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Tax Cuts – Enough to Make India a Global Manufacturing Hub?

India has recently announced an unprecedented reduction in its corporate tax rates. Not only is this a respite for domestic and existing foreign companies, but it is also expected to boost India’s position as a preferred investment destination for international companies looking to diversify their manufacturing footprint. Amidst the ongoing trade war between China and the USA, many companies, such as Apple, are looking to relocate a chunk of their manufacturing facilities away from China as part of a de-risk strategy. This presents the perfect opportunity for India to swoop in and encourage manufacturers to set base there instead of other Asian countries. However, tax reduction alone may not be enough to score these investments as the government needs to provide additional incentives apart from improving logistics and infrastructure, as well as land and labor laws in the country.

For the past three decades, India had one of the highest corporate tax rates in the South Asian region standing at 30% (effective rate of about 35% including surcharge and cess), making it one of the biggest sore points for investors looking at setting up a shop here.

However, September 2019 brought an unprecedented move, as the Indian government slashed the corporate tax rate to 22% from the existing 30%. Moreover, new manufacturing units established after 1 October 2019, are eligible for even lower tax rate of 15% (down from 25%) if they make fresh manufacturing investments by 2023.

The effective tax rate in these cases (subject to the condition that companies do not claim benefits for incentives or concessions) will be 25.75% (in case of 22% tax rate) and 17.01% (in case of 15% tax rate). These companies will also be exempt from minimum alternate tax (MAT). The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

To put this into perspective, India’s new tax rate is lower than the rate in China (25%), Korea (25%), Bangladesh (25%), Malaysia (24%), Japan (23.2%), however still a little higher than that of Vietnam (20%), Thailand (20%), Taiwan (20%), Cambodia (20%), and Singapore (17%). However, for new companies/MNCs looking to set up a unit in India, the country offers the most competitive rates in the region.

This tax break by India is also well-timed to exploit the degrading US-China relationship, which is resulting in several US-based companies, such as Apple, Google, Dell, etc., to look for manufacturing alternatives outside of China. Currently, Vietnam, Taiwan, and Thailand have been the prime beneficiaries of the trade war, with the three countries attracting about 80% of the 56 companies that have relocated from China during April 2018 to August 2019. However, India’s recently introduced tax cuts may act as a major stimuli for companies (that are looking to partly move out of China or are already in the process of doing it) to consider India for their investments.

While the tax reform stands across all industries, India is looking to boost investment in the labor-intensive electronics manufacturing sector including smart phones, televisions, etc. To achieve this, the government recently scrapped import tax on open cell TV panels, which are used to make television displays. In addition to large brands such as Apple, India is also targeting component and contract manufacturers for such companies (such as Wistron, Pegatron, and Foxconn) to shift their business from China and set a shop in India.

India's Tax Cuts Not Enough by EOS Intelligence

Is a tax break enough?

While this is a big step by the Indian government to attract foreign investments in the manufacturing space, many feel that this alone is not enough to make India the preferred alternative to its neighbors. Companies looking to relocate their manufacturing facilities also consider factors such as infrastructure (including warehousing cost and set-up), connectivity (encompassing transportation facilities and logistical support), and manpower (such as availability of skilled manpower and training costs) along with overall ease of doing business, which covers the extent of red tape, complexity of policies, and transparency of procedures.

The Indian government has to work towards improving the logistical infrastructure, skilled labor availability, and cumbersome land-acquisition process, among many other aspects. As per the World Economic Forum’s Global Competitiveness Report 2019, India ranks 70 (out of 141 countries) in terms of infrastructure. While India heavily depends on road transportation, it needs to invest in and develop modern rail and water transportation and connectivity if it wishes to compete with China (rank 36).

India also ranks poorly with regards to skilled workforce and labor market, ranking 107 and 103 on the indices, respectively. To put this in perspective, Indonesia ranks 65 with regards to skilled workforce and 85 for labor market, and Vietnam ranks 93 for skilled workforce and 83 for labor market. Other than this, India also struggles with complex land acquisition laws and procedures, and must look into streamlining both to position itself an attractive investment destination.

Apart from this, the government also needs to provide additional incentives for investments in sectors that are its key priorities, such as tech and electronics manufacturing for export. As per industry experts, electronics manufacturing in India carries 8-10% higher costs in comparison with other Asian countries. Thus the government must provide other incentives such as easy and cheaper credit, export incentives, and infrastructural support, to steer companies into India (instead of countries such as Vietnam, Indonesia, and Thailand).

Several experts and industry players suggest that the government should provide the electronics manufacturing industry incentives for exports that are similar to those under the ‘Merchandise Exports from India Scheme’, which provides several benefits including tax credits to exporters.

In August 2019, the Ministry of Electronics and Information Technology (MeitY) proposed incentives to boost electronics manufacturing in India. These include a 4-6% subsidy on interest rates on loans for new investment, waiver of collateral for loans taken to set up machinery, and the renewal of the electronics manufacturing cluster (EMC). EMC creates an ecosystem for main company and its suppliers to operate in a given area (the previous EMC scheme ended in 2018).

Apart from this, industry players are also seeking an extension of another scheme, Modified Special Incentive Package Scheme (MSIPS), which also ended in 2018. MSIPS provided a subsidy of about 25% on capital investment.

EOS Perspective

India’s tax break came at an extremely opportune time, with several MNCs having expressed their plans to branch out of China (for at least 20% of their existing manufacturing facilities). From imposing some of the highest corporate taxes, India has now become one of the most tax-friendly markets, especially for new investments.

This is likely to put India in the forefront for consideration, however, it is probably not enough. The government needs to work on several other facilitating factors, especially infrastructure, land laws, and availability of skilled labor, which are more favorable in other Asian countries.

Moreover, the appeal of some countries, such as Vietnam and Thailand, seems to remain high, as several of them introduced a ‘single point of contact’ facilities for investors. Under these facilities, in various forms, investors are provided with investment-related services and information at a single location, and/or are provided with single point of contact within each ministry and agency they have to deal with. This makes the access to information and investment procedures much easier for foreign investors, and increases the perception of transparency of the whole process. India on the other hand struggles with bureaucracy, fragmented agency landscape, and red tape. Despite initiating a single window policy, multinational representatives need to visit multiple offices and meet several officials (also in many cases offer bribes) to get an approval of their proposals and subsequently get the required permits. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

India struggles with bureaucracy, fragmented agency landscape, and red tape. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

Also in 2018, India only managed a mere 0.6% of its GDP from manufacturing FDI, indicating a low confidence level among foreign companies to make medium to long-term commitments in India. However, large part of the reason for this were also the high tax rates. Therefore, the recent tax reduction is a major step in the right direction, while the government still has some distance to bring India to replace China in the position of manufacturing giant of Asia, especially in the electronics sector.

by EOS Intelligence EOS Intelligence No Comments

China’s Cross-Border E-Commerce Sector Enjoying Government Support – But for How Long?

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It is a well-known fact that China, today, is the largest and fastest growing e-commerce market globally. Accounting for close to half of the global e-commerce sales, China’s e-commerce industry is witnessing a double-digit growth, rising by about 26% in 2016. Leading the growth in China’s e-commerce sector is cross-border e-commerce (CBEC), which is currently witnessing close to double the growth compared with the overall industry and is expected to continue to grow robustly over the next five years. The government has not only been charging favorable duty to promote CBEC, but has also created special customs-clearing zones in 13 cities to support cross-border trade. However, in 2016, the government came up with a new set of taxation and a list of items that were allowed to be only imported. Following a significant industry pressure, the government has pushed the implementation of these rules to the end of 2018, and it now remains to be seen whether the industry will continue to receive government support which is instrumental for it to flourish.

Cross-border e-commerce (CBEC) has been creating quite a buzz globally, and leading this global trend is China, one of fastest growing markets with respect to CBEC. A plethora of social factors such as improved standards of living, increased awareness about foreign products through greater international travel as well as access to information online, increased quality consciousness among consumers, limited options available locally (especially in product categories such as infant milk formula and health supplements) have resulted in escalated demand for international products in China. All these factors, along with the ease of buying through e-commerce and the growing tendency of Chinese people to use their mobile phones to shop, have resulted in exponential growth of the CBEC sector in the country.

China’s CBEC Industry – At a Glance

Retail Sales and Growth: The industry was estimated at US$85.8 billion in sales in 2016 and is expected to double up sales to about US$158 by 2020. The number of CBEC customers in China is estimated to rise from about 181 million in 2016 to close to 292 million in 2020.

Trade Partners and Goods: The UK, USA, Australia, France, and Italy are some of China’s largest trading partners with regards to CBEC. Cosmetics, food and healthcare products, mother and child solutions (including infant formula), clothing and footwear are the most shopped categories through CBEC.

Consumer Profile: About 65% of the customers are male and 75% are between the age of 24 and 40. Most of the customers are well-educated, with three-fourth of them having at least a graduate degree. The ticket size for about half of these purchases ranges between US$15 and US$75 (RMB100-500).

Leading Players: Most cross-border online sales are undertaken through third-party online marketplaces such as TMall Global (owned by Alibaba group) and JD Worldwide (owned by JD Group, China’s second largest e-commerce player). Global e-commerce leader, Amazon is also becoming increasingly active in China.

The government has also provided immense support to the CBEC sector, a fact that has been critical to the market growth. As an effort to weed out the illegal grey market imports and to promote e-commerce, China’s government relaxed cross-border e-commerce rules and the applicable custom rates (close to 15 to 60% depending on the item). Moreover, custom duty amounting to less than US$7.5 (RMB50) was exempted. The government also created 13 CBEC zones across the country in order to expedite custom clearing of foreign items ordered online. These zones house large warehouses where foreign brands and retailers stock items, which, upon being ordered, are put through custom clearance (under relaxed rules). This way the consumer receives foreign goods within few days of ordering it.

While this has been greatly benefiting the Chinese consumers who now have an access to a range of products that were once seemingly out of reach for the public at large, it is also revolutionizing how foreign players are operating in China. Traditionally, foreign companies (brands) required to have a legal entity in China (subsidiary, partner, or own manufacturer) to import goods through the general trade channels. These legal entities had the task to clear import customs and pay duties on goods imported into the country. However, under the CBEC channel, these foreign players are freed from the requirement of establishing a local entity before selling their goods in the Chinese market. This also relieves companies from several compliance procedures that they were required to follow in case they were entering the market through offline trade channels. Therefore, several players, who shied away from China in the past (owing to cumbersome product registration and approval process), are looking at this as their entry strategy in the market. Simpler compliance checks and reduced import taxes have also made it easy for companies to experiment and launch a host of products (on a hit and miss basis) in the Chinese market without much investment.

However, while CBEC has greatly supported the cause of promoting e-commerce and aiding international companies in accessing the Chinese markets, it has seriously hampered the business of several domestic players (especially in the cosmetics and health supplements industry) who have been protected from foreign competition in the past owing to strict import rules. Moreover, it has resulted in a major disadvantage for conventional retailers with a brick and mortar setup as goods sold through the CBEC route are levied with a lower number of taxes compared with similar goods sold through traditional trade channels in China.

Owing to these factors, in April 2016, the government revised the taxation rates for CBEC goods resulting in a marginal increase in taxes for few categories. Under the new rules, products would be temporarily levied with 0% import tariff but would be taxed at 70% of the applicable VAT and consumption tax rate, which changes based on the product category. For instance, cosmetics worth RMB500 (US$75) ordered through CBEC would be taxed 0% import tariff + VAT at 11.9% (i.e. 70% of applicable VAT rate for cosmetics – 17%) + consumption tax at 21% (i.e. 70% of applicable consumption tax for cosmetics – 30%), thereby, making the total amount equal to RMB664.5 (US$100). In addition to the changes in taxation, the government removed the waiver of custom duty of up to US$7.5 (RMB50) and set a limit of US$302 (RMB2,000) on a single transaction and of US$3,020 (RMB20,000) on purchase by a single person per year. It also released a list (termed as a ‘positive list’) of 1,293 products that were allowed to enter the Chinese market through CBEC. While the goods under the ‘positive list’ are exempted from submitting an import license to customs, few products from this list that come under China Food and Drug Administration (CFDA), such as cosmetics, infant formula, medical devices, health supplements, etc., require registration before import. This entails the same tedious registration or filing requirements required for products imported through the traditional trade channels. This greatly limits the inherent benefits of the CBEC model for these products.

While the government had initially intended and aimed for immediate implementation of these new regulations, protests and pressure from Chinese e-commerce companies and the ultimate objective of promoting the country’s e-commerce sector resulted in the government agreeing to a one-year transitional phase for these rules (which was to end in 2017). However, in September 2017, the government decided to extend the transitional period until the end of 2018 and to set up new trade zones for CBEC, reinforcing its support for the cross-border e-commerce sector. While changes in the regulation do seem to be a certainty in the future, the timeline for their introduction remains ambiguous as several industry analysts anticipate that they may get pushed off again.

Cross Border e-com in China

EOS Perspective

The cross-border e-commerce sector in China has been witnessing exponential growth and despite the looming new regulations, is expected to continue to grow at least over the next five years. While leading e-commerce companies in China (such as Alibaba group and JD group) have acted swiftly to benefit from this growing space, the greatest benefit has been for the foreign players who now have an easy access to Chinese consumers without the need of setting up a shop in the country. However, these benefits may be short-lived considering the new set of regulations. Few product categories such as infant formula, cosmetics, and health supplements (which have in actuality been the most popular categories for CBEC) will be subject to registration and filing requirements, thereby their so-called ‘honeymoon phase’ in the country is likely to end. Although a lot of products do not have to comply with registration/filing requirements and are only subject to a marginal increase in taxes (as per the new rules), this does not guarantee that future regulations will not impact their presence and sales in China. Therefore, while CBEC may be the smartest way for companies to test their products with limited investment in China, they may need a back-up plan in case the government further regularizes the industry to create a level-playing field for the traditional retail.

by EOS Intelligence EOS Intelligence No Comments

GCC to Introduce VAT: What It Means for Businesses, Economy, and People

The Gulf Cooperation Council (GCC) countries are gearing towards rolling out a 5% Value Added Tax (VAT) starting January 1, 2018. Economies of GCC countries are highly dependent on the oil and gas sector revenues, which account for about 80% of the GCC governments’ budgets. The recent volatility in oil prices have battered GCC nations’ revenues, which motivated the governments to initiate a reform in the form of indirect taxation with a goal to diversify income sources. VAT is a measure that will impart more stability and robustness to the governments’ income considering the outlook for crude oil still remains volatile, while diversified revenue sources will cushion the GCC economies in times of financial crisis.

A standard rate of 5% will be applied on most products, except specified food items, domestic public transportation, and healthcare, education, and financial services. The proposed VAT rate is much lower in comparison with rates in most European countries, China, and Australia. Nonetheless, the GCC countries still stand to gain in income with the tax implementation – for instance, the UAE is forecast to generate US$3.27 billion revenue during the first year of VAT introduction.

Industries such as construction and automotive are likely to benefit from VAT implementation, while retailers might feel a pinch due to dwindling margins. The sentiment among the citizens is wary to say the least – for instance, according to a survey conducted by CFA Society Emirates, citizens of the UAE did not seem quite optimistic towards the economic impact of VAT across certain parameters such as price inflation, cost of doing business, and inflow of foreign direct investments (FDI).

GCC to Introduce VAT

EOS Perspective

Introduction of VAT could empower the GCC economies by bolstering revenue generation, aiding infrastructure development, and improving productivity levels. While some may believe that VAT implementation could tarnish GCC countries’, particularly the UAE’s, competitiveness and tax-free haven status, it is important to consider that GCC markets’ attractiveness goes way beyond only the tax benefits. GCC’s appeal also lies in developed infrastructure, competitive labor costs, lower trade barriers, and proximity to the developing Asian and African markets – implementation of a new tax reform will not change this favorable business environment.

There have been some discussions regarding the negative implications of VAT, considering residents and businesses have grown accustomed to high incomes and low deductibles for a long time. Post VAT implementation, businesses are expected to incur certain additional costs related to administrative expenses, upgrading IT systems, and training staff members, among others.

Also, highly competitive industry sectors, or those operating with thin margins are likely to witness cash flow burden, as they will be required to meet the VAT costs on purchases before they can be reclaimed from the government – in certain scenarios, when the businesses end up paying more as VAT to suppliers as compared to the VAT collected from customers, the difference can be reclaimed from public funds. The way businesses operate is likely to fundamentally transform once VAT is applied, however, with adequate preparation businesses should be able to introduce systems and processes to avoid unnecessary cost implications as well as smoothly align themselves with the new tax system.

The way businesses operate is likely to fundamentally transform once VAT is applied, however, with adequate preparation businesses should be able to introduce systems and processes to avoid unnecessary cost implications as well as smoothly align themselves with the new tax system.

VAT is not expected to have much impact on a common man, as vital household expenditure items will be exempted from it – this includes about 100 varieties of staple food items and essential services such as healthcare and education. However, for a section of the population with an appetite for luxury goods, services, and lifestyles, as well as for tourists (along with VAT, they will have to pay duty tax again on some goods in their country of origin) the brunt of new taxation is likely to be felt.

Nonetheless, a modest tax rate of 5% will ensure that certain social-economic distortions often associated with VAT are minimized. Also, the decision to exempt a few vital sectors (basic food items, and healthcare, financial, and education services) will ascertain that they are not affected by the tax reform.

VAT imposition is expected to become an essential part of GCC regions’ economic reforms and the taxation policy will immensely aid in diversification of revenue sources. Further, the pre-implementation period should be used by the GCC countries to develop a modern tax administration system that ensures compliance, so that once VAT is implemented, businesses and residents are able to smoothly adapt themselves to the new taxation policy.

by EOS Intelligence EOS Intelligence No Comments

GST Likely to Become India’s Biggest Tax Reform

Business Acronym GST as Goods and Services Tax

After 16 years from the conception of the idea, in August 2016, the Indian parliament finally passed the much awaited Constitution Amendment Bill for the introduction of Goods and Services Tax (GST) which is set to replace almost all indirect taxes in the country by April 2017, effectively simplifying India’s tax system. GST, a value added tax, is a single tax levied on the supply of goods and services from the manufacturers to the end consumers. As per this new tax regulation, the dealer of the product will be liable to pay tax only on the value added by him in the supply chain, thereby offsetting tax credits paid on inputs. Thus, the consumer will bear only the GST charged by the last party in the supply chain.

Under the previous tax regime, the state and the central governments levied different charges such as income tax, sales tax, excise duty, central tax, and security transaction tax separately. The GST is set to replace this procedure of implementing multiple indirect taxes with a single comprehensive tax regime under the GST umbrella. The new regime will have a dual structure with the central government and the state government having administrative powers to charge GST across the supply chain. It will include three kinds of taxes: the central GST, the state GST, and an integrated GST to handle inter-sate transaction.

This new tax reform is said to have far reaching impact on the Indian economy. It aims to eliminate the shortcomings of the current way of applying taxes across the supply chain involving numerous multi-layered policies and to remove the ‘cascading effect’ of multiple taxes on goods and services. The old regime of imposing separate taxes on goods and services and dividing transaction values for taxation purpose led to administrative complications and high compliance costs. The new system of uniform and integrated tax rates is likely to facilitate ease of doing business in the country, while the removal of inter-state taxes is likely to reduce time and logistics cost of the movement of goods. In addition, the integration of taxes and removal of Central Sales Tax (CST) is expected to lead to a decline in prices of domestic goods and services. Lower transaction costs combined with the removal of CST are likely to facilitate a rise in the competitiveness of the country’s goods and services in the international market and boost exports.

A robust IT infrastructure will be the backbone of the GST system, initiating ease of tax administration for the government and transparent and easy conduct of tax services, such as payments and registrations, for the citizens. Only a comprehensive IT infrastructure is likely to enable smooth transfer of tax credit across the supply chain, keeping a check on leakage. The new system is also expected to lead to a decline in the cost of tax collection, thereby generating high tax revenues for the government.

The GST system is also believed to be of significant importance to the consumers. Multiple indirect taxes levied by the central and state governments led to incomplete input tax credit availability which had to be adjusted against tax payable leading to the inclusion of various hidden taxes in the cost of goods and services. The GST system will levy a single tax from the manufacturer to the consumer, providing transparency and clarity of taxes paid. Further, efficient business conduct and reduction of leakages will lower the tax burden on the goods.

While the GST promises to streamline the indirect tax regime with a single tax, it has to overcome various challenges to be successful. Since the country is adopting a dual structure with the central and state governments, the main issue would be the coordination between different states. The central and state governments will be required to come to an agreement regarding the GST rates, administration efficiency, and the implementation of the GST, which might prove to be a cumbersome procedure. Further, IT infrastructure, which is said to be the foundation of the GST regime, will be a critical factor affecting the success of the new system. A strong technology support connecting all state governments, banks, industry, and other stakeholders on a real-time basis will be required for the efficient conduct of business. In addition, since the working of the GST tax regime is different from the indirect tax system, proper training will be required for the tax administrative staff at central and state levels regarding legislation and procedures within the GST. Another factor the government will need to consider is to adjust the new tax in a way that the tax revenue remains at least same without any revenue loss. For this purpose, a Revenue Neutral Rate (RNR) will need to be calculated and critically evaluated, as such a rate is likely to have a great impact on the Indian economy.

GST is a much awaited revolutionary tax reform in the Indian economy. If implemented properly, it is believed to add 2% to 2.5% to the nation’s GDP in the long run. It promises ease of doing business, economic growth, and higher tax revenue. Even with the diverse challenges the new tax regime is likely to be faced with, the GST has the potential to be a game changer for the Indian economy in the near future and is said to pave the way to a ‘one nation, one tax’ system.

by EOS Intelligence EOS Intelligence No Comments

2014 FIFA World Cup Brazil – A Squandered Opportunity

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After 7 years of preparations, Brazil hosted the most expensive FIFA World Cup in 2014 at a cost that totaled billions of dollars. What is the associated outcome of spending huge sums on World Cup preparation? Did the investment leave any positive legacy for the country? What is the economic impact of hosting the World Cup on Brazil?

Investment and Associated Outcome

Investment in projects considered essential to hosting World Cup in 2014 varied across a range of sectors and had different impact on each of them. Around US$12.9 billion were invested in numerous projects focused on urban mobility, airports, stadiums, tourism, ports, telecommunication, and security between 2007 and 2013.

World Cup-related Investment By Sector, Brazil

Urban Mobility

Brazil has been struggling with overcrowded urban transportation systems for years. The insufficient public systems, paired with Brazilians’ growing financial capabilities, resulted in an increase in personal vehicles use, which in turn triggered chaotic and congested traffic conditions across Brazil’s major cities. 2014 World Cup investments planned in relation to urban mobility were expected to leave positive legacy for the country and to improve transportation systems in metropolitan cities easing traffic problems. But, several delays (caused by corruption, financing problems, etc.) were observed in execution of the planned urban mobility projects during 2007-2012, long before the event. Furthermore, as the World Cup neared, the government’s focus transferred to stadium construction works, as six out of the proposed twelve stadiums for 2014 World Cup still remained incomplete a year before the tournament. According to Responsibility Matrix 2013, investments dedicated to urban mobility projects were cut down to US$4 billion from US$6.6 billion anticipated in 2010. Some 21 of 53 projects planned in 2010 were discarded from the Matrix in 2013. Transformative advancements in transit infrastructure were expected to be the most beneficial outcome from hosting the mega sporting event. But with time, the priorities for government changed, and many of the ambitious projects never took off, as was the case with the proposed project for building high speed train linking Rio and Sao Paulo that was never executed.

Moreover, as the required urban mobility projects remained unfinished during the tournament, government declared holidays in schools and businesses on game days to ease traffic congestion. In June 2014, Sao Paulo State Federation of Commerce, a representative of 155 trade and business unions, estimated that the cost of lost productivity and overtime pay for businesses that remained inoperative during games would be around US$5 billion.

Furthermore, experts allege that these urban mobility projects were approved hastily without giving much thought to long-term benefits, which represents an intangible opportunity cost. For instance, some of the host cities, such as Sao Paulo, Manaus, Salvador, and Porto Alegre, were not allotted any investments in transport infrastructure. In most host cities, the mobility projects were limited to Bus Rapid Transit lines and there were no plans to invest in light rail, metro, or ferry lines.

Airports

An estimated investment of US$3.9 billion was designated to airports, out of which US$2.9 billion were contributed by private sources. These investments led to a noticeable improvement in airport infrastructure and facilities. An assessment report, published in July 2014, by President Dilma Rousseff and the Minister of Civil Aviation Moreira Franco indicated that around 16.7 million passengers used airport services in Brazil during the tournament. In addition, annual passenger capacity at airports increased by 52% over 2013 capacity level, reaching 67 million passengers per year. Between 2007 and 2014, aircraft yards were increased by 1,360 m², passenger terminals were increased by 350,000 m² and 54 new boarding gates as well as 10,300 parking slots were built. Modernized infrastructure and increased capacity will remain as positive legacy for the country.

Stadiums

Between 2007 and 2014, Brazil constructed five new stadiums, renovated five stadiums, and demolished and rebuilt two stadiums for 2014 World Cup. The estimated cost of construction and renovation of the proposed twelve stadiums for hosting 2014 World Cup game increased to US$3.5 billion, up from US$1.2 billion projected in 2007. Public opinion was outraged at these inflated costs, especially that they were paired with un-kept promises once given by the government representatives. After winning the bid to host the World Cup in October 2007, the former Sports Minister Orlando Silva promised, “There won’t be one cent of public money used to build stadiums”. However, according to Responsibility Matrix 2013, the contribution by private sources for building and refurbishing stadiums stood only at US$61.3 million, so majority of the costs were borne by federal investments and state and municipal governments. Another issue associated with the construction of large stadiums is its effect on urban real estate. Each newly built facility is spread across around 15 to 20 acres of urban land, making the space unavailable for any other, perhaps more productive, purposes. It is likely to also continue to negatively affect the real estate prices, especially, as urban land is scarce in Brazil.

Post 2014 World Cup, some cities, which received large stadiums built specifically for the tournament at capacities far exceeding local, every-day needs, are struggling to make these facilities economically viable. In particular, the stadiums built in Manaus, Natal, Cuiaba, and Brasilia appear to be under the fear of turning into ‘white elephants’. These cities have football teams playing in Brazil’s third-fourth division championships, which are not expected to attract the audience at volumes close to the stadiums’ capacities. Moreover, if government fails to find private sponsors for these stadiums, hefty maintenance costs will have to be paid from public funds. The newly built US$325 million stadium in Manaus alone is expected to demand US$3 million for annual maintenance.

Security

In June 2013, mass protests were held across the country during Confederation Cup, a warm-up tournament organized by FIFA to test stadiums, transportation, and security before 2014 World Cup, to express frustration over exorbitant spending by government on World Cup while Brazil still struggled with below par standards of healthcare and education. The protests turned violent with police crackdown and arrests. Following the event, Brazil’s government became alert and tightened up the security measures for the 2014 World Cup to ensure safety of the visitors. 177,000 security personnel were deployed during the tournament and US$900 million were invested in security structures, equipment, and training. Such high spending on security might not have been required if the government had addressed the problems of the country’s citizens in time, or at least had exhibited more understanding attitude to these sensitive in nature social problems.

Ports

Around US$322 million were invested in ports. With more than 90% of trade in Brazil routed through ports in 2012, ports are an important medium for international trade in the country. However, the funds allotment for improvement of ports under the header of World Cup-related investment remained limited as the sector was not assumed to directly impact the event. Between 2007 and 2013, funds were mainly used for modernization of port terminals at Salvador, Fortaleza, and Natal.

Telecommunication

During 2007-2013, around US$200 million were invested in improvement and expansion of telecommunication infrastructure in association with World Cup in Brazil. In order to connect the host stadiums and other official venues of the tournament, a 15,000 km long optical fiber network was installed that enabled to handle 166 terabytes of data during the World Cup. Furthermore, 15,012 mobile antennas were installed across the host cities. A report released post 2014 World Cup by SindiTelebrasil, a national union of telephone companies in Brazil, indicated that the telecommunication networks in the country were successful in handling large traffic volumes during the event. For instance, during the World Cup final match, held on July 13, 2014, between Germany and Argentina, the telecommunication networks managed high traffic volume of around to 2.6 million photos, which is equivalent 1,430 gigabytes of data.

Tourism

Post 2014 World Cup, President Dilma Rousseff announced that one million foreign tourists visited the country and three million Brazilian tourists travelled around the country during the event. Around 3.4 million people bought tickets to attend matches at the stadiums. Fan Fests attracted another five million people. By mid-June 2014, a total of 340,000 daily hotel bookings were recorded.

According to data released by Brazil Central Bank in July 2014, international visitors spent US$797 million in Brazil in the month of June 2014. Higher revenues from spending by international tourists in Brazil and reduced foreign trips by Brazilians during 2014 World Cup contributed in improvement of international travel account of services trade, which posted a deficit of US$1.2 billion in June 2014, down 17.3% from June 2013, providing some cushion to current account deficit. Economists believe that current account deficit over 5% of gross domestic product may lead to currency crisis in Brazil involving difficulty in debt repayments and currency depreciation. The twelve-month current account deficit remained stable at 3.6% of gross domestic product in June 2014, at the same level as in August 2013, because of narrowed gap in international travel account of services trade.

A survey conducted by Getúlio Vargas Foundation (FGV) and the Foundation Institute of Economic Research (FIPE), conducted by interviewing 6,627 foreign visitors and 6,038 Brazilians during the World Cup indicated that about a million tourists from 203 different countries came to Brazil during the tournament. Foreign visitors stayed in the country for an average of 13 days and visited 378 Brazilian municipalities. Thus, the event offered an opportunity for the country to promote its less popular tourist destinations to a group of diverse visitors. Furthermore, the survey suggests that 95% of the visitors expressed the desire to revisit, which might indicate brighter days for tourism industry in the future, provided that these tourists actually come back.

A Rocky Road to the Event

A look into World Cup-related investment across these sectors reveals that there have been mixed repercussions of the event across social and economy spheres. However, on a broader level, the planning, preparation, and organization of the event were challenged by a range of problems, which led to lost opportunities or even negative outcomes, and questioned the overall benefit of organizing 2014 World Cup by Brazil.

Increased Costs and Delays

In 2007, Carlos Langoni, then Finance Director of the 2014 World Cup Local Organizing Committee and former President of the Brazil Central Bank, estimated the World Cup-related cost at US$6 billion. In January 2010, Sports Ministry revised the estimates to around US$11 billion. According to the Responsibility Matrix 2013, the estimated actual expenditure was US$13 billion.

The increase in costs is believed to be partially attributed to the rampant political corruption in Brazil. By analyzing Brazil’s electoral data and government audit reports from 2007 to 2013, The Associated Press reported many-fold increase in campaign contributions to the political parties by the construction firms that were awarded most World Cup projects. This is suspected to have been a form of a bribe to win Word Cup-related projects and later allowed these companies to make huge profits by indulging into unfair practices such as fraudulent billing, under-compensation to workers, etc. For instance, Andrade Gutierrez, a construction conglomerate that got large contracts associated with World Cup, increased its political contributions to US$37.1 million in 2012 from US$73,180 in 2008. Adding to the suspicion of possible political linkage of the construction firms involved in World Cup-related projects, in 2014, Contas Abertas, a watchdog group that scrutinizes Brazilian government budgets, alleged that some contracts were awarded directly to the chosen construction firms and were never made available for public bid. A government audit report on construction projects associated with World Cup, released in early 2014, highlights several instances of price-gouging and suspected misuse of financial linkages between the construction firms and government. For instance, Brasilia’s government failed to impose US$16 million fine on Andrade Gutierrez for a five-month delay in completion of the stadium in the city. However, no corruption charges have been filed yet on individuals or companies related to World Cup work.

Additionally, experts believe that the lacking capability of construction firms in project planning and management also contributed to rising costs and delays. Furthermore, in order to accelerate the construction work, ‘emergency’ contracts were awarded at a higher price to leading (and known to be influential) construction firms, waiving the normal contracts, which further led to inflated costs.

Overexploitation of Workers

Construction projects, especially the stadiums, which were left to last-minute completion, had adverse effect on the workers. Many workers were assigned twelve-hour shifts and were asked to give up holidays to finish the construction work in time for World Cup. Some workers reportedly lost their employment as they could no longer tolerate the stress and physical strain. Around eight workers died in accidents on construction sites and these accidents occurred mainly due to lack of safety measures and inhuman working conditions. Many workers that had migrated from rural parts of the country to urban areas in search of World Cup-related employment opportunities complained about poor working and living conditions and under-compensation. Between 2007 and 2014, workers in various parts of the country, supported by labor unions, went on strike demanding their basic rights. Strikes and accidents triggered further delay in construction work related to World Cup.

Projects Financing and Funds Clearance Issues

According to Responsibility Matrix 2013, 80% of the total investments in World Cup-related projects were financed through investments and funding from federal, state and municipal governments.

Source of Funds

A larger role from the private sector was anticipated in preparation for 2014 World Cup, particularly for the event-specific projects such as construction of stadiums, and the government was expected to contribute mainly as a facilitator for the event. As the actual contribution from private funding was limited, the strain was passed on to local government budgets. In 2010, on failure to attract private investments for building stadiums for World Cup, the National Bank for Economic and Social Development (BNDES) opened a credit line of US$2.7 billion for completion of the World Cup stadiums. After receiving requests from states for financing, BNDES took up to three months to analyze the proposals and consequently the stadium construction work was further delayed.

Furthermore, complex and time consuming procedures continued to cause delay in funds clearing. According to World Cup Transparency Portal, by March 2014, 89.9% project work had already been contracted out, but payments were done for only 51.2% of them. This was implying increased payments out of local governments’ pockets in the second quarter of 2014, which occurred at the expense of several high-importance sectors such as healthcare or education.

Roadblocks for Micro and Small Enterprise

Around 44,000 enterprises associated with Brazilian Service of Support for Micro and Small Enterprises (SEBRAE), a non-profit autonomous institution promoting competitiveness and sustainable development of micro and small enterprises, are estimated to have earned US$230 million in revenue from World Cup-generated business opportunities from 2007 to 2014, which indicates that several of them were able to take good advantage of the opportunities provided by the event. However, it appears that many small food and FIFA merchandise vendors could have benefited to a greater extent, if they were not deterred to capitalize on large demand generated in the close proximity of stadiums during World Cup by FIFA’s heavy fee of US$8,000 from any non-FIFA approved vendor who wished to operate in a 1.5 km radius of host stadiums. The question is whether such a considerable fee remains in proportion to small and micro vendors’ scale of operations, who after all distribute FIFA merchandize, contributing to the publicity success of the event.

Even the few selected street vendors (estimated at around 1,000) that were granted temporary licenses to sell FIFA sponsors’ goods in the FIFA prohibited zones during the World Cup were not much at advantage. FIFA sponsors were responsible for selecting, contracting, and training the vendors. Proven experience of the vendors in selling goods in the neighborhood was the main the criteria for selection. Vendors were provided with uniforms, authorization cards, as well as goods to sell. Vendors retained a fixed 30% share in revenue from goods sold during the event, which limited their ability to negotiate the profit margins. As these vendors were not allowed to sell goods from non-FIFA sponsors, they lost an opportunity of earning higher revenues by selling locally manufactured or self-produced goods.

Mass Eviction

Eviction of People from Host CitiesBetween 2007 and 2013, about 248,297 people were forced to leave their homes due to infrastructure work for the tournament. Social activists claimed that most of the designated areas for relocation were at far distances from former dwellings and were less developed. There have been complaints that the compensations offered by the government to people for relocation were unfair and insufficient.

For instance, in May 2014, AlJazeera reported that in Rio de Janerio compensation sums offered to people for relocation was half the value of their old house, while employment opportunities in relocated areas remain scarce. These people belong to most impoverished communities in Brazil and lack of work opportunities and inadequate compensation may further worsen their condition, which may also lead to increase in crime rate.

Tax Revenue Lost Opportunity

Brazil government was rather generous in giving out tax breaks in relation to various activities associated with 2014 World Cup, and this was considerable revenue lost for the budget. In 2010, the Ministry of Treasury announced tax breaks for the construction and renovation of the stadiums for World Cup. The entities involved in stadium works were granted exemption from Industrialized Products Tax, Importation Tax, or social contributions. In addition, the twelve host cities were granted exemption from State Value Added Tax on all operations involving merchandise and materials for construction or renovation of the stadiums. Furthermore, all expenditure by FIFA in Brazil for World Cup was exempted from taxation. While it is always expected that tax relieve and exemptions are given in such high-profile, national events, it remains doubtful whether Brazil could afford foregoing such tax revenue, especially in the face of many social, structural, and welfare problems eating away the country’s public system.

 

EOS Perspective

2014 World Cup is believed to have provided a boost to Brazil economy, but this push was not significant enough to upswing economy’s recently sluggish growth. The temporary rise in tourism associated with the event, can, to some extent, offset lowered production and disruptions in the country during the event. However, it is unlikely that gains from this short tournament will make up for the inflated and overrun costs, suspected political corruption, fraudulently spent or lost money, missed opportunities of diverting some of the funds to other sectors, or social damage caused by disregard for dwellers and workers, along with other social costs that follow these deficiencies in a ripple effect. World Cup-generated opportunities benefited mostly construction, hospitality, travel, and tourism sectors.

The improvements and modernization of infrastructure will leave positive legacy for the country, which is a positive outcome, however achieved at a great expense, arguably not comparable with the country’s current financial capabilities. As emotions cool down and more objective analyses are offered by various experts, it is more and more visible that the positive impact of the event on Brazil economy, its people, and businesses is rather short-lived. Over long term, it is likely that Brazil will end up being the loser of the 2014 FIFA World Cup. As the event-generated income sources slowly dry up, Brazil will be left with a huge bill to pay in its hand, one that will have to be settled over years to come.

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