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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 82 i
House of COMMONS
TAKEN BEFORE the
Business, Innovation and Skills Committee
Trade and Investment: Brazil
Tuesday 22 May 2012
peter BIshop, jon coleman, Clive DAvenport and jaime gornsztejn
Evidence heard in Public Questions 51 129
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Taken before the Business, Innovation and Skills Committee
on Tuesday 22 May 2012
Mr Adrian Bailey (Chair)
Examination of Witnesses
Witnesses: Peter Bishop, London Chamber of Commerce and Industry, Jon Coleman, British Exporters Association, Clive Davenport, Federation of Small Businesses, and Jaime Gornsztejn, Brazilian Development Bank (BNDES), Brazilian Chamber of Commerce in Great Britain, gave evidence.
Q51 Chair: Welcome, and thank you for agreeing to speak to us this morning. You may be aware that Mr Davenport, who is due to appear with you, is stuck on a train and is not due to arrive at Paddington until 10 o’clock. I do not wish to hold up proceedings, so we will crack on and any specific questions to him we will incorporate as and when he arrives.
For transcription purposes, could you introduce yourselves, starting with you, Jon?
Jon Coleman: Jon Coleman, Chairman of the British Exporters Association.
Peter Bishop: I am Peter Bishop, Deputy Chief Executive of the London Chamber of Commerce.
Jaime Gornsztejn: Jaime Gornsztejn, Head of the Brazilian Development Bank in London and Chairman of the Brazilian Chamber of Commerce.
Q52 Chair: Thanks very much. Obviously, we have a lot of questions. Some of them we will specifically ask you all to answer and, if you do, I would appreciate it if you would be as succinct as to do justice to the question. Others may only require one person. Please do not feel obliged to supplement their answer, although obviously if you have something that either adds to it or subtracts from it, feel free to do so.
My first question is to both the BCC and British Exporters Association. Very briefly, can you summarise your recent experience of working with UKTI?
Jon Coleman: I think BExA is pleased with the introduction of the new products. We think there is work to be done. There is take-up. I think that £143 million of exports is associated with those new products, but we believe there is a bit of a way to go. Part of that, I think, will be helped, particularly for the SME sector, when UK Export Finance get its individual placements into the regional UKTI offices to get the word out about what UK Export Finance does, what it products are and the benefits of those products. We do, as an association, have views on some of the products. They were issued as pilots originally, and we are expecting, and we understand that there will be, a review of the products, and views will be sought from associations and companies on the nature of the products and improvements that could be made.
Elsewhere, there is still our benchmarking paper, which we issued for the second time this year and will reissue again after publication of the ECGD’s annual report and results later this year. We believe there are still some gaps in the product portfolio; most significantly, in the current banking environment and squeeze on bank liquidity, the number of banks and the capacity in the banking market to support export finance is significantly reduced. Those banks that are still in the market have reduced capacities for individual transactions, so increasingly we are seeing other ECAs providing a direct funding capability.
Q53 Chair: Can I just stop you there? Mr Davenport, please feel free to sit down. You have made it rather earlier than we expected. I am on my opening question, which is on your experience of working with UKTI, and Mr Coleman is in the process of responding to that. I will let you get your breath and have a sip of water, and you can summarise it when you are ready. Sorry, Mr Coleman, please continue.
Jon Coleman: I think the lack of a direct funding product from the UK, be it through UK Export Finance or a combination of that and HM Treasury, could be a significant drag on particularly large value exports out of the UK. The US ExIm Bank has a direct funding capability, as do a number of the Nordic ECAs and the Germans, so we see a potential-if you like-train crash that might happen. We were asked for examples of where deals have been lost for lack of the product. It is very difficult to find evidence of something that has not happened, but we are very conscious, as an association, of the fact that a number of our members identify potential deals that may fall because of the lack of underlying funding. So there may be an ECA guarantee-a UK Export Finance buyer credit guarantee-available, but whether there is funding behind that from the banks to access that guarantee is the question.
Q54 Chair: You focused on export finance, which obviously is very important, and I have some questions on that-that is your specific area of expertise. Lord Green yesterday at a meeting of the all-party group acknowledged that the take-up of the new products had been rather disappointing. Why do you think that is?
Jon Coleman: I think it is getting the message out, particularly to the SME environment, really marketing what UK Export Finance have through UKTI. There is certainly an element of that.
Q55 Chair: If I can interrupt you there, do you think that UKTI could do more in terms of its liaison with business in Britain to, if you like, demonstrate the relevance of these particular products to small businesses?
Jon Coleman: Indeed, yes.
Q56 Chair: You think they could do more.
Jon Coleman: I think they could, and I think that process would be assisted by the placement of Export Finance individuals, as is the plan, around the regional offices. I think two are in place to date.
Clive Davenport: If I can interrupt there, it is two out of nine so far, which is slow, shall we say. It is a concern, because our members are very keen to engage with UKTI but find it reasonably difficult because there are not enough personnel there to support, unlike other countries. Germany has, throughout the world, 17,000 people just searching for contracts. We do not do those sorts of things; that is why Germany has Brazil as its fourth largest exporting area-because they go out there and find the contracts. That is the big difference.
Q57 Chair: You have touched on a question I was going to follow up with. Having appropriate people in the regional government offices is one thing, but it is not in itself that proactive. What more could they be doing to establish contact with small businesses? Have you any views on this?
Clive Davenport: We have 30odd regional offices and we would and do engage with TI. We had a fairly reasonable response when we did our last survey, saying I think that 23% of members were aware of UKTI and also of the newly described-what is it called now?-Export Finance, but the take-up is extremely low. We are looking at 6% and 1%; very low take-up. That is a question that I feel needs to be asked: why is there such a low take-up on the products that they have? What I feel business really needs is that, if they go to UKTI, they should be able to know where the markets are and where the opportunities are, but you do not go there-you have to find that out for yourself on a trade mission. They do not appear to have any knowledge of that, which is confusing as far as I am concerned.
Q58 Chair: It is confusing to me, because having just come back from Brazil, I did get the feeling that in Brazil UKTI did have a pretty good idea of it, but if that is not being communicated, there is obviously a problem somewhere. Would that, from your experience, be a reasonable comment to make?
Clive Davenport: Yes.
Q59 Chair: Peter, have you any comment?
Peter Bishop: Yes, I have. First, with UK, they are doing many things right. You do not win the Best Trade Promotion Organisation in the world 2010 against pretty stiff competition without having a lot to offer. On the plus side, the role of the international trade adviser is, by and large, experienced exporters who have retired or have stood down and should be getting more one to one, face to face, with actual and potential exporters. That, I believe, is the good and the bad.
The crucial element for UKTI, which I do not believe it is doing yet but is very well placed to do, is to bring this figure of, we believe, 20% of UK SMEs who do not export up to the German average of 29%, or the EU average of 25%-in fact, globally, it is 29%. That is despite the fact that Britain is a very good exporter; its MNEs, by and large, are punching above their weight. But all the time that the average of SMEs exporting is down, we are not going to make the inroads into the deficit and so on that we should. UKTI should, metaphorically, be knocking on the doors of SMEs who do not believe they can export. They believe there are barriers to export. These barriers, by the way, are exactly the same in Germany and France and so on, although-and you may come to this-I believe that the German export trade promotion system model is a good one and, indeed, involves their running of German chambers of commerce overseas. But UKTI has a bigger role to play, I feel.
Q60 David Ward: There just seems to be a gap here. We were looking at a UKTI brochure when we were in Brazil-their publication-and it said that, if you are a small business, you should almost forget Brazil because it is such a difficult place. I raised this issue in the meeting, and they said, "Well, we have to be honest with people." Is there a reluctance, do you feel, to engage fully here because the support that is required for small businesses is beyond the ability or the remit of UKTI in this country?
Peter Bishop: There is certainly more ability within UKTI now to give the one-to-one advice on breaking into even difficult markets like Brazil than there has ever been. The introduction of international trade advisers is relatively recent; it is 10 years or more, but there was nothing before that.
As to whether it is right that small businesses cannot break into Brazil, no it is not. Our last trade mission to Brazil was full of SMEs. Brazil, as I am sure my colleague on the left would say, is a country where partnership is key. You are not going to go and do it on your own, but if you find the right partner, yes, you can, so small businesses can find partners too.
Q61 Chair: Can I just ask you a couple of other supplementary ones? Do you feel that the extra money that was put into UKTI in the autumn statement is delivering?
Peter Bishop: It has not touched my agenda, so I do not know.
Q62 Chair: Right, okay. Have you any particular comments about or experience of the Passport to Export and Gateway to Global Growth schemes?
Peter Bishop: Our experience of them has been good. Again, they rely on the past experience of people who have been at the coalface-the ITAs. I would like to see them do more of that-the ITAs-and be less involved in taking trade missions. That is what the trade associations and the chambers do. We are the not-for-profits. We do not take trade missions as a profit centre; we do it because we think that is what chambers should do. We want the ITAs to come on the trade missions, sit beside the exporters on the plane and be there in the days that our small firms are there, but we do not want them wasting their time organising them. Let the private sector or the chamber TA sector, which is the grey world in between charities and not-for-profits, do that.
Q63 Chair: Just as a supplementary to you, Mr Bishop, comment was made when we were in Brazil that, in effect, the German equivalent of the Chamber of Commerce there was very active and worked very much with German export organisations. It is not the same in terms of the British Chamber there. Do you feel that there is more that you could do as an organisation to supplement the efforts of UKTI, and is there anything that UKTI could do that would make that easier for you?
Peter Bishop: The German system, as I said, is very different. The German Brazilian Chamber of Commerce is something like 90% funded by the Government, whereas the British Brazilian Chamber may have some money from UKTI, but it will be a small proportion and the remainder will be paid for by Shell Brazil and other UK firms there. It is a voluntary system; it is the private law status system of Chambers of Commerce, as we have here in the UK, and the public law status in Germany. I am very fortunate to have experience of many British Polish, British Turkish and so on chambers around the world, and they do a lot with a little. Should they get more Government funding and do more? Yes, in cahoots with UKTI. For example, China is a good one, because of course you have the CBBC, which is a genuine publicprivate partnership, and that works.
Q64 Chair: I do not want to put words in your mouth, but if some of that money that was used for UKTI came your way, in effect, that would enable you to strengthen your offer.
Peter Bishop: I think so, yes.
Q65 Chair: Is that a reasonable comment to make?
Peter Bishop: It is, with the caveat that of course UKTI is UKTI everywhere. Every chamber is independent from every other chamber, other than the World Chambers Federation, which is an umbrella organisation for chambers worldwide. It certainly has not got any control on chambers, so there would be difficulties in that.
Q66 Chair: Have the other speakers any comments on that?
Clive Davenport: We feel that we are really comparing apples and pears here. If you look at the performance and the infrastructure, and the whole way that the German system runs, it really is no surprise that they are the strongest member in Europe at the moment and are likely to be for some considerable time. That is because they have a system geared to exporting their goods and giving added value into their country. That is what they are solely geared to do, and ours could be said to look, by comparison, a little amateurish-a little disconnected. The statement that we want to double our exports from £2 billion to £4 billion is a great start, but it is only a statement. Doing it is not quite the same thing-it is not quite as easy.
Chair: You have touched on my next question.
Clive Davenport: Sorry.
Q67 Chair: That does not matter, no, no; it preempts them. I will alter my next question, which is basically: what are the Germans doing that we are not doing, but could and should do?
Clive Davenport: I think the biggest thing is that they have had this system running for some considerable time. They have honed this down to a very efficient machine now. They have extremely fast, focused feedback systems, which we certainly, at our end-at the small business end of the market-do not see happening, and that is the problem we have. UKTI really is not set up as yet to be able to go out and engage one to one in the same way that the Germans engage through their chambers with their small businesses. That is the difference. It is not just the federation that has heard that; we have heard that from several different sources.
Q68 Chair: Is that partly because, basically, the German chambers system is far better developed, if you like, than the British?
Clive Davenport: I think the chamber system in Germany is integrated virtually within the Government system, and that is where the disconnect is, I think, in this country-that it is a voluntary organisation. It is not that I have anything against voluntary organisations, but if we are going to focus on something and achieve a result, let us focus on it and achieve a result, instead of just saying, "We have always done it this way." That is not good enough in the 21st century. We cannot do it that way anymore. We have to compete like for like, and until we do, we are not going to get very far.
Q69 Chair: Mr Bishop, have you any comment on this?
Clive Davenport: I am sure he has.
Peter Bishop: UKTI is within the German chambers. That is the difference. It is a coherent and very, very well-funded organisation because it is mandatory for every German business to be a CCI member. I am not saying that we want that, because chambers of commerce in the UK, by and large, value the independence that they have. There is a hybrid version in Romania, by the way, where the chambers of commerce are responsible for company registration, which funds them, but it is not mandatory for any firm to join them. So they have some independence, and they certainly have to make an offer to businesses to entice them to join and stay members. That might be a model worth looking at.
Q70 Chair: Okay. Could I just finish off my questions? UKTI has made a target of doubling exports to Brazil by 2015, as you mention. I think, following our visit, we are slightly confused, and you may be also-I do not know. Is this, if you like, conventional exports from this country to Brazil or, if you like, increasing the turnover of British manufacturers in Brazil? Can you offer any view on that?
Jon Coleman: I do not have anything on that.
Jaime Gornsztejn: I think it is probably exports from the UK to Brazil, because if you consider turnover of British companies in Brazil, it is much more than that, so I believe it is increase in exports.
Q71 Chair: Yes. We had some confusion, but your interpretation is that this is conventional exports.
Jaime Gornsztejn: Yes.
Chair: From this country to Brazil.
Q72 Paul Blomfield: Mr Gornsztejn, we had a very useful meeting with your President, Mr Coutinho, and his senior team in Sao Paulo, but I wonder if I can just explore some further issues. Could you perhaps share with us what particular aspects of the UK as a trading partner interest you in your capacity as the London head of BNDES?
Jaime Gornsztejn: What I see from my contacts with British companies is that there is a lot of complementarity between the Brazilian economy and the British economy. Because of that, there are many opportunities for partnerships and, through partnerships, to increase exports and increase the flow of trade in general. So, in terms of specific sectors, the driver is innovation and technology. It is strategic for Brazil to increase the level of innovation in the economy, but also Brazil is a growth market, whereas in the UK there are many companies-large, small and medium-sized-with very high technological content looking for growth markets. So I think that is where we can find the complementarity between the economies.
Some other sectors are biotechnology-I think there are many opportunities in biotech-and pharmaceutical, not to mention oil and gas, of course, but with oil and gas not just the major exploration production companies, but the whole supply chain. That is coming back to the question about how SMEs can break into the Brazilian market. Of course, that does not apply to all of them, but in many cases it is through the supply chain. For instance, if you have an SME that is a supplier to BG Group or to RollsRoyce, that is a way for them to break into the Brazilian market-through those major companies that are already well settled and growing in the Brazilian market.
Q73 Paul Blomfield: I think you make an interesting point about the supply chain. We were exploring with companies there the understandable requirements for local content. Do you see any potential conflict there?
Jaime Gornsztejn: No, I see an opportunity there, and because there are many British companies already with a strong presence in the Brazilian market and they can comply with those requirements of local content, there is an opportunity for them also to bring their suppliers on board. So I do not see a conflict; I see an opportunity for companies, such as BG and RollsRoyce, which are already present in the market.
Q74 Paul Blomfield: Indeed, we had very productive, useful meetings with both BG and RollsRoyce. What advice would you give to UK businesses who were interested in expanding their business with Brazil?
Jaime Gornsztejn: A colleague mentioned that partnerships are important. I would say companies from other countries have been more active in the past, say in the last 10 years or so. We had a big privatisation programme in Brazil in the 1990s and most of the assets at that time were bought by French, Spanish and Portuguese companies. But now it is a new stage in the Brazilian economy, so there are new opportunities arising for the privatisation of airports and infrastructure. For new entrants into the market, I think it is very important for them to partner with a local player otherwise it can become difficult. If you are a newcomer into the market and you are a mediumsized company or a small company, I think it will be much easier, if it is possible, to partner with a local player.
Q75 Paul Blomfield: I think that is confirming a very strong message that we got talking across the board to different stakeholders while we were there. Do you think there are things that we can do better as a country, either as a Government or UK businesses, when you compare us with those countries that have been more effective in engaging? Are there specific things we could do better?
Jaime Gornsztejn: I think, by and large, that British companies should be engaged more with Brazilian companies, the Brazilian Government and the market. As I see companies from other countries, they have a stronger presence there. They go to Brazil more often, they make more trade missions, and so they are more engaging with the local companies and local authorities. They exploit the market, I think, more effectively. Also, from this side, I see a lack of information about Brazil. The Government does a lot and UKTI does a lot.
The Brazilian chamber also helps in this effort in disseminating information, but many companies come to me, either in my capacity in the Brazilian Chamber of Commerce or head of BNDES, and they say, "I know that Brazil is a growth market that offers many opportunities," but other than that they have no idea that Brazil is not just Rio or Sao Paulo; it is a huge country with regional differences. It is not just a commoditydriven economy. Brazil also exports aircraft, and there are some British companies that are suppliers to Embraer, so when Embraer is exporting a Brazilian aircraft, there is UK content in there, so we are also increasing UK exports indirectly.
Today, the economies are much interconnected, so it can be tricky to measure how you increase exports. Sometimes it is done indirectly when you have a partnership between a UK company and a Brazilian company and there is UK content in Brazilian exports, and, vice versa, there could be Brazilian content in UK exports as well.
Q76 Chair: I want to follow up those points with two further questions, and perhaps Peter Bishop may be better qualified to answer them. Should trade associations, UKTI or some other body be actively looking, if you like, to seek potential British and Brazilian partners to develop trade?
Peter Bishop: All three of them do undertake certain activities in finding the right partners-that word again-for British businesses in Brazil and, indeed, other countries. They do it seeing, first and foremost, Brazil as the market and not necessarily a joint venture in order then to sell into Latin America, Mexico and so on-not actively, as far as I am aware. I do not know if you two would think otherwise. From our perspective, getting SMEs to look at Brazil is not that difficult anymore because of the emergence of BRIC, the CIVETS and so on. They are markets that wouldbe exporters do look at once the idea of exporting has been taken to them in the first place.
Language is a big difficulty in Brazil, of course, and that is something that I think UKTI needs to look at more. It used to run a very good campaign called the National Languages for Exports Campaign where it put over the message that the lingua franca of business is the language of the buyer; I am sure that had some impact, but it has not happened for a while.
Q77 Chair: Yes. Without wishing to sound facetious, is there scope for setting up an international business dating agency to carry out this partnership exploration role?
Clive Davenport: I personally think that that would be an excellent idea. Let me reinforce what was mentioned earlier about the perception of Brazil as being Rio and Sao Paulo. Embraer is the fourth largest aircraft manufacturer in the world, but how many people know that? This is the sort of thing. There is a huge market there-huge potential. I exported filtration units to Chile, and before I left the organisation I am talking about, the next step was going to Brazil, because it was such a huge market. The problem we had was a language problem; that was one of our restrictions, but we managed with Chile without any problem at all.
Jaime Gornsztejn: You manage with China.
Clive Davenport: Absolutely. As far as small business is concerned, 20% of our members-50,000 businesses-export. Some 87% is to Europe, but 11% is to South America, and we are doing further surveys towards the end of this year, which will give you a lot more information. We will send those across to you as soon as we get the results.
Q78 Chair: Good, thank you.
My other supplementary is for Mr Gornsztejn. Given that your bank is heavily involved in business investment in Brazil and you have an office here, and that a huge number of SMEs declare that they have a problem in getting business finance not just to export but to invest, is your bank willing to invest in British domestic SMEs in order to expand their capacity to export?
Jaime Gornsztejn: British companies that operate in Brazil are eligible for financing from us, so their Brazilian operations are eligible, but not directly here. So that will be financing for a subsidiary or a joint venture established in Brazil.
Q79 Chair: I am not sure if I have got this. Do you invest in British SMEs irrespective of whether they export-
Jaime Gornsztejn: No. We finance them in their operations in Brazil, so if they set up a manufacturing plant in Brazil, we can finance that.
Q80 Chair: I am trying to tease out whether your bank would be prepared to fill the gaps, if you like, that so many British banks, we are told, will not.
Jaime Gornsztejn: We can fill the gap if there is, for instance, a joint venture between a Brazilian company and a British company. That is something that we are ready to finance. Mainly if it is driven by innovation, by technology, we are open to finance it, but because we are owned by the Brazilian Government, we are policydriven.
Q81 Chair: It might be, shall we say, a positive selling point that if you have some sort of joint partnership, you might get more investment.
Jaime Gornsztejn: Absolutely, yes, we want to encourage that.
Chair: That is helpful.
Q82 David Ward: I know this may seem slightly repetitive, but it is all about building layers. It is obviously very important for us to evaluate the "effort in, benefit out" of whatever we are doing, wherever we are doing it. We were at the APPG last night, where Mongolia was suggested as the place we ought to be, and some other suggestions came forward as well. I think we have a feeling for this, but just how tough is Brazil-we know the World Bank rankings and so on-as a challenge, and how great an opportunity is it for us?
Jon Coleman: Certainly from our members’ perspective, it is a big opportunity. It is a large and growing market. All markets are different, and Brazil certainly has certain characteristics that do mark them out depending on sector, but certainly underlying is the requirement for local Brazilian involvement in the export programme, so we have a member in the oil and gas area who has to have, almost as a prequalifier when bidding, anything between 50% and 60% Brazilian content in his export contract. That is not necessarily, in that particular sector, in high-tech areas of that supply chain, but there is a requirement to involve Brazilian industry. To be honest, that is the nature of the market, and all you can do as an exporter is to address the market requirement. I think the exporters generally view it as a large market and a growing market. It is not a traditional export market inasmuch as you might have 90% UK content in your export sale, but the rules are there and you have to abide by them, obviously.
Elsewhere, our defence members clearly see Brazil, with the largest defence budget in Latin America, as a key market. It is prescriptive in its nature. The Brazilians, quite naturally, have a requirement to maintain selfsufficiency in terms of technology and capability, so the onus is on the UK exporter to partner either through a JV or through a partnership arrangement or maybe, depending on the nature of the sector you are in, to purchase of a Brazilian company in order to be able to access the market. There was a law introduced at the beginning of this year-I think it was Law 12597-where the Government has moved that stage a little bit further forward and said they want to identify essentially strategic products and systems for the defence sector. For those, they will be looking to purchase through Brazilian entities. So I think the exporting model for UK exporters is shifting a little, certainly in the defence sector.
Peter Bishop: Can I add to that? I would say, leaving aside the challenges of language and culture and some isolated high tariffs, that it has not got exchange controls. It is not the unliberalised market that we associate with the Latin America of x years ago, and it is a signatory-this has made exporting easier-to the Istanbul convention on the temporary import and export of goods for trade fairs, exhibition, samples and so on. For British exporters, that is a great trade facilitation tool, because it means they can take their goods and wares into Brazil without any customs bonds and so on. It is also a very big message to the world from Brazil that they are open for business-that they want trade in and, of course, they want trade out. So the ATA Carnet, which the Istanbul convention runs, is a great boon to British business.
Q83 David Ward: Just for the record, what would be the direct things that you are doing for your members to encourage them to invest in Brazil?
Peter Bishop: There is a great link, of course, with London 2012 and Rio 2016. We will be taking another trade mission at the end of this year and, by the way, all the sectors that you mentioned-
Chair: The next question is going to be covering this area. Is there anything else you want to raise, David?
Q84 David Ward: We have touched on the links with the German comparator. Is there anything else in terms of the chambers-differences between ourselves and the German relationship connection there? Is there anything to add to that?
Peter Bishop: If you go through the phone book in Porto Alegre, it is all German names. The social links and the family links with Germany are very, very strong.
Q85 Julie Elliott: On the Olympics, the FSB has observed that the Government should make the most of the Olympics handover in small business terms-the number of contracts available, the website being used-and that might mean encouraging big business to partner with small or encouraging consortia of SMEs. Can you expand on your position on how to develop the Olympics handover business through consortia?
Clive Davenport: We were quite pleased as far as the Olympics in this country is concerned because small businesses had 75% of the contracts, which was excellent. That was in volume, not in value, I must add. There has been a good working relationship, and I think that is a very strong base we could use to move into the Olympic situation as far as Brazil is concerned. I think that is a very good opportunity. The focus has to be on the larger consortia-to encourage them to do that-because, as my colleague was saying, there is a lot of business to be had in that area, in the construction industry, and it is up to us to stand up to the plate and do something about it, and also to make sure that small business is engaged with it all the time because there is a lot that they can do.
One of the issues that we have is that we constantly talk about high tech and that high end of the market, and there are a lot of other things that Britain does. Although I am in a high-tech business-computer controlled machining-that does not mean to say I do not appreciate that there are a lot of other businesses around that do a lot of other things that could quite easily do a lot of business with Brazil, if they knew they were there.
Q86 Julie Elliott: What kind of things?
Clive Davenport: Thousands of different things. The defence industry, personal armour-very little personal armour goes into the Brazilian market. We are extremely good at doing that sort of thing. We could be doing a lot more.
Chair: I am going to bring in David Ward again on Export Finance, some of which we have already discussed, so please do not go over old ground.
Q87 David Ward: My question is for Jon on the submission from the BExA. We have had some comments through saying that the SME sector would benefit from the simplification of UK Export Finance documentation and a greater focus from UK Export Finance on SME needs. Just expand on that for us, if you will, please.
Jon Coleman: There are two sides to it. One is purely on the documentation. To illustrate it, I think the application form for the new bond issue support product that is in existence is 33 pages long. If you look at other ECAs and their documentation, you are looking at maybe a six or seven-page document, so it really is simplification of the documentation process. It is very offputting, particularly for a small business, to have to wade through 30 pages when there is probably only about one page in there that is key to the process.
I think generally that BExA views UK Export Finance still as having a tendency to speak and listen to bank needs and bank requirements more than necessarily getting it from the horse’s mouth, so to speak, in terms of the exporter needs. At the end of the day, it is the exporter who is the customer or the client of UK Export Finance.
Q88 David Ward: That, then, is linked to the next question, which I suppose is really about the level of support and advice that is available. I think, Clive, that the FSB has commented on this in terms of being aware of the regional rollout of the regional trade advisers and that it is going slowly-you mentioned that earlier on. How much of a drawback is this to us?
Clive Davenport: I think it is a severe drawback as far as small business is concerned. I am not being patronising, but small businesses need a lot more handholding than very large organisations. Larger organisations have the infrastructure within them. If a decision has been made at board level that they are going to export, there will be an organisation within the company that will set that up. But in small businesses, as I am sure you are aware, the manager is the one who also makes the coffee, at the end of the day, and he has to do an awful lot of things. So it is a very good thing if we can get trade organisations like the finance and UKTI to engage more.
I was talking at an allparty meeting last week about Export Finance, and there was someone there who was selling papermaking machinery to China, which is a bit like selling sand to the Arabs, but he had managed it. The reason why he had managed it was that the then ECGD guy had physically walked him through the paperwork. He said when he first had the document he virtually put it straight into his out tray because it was such a huge document with so many different variations on it. It was only when the guy came in and said, "You do not need to do that; just fill that in there, do this, do that," that the job was done and the finance guarantee came through virtually straight away. That is the difference. You have to get that sort of engagement so that small businesses have confidence to be able to move forward, and that is what is needed.
Jon Coleman: When you go through the application process, we do have at the British Exporters Association an issue with the exit product just in terms of the nature of the policy coverage. There is a certain amount of ambiguity in the policy wording, which we would like to resolve, hopefully during the review process. It is really around a London market policy being seven or eight pages and very clear, just like your car insurance policy: what you are covered for, what you are not covered for and what your responsibilities are. I think the current wording in the document tells you what you are not covered for and what your responsibilities are, but it is a little bit ambiguous in terms of the real nature of your cover, particularly for insolvency, which is key for the smaller exporter coverage. So there are technical areas in the documentation that we would be keen to look at.
Peter Bishop: What we hear, but I bow to the expertise to my right, in the world of export credit, or the old ECDG world, is, "Fine, it’s nice to have a revamped organisation, new products and so on, but does it compare with COFACE or with our competitors who use Euler Hermes?" I know there are state aid rules and consensus rates and so on, but the concern or fear or possible belief is that we are overcomplicating how we provide export credit insurance, and that it is not the same way they do it in France, Germany and elsewhere.
Q89 David Ward: Has this been affected by the demise of the RDAs?
Peter Bishop: No impact at all.
Clive Davenport: No, I do not think so.
Q90 David Ward: So it is unconnected, because obviously somewhere we are building a new structure up with the LEPs and so on. Is that connected? There are two, I believe, that have so far moved forward and are set up, but there are seven that are not, or is it just totally unrelated to the development of the LEPs?
Clive Davenport: Most of the LEPs are semivoluntary, certainly from the federation’s point of view, and you can only ask so much of volunteers. Without being disparaging at all, we are coming back to amateurism. We have to get this much more professional. We have to put our money where our mouth is. If we are going to export, let us invest in it and do it properly, because if we do not we are just going to get left further and further and further behind. Other countries have demonstrated quite admirably that, if they invest, they get results. It is not just Germany; there are a lot of other countries that do that and that is the way it has to be done.
Q91 David Ward: Just to finish my series, because I think you mentioned Export Finance, should UK Export Finance be opening £1 billion lines of credit for Petrobras’ investment?
Clive Davenport: Yes, I think so, yes. A simple, straightforward answer: yes.
Jon Coleman: It certainly should be. It is what the ECDG should be doing. I think, as I mentioned early on, there is the issue of underlying financing under that guarantee if credit terms are required.
Chair: Sorry, could you speak up?
Jon Coleman: Sorry. The ECDG guarantee and the credit line we are certainly all in favour of. I think there is the issue that if credit terms are required with exports supported by that credit line, will the underlying bank financing be available to make use of that guarantee?
Q92 Chair: Can I ask Mr Gornsztejn if he has a contribution there, given his position?
Jaime Gornsztejn: I think this is very positive. There is much equipment that Petrobras imports from the UK and this ECDG guarantee will make them more competitive in the Brazilian market. The Chinese just opened a 10-billion line of credit for Petrobras.
Q93 Rebecca Harris: I would just like to go back a little bit, because obviously this Committee has already done an inquiry into the abolition of the RDAs and the development of local enterprise partnerships. What experience have you had in your relations with the new LEPs in terms of them pushing exports?
Peter Bishop: Very little. You made the point, Clive, that it is about partnerships that exist now. If they have a particular international trade bias or bent, then fine. I spoke to somebody close to LEPs yesterday and they said that if you can take the area of LEPs as a whole, their three priorities are infrastructure, skills and planning. I said, "What about international trade?", and it was, "Not really an issue."
Clive Davenport: LEPs are a very mixed bag. There are a couple that are quite keen, but in most of the others very little at all, if anything, is happening.
Q94 Rebecca Harris: I want to talk a bit more about, in particular, the difficulties that we have discussed about doing trade in Brazil and how your membership, your companies and firms, might be responding to that. We heard a lot about the difficulties of doing business in Brazil, including tax and accounting. How are your members taking on the local challenges of those issues and how much are they deterred by them?
Clive Davenport: There is still a great deal of confusion and the whole system needs to be more focused than it is now, that is for sure. It is not functioning properly at the moment. There have been an awful lot of changes in the whole structure, certainly in England. In Wales, where I live, we have not had that structure for some time. Generally, everything goes back down to the Government, so it is slightly different there. Having said that, we do not seem to have a great improvement in our export performance anyway, even if it has gone back to Government, so I am not quite sure where we are going to go with it.
Peter Bishop: We have had two or three seminars on Brazil in the last year and a half-so, one every six months-sometimes partnering with the Brazilian chamber and with UKTI as well. We took a trade mission to Brazil last August; we will take one after the games this year, which will focus on opportunities in Rio 2016. This is, I hope, a good example of publicprivate sector partnership, but with us doing that and then the Government supporting that businesses get through one-to-one sessions with ITAs, that should make a difference in individual cases. If I could just repeat, though, we need more SMEs aware that they have things that are potentially exportable and the Government can help with that.
Q95 Rebecca Harris: Given it is quite clear that to operate in Brazil you need to have a local partner, what is your view of having a local partnership, working in partnership in order to export to third-party nations?
Jon Coleman: Certainly, if you can develop a JV or work with a local partner and develop a product that is both for the domestic Brazilian market and then is exportable and has UK content in it, almost the spinoff is that it is a winwin in that sense. Certainly, the example of Embraer was given, and that is a very good example of where there is UK content on Embraer aircraft, and that is an extra UK export.
Q96 Rebecca Harris: Given all the local content rules, how do we judge that, when we are operating in Brazil, we really are increasing our exports, given the level of local content rules that are required in Brazil? How does Britain judge we are really making an impact for UK plc?
Jon Coleman: To a large extent, I think the view from individual members would be that it really almost comes down to individual programme and individual product, and what the key technology is that you want to maintain as your core base and what you are going to develop in that market. Leading out from that, what does that mean in terms of local content? I would say it is difficult to be prescriptive in that sense, but it really is probably programme by programme and particular opportunities.
Peter Bishop: I would say the things you are looking at are doing business, employing people and earning foreign currency-trying to get the trade deficit narrowed-and whether and how that involves local partnerships, so be it. That is the route.
Jon Coleman: If you have to engage, those are the rules, and if there is a requirement for an element of local content, you have to look at it as the additional opportunity for UK export and UK jobs associated with that sale.
Q97 Rebecca Harris: How big an obstacle are those local content rules for getting an encouraging rate of supply chain follow-through into Brazil on the back of the big boys-the JCBs, etc?
Jon Coleman: It can be difficult, I think. It can be difficult to identify the right partners and those that can step in to work and produce the product to make up the local content. There is probably an element of risk in terms of identifying the right local suppliers to maintain your programme, so that is difficult. There will then be a tradeoff, perhaps on cost as well, depending on that local supplier’s learning curve to get up to speed to produce whatever element of your programme they are producing.
Q98 Rebecca Harris: I wanted to ask the Brazilian perspective here on Brazilian employment law and the tax challenges, and how you think they might develop in the future. Do you think there may be changes? We are told that there is an incredibly complex tax system and some quite complicated employment rules. Do you see those developing in future?
Jaime Gornsztejn: There have recently been changes in many sectors in terms of simplifying the tax on employment and taxation on payroll, so in a number of sectors this has become much easier-much less complicated. That is part of the effort by the Government to increase the competitiveness of Brazilian industry and Brazilian business. In other respects, the progress is slow in terms of employment law, but I do not think it is much more complicated than other growth markets. There are challenges, but it is important, in addition to having perhaps a local partner, to have local advice. You need local advice. It is not just the rules and the employment law that businesses are used to dealing with here. Of course they could be different in Brazil, so you need to have local accountants and lawyers, and I do not think that is a major obstacle for companies doing business there. It is not easy, but it is not an obstacle.
Q99 Rebecca Harris: What do you think the prospects are for us eventually sorting out our double taxation situation?
Jaime Gornsztejn: That is a difficult question; I do not know the answer. It is not easy. Negotiations have been going on for a long time. The Brazilian economy is gradually opening up; it is becoming more international. The flow of trade is increasing, and when you have not just more inward investment into Brazil but more outward investment from Brazilian companies overseas, the value of a double taxation agreement will become more evident for both parties.
Q100 Rebecca Harris: What is your hunch about when that might be?
Jaime Gornsztejn: There is a lot of momentum in terms of Brazilian companies investing overseas; that is definitely a trend of the Brazilian economy, not just in Petrobras or the big mining or oil and gas companies, but for sizeable companies in engineering, food-beef-and machines and equipment. They are increasingly setting up subsidiaries overseas or joint ventures. When they were only inwardlooking-only focused on the domestic market-there was not much value in the double taxation agreement, but now I am sure that this will become more evident.
Q101 Chair: There would seem to be a logic that, as Brazil invests more overseas, the relative advantage or disadvantage from the current taxation system changes. Do you feel that the level of export finance to other countries is reaching a point where it will bring pressure on the Government and, indeed, is there pressure from Brazilian companies that want to export abroad and invest abroad on the Brazilian Government to change their current arrangements?
Jaime Gornsztejn: In terms of double taxation agreements?
Jaime Gornsztejn: There is, yes. There is pressure. I think there is growing pressure and that the pressure will grow as companies become more international.
Peter Bishop: Also, Chair, there was pressure from the business community in Brazil for the Government to sign the Istanbul convention, which is a trade facilitation one, but it shows a propensity, as I said, to be seen as a global world business-in and out. So I would have thought that that is a good sign for the double tax agreement.
Q102 Chair: Yes, that raises another issue: Brazil wants to be a major world economic player. Can it really fulfil that role without some sort of taxation arrangement?
Jaime Gornsztejn: This is a fairly recent trend in the Brazilian economy, as I said. Because Brazil has such a strong domestic market, many companies are comfortable with that market, but increasingly we see companies that have a strong position in the Brazilian market looking for opportunities overseas. They have access to new markets or to technology, and as they become global players, I am sure they will put pressure on the Government to change or improve the taxation schemes with other countries-at least with the main trading partners.
Chair: I have rather overtaken some of Rebecca’s questions. Is there anything else you want to ask?
Rebecca Harris: No, I think that is me done.
Q103 Julie Elliott: During the visit, we heard time and time again of Brazil’s wish for technology transfer. Particularly to you, Jon, are your members taking this on board strategically, not just for Brazil but globally?
Jon Coleman: I think our members are going to have to, given the nature of the requirement. I think it will depend on individual programmes and requirements, but clearly technology transfer is key to being able to access this particular market. If you do not offer it, you will not get into the market. I think that has moved over the last few years. Our European competitors in the defence sector were successful, particularly in 2009, with very large value deals where there was an element of technology transfer and an element of local content. But I think that has moved on almost a further shift forward, and there is now a requirement to provide technology and to develop technology jointly, and it is a matter of identifying the right model for the particular programme-what technology is required? Clearly you have to have that required technology in the first place. What is the real market capacity in Brazil? That will be a factor. What is the overall benefit of the programme to the exporter and, indeed, are there future export opportunities out of Brazil if you were to set up a joint venture and develop jointly a technology with your Brazilian partner? It is a different approach to a traditional export, but the requirement is set, so you have to address it.
The other aspect is you need to know where you are going in the supply chain. If you are going in directly to Government and you are working at that level with a national, strategic supplier, there is going to be one approach. If you are providing technology at a lower level in the supply chain, I think the question to be explored is: what are the partnership requirements at that level? It is probably going to be more project or component or systemspecific, rather than more of a general technology.
Q104 Julie Elliott: I suppose the other side to that is: what is the risk that technology transfer to Brazil will jeopardise UK competitiveness?
Jon Coleman: I think technology development in the UK, depending on the sector, is really driven by Government investment in technology and private investment. Having developed those technologies, I think companies are clearly very careful to protect their key IPRs and their key capabilities, so they are not going to compromise their core technological position. It may well be that the opportunities in Brazil do provide an opportunity to further develop that particular technology for that particular application, particularly if the customer requirement is specific and different to the UK. So I do not think our members necessarily see that we are going to lose all our technology by entering into this transaction. It is a matter of considering what you are happy transferring, what the requirement is, what needs to be transferred, and getting comfortable with that in the overall context of your own business.
Jaime Gornsztejn: On the issue of technology transfer, I think we would like a more positive mindset. It is not technology transfer but rather joint technological development. What we see today is, for instance, BG Group setting up a research centre in Brazil. That is not about technology transfer but about joint development with Brazilian scientists and universities. There are other examples as well: General Electric has set up a research centre in Brazil, as have IBM and other major corporates, and Boeing has now set up a research centre in aviation biofuels. That is not just transferring technology and protecting it-"We are going to transfer the minimum possible just to comply with the requirements and then protect the most." I think a better mindset is: "What can we do together?" because there is technology available in Brazil, and some of the technology developed in Brazil is not available here. So what can we do in terms of joint development of this technology, not just protecting what we have?
Q105 Chair: Can I just follow that up, because Brazil itself is investing in R and D, and my interpretation of what you have said is that there is potential for British companies to benefit from Brazilian R and D by setting up partnerships within Brazil? Is that reasonable?
Jaime Gornsztejn: Yes, absolutely. There are many areas of expertise; for instance, biofuels, oil and gas, of course, and pharmaceuticals. It is a case of identifying a partner in a Brazilian university or research centre that has technology that would complement what is available here, and then we can use the technology here with what is available in Brazil and then see what we can do to further develop the technology.
Q106 Chair: Have any of the other speakers any views on this?
Clive Davenport: My personal view is yes. I have always been hugely impressed by Brazil’s whole attitude to the aeronautics industry and the way it has moved forward. Embraer started life building Piper aircraft under licence, and look at it now. That is phenomenal and I cannot overstate that enough. The other one is satellites. Initially they were doing it with NASA; now they are doing it on their own. That is incredible-really incredible.
Jaime Gornsztejn: That is a good point about satellites.
Clive Davenport: They have their own geostationary system.
Jaime Gornsztejn: Yes, and we have a partnership with China and another partnership with Ukraine in terms of satellite launching. There is a very specific location in the north-east of Brazil that is very suitable for satellite launching, because you save on fuel; it is a very specific but very special location in terms of satellite launching. It is a technology that is available in this country in terms of microsatellites for identifying climate change problems, so that is an interesting area-aerospace and satellites.
Q107 Chair: Can I just supplement that with a general question? I think there was some concern, particularly in the defence area, about the fact that in some areas we were exporting expertise and setting up facilities, and developments in Brazil meant we would be setting up, in effect, a rival centre of excellence that would compete effectively with the indigenous British industry. Have any of the business community any comments on that?
Clive Davenport: Personally, I think competition is a good thing. We have to remember-this is not that long ago-coming back to aircraft again, that the original prop trainer we were going to buy was the Tucano. We did not in the end; we stuck with our own, but we were seriously considering using the Brazilian model, and that shows you the level that the MOD is at. It realises that there is a market there and that there are things that it can do jointly that can make the whole infrastructure function better. I am also, for my sins, on the MOD Small Business Committee, and what are we going to do about those areas and where are we going to go has been openly discussed there and has been for nearly a year now. It is a very positive approach because there are certain areas in the world that are perceived to be threats and there are certain areas that are perceived not to be threats. So if you have an intelligent nation that is not perceived to be a threat, you have an opportunity, which is the standard British trait, to go out there and trade with them.
Peter Bishop: We would see it very simply as an example of globalisation.
Jon Coleman: I would say, very much in line with Clive, that there are opportunities. I do not think you look at it necessarily as building a competitor; you are building a partnership and, hopefully, you will leverage that partnership in the future to the benefit of both the UK party and the Brazilian party. Some of these developments, particularly in large-value defence projects, take time and commitment, and they are longterm programmes, and really the benefit of them-not necessarily off the back of the original programme-is working together for future programmes, be that exports out of Brazil in conjunction with the UK, or export out of the UK with content coming from Brazil.
Q108 Paul Blomfield: Mr Gornsztejn, you have two roles in relation to the bank and also the Brazilian Chamber of Commerce here in London. I wonder if we could explore that latter role a little bit and if you could outline to us in a bit more detail the activities and the priorities of the chamber.
Jaime Gornsztejn: The Brazilian Chamber of Commerce was founded 70 years ago. Today we have about 220 members: Brazilian companies with business in the UK, and also British companies with business in Brazil. The sectors range from mining, oil and gas, and energy, to professional services, legal services, engineering, insurance, and banking. In terms of size, they are the major corporates but also SMEs. We do not have funding from the Brazilian Government or the British Government, so we are funded by membership fees from our members.
In terms of activities, chambers of commerce vary-there are different models. As we are small compared with, for instance, the Chinese chamber-small in terms of structure and resources-our focus is very much on disseminating information and raising awareness. We do not provide tailormade services like consulting services, as some chambers do. We try to raise awareness and to generate networking opportunities in the main sectors that we identify as key in bilateral trade and investment: energy, biofuels, the Olympic games, major sporting events, financial services and legal services, for instance. We organise seminars on those sectors, but also briefings on the Brazilian economy in general. Every time there is a Brazilian Minister or a Brazilian business leader coming to London, we try to organise a briefing and bring members of the chamber and guests to have a firsthand report on what is going on in Brazil or new developments.
We also have a very good relationship with UKTI and the commercial section in the Brazilian embassy. In terms of UKTI, often members of the chamber join trade missions, so we make an effort to engage our members in the trade missions. Some of our events are also sponsored by UKTI, and our links with the commercial section of the Brazilian embassy are also very good. Often when we have a request for a tailormade service, almost like a consulting service, we direct this enquiry to UKTI or to the commercial section in the Brazilian embassy, depending on the subject.
Q109 Paul Blomfield: Do you find that relationship with UKTI productive? Could it be better? Is there anything that would enhance it?
Jaime Gornsztejn: It is good, but it could be better. We could do more with UKTI. We could leverage on the UKTI network in the country, because, as I say, we have a very small structure and we are based in London, so it is difficult for us to reach companies who have an interest in Brazil but are based outside London. I think that is an opportunity to partner with not just the network of UKTI, but other regional chambers of commerce. I think that is a point of improvement and something we can work on to be more effective in terms of reaching businesses; for instance, in Newcastle there are many companies interested in Brazil, and, in Scotland, companies in the oil and gas sector.
Q110 Paul Blomfield: You mentioned you had run joint events with the London chamber. Have you done that with other chambers around the country?
Jaime Gornsztejn: No, not yet; it is on the todo list, certainly.
Q111 Paul Blomfield: It is on the todo list, okay. Is that something the British chambers and UKTI could help you with?
Jaime Gornsztejn: Yes, certainly they could help us with that. A couple of months ago, we organised a seminar in Aberdeen together with HSBC and UKTI, so we were partners in that initiative. For us, the only way to reach companies outside London is by partnering with regional chambers of commerce and UKTI, so I think there is room for development in this area.
Q112 Paul Blomfield: That is something you have identified you could do as an organisation. Are there more things UKTI could do to help to build the relationship from our side?
Jaime Gornsztejn: It is already very helpful, but I think we need to work more closely with UKTI. In the past we were more active in terms of trade missions. For instance, in the past there was a leader from the Brazilian chamber leading the Brazilian chamber group in the UK on a number of trade missions, and that has not happened recently. So even though we are sending many of our members on the trade mission, there has not been room to send a leader of the mission.
Also, in terms of seminars, we can try to bring companies that have entered into the Brazilian market as case studies. We always find that very useful for companies that are looking to the Brazilian market. SMEs in particular will say, "It is very difficult; it is too complicated," but if you have a company that has already done it, that is very effective.
Q113 Paul Blomfield: Thank you very much for that. Can I then move back to your other role with BNDES? Can you tell us a little bit more about the bank’s decision to locate here in London and the reasons for that?
Jaime Gornsztejn: That was in 2009. In 2008, we had a major strategic review at BNDES and we identified that one of the trends of the Brazilian economy was that Brazilian companies were becoming multinational. We saw that, and because of that we felt the need to be better equipped to support this move by Brazilian companies. So we decided that it was important for us to have a physical presence in a major financial centre, not only focusing on that financial centre, but as a hub for our international operations, so I think the choice of London was natural. It happened naturally, given the prerequisites I have just mentioned. One of the criteria was that it should be very easy to set up. We have a company here-a subsidiary of BNDES-and it was very easy for us to do that in terms of paperwork. It was really easy, because we also considered other options. It is not a bank we have here; it is a subsidiary in the form of a holding company, so it was easy to set up the company.
UKTI was extremely helpful, very welcoming, and not just UKTI but other authorities: the Department for Business and the Lord Mayor of the City were also very welcoming. The decision was to have our subsidiary here, our office, and have London as the hub for our international operations, because it is an important financial centre. There are other organisations similar to ours-other development banks-that have a presence in London, and other stakeholders with which we have a relationship, such as fund managers and sovereign wealth funds, have a presence in London. It is a cluster and so it is easy to do business and connect with the partners with which we have a relationship being based in London. That is one reason.
The other reason is that, as this is the hub for our international operations and we are not planning to have an extensive network of offices around the world, it was important for us to be in a central location in terms of geography. From here it is easy to do business in continental Europe and also the Middle East and Africa, which are important markets for us. It even helps in terms of time zone.
Q114 Paul Blomfield: How do you see your operation developing from London?
Jaime Gornsztejn: In the beginning it was just me; now we are moving to a bigger office and bringing more people on board, increasing the team. Last year, we were dedicated to an exercise of strategic planning and also assessing issues such as regulation-all the changes in regulation and the possible impact on our activities-and taxation, which is important for our activities as well. This is all done, so we have a road map-not just for our present activities but also for our future activities-from having London as our international hub.
Q115 Paul Blomfield: What are the key parts of that road map?
Jaime Gornsztejn: One of them is fundraising. We use our UK subsidiary as a way to tap into the capital markets. We are raising funds for BNDES. That will be used, first, to finance projects in Brazil and, secondly, to finance projects outside Brazil in which Brazilian companies are involved.
The second role is exactly as I mentioned: it is using this international hub to structure projects and finance projects in which there is a Brazilian component, so to speak, be it an acquisition, a joint venture or infrastructure project, in which there is also a requirement for financing of local content outside Brazil. We do that much more effectively using our UK hub.
Q116 Paul Blomfield: Okay, thank you.
Can I turn to a different issue-a specific area of your discussions with UKTI? Have you talked with it about its targets to attract inward investment from Brazil?
Jaime Gornsztejn: If we have targets for that? No, we do not have specific targets in terms of location. This is pretty much-
Q117 Chair: Excuse me for interrupting, but UKTI may have.
Jaime Gornsztejn: Yes. Whenever possible, UKTI introduces us to companies that are looking for financing here. Many of them are already our clients, so if a Brazilian company is already our client in Brazil but is looking into financing for its UK subsidiaries, that is something we are prepared to do.
Q118 Chair: Given the fact that I think it has a target of 20 foreign direct investments from Brazil to the UK, have you had any discussion with it at all about that?
Jaime Gornsztejn: No, I have not.
Q119 Chair: That is interesting.
Could I just conclude with one or two questions? First, the issue was raised earlier about language skills and barriers, and certainly that was one of the issues that did emerge when we were in Brazil. I would welcome the panel’s observations on how big a barrier it is and what the Government might be doing to address it.
Peter Bishop: Certainly there are two ways of dealing with the barrier, which it what it undoubtedly is. One is the obvious shortterm one, which is translation-simultaneous translation, etc, interpretation-and the other is increasing the learning of Portuguese in English schools and so on. I mentioned that a predecessor of UKTI ran for a number of years a campaign called the National Languages for Exports Campaign, which did instil in businesses the need to have a strategy for language, which obviously would involve the use of interpreters and translators as appropriate, and instilled in them even more that the language of business is the buyer’s one. That is probably all I can say on that, because the issue about languages in schools is much bigger.
Q120 Chair: Does anybody else have any observations on it? No. Do you think that some of this problem may be overcome by, I quote, the "Science without Borders" project, through which we are getting students from Brazil here or possibly even, if you like, a reverse process? Have you any views on that?
Clive Davenport: I do not think it would do any harm; that is for sure.
Peter Bishop: I think it would be a positive thing. There have been similar schemes with places like Japan, where it has worked. I have not heard of this one with Brazil.
Q121 Chair: Do you think the chambers could play a role in this?
Peter Bishop: We certainly did with the Japan one, where we found people who would go and be placed in Japan for six months, learn the language and then come back to their company. So yes, chambers have played a role in similar schemes and would be very happy to in the future, I am sure.
Chair: Good, thank you.
Q122 David Ward: I was quite struck by the comment on the amateurish approach.
Clive Davenport: A bit harsh, I suppose.
Q123 David Ward: Each from your own perspective, if you look at the various things that we need to do to get this right in terms of exports and inward investment, how many of those things are we doing really professionally and how many do you think we are doing still in an amateurish way? Just take the two or three most important things we need to get right. It is sort of a British approach, in many ways, that we are familiar with in other contexts. What are we doing really well-driven, focused and professionally-and what are we doing in an amateurish way?
Clive Davenport: I think the biggest thing that we have done, or certainly UKTI has done, is to acknowledge the fact that we need to do more. That is an excellent start, because without that mental approach you are going to get nowhere. TI has talked to the federation quite a bit, and we are actively trying to put forward structures that will engage UKTI into the federation’s meetings so that you get the breakdown of the barriers and reduce the resistance.
The big thing that we need to do is to make sure that UKTI is aware of the fact that what we need to do is directly, one to one, engage with the businesses to make it move. I was heartened by what my colleague said-that having an example of a successful story is probably the most powerful thing you are going to get. It is going to break down more barriers in one single blow than anything else, and that is the sort of thing we need to build on, but we need to do it quickly because time just wanders on if you are not careful. We need to get things moving if we are to achieve the 2015 target.
Jon Coleman: One thing that would certainly help SMEs would be a review of the charging system on OMIS, the Overseas Market Information System, and the way that is charged-small businesses having to pay up front for data and assistance. Our members do not have an issue with the principle of paying, but they would rather pay on the basis of business won, so when they win a deal and win an export into that market, they then pay the fee, rather than having to pay up front.
Q124 Chair: That is an interesting point-payment by results. Looking at it from UKTI’s position, they could do a lot of work for nothing if the company did not win business. On the other hand, those companies that did might well generate a level of business that would, if you like, enable UKTI to charge more than they would have done otherwise. Would your members be-
Jon Coleman: I think as long as our members viewed the service they were getting as being of value they would pay an appropriate charge for that, but it is much easier to pay it when you have won the business rather than pay it up front. So I think it would obviously depend on the charging scale and whether they felt they were getting value for money or not.
Chair: That is interesting.
Jon Coleman: I think there are other areas as well, such as when there are receptions for trade delegations, advance notification of who is going to be at those receptions so that attendees can then go and do their own research on whom they want to speak to. If they are going to get into details of how they are going to trade or how they want to trade, they can do a bit of research on that individual.
Q125 Chair: Are you telling us that this is not normally done?
Jon Coleman: That does not seem to be normally done, no. We see it as something that should be fairly easy to do.
Q126 David Ward: It is frighteningly basic stuff that seems to be missing.
Jon Coleman: Yes. In addition to that, if data is readily available within UKTI, the embassy or wherever, on particular distributors, importers or companies-whatever the requirement of the SME or the exporter is-it could just be made available. At the moment, I think generally that exporters are charged just to access readily available data. It is a little bit back to the charging regime again.
Peter Bishop: On the OMIS point, our experience is that there is great variance in quality and price market by market. We also believe that chambers of commerce and TAs should be given some sort of leeway. We have to pay an OMIS every time we take a trade mission, and yet we are helping the posts and UKTI achieves the same objectives as the post. I had not heard that one until just now about paying on results. I think it is certainly worth looking at.
But I would say, with UKTI overall, there is a very long list of businesses who will say to you and us that without UKTI they would not have got into markets as they have and not made the export sales that they have. There is a great deal of very good work based, I believe, on the experience and the backgrounds of the ITAs. What I would say is that there are many more potential exporters out there who should be sitting in front of ITAs, getting their experience and being able to export more.
Q127 Chair: Thank you. I shall finish off with some questions to Mr Gornsztejn, although if others wish to supplement his answers they should feel free to do so. Do you see any major threats to economic growth in Brazil from exchange rate issues or internal credit issues?
Jaime Gornsztejn: Of course there are challenges in the Brazilian economy. There are many challenges. One of them is the level of investment in the economy. That is something that we at the Brazilian Development Bank are very much trying to encourage-more investment in the economy. The level of investment-how much companies and the Government invest-is about 18% of GDP, which is compatible with a mature economy, not with a growth economy, and so of course there is a tradeoff between how much you can grow without generating inflation if your level of investment is low. So we have all these variables you need to play with. Of course, if Brazil wants to grow at a sustainable level of, say, 3.5% or 4%, we need to increase the level of investment in the economy so that we can grow without putting pressure on inflation. Although inflation is under control and is about 5% or 5.5%, and has been under control since 1997, the times of high inflation are pretty much in people’s memories, so we cannot be too careful about that.
You mentioned credit. I do not see any kind of credit bubble developing. That is not an issue at the moment. The issue I see in terms of credit is the availability of longterm credit for investment. Today this is provided only by BNDES. That is the only source of longterm credit in Brazil, so what we need to develop is also a market for private sector longterm credit in Brazil to sustain the level of investment required. In terms of consumer credit and credit for mortgages, it is not an issue. It is very low at the moment. The total level of credit in the economy is about 40% of GDP. In some mature economies it is more than 100% of GDP in terms of credit. Since we had the banking crisis after the end of high inflation in the late 1990s, the banks in Brazil are subject to very strict supervision by the central bank. The ratios required there are more rigorous than the Basel ratios, so the banks in Brazil are in good shape.
You mentioned exchange rates. There has been in the past couple of weeks significant movement in terms of exchange rates. Of course there is, again, a tradeoff. There is a massive inflow of capital into Brazil. Investors are looking for a lowrisk country with a high return in terms of interest rate, so there is this massive inflow of capital that is generating appreciation of the currency, and that has an impact on the competitiveness of Brazilian companies overseas or Brazilian exporters. On the other hand, it helps to keep inflation under control.
Q128 Chair: Just before you move on, in terms of the fact that you are becoming a petroeconomy, do you think those problems will be exacerbated with the inflow of investment?
Jaime Gornsztejn: We have to work on that. The Government are looking carefully into other countries that had similar challenges, like Norway and the Arab countries, and there is a Brazilian sovereign wealth fund that has been set up. It is not operating as such, so it exists basically only on paper, but potentially it is a tool that the Government are going to use to help to prevent further appreciation of the Brazilian currency. The horizon is four years or something, when the revenues from the new oil reserves start to come in, but of course we have to be careful with that.
Q129 Chair: In terms of the issues of protectionism and local content requirements, do you think Brazil is going to become more protectionist, particularly given the export threats from China, or do you think that as it develops its economy it will become more "liberal"?
Jaime Gornsztejn: I think maybe there is a global trend towards a bit more state activism. As I said right at the beginning, it is not just a commoditiesbased economy. Although many people think the Brazilian economy is based on only soya, iron ore and orange juice, that is not true. The Brazilian industrial base has been developed in the last 40 years. It is under threat from China and from other countries, and the Government have to act to ensure there is fair competition. At the same time, you mentioned local content, and that is an important tool in terms of developing the local industry. We have massive oil reserves, but how can we use those oil reserves also to generate spillover effects in the industry-innovation, technology, jobs in the industry-because one day the oil will be gone and what is left? It is what you generated in terms of innovation and technology. So these policies of local content are pretty much trying to address this issue of how to develop the local industry.
Chair: Thank you. Does anybody else wish to supplement those answers with anything? I appreciate it is not your normal area of expertise.
That concludes the questions. Can I thank you? You have been incredibly helpful and I think we have teased out a number of issues which, if you like, were not fully teased out from our trip to Brazil, and we will be incorporating them, first, in the questions that we have to the Minister and, secondly, in any recommendations that we may make arising from it.
I am conscious of the fact that you may, in retrospect, feel that you might like to add to or possibly even subtract from any of the answers that you have given us, and do feel free to supplement your verbal evidence today with any further written evidence, if you feel it is appropriate to do so. I am also conscious of the fact that we may well not have asked you a question that you feel would be relevant for us to have asked, and feel free to give us an answer that we were neglectful enough not to ask, if that again is appropriate. Again, if we think of anything we may well write to you to ask for further information.
On that note, can I thank you very much? That is incredibly helpful and you will no doubt be looking at our report as and when it is published. Thank you very much.