French Insider Podcast Ep. 18
Debriefing the Results of the Brazilian Election and its Effect on Multinational Business with Fernando Zanotti Schneider of Abe Advogados
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Listen to the original podcast released December 1, 2022 here:
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In this episode of French Insider, Fernando Zanotti Schneider, a partner at the Brazilian law firm of Abe Advogados, joins Sheppard Mullin partner Tony Girolami to discuss the recent Brazilian election, including what the return of Ignacio Lula da Silva to the presidency might mean for the multinational business community, particularly foreign investors.
Guests:
About Fernando Zanotti Schneider
Fernando is a partner in Abe Advogados São Paulo office, where he serves as practice group lead in the corporate, M&A, and contracts and complex negotiation areas. For the past few years, he has been representing clients in the acquisition and sale of important corporate entities in several economic sectors, particularly technology, financial services, retail and energy. Fernando has provided consulting services to foreign clients in greenfield transactions, joint ventures, project finance and corporate operations related to the acquisition and sale of enterprises, both in Brazil and abroad. In 2014, Fernando served as an international associate in Tokyo, Japan, in association with Matsuda & Partners. His years practicing law have allowed Fernando to acquire significant expertise in deal structuring, due diligence, and mergers and acquisitions. Fernando is a Member of the Brazilian Institute of Corporate Governance and regularly authors articles covering a diverse range of corporate topics for Abe Advogados’ blog.
About Tony Girolami
Tony Girolami is a partner in the Real Estate, Energy, Land Use & Environmental Practice Group in Sheppard Mullins’ San Diego office, where he also serves on the firm’s Energy, Infrastructure and Project Finance Team and is Co-Chair of the Latin America Group. Tony specializes in corporate and renewable energy-related transactions with an international focus, representing both U.S. and international clients in cross-border business transactions involving the development and financing of renewable energy projects, agricultural developments and basic infrastructure in the United States, Latin America and Asia. He has represented financial institutions, infrastructure developers and renewable energy companies in the formation of joint ventures, project financings, greenfield project developments, construction and supply contracts, off-take agreements and distribution agreements. Tony is also admitted as a Foreign Legal Consultant in Brazil, where he worked as a senior associate in Sao Paulo until 2006.
Transcript:
Tony Girolami:
Hello everyone, and welcome to an impromptu episode of the French Insider podcast. My name is Tony Girolami, and I am a partner in the firm's real estate, environmental, and energy groups, as well as the co-leader of the firm's Latin America Desk. Joining me today is Fernando Zanotti Schneider, who's a partner with the corporate and M&A group of Abe Advogados to discuss the outcome of the recent presidential elections in Brazil, and what multinational companies can expect in the aftermath.
Well, welcome to a special collaborative podcast produced by the French Insider Podcasts, and the new Focus Americas podcast. Today our focus will be on Brazil. Brazil as many of our listeners may know, is home to the largest economy in Latin America, and the ninth largest in the world, and is a critical nation in the fight against climate change.
Brazil is also a world leader in alternative fuels, and renewable energy, and is a very important market for foreign investors from France, North America, Asia and Europe. So given the recent presidential elections in Brazil, we're interested in knowing what comes next for Brazil, under the return to the presidency of Inácio Lula da Silva, whereas he's most commonly known as Lula. We are delighted to have with us Fernando Zanotti of the Brazilian law firm, Abe Advogados in Sao Paulo to discuss these recent events and what it means for foreign investors. Fernando is a partner in practices in the areas of corporate law, mergers and acquisitions and foreign investment. Fernando, welcome to the podcast.
Fernando Zanotti Schneider:
Thank you Tony. It's a pleasure to be here. I was delighted with the invitation.
Tony Girolami:
Well, Fernando, in Brazil we've had elections and we've seen the return to the presidency of Lula. So what is the mood in Brazil currently?
Fernando Zanotti Schneider:
Well, Tony, I would say that was a very divided election, very tight race, the total computation of votes, the difference among Lula and the former president, Bolsonaro, was less than 2 million in the total of almost 120 million votes, so that it is divided. Some people were very happy with the return of Lula to the presidency and the Bolsonaro influencers were a little bit sad and are afraid of the next steps in a very competitive election.
Tony Girolami:
So just to give our listeners a bit of context, could you just give us a summary of the Bolsonaro administration agenda and how we arrived at where we are today?
Fernando Zanotti Schneider:
Sure, sure. Tony, well, Bolsonaro was very provocative and had a lot of combative policies that were highlighted during his presidency here in Brazil. He's our, similar to, Trump in the way that he handles the media, the big press. So this is always something that jumps out of the pages of the newspapers, but in a larger sense he was heavily impacted by the COVID impacts and this was a big part of his period as a president, but in a larger sense, he was as a right wing and what right wing here in Brazil means for this purpose, is more a liberal in terms of economic. So he had a less engaging state enterprising, which was seen by most of entrepreneurs and companies as something helpful for the Brazilian economic environment. One of his major things that he got done here was the free economic reform. He passed some laws to try to speed up and reduce bureaucracy here in Brazil. That was a very, very nice move because Brazil is a country with large red tape and very formalities, especially when doing business with the government. This was something that he has accomplished and hopefully Lula will also maintain this. He also has appointed two judges to the Brazilian Supreme Court. Those judges were under a high scrutiny of the left wing parties because one of them, as Bolsonaro has mentioned, was a very Christian or very religious guy and this was Bolsonaro main reasons to appoint him as a Supreme Court judge and that were at least from the legal perspective, the two main aspects. He's a very controversial figure. He was very leaning towards more, not environmental friendly kind of policies. This part of the Economic Freedom Act that he passed here in Brazil was also criticized as a way to deregulate it and make more easier to deforest the rainforest here in Brazil. So that's in a nutshell for the last four years that's what happened with Bolsonaro.
Tony Girolami:
We know the result of the election at the presidential level, at the executive level, could you comment on what the Brazilian Congress looks like? Does Lula have support within Congress for his new agenda or will he have to make certain political deals with other political parties?
Fernando Zanotti Schneider:
This is really funny because it's kind of curious because even though Bolsonaro lost the president seat, his party is now the leader of the Congress, his party, “PL”, was with almost 97 seats out of almost 500. Brazil is not like US that you have mostly Republicans or Democrats. We are a very diverse political system. So to have almost a hundred seats in the Congress is a lot. For instance, “PT”, the workers party from Lula got only 70, so we are tending to see a more right wing Congress which would be more favorable to Bolsonaro and a lot of Bolsonaro's indications got some huge votes. The most voted deputy in Brazil was influenced heavily by Bolsonaro and this will also means that Lula, to properly govern in the next four years, will need to make some adjustments. He will not be able to govern only with PT or similar parties with left wing approach. He will need definitely to make some compromises and try to have some influence, which is pretty normal here in Brazil. Normally we have more centralized deputies and congressmen that tend to pick each topic and decide in accordance with each topic. They do not limit themselves in accordance with right wing approach or left wing view.
Tony Girolami:
So Fernando, a lot of our listeners are foreign investors. They are very interested in doing business in Brazil or they actually have operations in Brazil. So from the perspective of a foreign investor, what can the business community expect from the Lula administration? Are there any hints either from his campaign or from his prior administrations about his view towards foreign investment?
Fernando Zanotti Schneider:
For the last couple of weeks, Lula has made some very huge signs on how he will lead for the next four years and I think this is really important, Tony, for the investors or for directors who have companies operating here. The most important thing that Lula is being criticized for, is about government spending. He's saying that he will probably exceed the cap. We have a fiscal cap here in Brazil, it's called Cato. It is the fiscal cap of the maximum amount of government spending that he could do, He is trying to pass a law this year still, that should be valid next year, that he will go above the cap in around 40 or 50 billion U.S. dollars. That's a lot, but the thing is, if it is one time, only one hit, there is no problem, most of the stock market financial advisors are saying that if it is a single hit, there won't be a problem in the long run for the fiscal aspects of the Brazilian budget.
And this is something very, very important because we have been suffering with inflation and government spending usually tends to get more inflation. This is one aspect that he has been talking a lot recently in the last two weeks, I would say. Further to that he is communicating and that's something that it's completely opposite from Bolsonaro and I think for the international community, it's really good news that the environmental agenda, the ESG agenda has picked up from what was his former goal. So he has been talking about having international funds to save the rainforest, to make carbon neutral governments and that sounds a lot like music for investor with big ESG practice. So that's one huge swing.
Another thing that we could comment is that he will probably develop more the house market. Here in Brazil we have a very big deficit about houses for families and he is willing to invest big money on this, which has already made some stock from those companies going up on the Brazilian stock market. But his agenda will pretty much be similar to what was in 2002 when he first got elected. He sees Brazil as a very big economy, the 10th economy of the world and he's willing to spend a little bit more and make the government a little bit more influential on the sectors to increase industrialization and productivity, efficiency. And that's some really good signs about him. Another aspect that he's saying that is probably going to do is, Bolsonaro was privatizing a lot of companies here in Brazil and Lula-
Tony Girolami:
These are former state-owned companies?
Fernando Zanotti Schneider:
Yeah, Bolsonaro has reformed our energy, the most important energy distributor here in Brazil called Eletrobras. He has done this in the beginning of 2022. What Lula is saying is, "I want to make investments in infrastructure, but I will do what we call here PPP." It's a public and private partnership to have more developed infrastructures. So as we are a very underdeveloped economy infrastructure, this might also be some good signs, especially for investors to come. They should be interested in this, of course it is something very hard to do here in Brazil, but the way that Lula has already done is, was most the infrastructure development that we had in the last decade was due to PPP and he's trying to return to the same model.
Tony Girolami:
Yeah, I recall in Brazil during his administration that Parque De Sao Paulo metro was done under PPP-
Fernando Zanotti Schneider:
Exactly.
Tony Girolami:
... That the law is well established and it's been on the books. So I think that should be a very positive development for particularly foreign investors in the heavy infrastructure area.
Fernando Zanotti Schneider:
We had hosted the World Cup were 2014 and most of the investments were doing under PPP regime and the contracts work fine except for one or two arbitration, but the most of it, the regime, the regulation under it, it's very solid.
Tony Girolami:
In addition to these infrastructure opportunities, what are you also anticipating as commercial opportunities for foreign investors under the Lula administration?
Fernando Zanotti Schneider:
I think, and this is part of the speech that he gave this week internationally, is energy. Clean energy is a business of Brazil. We have very high potential with solar energy, green hydrogen, especially in the northeast of Brazil. There is immense potential to develop this and this is something that I would probably say it will be our area of very big investments in the future. Even with Bolsonaro, this is already trending, but I think for the next 2, 3, 4 years, this will be very strong here in Brazil.
Tony Girolami:
One of the pillars of President Lula's campaign was discussions about reducing inequality in Brazil. Are there any particular plans on the social agenda, either through land reform or labor reform or direct subsidies to poor families? Has he given any indication of how the social agenda will be advanced?
Fernando Zanotti Schneider:
Yeah, most of the deficit on the cap, the Cato that I talked about, will go to social spending. We have what we call here Bolsa Família, it's a check made for the poorest families here in Brazil. Most of that he's trying to get out of the fiscal cap. So he's investing heavily on social issues. On labor law, it's important to point out Brazil has, on 2017, we had a very important labor reform here on labor law and some people say some, especially from the workers' body that it went too far, especially considering what we call here in Brazil the “uberification” of the workplace.
We have very high number of individuals here who rely greatly on apps like car sharing apps and food delivery and all of those things. And those individuals are not a part of the labor regime here in Brazil. And Lula has made very hard commitments on all his speech even during the campaign that this should change. It's hard to know exactly where the needle will fall on this Tony, because he will face great challenge to try to pass a labor reform in the Congress as it is. As I mentioned, it's a right wing congress with a left wing government. I think this is similar to what will happen now US that you have more, if I'm not wrong, Republican senate with a Democrat government with Biden. So in some ways we're mirroring this aspect of U.S. politics.
Tony Girolami:
Well, considering these changes in your role as an advocate, as a consultant, what advice would you give to foreign investors about the current climate in Brazil?
Fernando Zanotti Schneider:
To invest in Brazil, you need to be very flexible about the structural changes. It's very hard to predict the U.S. dollar/real ratio, we are very dynamic economy, so inflation could rise or could stay under control. But aside of this economical aspects of our economy, when the investor are coming here, I really think that, should make things need to be properly established. One is the fiscal aspects of Brazil. Brazil is not under the same guidelines as the OCDE rules, so you need to be very careful about the fiscal aspects of coming to Brazil and operating in Brazil. This could be a huge game changers if you are collecting the taxes rights or not.
Then the other aspect is the contracts. In Brazil, we have a very good standard of honoring our contracts, which is of course good for business. Sometimes the judiciary system is a little slow, but most of the agreements now among corporations are under arbitration law and that has been going on with very good results. So I would say that to be properly established from a tax perspective as well as a contractual landscape is probably the two main legal challenges that someone investing in Brazil will face.
Tony Girolami:
Well, how do you and your law firm approach foreign investors? What services do you provide for them in this regard?
Fernando Zanotti Schneider:
Myself, Tony, I usually enter into interplay when we are talking about M&A. So whenever a foreign company is trying to acquire or initiate or to integrate verticals here in Brazil, that's when I come into play because as an M&A lawyer, M&A lawyers, that's something we do and that's the kind of service we like to do. We currently represent some foreign clients, some heavily on Japan Desk as well, so we work closely with big Japanese companies investing here in Brazil and the law firm as a whole, we try to understand as much of the business of the company as possible. So we try to anticipate the needs of the clients. That's our goal to make things as smooth as possible. And Brazil does have some bumps. We are not a very easy and friendly environment for entrepreneurs here in Brazil, so we try to make things as smooth as possible.
Tony Girolami:
So a great deal of patience is required by foreign investors typically.
Fernando Zanotti Schneider:
You should put your top personnel here in Brazil because you need to be very agile, flexible and try to get very good quality human material here in Brazil. That's something that the country lacks of because our education is not on the same levels of standards as US, Canada, Europe. So I would say to get your best personnel in place to come to Brazil. It is with huge opportunities. The Economy is growing for the last three or four years, which was good even during COVID times, but that's something I would highly advise on.
Tony Girolami:
And apart from that sales pitch, it's a beautiful place with very lovely people. I can attest to that from my own time in Brazil.
Fernando Zanotti Schneider:
You're too kind, Tony.
Tony Girolami:
So Fernando, no discussion of Brazil would be complete without a discussion about futebol (football). So Fernando, not to put you on the spot, but what are Brazil's chances for winning the World Cup?
Fernando Zanotti Schneider:
90, 80%.
Tony Girolami:
You're very confident.
Fernando Zanotti Schneider:
No, just kidding. But I'm a huge soccer, football fan. I really enjoy the game. It's a big part of us Brazilians, it’s something that the country stops at the time, that Seleção, the Brazilian soccer team plays, the country literally stops. And I think of course all countries went under COVID and went a long way this past couple of years. But it would mean a lot for us Brazilians to win this world cup and put some peace after a very hard and conflicted election, COVID, this will mean very good to the Brazilian guys, to the Brazilian population. That's something that I'm very hopeful of, but it's very tough. Argentina, our main contesters locally is very good. England, I think it's a very good and France, France is very hard as well. The last two times we met them in the World Cup where one was in '98 against Zidane, we lost in 2006 against Zidane, again, we lost. But those scars will heal and will become champions again.
Tony Girolami:
Well, I hope you have the opportunity to witness some games. I understand that you're headed over to Qatar to view some of the games, so I hope you enjoy yourself and I really want thank you for your time and participation today. I think this has been a great conversation and we look forward to getting an update or two in the future about the Lula administration and the economic performance of Brazil.
Fernando Zanotti Schneider:
Thank you, Tony. It was my pleasure here. I'm always glad to talk with you. You know that it's a pleasure to be here and hopefully it will have a better future with Lula in the presidency and if I can help in any way, please do not hesitate to be in contact with me.
Tony Girolami:
Well great. Well thank you. Appreciate it.
Speaker 1:
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