Lula wants to resume failed policy to stimulate the shipbuilding industry

With the intention of stimulating the use of shipyards in the national naval industry, the government of Luiz Inácio Lula da Silva (PT) intends to resume the so-called local content policy (PCL), which prioritizes Brazilian raw materials and labor in the construction of platforms, ships, rigs and refineries.

Adopted in the PT’s previous mandates, the policy is criticized by scholars and industry analysts for having generated negative effects for the development of the industry, at the same time that it raised costs for the oil companies, in particular Petrobras.

A qualitative analysis of the local content policy for the oil and gas industry in Brazil, by William Vitto, concluded that, despite some positive results, the policy adopted during the PT governments ended up being limited only to material production, leaving out of the concept efforts in terms of exports and investments in infrastructure, research and development.

“In the same way, it can be considered that the excessive emphasis on the protectionist policy led to serious failures in its outline, as it ended up being a hindrance to the initiative”, says an excerpt from the study, developed within the scope of the Graduate Program in Public Policies, Strategies and Development of the Economics Institute of the Federal University of Rio de Janeiro (UFRJ).

The Organization for Economic Cooperation and Development (OECD) considers that, although local content policies can help governments achieve short-term goals, competitiveness ends up being impaired over time.

“While most studies have focused on the long-term inefficiencies caused by PCLs, an OECD study also highlights the subsequent costs imposed on the rest of the economy. The inefficiencies that arise in other sectors due to PCL actually reduce job growth and opportunities to achieve economies of scale, undermining the original objectives”, summarizes the entity.

Also according to the OECD, countries that impose minimum requirements for local content lose international competitiveness with a reduction in exports from sectors not directly targeted by the nationalization policy.

“As sectors that benefit from PCL consume more domestic resources, other sectors are forced to reduce production or increase imports, leading to a concentration of domestic economic activity. This process ends up undermining the opportunities for growth and innovation that come from a diverse and dynamic economy”, explains the organization.

Nationalization of the oil and gas sector

The incentive to hire local content has already been the focus of the National Agency of Petroleum, Natural Gas and Biofuels (ANP) since 1999, still under the government of Fernando Henrique Cardoso (PSDB).

That year, when the first bidding round for oil and gas exploration and production fields took place, the regulatory body already assigned a higher score to companies that committed to using a higher percentage of domestic products and services.

But it was from Lula’s first government, in 2003, that the requirement for a minimum percentage of local content by concessionaires came into force. The concession contract for the fifth ANP bidding round provided for a fine in case of non-compliance with the mandatory indexes, which varied from 30% to 70%, depending on the block.

In the sixth bidding round, the local content commitments offered reached an average of 86% in the exploration stage and 89% in the production development stage.

During the Dilma Rousseff (PT) government, the required indexes varied, for offshore blocks, from 37% to 55% in the exploration phase. In the other stages, they were between 55% and 65%, depending on the announcement.

During the management of the PT, the local content policy began to show signs of wear and tear, which had its maximum expression in the company Sete Brasil. The company was created in 2010 to facilitate the development of the Brazilian naval industry, meeting ANP requirements for the construction of platforms.

Among the partners of Sete Brasil were the banks BTG Pactual, Bradesco and Santander, the pension funds Previ, Petros and Funcef, the FGTS investment fund and Petrobras. In 2012, the group reached 28 orders and US$ 75 billion in contracts, with credit of R$ 8.8 billion from the National Bank for Economic and Social Development (BNDES).

In the second half of 2014, Operation Lava Jato ended up revealing, among the corruption scandals involving Petrobras, schemes with Sete Brasil itself. The sector was still impacted by a sharp drop in the price of oil and by a currency devaluation.

In 2016, the company filed for bankruptcy, with a debt of US$ 19.3 billion.

“In the shipping industry I don’t particularly believe. I already paid my bill. Each generation of entrepreneurs pays its bill for the Brazilian shipbuilding industry. Will stay for the next one. My generation has already paid that bill”, said the senior partner and chairman of the board of BTG Pactual André Esteves, in March, at the CEO Conference event, as reported by Bloomberg Línea.

In 2017, the Michel Temer (MDB) government practically cut in half the minimum levels of local content required in sector auctions. For offshore blocks, the nationalization index was set at 18% in the exploration phase, considering products and services. The production development stage now has a minimum level of 25% in the construction of the well, 40% in the collection system and 25% in the platforms.

The rules were maintained in the government of Jair Bolsonaro (PL) for the main oil auctions in recent years, such as the last pre-salt rounds through the sharing regime and the offer of surpluses from the transfer of rights.

Resumption of the local content policy and investment in the shipbuilding industry

The intention to resume the local content policy was signaled by Lula on the first day of his term. “Brazil is too big to renounce its productive potential. It makes no sense to import fuels, fertilizers, oil platforms, microprocessors, aircraft and satellites,” said the president at his inauguration ceremony at the National Congress on January 1. “We have sufficient technical capacity, capital and market to resume industrialization and offer services at a competitive level”.

In March, the vice-president and minister of Development, Industry and Commerce, Geraldo Alckmin, made a commitment to create a working group and a council to discuss policies related to local content. A study taken to him by the Single Federation of Oil Workers (FUP) pointed out that there was a loss of 4.4 million jobs after 2016, with the collapse of the shipbuilding industry.

In April, in his 100-day government speech, Lula stated that he will expand the fleet of ships belonging to Transpetro, Petrobras’ logistics subsidiary. “Pay attention, Minister of Mines and Energy [Alexandre Silveira] what I’m going to talk about now: Petrobras will finance research into new renewable fuels and, at the same time, will resume its leading role in investments, expanding Transpetro’s fleet of ships and generating jobs in our shipyards”, said the president.

In yet another nod to the sector, the president of Petrobras, Jean Paul Prates, nominated Sergio Bacci for the command of Transpetro. Bacci was vice-president of the National Union of the Naval and Offshore Construction and Repair Industry (Sinaval), which represents shipyards and companies in the naval industry chain.

Last week, Bacci met with members of the Federal Audit Court (TCU) and the Federal Comptroller General’s Office (CGU) to discuss the possibility of national shipyards involved in Lava Jato returning to participate in Transpetro bids.

“The process that the country has gone through in recent years has helped to build governance to avoid problems in the future,” he said about irregularities in hiring made in the past, according to the website epbr.

Complex equipment made in Brazil is “three or four times more expensive”, said Petrobras president

Prates had already stated, at the beginning of March, that, during his management, the company will invest again in the construction of support ships in Brazil and that it will count on government help for this. “If you do a survey, today, perhaps, a very complex piece of equipment made entirely in Brazil is three or four times more expensive. So, when there is a discrepancy at this level, public policy and another type of approach to this problem are needed, ”he said, at a press conference.

On the 24th, in an interview with CNN Brasil, the Minister of Mines and Energy, Alexandre Silveira, said that the intention is not to return to the same nationalization rates as in the past, but to find a “balance point” between the demands of PT governments and current rules.

According to him, the purpose is to encourage Brazilian equipment manufacturers and promote the shipbuilding industry, “We want to guarantee stimulation to the national industry, but without strangling the competitiveness of oil companies installed in the country and without generating a risk of delay in deliveries”, he said.

At the same vehicle, the founding director of the Brazilian Center for Infrastructure (CBIE), Adriano Pires, assessed that mistaken policies for oil and gas exploration could drive investors away.

“If you have a wrong local content policy, you won’t have investors to participate in auctions, which is very bad. Let’s remember that oil, more and more tends, in the medium and long term, to be worth less. So we have to get that oil out of the ground,” she said.