| BUSINESSWEEK ONLINE : NOVEMBER 15, 1999 ISSUE | ||||||||
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| INTERNATIONAL BUSINESS
Commentary: It's Tougher to Do Business in Brazil. That's Good Brazil can be a tricky place to do business. Just ask MCI WorldCom Inc. (MCI), which shelled out $2.3 billion for long-distance phone carrier Embratel when it was privatized last year. What MCI did not know then was that the country's tax agency would later stick it with a $650 million bill for back taxes--a move the company declared on Oct. 27 that it would fight. Adding insult to injury, the national antitrust authority announced in late October that it would scrutinize the merger of MCI's Brazilian operations with those of Sprint Corp. MCI's travails in Brazil could dampen foreign investors' enthusiasm for upcoming auctions of state-owned assets. This is cause for concern, as the government needs as much privatization money as it can muster in order to reduce its $65 billion budget deficit. But there's another side to the story: The MCI brouhaha is a sign that Brazil's institutions--from government agencies to the judiciary--are maturing and, in fact, are beginning to act independently of political pressure. This is a positive step, even if it makes doing business in the country more complex. Investors must understand that Brazil is not a place where the President's blessing is all that is required to ensure the sanctity of a deal. PROMISES, PROMISES. In MCI's case, in fact, the tax authorities are ignoring the government's earlier promises to MCI. The tax agency is charging the U.S. telecom giant with taxes and fines accumulated in the two years before the government auctioned off Embratel in July, 1998--even though MCI was assured by the government that it would not be held responsible for these liabilities. Now, MCI is awaiting a ruling from Brazil's attorney general's office on the dispute between the government agencies. It's a hassle--but it's a hassle that resembles the give and take between U.S. politicians, independent regulators, and the courts. If the attorney general rules against MCI, the company says it may seek redress in the Brazilian courts. There, the judges have been building a strong reputation for independence in the last few years. ''Multinationals absolutely get a fair shake in Brazilian courts,'' says John McNaughton, an American who works for Sao Paulo law firm Noronha Advogados. Foreign firms routinely challenge tax charges in court and frequently win, McNaughton says. The courts often rule against the government, too. On Sept. 30, Brazil's Supreme Court declared unconstitutional a key pension reform designed to help curb the budget deficit--despite President Henrique Cardoso's wishes. Foreign investors should get used to dealing with another Brazilian agency that has been flexing its muscles recently. Until a few years ago, CADE, Brazil's antitrust regulator, was a do-nothing panel. That's changed as merger and acquisition activity has picked up dramatically. In July, CADE fined Miller Brewing Co. and its Brazilian joint-venture partner, Cervejaria Brahma, more than $400,000 for failing to meet pricing conditions set by the agency. Now CADE must rule on whether Sprint (FON) and MCI can merge their interests in Brazil. Sprint owns 25% of Intelig, a phone operator that was given a license to compete against MCI's Embratel. ''Our concern is to guarantee competition in Brazil,'' says CADE President Gesner de Oliveira. Skeptics about the fairness of Brazil's business dealings can still point to the paramount power of politicians at the state level. Far from Brasilia, some governors don't hesitate to overturn decisions made by their predecessors. Just look at the state of Minas Gerais. There, Governor Itamar Franco is waging an all-out campaign to reverse the privatization of electricity utility Cemig. Two U.S. power companies, AES Corp. (AES) and Southern Co.(SO), and Rio de Janeiro-based investment fund Opportunity secured 33% of Cemig's voting shares along with operating control in 1997. But even here Franco may still lose. The companies are fighting his effort to toss their representatives off the utility's board. And they may take the matter to Brazil's federal courts. As Brazil continues to evolve both politically and economically, foreign companies are sure to run up against more surprises. But overall, they should support the changes under way, since truly independent courts and regulators will learn to protect investors and local players equally. Meanwhile, multinationals should simply take it for granted that they may have to deal with more energetic antitrust regulators and tax authorities. That's part of doing business in a rapidly evolving Brazil. By Ian Katz _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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