Brazil is still the largest recipient of FDI in Latin America

Here is a cheerful news for those sickened by the gloom and doom talk of Cassandras about Brazil in recent years. Brazil received 62.5 billion dollars of Foreign Direct Investment (FDI) in 2014 and continued to be the top recipient of FDI in the region according to the 27 May report of the Economic Commission for Latin American and Caribbean(ECLAC). Brazil got 40% of the total FDI of 153 billion received by Latin America in 2014 and almost three times the FDI received by Mexico, currently the darling of marketeers. 

FDI received by Brazil is more than twice the FDI flow into India which was 29 billion dollars in the fiscal 2014-15. 

Other major Latin American recipients of FDI in 2014 were Mexico-23 billion, Chile-22 bn, Colombia-16 bn, Peru-6.7 bn and Argentina- 6.6 bn. Central America got 10.5 bn of which Panama accounted for 4.7 bn

Services sector received the largest share of FDI followed by manufacture, mining, infrastructure and renewable energy.

Netherlands was the largest investor in Latin America in 2014 accounting for 20% share of the FDI in the region, followed by USA-17% and Spain-10%. 

Not surprisingly, even ECLAC could not find actual figures of FDI from China, since the Chinese activities are non-transparent. ECLAC estimates that the Chinese investment in 2014 might have been 10 billion and has guessed that China's annual FDI in Latin America could have been around 10 billion dollars from 2010 to 2013. The Chinese Premier, who has just made a tour of Brazil, Colombia, Peru and Chile, has announced billions of dollars of credit for investment including in railways and infrastructure

FDI received by Latin America has decreased by 16% in 2014 from 2013 when it reached a record of 183 billion. ECLAC predicts further decline of 10% in 2015. Falling prices of oil and metals are the main reason for the projected decrease in FDI

Outward FDI of Latin America was 30 billion dollars in 2014. Chile was the largest foreign investor with 12 billion dollars, followed by Mexico-7.6 bn, Colombia-3.8 bn and Argentina –2.1 bn. Most of the outward FDI has gone into Latin America itself.

There has been no big Indian investment in Latin America in 2014. But there has been a number of small investments and announcements in areas such as two wheelers and auto parts. Nor was there any significant Latin America investment in India last year. 2015 might see some large investment by Carlos Slim, the Mexican billionaire ( the second richest person in the world, according to Forbes) who visited India last month to explore the opportunities offered by the large and fast growing market of India.

Although the Brazilian economy has slowed down and the country is mired in corruption scandals, this is a good time for Indian investment in Brazil, since the prices of assets are low and the currency is weak. Argentina, with more difficulties, offers even better opportunities. In any case, these two countries are certain to recover next year and get back on the path of growth and prosperity. The decline in prices of minerals and commodities have made mining and agribusiness assets cheaper. The opening of the Mexican energy sector to private sector and the emergence of Mexico as a 'manufacturing hub for the Americas' offer new opportunities for Indian investors. The Indian energy companies, especially, should seriously look at acquisition of oil fields in Brazil, Mexico, Colombia and shale reserves in Argentina. It is timely that an Indian delegation of oil companies lead by the Minister of Petroleum has just visited Mexico and Colombia. 

The rise and fall of Petrobras

Petrobras, the Brazilian national oil company raised a record $72.8 billion in the IPO in September 2010. This was the largest amount raised by any company in the world till then. With a market value of $214 billion, Petrobras had become the fourth biggest company in the world.  

After the IPO event, a beaming and proud President Lula said ¨It wasn’t in Frankfurt, it wasn’t in New York, it was in our Sao Paulo exchange that we carried out the biggest capitalization in the history of capitalism.” The shares of the company are also traded in NYSE besides in Sao Paulo.

Petrobras's investment plan of $220. 6 billion in the period 2014-18 is one of the largest corporate investment plans. The company has assets and operations in 18 countries around the world and is a global leader in deep sea oil production.

It was the bluest of blue chips in the national stock exchange and its bonds were the benchmark for other Brazilian companies.  It was also the largest patron of culture and sports and  in the country. Petrobras became a crown jewel of the Brazilian industry and its rise was seen as emblematic of the emergence of a New Brazil. 

Petrobras even made it to the 2008 list of top 50 companies in the world for high transparency levels, compiled by Transparency International which monitors global corruption.

It was a remarkable achievement for a company which was founded as a government undertaking in 1953 without any meaningful oil reserves or expertise. In the beginning, Petrobras had the monopoly in the national hydrocarbons sector but in 1997 the government allowed entry of private sector. While retaining 64% of the controlling shares, the government partially privatized Petrobras by selling shares to national and foreign investors. The listing in NYSE helped Petrobras to raise funds and enhance its management and financial information systems to the best practices in the developed countries. 

Today its reputation remains shattered after the corruption scandal which has been unfolding since March 2014. The prosecutors have found 800 million dollars of bribe shared between Petrobras executives, private contractors and politicians. Assets and contracts of the firm are found to have been inflated. The auditors had initially refused to certify its balance sheet in the absence of quantification of the losses caused by the scam. 

Over thirty executives of Petrobras and its contractors have been indicted and investigations have been initiated against 54 politicians and two dozen top private building and engineering firms.  A senior Petrobras executive Pedro Barusco, who has turned approver, has agreed to return about 100 million dollars from his Swiss bank accounts.  Of this, 57 million dollars has already been received. Some US law firms have filed class action suits on behalf of minority share holders. The US Security and Exchanges Commission has started an investigation. 

The CEO of Petrobras along with five directors were forced to resign in Februaryand a new CEO has just been appointed. The share value of the company has come down by seventy percent. This is, of course, mainly due to the drastic decline in oil prices. Since the company has lost its investment grade rating, it will find it difficult and costly to raise finance from the global market and service its large debt of 137 billion dollars. The construction and engineering firms involved in the scandal have also faced credit squeeze and financial problems. This means that the ongoing projects of Petrobras as well as the country's infrastuctural projects will also face delays and uncertainties.

The fall of Petrobras is now seen as reflecting the fall of Brazil itself from its go-go growth years of 2003 to 2010 when the country looked as though it had arrived on the global stage. But now Brazil is facing a combination of political uncertainties, economic recession, water and power shortages besides the corruption scandal.

What caused this disaster for a company which was earlier considered as a role model for other national oil companies in the developing world?

The first reason is corruption in the Brazilian society. Petrobras could not escape the national disease for long. While the company was relatively clean in the past, the executives and politicians became greedy after seeing the large number of multibillion dollar contracts. 

Second, the company became too big and diverse for control. It has gone beyond its core competence and has ventured into petrochemicals, fertilizers, biofuels, electricity and wind energy. This massive and diverse structure lent itself to malpractices by crooked executives.

Third, hubris. In the euphoria of success of discovery of large pre-salt fields and the largest IPO, the top management and the government got carried away and did not pay attention to internal details of the company.

Fourth, the government has caused considerable loss to the company by forcing it to sell petrol at prices much below the market prices. 

Fifth- the incompetence of CEOs, the Board and the auditors who failed to detect and stop the corrupt practices. Or they found it difficult to stop the corrupt executives who were too powerful with political connections.

However, Petrobras has the potential to recover from the current mess. It remains as one of the largest oil producers in the world with ample reserves to increase production to produce 5 million bpd in the next decade doubling its current output.  

Petrobras is a research and innovation driven company. It earmarks one percent of its gross receipts for R and D. It has created world records in deep-sea production and obtained many patents by smart collaboration with suppliers and subcontractors besides in-house development. 

The government cannot afford to let Petrobras fail. It is the largest tax payer and the largest corporate contributor to GDP. 

The company can exit from loss making operations and sell some assets to recoup finances. But the full financial recovery of the company depends on the oil prices. If the prevailing low prices persist, recovery will take a longer time. 

How does Petrobras compares to India's oil companies?  Petrobras was established around the same time as ONGC and IOC were formed in India. Thanks to Petrobras's  relentless, aggressive and innovative search for oil through the deepest parts of the sea, Brazil became self reliant in oil in 2006 and has now become an exporter too. Besides discovering oil, Petrobras has helped in the country's strategic goal to reduce dependence on fossil fuel and increase the share of renewable energy. It enthusiastically took to ethanol, bio-diesel and other biofuels and collaborated with car companies and ethanol producers to make the pioneering 'fuel ethanol' programme of the country a success. Thanks to this team spirit of the company, Brazil has reduced consumption of oil, contained pollution and increased the income of sugar cane farmers and strengthened the domestic sugar-alcohol industry. 

But India is becoming more and more dependent on imports of oil. ONGC has not been as aggressive and innovative in exploration as Petrobras. The Indian public sector oil marketing companies keep merrily increasing the imports. More imports, more consumption and higher prices of oil mean more revenue for them. They do not align their business model to the strategic energy policy of the country to reduce imports and generate more energy through renewable sources and reduce pollution. They do not play for Team India in energy and are stuck in their own narrow silos of earnings without a larger vision.

The Petrobras scandal is not likely to adversely affect  the investment by OVL and other Indian companies in consortium with Petrobras in the Brazilian oil fields. India has been importing crude from Brazil and likely to increase the imports in the future. Reliance has been exporting diesel to Brazil whose refining capacity is inadequate. The diesel exports are likely to go up since the new refinery projects of Petrobras have been hit and delayed by the corruption scandal.