Brazil: Economic Development Fueled By A Growing Market

Sunday, February 1, 2009 - 01:00

Editor: Alex, how did your firm come to be part of Thompson & Knight?

Chequer: Having moved back to Brazil to take care of my father's business after he passed away, I joined a small new firm with three partners and six or seven lawyers - some were former Petrobras international lawyers, perhaps the only Brazilians who at that time had international experience in the oil and gas market. Our firm represented the Brazilian government in the opening of the oil and gas business in Brazil to investment by international oil and gas companies (IOCs).

Petrobras used to be the only company authorized to explore and produce, export and refine oil in Brazil. In 1997 the government enacted a new law, the Petroleum Law, to open the oil and gas market in Brazil to foreign investors. Our firm represented the Brazilian government in the drafting of the Petroleum Law and the organization of the Agência Nacional do Petróleo, Gás Natural e Biocombustiveis (ANP), the national Petroleum Law agency. After ANP was organized, we started to represent IOCs.

Our firm had decided to join with a Canadian law firm. I did not agree with the merger because I felt that, because of our expertise in the energy area, we should join with a firm that was also focused on the energy business and with offices in Houston and London. I felt that Thompson & Knight would be an ideal fit. The next morning, I called one of its partners and asked if the firm wanted to have a presence in Brazil. He said yes, we are interested. He asked me when I was available to fly to Dallas. I said I could fly tonight, and he said okay, I'll be waiting for you tomorrow. I just had time to buy my airplane ticket and go to the airport.

After my trip to Dallas, we established an association with Thompson & Knight. We did not become part of Thompson & Knight until 2002 when we were around 15 lawyers. That is how we joined Thompson & Knight. You can partly control your destiny, but in this case the planets were aligned.

Editor: Tell us about your offices in Brazil and their prospects for the future.

Chequer: We have three offices in Brazil. The Vitória office is very small and was created to serve the operations of ArcelorMittal, Petrobras, Companhia Vale do Rio Doce, Canexus, Funcef, Baker Hughes, Weatherford, and other big clients for their operations in the surrounding area. However, in Rio and São Paulo we have 68 lawyers and expect to grow. In fact, we are currently in discussions with key partners at some of our competitors about joining us. By the end of 2010, we will have about 110 lawyers in our Brazil offices.

By virtue of being part of Thompson & Knight and being able to draw on its resources throughout the world, the Brazil offices have an immense competitive advantage over our competitors here in Brazil. We are in constant electronic and telephonic contact with the rest of the firm, and many of its lawyers from elsewhere in the world visit Brazil. I go to the U.S. at least once a month. I still have my apartment and my car in Houston; I have my home there. I also spend a lot of time in New York, Angola, London and hope to spend more time in the Middle East, mostly in Dubai.

Over the long term, our economy will continue to move forward because there are so many needs to fill - and we will be there to handle the legal end. Nevertheless, the global financial crisis will affect some companies doing business in Brazil. So, there will also be growth in our insolvency and restructuring practice. We are currently negotiating with five lawyers from another firm in Brazil to add them to our practice in this area.

Editor: How is Brazil facing up to the international economic and financial crisis?

Chequer: Unlike a mature economy like that of the U.S. or Europe, we have a frontier of unsatisfied needs. Many Brazilians don't have a house yet. They don't have cars. In the last five to ten years, many people have become involved in our growing market economy. Because they are making more money, they can realize their dreams of having a house, a car, and the other things that a good life can bring - and they demand highways, electricity, and other aspects of the infrastructure that make enjoyment of those things possible.

We are confident that our growing market economy will propel Brazil forward at an accelerating pace - even though we may encounter a few speed bumps along the way. In 2008, sale of cars in Brazil grew about 30 percent in comparison to 2007. These numbers have made Brazil the fourth largest market of the world. In 2008, even in a bad scenario, our overall economy grew about five to six percent.

We are not shutting down projects. We are delaying some projects. Consider that most of our law practice is related to building infrastructure. These investments are not short-term investments. If you start to build a hydroelectric power plant today, you are looking to a horizon of 30 to 60 years - a long-term view. This is good for our practice because there is a continuing need for legal services for some major projects with a larger horizon.

Editor: What percentage of your practice is representing direct foreign investment?

Chequer: Seventy-five percent foreign investors and 25 percent Brazilian investors.

Editor: And you're not seeing any slowdown by the foreign investors, at least in terms of cancellations?

Chequer: We see some projects where the clients' decisions are delayed, but they are not cancelling projects. Let me give you an example. Alcoa recently announced that they were reducing their global workforce by 30,000. They did not fire anyone in Brazil, and they are keeping their investments here. Investors in Brazil take a long-term view. Take the example of the oil and gas companies. Brazil made big oil discoveries in the last two years, but if they start to develop the oil fields now, it will take around seven to ten years to produce the first oil. They will come on stream at a time when there is confidence that oil prices will be higher than they are today. British Gas has partnered with Petrobras in some of these big discoveries, and they invest a lot of money in Brazil. Coincidentally the CEO of British Gas recently said its investments in Brazil will be its main focus.

Editor: When it comes to energy, Brazil has come a long way from back around 1970, when Brazil was prospecting in Angola and Iraq, trying to secure petroleum resources.

Chequer: Yes, and consider that at that time Brazil was consuming around 250,000 barrels a day. Today we produce 2.3 million barrels a day of oil and gas equivalent, and we consume the barrels that we produce. In the next five to seven years, we will start to export oil.

Editor: Are there other reasons for optimism?

Chequer: Companhia Vale do Rio Doce, after suspending some labor contracts, called people back to work again, saying it needs to produce more ore for export. The Brazilian government and national development banks (BNDES and the others) are putting a lot of money into infrastructure projects, some in partnership with private companies.

One thing pushes another. If you are building a hydroelectric power plant, you need cement. If you buy cement, the cement industry creates a demand for machines to produce it. If you build machines, you need to buy ore and steel. Although businesses will feel pain in 2009, Brazil as a country will grow at about 2.5 to 3.5 percent. Those are good numbers compared to the dismal scenario facing much of the world.

Editor: Is corruption still a problem?

Chequer: Corruption in Brazil is found primarily in the government and principally affects government contractors. In the last ten years, there has been a great improvement in public honesty. The judiciary has been a problem. But, in many cases arbitration is available and is a well-accepted alternative. Even with respect to the courts, the winds of change are blowing. With the adoption of the new Brazilian Constitution in 1988, prosecutors became quite powerful and the job attracted bright, young, idealistic people. They belong, as I do, to a new generation in Brazil that views corruption as an impediment to economic progress. Every day when we open one of our newspapers, we read of new investigations and of people being sent jail - not only the small fry, but also prominent people.

Editor: You mentioned the availability of arbitration. Does that include international arbitrations where a government entity is a party?

Chequer: Yes, I represented large international companies in an international arbitration seeking recovery against Brazilian government agencies. The government lost the arbitration, and they paid our price. The arbitration was held in Rio de Janeiro, but it was under ICC rules. This is okay in Brazil. When the result was challenged, the Supreme Court of Brazil agreed that you can have international arbitration with government entities or with government agencies.

If you receive an award in an arbitration proceeding, it can be enforced in the courts. My experience with arbitration in Brazil is that when the other party lost the arbitration, going to court to seek enforcement was unnecessary; they simply paid. It's a matter of credibility.

Editor: Do you have any closing comments?

Chequer: Brazil is now a very open economy. The legal rules in Brazil are clear. You may sometimes face a little red tape - for example, it may take a little longer to establish a new legal entity - but the rule of law works. If you are doing business here, you don't have to worry about expropriation. It's a real democracy; the system of checks and balances among the executive, judicial, and legislative branches works very well here. It's a country offering great economic opportunity. You just have to have a little patience to learn how things work, but there's no doubt that you can make money here. Alcoa is a good example. So are General Motors and Ford. They have been making money in Brazil for years.

Please email the interviewee at alexandre.chequer@tklaw.com.with questions about this interview.