As I interacted with public and private sector influencers in Brazil, I was overwhelmed by a single observation which is the subject of my post this week. The observation is complex and I’m sure it will leave more than a few puzzling but, here goes.
The stated purpose of our visit was to carry forward conversations about the use of Trade Credit Offsets as an accelerator for enterprise creation and financing in Brazil. While experts from around the world come to Brazil loudly promoting investment in Brazil, this cacophony has masked a huge reality – I think intentionally. Let me explain.
Business is built on the interaction, and value exchange, between a steward of resources or goods and those who have use for those resources or goods. The nature of the value exchange may take the form of commerce with money or it may take the form of defined mutual benefit. However, in Brazil, the desire to create equity-based capital markets – encouraged by experts from abroad and reinforced by influencers within – provides the context for a deep systemic failure. Clamoring for “access to capital” to create the next “Silicon Valley” illusion is en vogue. When a person like me asks about cash-flow, revenue, or value exchange, I’m viewed as an anachronism. You see, in our promotion of economic development around the world, we’ve not promoted business – we’ve promoted usurious capital markets where it’s about investment returns, not enterprise. Stop and think. How many of you actually KNOW the business of the companies in which your pensions are invested. Get it?
A Trade Credit Offset is a function of market asymmetries. When a country buys a fighter plane or a hydroelectric power plant, the economic imbalance created by a net outflow of money from a country to a company is excessive – many times representing significant fractions of GDP. To address this imbalance, most countries impose Trade Credit Offsets which act a bit like a rebate. If, as a company, I sell a billion dollar power plant to a country, I am required to create $300 million dollars of market with the country in return. Historically this took the path of purchasing commodities, raw materials or components. Offsets can range from 25% to 100% of the nominal value of the contract and must be satisfied before the company can recognize the revenue on its balance sheets.
Over time, companies began setting up local subsidiaries for component manufacturing, assembly or service creating employment value which, in many instances helped deal with offsets. More recently – and most substantially used by China – technology transfer and know-how have become increasingly desirable by countries increasing their industrial efforts. Multiples are put in place to incentivize things like technology transfer which, in many instances receives a 10 fold multiple on its value as the offset satisfaction.
In fiscal year 2009, we identified over $5.2 billion in unsatisfied Trade Credit Offsets in Brazil. This number is staggering on a number of levels. First, what it means is that while Brazilian economic development professionals are running around looking for equity capital, they’re ignoring the LARGEST capital source in Brazil, created by Brazilian procurement and waiting to be deployed. Second, it means the supplier companies providing goods and services to Brazil are likely holding large amount of contingent revenue on their books (up to $20 billion) which cannot be recognized until satisfied. Third, it means that while creating offsets, Brazil is not effectively using this program for the fulcrum it affords. Brazil is paying premium price for less than they should be getting and they’re leaving untapped billions on the table.
So, I explained this in my meetings in Rio. Not surprisingly, people connected with Brazil’s largest corporations got it immediately. In many cases, their response was informed by the fact that they have suffered cost overruns and huge expenses from being overbilled by foreign companies who are passing along offset risk in proprietary pricing and financing. But regrettably, and to the round-about point of this post, the people in the public sector were frozen in disbelief. Their first response was, “I can’t believe what you are saying.” Frequently that response was followed by, “Why hasn’t anyone ever told me about this?” And then, my favorite, “Do you have a white-paper on this?”
I guess this is the point where I had my mini-epiphany of the week. A white-paper! Really?
If you had gone for three days in the desert without water and I handed you a bottle of water, would you first ask me to explain the chemical structure of water? Would you debate the importance of water and your lack of clarity around whether water is really as important as others say it is? And as you’re dying of dehydration, would you convene a committee to explore the merits of taking water given the possibility that it might be from the tap versus from a mountain spring in France? No. You’d drink the water.
I guess what struck me was the irony that people looking for investment – when confronted with capital far in excess of their wildest imaginations of capital for business development – chose to continue to pursue the proven failed model and walk past the largest capital asset the country has at its disposal. Which leads me to the title of my post “Give Chance a Hope”. It’s time that we give ourselves the permission to trust our observation of facts rather than rationalize consensus thinking in the face of wholesale evidentiary dissension.
Our current economic and social paradigms are heavily biased on propaganda. The controllers of the message become the arbiters of truth – even when all evidence stands in direct contravention. They are the hypnotists of those charged with leadership. In Papua New Guinea, I presented the Provincial Government of East New Britain with data from a mining company’s PUBLIC FILINGS on the stock exchange. This data explicitly said that the company was taking gold out of the country and not paying their required royalty. The mining company successfully prevailed upon the local press to publish a retraction of a report of the company’s own public filings. The Provincial Government cowered in the face of pressure from the mine. At no point did the government ever independently verify the news published by the mine on the company’s own website which confirmed their abuse. And the Toronto Stock Exchange, when informed of the same information, has taken no action against incontrovertible evidence of legal and financial violations.
Over 100 countries have been exposed to the Global Innovation Commons – a repository of open source innovations available for immediate deployment in the fields of carbon-alternative energy, agriculture and soil management, clean water, and tropical diseases. The vast majority of those who encounter the repository of OPEN SOURCE data remain convinced that they cannot use the information because it was once patented. Think about it. The very system which Thomas Jefferson established to SHARE information with the general public has been so thoroughly abused that the very basis of the social contract has been rendered unimaginable by the same general public. Over $2 trillion dollars of innovation, available for free, untouched!
Where’s the problem? Is the Government of East New Britain corrupt? Are economic developers in 100 countries corrupt? No, I think not. As a matter of fact, I think that the true failure is summarized most honestly by a gentleman representing my generous host in Brazil who had the decency of acknowledging, “We didn’t even know we could know.”
In the face of the self-proclaimed “knowledge economy” it is a moral failure to accept “not knowing” as a justification for the perpetuation of mineral rights abuses, inefficient energy technology legacies, contaminated water, food shortage and land degradation, and rampant disease. My friends in Brazil, Papua New Guinea, and over 100 other countries are not the problem – we all are. We must act to educate. We must inform ourselves and commit to sharing information with others. Start by getting the messages in this blog out to your friends and colleagues – look at the referenced data – draw your own conclusions and ACT.