroz Galvão,that is producing a fleet ofvessels for Petrobras. Thecomplex is also home tonumerous other companiesspecialising in logistics andports.

Other so-called pólos orclusters include steel andpharma-chemical industrialzones in Pernambuco, andanother petrochemical clus-ter in Bahia. The region hasalso succeeded in diversify-

ing from old heavy industryinto new technology sectors.Recife has the Porto Digital,a district of high-technologycompanies located in thecity’s old port area, whilethe region’s high winds andintense sunshine are stimu-lating growth in renewableenergy businesses.

Some of Brazil’s mostprominent companies have

their roots in northeasternbusiness families, includingOdebrecht and QueirozGalvão, the constructioncompanies. But new onesare emerging too, includingCoca-Cola’s bottlers in theregion, Guararapes, Norsaand Renosa, which follow-ing a merger will becomethe second-largest producer

for the beverage maker inBrazil, with a reportedR$6bn in revenues.

Stacked against theseopportunities is what thefuture will hold for thenortheast once the con-struction boom associatedwith its megaprojects ends.The region lacks semi-skilled, skilled and highlyqualified labour, eventhough it is attracting tech-nology-intensive industriesthat traditionally were theprovince of the richersouth, such as automotivesand chemicals.

“One of the key chal-lenges . . . is what is goingto happen after those con-struction jobs are gone,”says Mr Gomez Ang of theIFC. “What are people goingto be doing and where isthe job generation going tocome from?”

The lack of large privatesector lenders to help spurgrowth provides another

challenge, he adds. Thebusiness culture can bequite insular for a regionthat needs to attract outsidecapital to grow, althoughthat is changing as a newgeneration of business lead-ers emerges.

Against its drawbacks,new infrastructure, such asplanned railway links withthe interior of Brazil thatwill provide an alternativeto southern ports for soyfarmers looking to exporttheir produce, will helpprompt growth.

The IFC has alreadyinvested about $1bn in 10projects, including helpingto advise alongside the Bra-zilian Development Bank(BNDES) and the Inter-American DevelopmentBank on Hospital do Subúr-bio, a medical facility in anunderserved part of Salva-dor that was Brazil’s firstpublic-private partnershipin health.

Big projects fuel region’s push to keep momentum

42%Middle class as a proportionof the northeast’s population

FINANCIAL TIMES THURSDAY MARCH 27 2014 ★ 3

Alagoas0.7%

Paraíba 0.9%

Piauí0.6%

Maranhão1.3%

Ceará2.1%

Sergipe0.6%

Rio Grande do Norte 0.9%

Pernambuco2.5%

Bahia3.9%

NORTHEAST REGION

NORTH REGION

CENTRE-WESTREGION

SOUTHEASTREGION

SOUTHREGION

Rio de Janeiro 11.2%

São Paulo 32.6%

I LB R A ZZZ

Brazilian GDP

Southeast

Centre-west

South

North

28.4

27.8

24.4

7.9

13.9

Northeast

By industryBrazilian real (bn), 2013

Agriculture

Mining

Manufacturing

Constructing

Utilities 96

Commerce

Transport

Communication 108

Financial intermediation

Others

Real estate

Public sector

Sources: Thomson Reuters Datastream; CEIC FT graphic

The economic picture

2006 08 10 13-4-202468

State GDP as % of national GDP 2011

-60

-40

-20

0

PiauíMaranhão

AlagoasParaíba

CearáRio Grandedo Norte

BahiaPernambuco

Sergipe

235 168 535 222 520 218 288 646 340 728

Per capitaBrazilian real (’000), 2011

GrowthAnnual % change

Per capita in the northeast% difference from national average, 2011

Agriculture Industry Services

Below 1%1%-5%5%-10%Above 10%

BrasíliaRegional GDPBrazilian real (bn), 2011(and % in brackets)

Southeast region(55%)2,296

South region(16%) 672

Northeastregion

(13%)555

Centre-west region(10%) 396

North region(5%) 224

4,143

Map key

Conversion rateat Mar 20 2014

R$1=$0.43

Doing Business in Brazil’s Northeast

Praia da Pipa, in the state ofRio Grande do Norte, 80kmsouth of state capital Natal,has everything a beach-loving tourist could want.

There are calm, warm waters, withthe opportunity to surf out past thecoral, and bars and restaurants thatserve the northeast’s traditional cui-sine.

But getting home again can be tor-turous. It is a 30-minute drive alongwinding back roads before you reachthe highway, then it is at leastanother hour to get to the airport.From Natal, a World Cup host city,flights to New York are routedthrough Rio de Janeiro or São Paulo,some 2,500km to the south, for a tripthat can take anywhere between 17and 30 hours.

The nine states in Brazil’s northeastoffer vast potential for tourism – thatmuch is obvious. But as much else inthe country’s economy, infrastructureproblems hinder development, andtourism remains limited mostly todomestic travellers.

The rest of the region suffers fromworse infrastructure issues than Pipa,with problems with transportation,telecommunications, and energy pro-vision. These are more pressing thanairport expansion, says PauloResende, infrastructure specialist atthe Fundação Dom Cabral businessschool in Nova Lima near the south-ern city of Belo Horizonte.

“Tourism-related investments in thenortheast have suffered from a lack ofstrategic thinking, and variousprojects lack the necessary links thatwould really add value,” says MrResende. He cites a new airport beingbuilt near Natal, in São Gonçalo doAmarante, that has not been properlyconnected to the region’s highwaynetwork, and ports that work at cross-purposes (see box).

Infrastructure projects are highlypolitical, he says, which can lead tocorruption or see the investments lostin labyrinthine bureaucracy. Thecountry’s tourism industry generatedrevenues of R$250bn [$106bn] in 2012,up from R$189bn the previous year,

according to Brazil’s ministry of tour-ism. But most of the growth has beenpowered by the rise of the country’smiddle class, who are travelling morearound their vast country as wageshave risen. The government estimates85-90 per cent of revenues in the sec-tor are from domestic tourism.

The northeast is the second mostpopular destination for tourists, bothfrom Brazil and abroad, accountingfor 30 per cent of trips. The southeast,which includes Rio de Janeiro and SãoPaulo, accounts for 37 per cent.

The government has no preferencefor either domestic or internationaltourists, says José Francisco de SallesLopes, director of research at the min-

istry of tourism. “We are interested inhaving one grow just as much as theother. We are in a constant process ofexecuting a national plan of action,with specific goals to expand growth.”

One of these goals in the northeastis to focus on “regionalisation” – inte-grating city governments strategi-cally, so that visitors spend time inmore than one municipality and staylonger and spend more.

As part of a national infrastructurepush, 13 cities in the northeast willreceive R$7.8m to invest in and pro-mote tourism in their historical cen-tres. They include Salvador, the most-visited city in the region, and manyother cities such as Recife and João

Pessoa, the state capital of Paraiba,which played leading roles in Brazil’scolonial development. These funds arein addition to the R$4.5bn invested ininfrastructure over the past 11 years.

But the situation on the ground canstill be patchy. On a sunny Marchafternoon in João Pessoa, the beauti-ful stretch of coast was largely empty.The next day, rain knocked outpower, telephones and the internet inthe area for hours. Infrastructure bot-tlenecks contribute to costs that oftensurprise visitors. Despite beingcheaper than cities such as Rio deJaneiro – where soaring costs atbeaches and restaurants have fuelleda public outcry – visitors to the north-

east will find hotels, meals and trans-port are not much cheaper than in theUS or western Europe.

In much of the region, public trans-port is feeble, and visitors rely ontaxis, which quickly prove expensive,or the difficult process of hiring a car.

“We do get the odd foreigner hereand there, but they are usuallyexchange students or backpackers,”says Carol Andrade, who organisescultural projects in João Pessoa witha project called O Que Acontece PorAqui (What Happens Here).

“With just a little improvement andmore promotion, we would be readyto welcome more visitors and intro-duce them to the local culture.”

Transport bottlenecks deter foreign visitorsTourism Politics andbureaucracy blamedfor delays to projects,reports Vincent Bevins

Splendidisolation:Rio Grandedo Norte isbeautiful,buttransport isproblematic

Getty Images

Despite their strategiclocation for trade withEurope, ports in thenortheast have seen theirparticipation in Brazil’sshipping industry decreaseover the past few years, whileplans to expand at twolocations have stalledrecently.

In 2009, northeastern portsmoved 165m tonnes of goodsand cargo, or 22 per cent ofthe national total. In 2013,the 216m tonnes movedamounted to just 17 per cent.

A plan to double capacityat Suape port, inPernambuco state, is inlimbo, and the first round ofinvestments, which shouldtotal R$600m­R$700m($250m­$300m), has no setdate.

Leandro Mello de Angeles,project finance executive atItaú BBA, the investmentbank, says: “Our expectationwas that it would begin thisyear, but with the World Cupand elections planned for2014, we have no indicationwhen it will happen.

“The ports situation in thenortheast remainsunchanged.”

Brazil approved a newregulatory code governing itsports in 2012, and the privatebidding process is still beinganalysed nationwide by

Brazil’s federal accountabilityoffice.

But of the R$54bn ofplanned investments inBrazil’s ports, R$10bn isdestined for the northeast.

Plans for a new port, PortoSul, in southern Bahia, arestill awaiting approval fromregulators.

Commodities such as grain,soya and minerals, andvarious other cargoes flowthrough the northeast. Theregion’s ports, and plannedport investments, are a mixof public and privateinitiatives.

Compared with Brazil’sother main shipping hubs, thenortheast’s leading portssuffer from a lack of strategicadvantage, says PauloResende, infrastructurespecialist at the FundaçãoDom Cabral businessschool in Nova Lima,southern Brazil.

“The port of Santos[in southeastern São Paulostate] is linked to the centreof Brazil’s economy, andthe port in São Luís [innortheastern Maranhãostate] is linked directly byrail to Carajás, a miningcentre,” Prof Resende says.

“But Suape, the largestport in the region, isn’tlinked to any specificindustry.” VB

Ports Expansion plans stuck in limbo

Christopher CampbellFT graphic designer

Maya JaggiFreelance journalist and writer

Richard LapperPrincipal, FT Confidential, theFT’s emerging marketsresearch service

Joe LeahyBrazil bureau chief

Samantha PearsonBrazil correspondent

Vincent BevinsFreelance journalist

Hugo GreenhalghCommissioning editor

Andy MearsPicture editor

Steven BirdDesigner

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‘Tourism investmentshave suffered from a lackof strategic thinking’

4 ★ FINANCIAL TIMES THURSDAY MARCH 27 2014

The Portuguese encounterwith Brazil began in thenortheast, when the ex-plorer Pedro Cabral madelandfall in Bahia in 1500.But it was not until the20th century that itsregional literature startedto make waves.

Euclides da Cunha’sBacklands (Os Sertões, 1902)is dubbed the “bible of theBrazilian nation”. Da Cunhawas a staunch republican ofPortuguese and Bahianancestry, expelled from mil-itary school for throwingdown a sword in front ofthe imperial war ministerbefore Brazil became arepublic in 1889.

An army engineer, he wassent as a war reporter in1897, to the Bahian interiornorth of Salvador, when therepublic’s troops quashed apopular rebellion in Canu-dos led by Antônio Consel-heiro (“the counsellor”).The federal army bombedkerosene-doused villages,burning the inhabitantsalive. The carnage was aforetaste of the industrial-ised slaughter of the firstworld war, according toGerald Martin, the biogra-pher of Gabriel García Már-quez and author of JourneysThrough the Labyrinth(1989). Outraged in tone,baroque in style, Backlandsbroke ground as war report-age. The military campaignof the urban coast againstthe sertão – the drought-plagued interior scrublands– became, Prof Martinwrote, a landmark in theimposition of “civilisationover barbarism, technologyover religion, Europe overAmerica, the city over thecountry, and the nationover the regions”.

Yet, riddled with thepseudoscientific racism ofthe day, Backlands was aself-contradictory work by aman appalled by atrocitiescommitted in the name ofthe civilisation he espoused.

Da Cunha dehumanisedthe sertanejos, or backland-ers – many of them mestizodescendants of Portugueseand Amerindians – as a“Hercules-Quasimodo” type.

But he also came toadmire the peasant resistersas “Titans”, the “core of ournationality, the bedrock ofour race”. He died in 1909from a gunshot woundinflicted by his wife’s lover.

His classic work inspiredothers, including Devil toPay in the Backlands(Grande Sertão: Veredas,1956), a postmodernist cow-boy novel by JoãoGuimâraes Rosa, and TheWar of the End of the World(1981) by Mario VargasLlosa, the Peruvian Nobellaureate’s take on thecrushing of Canudos.

For Ilan Stavans, whointroduced Penguin’s newtranslation in 2010, Back-lands strove to fathom the“rivers of blood on whichmodern Brazil was built”.

The first African slavesarrived in the northeast

from Guinea in 1538. Slav-ery was abolished only in1888. The cane fields, whichformed colonial Brazil’s eco-nomic heartland, were afocus of literature. GilbertoFreyre’s The Masters andthe Slaves (Casa Grande eSenzala, 1933), an accountof colonial society, was thefirst to celebrate the Afri-can legacy and a mixed-racenation born of sexual rela-tions on the plantations.

Freyre, from Recife inPernambuco state arguedthat Brazil’s soul lay not inthe southern cities but thesugar plantations and inte-rior of the northeast.

Salvador da Bahia wasthe imperial Brazilian capi-tal for more than 200 yearsfrom 1549. The move to Rioin 1763 followed a decline inthe sugar industry. As eco-nomic power shifted south,the northeast came to sym-bolise poverty and back-wardness.

David Treece, professor ofPortuguese at King’s CollegeLondon and author of Bra-zilian Jive: From Samba toBossa and Rap (2013), saysthe northeasterners are “theIrish of Brazil”.

He says: “The big cities ofthe southeast and Brasíliawere built by northeasternmigrants, who still sufferprejudice.” The sense thatthe northeast was fallingbehind, says Prof Treece,lent impetus to the Region-alist movement that Freyrelaunched in 1926.

Its social-realist novels ofthe 1930s and 1940s – coin-ciding with PresidentGetúlio Vargas’s New State– are seen as a golden age inBrazilian fiction.

The Bahian Jorge Amadowas the best-known, if notalways best loved, Braziliannovelist of the 20th century.

The son of a merchantturned coffee planter,Amado spent time in jail forpolitical activities. Typicalof his militant fiction areCacao (1933), set on thecocoa plantations of Ilhéus,and his urban novels of Sal-vador. His focus was theexuberance and sensualityof Afro-Brazilian life, andhis later novels were una-shamedly erotic and popu-list, including Gabriela,Clove and Cinnamon (Gabri-ela, Cravo e Canela, 1958)and Dona Flor and her TwoHusbands (Dona Flor e SeusDois Maridos, 1966).

For the critic John Gled-son, beneath Amado’s“defence of the poor, ofblacks and of women” lie“demeaning sexual andracial stereotypes whichmark him as a man of thepast”. Yet Prof Treece saysAmado “made ordinary Bra-zilians into protagonists oftheir own lives, even thoughhe is open to the charge ofperpetuating myths with aspicy recipe of sex and reli-gion: he famously said that,to overcome Brazil’s prob-lems, what Brazilians needto do is go to bed with eachother”.

Novels tell ofnortheast’scolonial pastCulture

Writers offer vividinsights into theregion’s oftenturbulent history,says Maya Jaggi

As economic powershifted south, thenortheast came tosymbolise povertyand backwardness

When Pernambuco state innortheast Brazil decided tobuild its World Cup sta-dium in the middle of a for-est, many questioned thewisdom of such a plan.

The Arena Pernambuco isabout 20km west of thestate capital Recife in theregion of São Lourenço daMata. In heavy traffic, itcan take more than an hourto get there from the city’shotels and airport.

“Of all the 12 [World Cup]stadiums in Brazil, it is the

only one not in a state capi-tal,” Ricardo Leitão, theWorld Cup secretary forPernambuco, says proudly.“People always ask us whywe built it so far away.”

His answer is simple: Per-nambuco is just doing whatBrazil’s federal governmentdid more than 50 years agowhen it built the country’scapital Brasília in a vastarea of empty scrubland. Atthe time, the decision todevelop Brazil’s interiorand shift economic activityaway from the coast wasequally controversial.

“In Pernambuco, we havevarious growth poles on thecoast, so we decided todevelop the state’s inte-rior,” says Mr Leitão. “It issimilar to what London didwith the Olympics to stimu-late growth in new areas.”

However, to some extentPernambuco’s lofty ambi-

tions reflect the progressthe state has made.

Traditionally one of thepoorest regions of Brazil,Pernambuco has developedinto a confident economicpowerhouse over the pastfew years, as millions jointhe middle class and taxincentives lure multination-als to the region.

In 2012, the state’s econ-omy grew 2.3 per cent, com-pared with 1 per cent forBrazil as a whole.

In a sign of the region’sgrowing political influence,Eduardo Campos, Pernam-buco’s governor and head ofthe centrist Brazilian Social-ist Party (PSB), poses thebiggest threat to DilmaRousseff’s chances of re-elec-tion as president this year.

However, Pernambuco’sstadium stands out not onlybecause of its location butalso because it was one of

the first to be ready. After30 months under construc-tion, the 46,000-seat stadiumopened in May 2013.

It was meant to be readyby Fifa’s deadline of Decem-ber, but the governmentbrought forward the worksso that Recife could be ahost for the ConfederationsCup, the World Cupwarm-up. It was the onlycity that built its stadiumfrom scratch for last year’stournament; the other fiverenovated existing arenas.

In the rush to finish, thecost of the stadium rose toabout R$650m ($277m), upfrom the original estimateof R$529.5m, says Mr Leitão.

Nevertheless, Pernam-buco’s efforts are in starkcontrast to those of largercities such as São Paulo,whose stadium is not onlyover budget but also not fin-ished. After a fatal construc-

tion accident at the city’sItaquerão stadium inNovember, Fifa extended itsdeadline until April – onlytwo months before theWorld Cup begins. Stadiumsin Curitiba and Porto Alegreare also behind schedule.

Mr Leitão attributes Per-nambuco’s timeliness to theproject’s financing model.Unlike larger cities such asSão Paulo, Recife does nothave a football team largeor wealthy enough to buildits own stadium. The gov-ernment therefore turned toa public-private partnershipwith Brazilian industrialconglomerate Odebrecht.

“It gave us the agility weneeded to bring the worksforward,” says Mr Leitão.“The government alone hasmany limitations – forexample, for every singlething you need to buy, youhave to request a tender.”

About 800km northwestof Recife, Fortaleza’s refur-bished stadium in the stateof Ceará was the result of asimilar PPP with GalvãoEnghenaria, the Brazilianconstruction company. The

renovation of the stadium,which has a capacity ofnearly 64,000, came in onbudget at R$519m.

While Ferruccio Feitosa,the World Cup secretary forCeará, moved his office tothe building site to helpaccelerate the construction,Mr Leitão says his depart-ment installed cameras inRecife’s stadium to monitorthe works around the clock.

Under Pernambuco’sagreement with Odebrecht,the company is guaranteedrevenues of some R$3.5m amonth for 30 years. If therevenues exceed or fallshort of that figure, the gov-ernment will either receivea payment or make up thedifference.

Odebrecht has alreadysecured part of that reve-nue stream by signing adeal with Náutico, one ofRecife’s top football clubs.

Each year, the stadium willhost roughly 60 footballmatches, as well as othersporting events, shows, con-certs and conventions.

About R$1.5bn of publicinvestment will also be fun-nelled into 19 transportprojects, including road, air-port and metro upgrades,says Mr Leitão.

However, the region’smost ambitious investmentwill come after the WorldCup with the of the “City ofthe Cup”. This project willinclude housing, an indoorarena, parks, bars and res-taurants, schools, a conven-tion centre, a universitycampus, a shopping centreand offices, and will finallyjustify the stadium’s seem-ingly random location.

“Pernambuco is not goingto have an opportunity likethis again this century,” MrLeitão says.

Choice as World Cup venue provides kick­start for Pernambuco

Game on: Arena Pernambuco

Regeneration

Stadium in state’sinterior is part of awider plan to reviveeconomy, reportsSamantha Pearson

Doing Business in Brazil’s Northeast

During much of the 1990s,information technology stu-dents in Brazil’s northeast-ern city of Recife were allgiven the same advice when

they graduated: leave Recife.The city had established itself as

the northeast’s IT hub in the 1970sand 1980s, attracting companies suchas IBM, the US technology group, butBrazil’s economic crisis in the early1990s pushed the sector close to col-lapse. IT professionals were forced toflee to São Paulo, Rio de Janeiro orthe US in search of work.

However, the establishment of thePorto Digital information and commu-nications technology park in Recife’sabandoned port 13 years ago has notonly helped to retain talent in theregion, but also played a role in trans-forming the city’s economy.

“Porto Digital was not just a way tofix the ‘brain drain’ we were suffering,but also an attempt to create an eco-nomic model for the city based oninformation and knowledge,” saysFrancisco Saboya, Porto Digital’s pres-ident.

Created in 2000 and in operation by2001, the park started with three com-panies with a combined staff of justover 40 people. Now, about 7,100 peo-ple work in the park for 230 compa-nies, which together make more thanR$1bn ($429m) in revenue each year.By 2020, Mr Saboya expects 20,000 peo-ple to be working in Porto Digital.

All companies that locate theiroffices in Porto Digital are given a 60per cent discount on the municipalgovernment’s ISS services tax, as wellas other benefits, such as support to

hire and train staff. For many of PortoDigital’s companies, however, thepark’s biggest attraction is the oppor-tunity to network with others in thesame sector in a relatively small area.

Porto Digital is located on a 2km-long island, with the river on one sideand the sea on the other – one ofcity’s many islands or peninsulas thathave led to it being known as theBrazilian Venice.

“Everyone in the business is justnext door, so when you go out forlunch, you bump into them,” saysMarco Tuio Caraciolo, co-owner ofManifesto Games, one of the park’sgrowing number of gaming compa-nies. “We often end up doing things inpartnership.”

However, being on an island has itsdrawbacks, says Mr Saboya. In need

of more space, Porto Digital had topersuade the local government to passa law two years ago to allow the parkto expand across the bridge into theneighbouring district of Santo Amaro.

“One of our challenges is to expandthe supply of office space in the parkto help convince the big Brazilian andglobal companies that Porto Digital isthe best place in the country to dobusiness,” says Mr Saboya.

Nevertheless, the park’s locationhas also been vital to its success, hesays. In partnership with the privatesector and the Federal University ofPernambuco (UFPE), the governmentdecided in 2000 to develop Porto Dig-ital on the island where the city itselfwas born. Once a thriving port areaand the historic centre of Recife, theisland became rundown after a larger

port was built farther from the city.“Instead of developing the park in a

closed area within the university cam-pus, it was decided to locate it in thecentre of the city to help with theregeneration of the region,” says MrSaboya. “Ten years ago, most of thebuildings were abandoned and in anextremely bad state; the differencenow is huge.”

As a sign of just how far Porto Dig-ital has come, many professionals arenot only staying in Recife but alsoreturning to the city, says Manifesto’sMr Caraciolo. “Many people who usedto work at Microsoft in the US arecoming back,” he says.

“There is still a long way to gobefore the park attracts bigger compa-nies, but it is much better for us herethan it used to be.”

Rebirth of the Brazilian VeniceInvestment Site in city’s former port area to employ 20,000 people by 2020, reports Samantha Pearson

New port of call: Porto Digital is not only designed to stop the city’s brain drain but also to create an economic model based on information and knowledge

‘Manypeople whoused towork atMicrosoftin the USare comingback’

As a teenager, Marco TulioCaraciolo loved nothing more thanplaying computer games. But notonce did he imagine he wouldbuild a career out of it, let alone inhis home city of Recife in Brazil’spoor northeast region.

However, at the age of 30 he isnow the co­owner of ManifestoGames, one of the innovativegaming start­ups at the heart ofthe city’s Porto Digital technologypark. With clients such as theItalian carmaker Fiat, Manifesto

expects to more than double itsrevenue to R$4m ($1.7m) this yearfrom R$1.5m in 2013.

“Playing video games is verydifferent from making them. It’slike food – just because you likeeating doesn’t mean you are goingto be a good cook,” he says.

Mr Caraciolo started thecompany with his friend VicenteVieira eight years ago after leavinguniversity. Their best known gameis Fruits Inc, in which the playerhelps to develop a fruit farm. It

has been downloaded 3.5m timesand has been translated into 11languages.

However, about two years ago,the friends decided to change

Manifesto’s focus andconcentrate on developing

games for businesses.“Most brands have a strategy

when it comes to Facebook, butwe wanted to show companies

that they could also create acommunity in the games world,”

says Mr Caraciolo.

Park life Expansion prompts Manifesto to change its game plan