Digging deep: Lula promises economic growth. He's looking at the Amazon to get it.

Brazil's President Luiz Inacio Lula da Silva--riding high on a 70% popularity rating and a seemingly endless honeymoon with foreign investors--has gone double-or-nothing on his political future, predicting strong growth in 2004. Now he has to deliver Brazilian leaders have a lot of ideas about how to stimulate growth: Cutting high interest rates, for example, should spur foreign investment. He's spending more on public works, too, in particular on public construction and sanitation.

But perhaps the biggest--and most controversial--idea is a huge list of infrastructure projects to be built in the Amazon, detailed in the administrations US$629 billion Multi-Annual Plan, known as the PPA. Released quietly in August, the administration's plan sets development spending and investment priorities to 2007, including spending nearly half--$298 billion--on dozens of Amazon development projects ranging from roads, bridges, power transmission lines and gas pipelines to dams, waterways, railroads and airports. Not surprisingly, business strongly backs the idea; green groups are aghast.

The Amazon "can't be treated like it was something from another world, untouchable, in which the people don't have the right to the benefits," Lula said in a televised speech in June. sounding more like the ex-union leader he is than the environmentalist he ran as before assuming the presidency in January 2003. The cash-strapped government expects private-sector consortiums to finance the bulk of these development projects. The government intends to be a minority partner to help get projects off the ground, hoping they boost economic growth and create jobs in the medium term,

"Environmentalists aren't wrong to question Lula's Amazon infrastructure projects because they will have an environmental impact. But they need to understand that environmental concerns need to be weighed against now urgently needed economic growth, growth which will improve Brazilians' quality of life," says Jose Freitas de Mascarenhas, a director of Brazilian construction company Odebrecht and head of the National Industrial Confederation, 'And for the economy to grow, better roads and more energy supplying dams need to be built, even if it means building them in the Amazon."

Environmentalists agree that the plan's Amazon components will generate more economic growth. But it will also bring, they charge, the untrammeled type of development that has eaten away at the rainforest region for decades and has already destroyed 15% of it. "The Lula government, faced with a stagnating economy, is taking a growth-at-any-cost approach towards development, one that has caused the concerns that Lula voiced as a candidate to ring hollow," says Martin Santilli, public policy director of the Socio-Environmental Institute, one of Brazil's most influential environmental non-governmental organizations. "That gung-ho developmentalist approach, reflected in the PPA Amazon infrastructure projects, shows just how desperate the government is to jump-start the economy"

Paving for progress. Among the most controversial Amazon projects is paving the BB-163 highway. The $270 million project would pave the remaining 1,174-kilometer dirt stretch in northern Para state by 2007. The road would also connect the western farm state of Main Grosso with the Amazon River port of Santarem. Also on tap are two natural-gas pipelines for state oil company Petrobras to move gas from its Urucu fields to thermoelectric plants in two western Amazon cities by 2006. To cost $765 million, the pipeline plan calls for the construction of 417 kilometers of pipeline to Manaus and 522 kilometers to Porto Velho, to thermoelectric plants owned by U.S. energy company El Paso Energy and by state-owned Eletronorte.

The government also is moving ahead on a potential 11,882-megawatt, $6.6 billion hydroelectric dam on the Xingu River, called Belo Monte. For years, Brazil has studied the idea; Lula's Amazon plan does not earmark funds for construction, nor has it been approved. But it does call for $3.5 million to conduct feasibility and environmental impact studies.

Belo Monte would power foreign and Brazilian-owned aluminum plants that produce for domestic and export consumption, government officials say. They also say that the BR-163 road-paving work is needed to help soy farmers from Mato Grosso, the leading soy-producing state in Brazil, get their crops to export markets. Tropical rains inundate and partially wash away this dirt strip, making it virtually impossible to use six months a year. The government spends much of the rest of the year repairing the road.

Government officials argue that the Petrobras natural gas pipelines will be a big boost in meeting energy demand and will both save money and benefit the environment by replacing costlier and dirtier diesel fuel currently being burned by the power plants serving Manaus and Porto Velho. The Mines and Energy Ministry nevertheless recently backpedaled, saying that it intends to scale down plans for Belo Monte, cutting the power station's capacity from 11,182 megawatts to between 5,500 megawatts and 7,500 megawatts. That, they say, would significantly reduce the project's cost and environmental impact.

Eletronorte, the state power company overseeing the dam project, is lobbying strongly for its approval. "Belo Monte will have the lowest generating costs of any dam ever built in Brazil, or any dam on the drawing boards," says Paulo Cesar Magalhaes Domingues, a member of the Eletronorte energy planning council. 'And this should attract industrial investors."

But environmentalists argue Belo Monte should be scrapped, not scaled down, asserting that not even a downsized dam can be made economically or environmentally feasible. Besides flooding the area to create a 400-square-kilometer reservoir, they claim it won't be able to guarantee energy during the three-to-fourth month dry season, when water runs low.

Unchecked. They also contend that it and the other large Amazon infrastructure projects, will, like all those before them, attract settlers and thus fuel destruction of the world's largest rainforest. "Paving the rest of the BR-163 highway, laying the gas pipelines and building even a scaled down Belo Monte will open the Amazon up to unchecked colonization that would do considerable environmental damage," says Roberto Smeraldi, the director of Friends of the Earth in Brazil. "That's because the government has developed an economic-growth-based PPA that doesn't consider the regional development of the Amazon in any sustainable way."

Sebastiao Soares, the secretary of strategic planning at Brazil's Planning Ministry, which drafted the plan, defends the government's approach. He says that plans to build a greatly downsized Belo Monte have not even been finalized. He also argues that the two Petrobras gas pipelines have minimal environmental impact, pointing out that they Hill be buried, and that no access roads will be left to invite colonization.

The government is considering ways to redesign the BR-163 paving project so that it forms part of a larger Para state development plan, what. Soares calls "a more holistic, sustainable strategy aimed at curbing colonization and land speculation" One idea now being considered is setting up conservation areas, such as national or state parks, biological reserves or national forests where managed wood harvesting could be done along up to 80% of the BR-163 highway.

"The Lula government continues to believe in sustainable development in the Amazon and elsewhere in Brazil, which is why Belo Monte is being scaled down and why BR-163 is being rethought," Soares says, echoing Lula's campaign platform. 'And while inter-ministerial disputes involving the environment, especially in the Amazon, occur, what's important to remember is that Marina Silva is still the Environment Minister."

Silva, a former senator who has been a leading environmental advocate in Brazil, was reportedly so upset by recent environmental decisions made by the Lula administration--especially a decision to allow the planting of genetically modified soybeans--that she had to deny rumors that she would soon leave the government. Yet the Environment Ministry now says that it believes that the government will heed the recommendations of an 11-ministry working group set up after a July 2003 report showed an alarming 40% increase in the Amazon deforestation rate. The work group, whose later recommendations were meant to reduce the deforestation rate, suggested that the government more carefully assess the economic impacts of various infrastructure public works projects, among them BR-163.

Claudio Langone, vice minister under Silva at the Environment Ministry, maintains that when the plans for the Amazon projects were drafted the government was not fully aware how much faster the rainforest was being cut down. "The PPA was nearing completion when the government, in July, got the figures showing the 40% increase in the Amazon deforestation rate," says Langone. "And because the PPA, as set forth in the constitution, needs to be sent to Congress by Aug. 31 of the year the government takes office, the Lula administration lacked the time to delay its release while it. Rethought and reworked some of its more Controversial Amazon mega-projects:"

Farm to market. Mate Grosso governor Blairo Maggi, Brazil's largest soy farmer--as well as the state's other soy farmers--supports Lula's push to pave BR-163. Mate Grosso farmers like Orcival Guimaraes, too, are waiting expectantly for a decision. "If BR-163 were completely paved and thus usable for transport, I could truck export soybeans to the Santarem port, instead of to the clogged southern port of Paranagua, which is much farther away. That means I could greatly reduce my freight costs and delivery times, which would make me more competitive and thus increase my export orders," says Guimaraes, who cultivates 28,000 tons of soybeans a year, most of which is exported. "I'm happy Lula is behind the paving of BR-163 and believe that he'll succeed in balancing economic growth needs with environ mental concerns, which I believe green groups have overblown."

Environmentalists who had embraced Lula's eco-friendly campaign platform had expected a much more green conscious president. Now they fear he is leaning toward authorizing construction of Angra III, Brazil's third nuclear-power plant, and they blasted the government's October announcement that Brazil will start enriching uranium in 2004 for use in its two domestic reactors and, by 2014, for sale abroad.

They also fault the president for allowing farmers to plant banned genetically modified soybeans in the 2002 03 and 2003-04 growing seasons, based on the government's defense that maintaining a ban m: such crops would cause farmers economic hardship. "Lula is trying to appease both the developmentalists and the environmentalists," says Amaryllis Romano, an agribusiness and construction sector analyst with Tendencias, a Sao Paulo consulting firm. "But if and when push comes to shove, I believe the developmentalists will win the day because after three years of near-zero economic growth Lula has to go all out to get the economy moving, that or lose widespread popular support and part of his political base."

Friends of the Earth's Smeraldi is pessimistic. He says that it's no surprise that farmers and industrial groups, both of which stand to benefit from Amazon infrastructure projects, support Lula's pro-development positions. But, he adds, among the most influential lobbyists pressuring the Lula government to go full-speed-ahead on such projects are, in fact, state-run companies. "Lula is under siege both from farmers and industrial lobbyists to develop the Amazon. But state companies like Petrobras, which wants its gas pipelines laid there, and Eletronorte, which is behind Belo Monte and other Amazon dam-building projects, are perhaps even more key in determining government policy," says Smeraldi. "That's because they are inside the government and, as such, have greater access to Lula's ear and thus greater influence over him."

Back in Business

Brazil's Central Bank was able to regain foreign investors' confidence during 2003 after successfully cutting interest rates four times throughout the year, to 19% from 26.5%. With the support of President Luiz Inacio Lula da Silva, strict fiscal and monetary policies were implemented. The country also scored US$6 billion in new money from the International Monetary Fund (IMF), raising the total credit available to $14 bib Lion. Central Bank President Henrique Meirelles talks with LATIN TRADE Reporter Michelle Guevara about the country's prospects.

Has Lula's administration helped restore investor confidence in Brazilian companies?

Brazil is coming back to the markets. Brazil was, for a short period of time, out of the markets due to uncertainties in the last year or two about how the Lula administration would be. The moment that the fiscal discipline, the monetary austerity, and the direction this government took [became clear], markets came back to normal. And actually, most of the ratios we have are at pre-crisis levels. Our current account numbers are back to levels of 1994, the best in the past 10 years. The rollover rate for private companies is also back to pre crisis levels.

What is driving growth in Brazil?

I think that the solid fiscal policy and solid monetary policy has brought inflation down [and] has brought stability back. The markets are stabilized, and now companies have the confidence to plan, to invest and to grow. And with inflation down you also have also a steady recovery of the purchasing power of the average worker. All that together is giving the conditions, together with the flexibility of the monetary policy, for the country to start growing steadily.

Will interest rates continue to drop in 20041

We expect that the recovery is sustainable exactly because the Central Bank took a very gradual approach ... and our expectation is that recovery is taking place in a sustainable and solid way.

Twenty-percent of Brazil's $300 billion external debt is due in the first half of 2004. Are there any plans to restructure that debt?

No plans whatsoever. We have already anticipated part of the demands for next year. We issued some papers [in 2003] and actually the next year seems quite comfortable for us.

The deal with the IMF was described as a type of insurance. What concerns does the Central Bank have going into 2004?

There is not a specific concern. It's only a question that we came out from a very deep crisis in the year 2002 ... when Brazil lost $28 billion of external lines and we are now phasing out of IMF [loans] and decided it would be a good idea to have that kind of insurance for one more year while the markets regain full [confidence], which we have. All that continues to build on the precautionary side and not anything specific.