On a sunny February morning, Brazilian President Luiz Inacio Lula da Silva is doing what he loves: pumping up his audience by unveiling a multi-million dollar government dam that's bringing jobs to their backyard.
Hundreds of workers jam under a white plastic awning near Goiania in the nation's central region as Lula launches into two favourite subjects: soccer and Brazil's federal audit court, known by its initials TCU. The watchdog agency, similar to the US Government Accountability Office, has become Lula's bane, Bloomberg Markets reports in its June issue.
"We will hold in Brazil the best World Cup," Lula says, referring to the global soccer championship that the nation will host after six decades without a major international sports event.
"The one thing I can't promise is we will win the 2014 World Cup, because maybe the TCU would ask for an audit," he adds. The crowd bursts into laughter.
The comment is more than an off-the-cuff joke: Lula and his push for government-funded growth are butting up against calls from political opponents and the TCU to rein in spending — and the president himself — as the October presidential election looms.
In the seven-plus years of his presidency, Lula, 64, has steered Latin America's biggest economy from the edge of default and turned the nation of 193 million into an emerging financial power.
The Brazilian real soared 33 per cent in 2009, the largest gain among the world's 16 most actively traded currencies. Annual inflation dropped to 5.17 per cent in March from 14.5 per cent when Lula took office in January 2003 — a far cry from the 6,800 per cent in April 1990. Gross domestic product growth is forecast to accelerate to 5.8 per cent in 2010 from 2.7 per cent at the beginning of Lula's term.
"Brazil is definitely among the hottest markets this year for us," says William Landers, who helps manage $8.7 billion [Dh31.99 billion] of Latin American assets at BlackRock Inc. in Plainsboro, New Jersey.
International investors are pouring money into Brazil. They added 20.5 billion reais (Dh43.35 billion) of Brazilian shares to their holdings last year, the most since records began in 1994.
Foreign direct investment this year is on its way to recovering to the 2008 record of $45 billion. And Brazil's biggest company, state-owned oil giant Petroleo Brasileiro SA, plans to sell as much as $25 billion in stock — the largest share sale in history, according to Luciano Coutinho, president of Brazil's development bank.
Adored President
To top it off, Lula, a former labour leader whose tales of growing up in poverty have helped win him an approval rating of 80-plus per cent, is one of the nation's most adored presidents.
Not everyone is so effusive about Lula. TCU President Ubiratan Aguiar says the president is carrying out public works at any price in the name of development. Former Brazilian President Fernando Henrique Cardoso, who defeated Lula in 1994 and 1998, says Lula is exploiting his popularity to run roughshod over checks and balances that keep spending under control. Cardoso says Lula is using government largess to boost chances of a presidential victory for his handpicked successor, former chief of staff Dilma Rousseff. Rousseff has no leadership skills and doesn't inspire confidence, Cardoso says.
Brazil's electoral court fined Lula twice this year, for a total of 15,000 reais, saying he campaigned for Rousseff ahead of the period allowed by law. Lula was also fined in August 2006 for running ads for the presidential election ahead of the legal starting date.
"You don't see Lula defending transparency and honesty in government," says Larry Birns, head of the Washington-based Council on Hemispheric Affairs. "You see Lula defending jobs and growth at any cost."
Birns says Lula is insensitive to the importance of creating a government with ground rules and combating lapses when they occur.
"All of this eventually is going to come back to haunt this administration," Birns says.
Environmentalists gripe that Lula's building spree is worsening deforestation of the Amazon rain forest and risking overdevelopment. On April 12, James Cameron, director of the top-grossing film Avatar, travelled to Brazil to protest what would be the world's third-largest hydroelectric dam, called Belo Monte. It's planned for the Xingu River in the heart of the Amazon.
"Lula thinks his popularity gives him the right to do whatever he pleases," says Arthur Virgilio, who leads the opposition Socia l Democratic Party, or PSDB, in Brazil's Senate. Cardoso is also a PSDB member. "He is authoritarian and often forgets that Brazil is a democracy," Virgilio says.
Lula's biggest battle is with the TCU. Brazil formed the Tribunal de Contas da Uniao 119 years ago to control how the government allocates the federal budget — which amounts to 1.86 trillion reais for 2010.
Every year, the TCU audits a 20 per cent sample of public works projects and sends the results to Congress. If the TCU finds evidence of billing fraud, overcharging or other irregularities, it can recommend suspending work. Congress then blocks funding for the projects that are suspended and orders construction stopped.
The TCU audited 219 projects last year that accounted for 35.4 billion reais in public-sector investments. It recommended stopping 41 of them. Thirteen are part of Lula's spending programme called the Growth Acceleration Plan, known as PAC.
"Lula and his party are really uncomfortable with controls on spending," Cardoso says. "All these controls prevent exactly what they want to do, which is to make arbitrary decisions based on political inclination and not on technical or market considerations."
Big government
Lula's government hired 57,100 public servants from 2003 to 2009, increasing the number to 542,843 at the end of 2009, the highest since 1996. It cut 25 billion reais in taxes last year. Brazil has posted a budget deficit every month in the 14 months through December 2009. In 2008, the country had a budget gap of 37.7 billion reais, the biggest in 15 years.
Virgilio Castro Cunha, an economist at Bank of America Merrill Lynch in Sao Paulo, says some investors worry that Rousseff may keep up Lula's spending and hiring spree.
"It could lead to renewed concerns about the government's fiscal policy and the overall size of the government," he says.
Rousseff, 62, is picking up Lula's fight for jobs and growth. The one-time Marxist guerrilla, who has never been elected to office, is campaigning on the assertion that she created the PAC spending programme while serving as Lula's chief of staff. She's running against PSDB member Jose Serra, governor of Sao Paulo state, Brazil's wealthiest.
When Serra, 68, officially declared his candidacy on April 10, he pledged to increase government investment in infrastructure and loosen fiscal restraints. Even so, former central bank director Paulo Vieira da Cunha, now a partner at Tandem Global Partners in New York, says Serra may be more likely than Rousseff to put a lid on federal spending by promoting public-private partnerships and curtailing government jobs.
Cardoso says he worries Lula and his party are grabbing too much power. Yet even he says Brazil won't turn into a Venezuela if Rousseff wins and follows in Lula's footsteps. Authorities in Brazil's northern neighbour have detained journalists, opposition politicians and the top television network executive for bad-mouthing President Hugo Chavez.
Not another Venezuela
In January, Chavez expropriated supermarkets owned by French retailer Casino Guichard Perrachon SA, saying he was protecting Venezuelans from illegal price increases.
"Brazil won't be Venezuela because it has strong institutions and a more educated population," Cardoso says.
All the same, Lula's association with Bolivian President Evo Morales; Fidel Castro and his brother Raul, Cuba's president; and Chavez may mean Brazil's leader is moving to the left, says Juan Carlos Hidalgo, project coordinator for Latin America at the Washington research group Cato Institute. Those ties, and Brazil's resistance to calls for tougher sanctions on Iran's nuclear programme, may strain its relationship with the US, he says.
BlackRock's Landers says he doesn't expect either a Rousseff or a Serra presidency to hurt investor appetite for Brazilian assets.
"There may be a few hiccups here and there on the market during the campaign because investors will watch closely what the leading candidates are saying," Landers says. "They both want the same thing for the economy: sustainable growth, inflation under control, rising employment and improved access to credit so that Brazil's consumer base can continue to grow."
Nobody else has Lula's ability to make both the people and the international investing community happy. Brazil, which defaulted on its foreign debt twice since 1983 and devalued its currency in 1999, has come storming back under his guidance. The country got its first investment-grade rating in April 2008 when Standard & Poor's boosted Brazil's sovereign debt to BBB- from BB+. That same year, Brazil, which is the world's biggest exporter of beef, coffee, orange juice and sugar, held so many dollars that it created a sovereign-wealth fund to invest outside its borders.
Foreign exchange reserves surged to $244.8 billion in April as record commodity exports continued to flood the local market with the US currency. "The economic stability we see now is not going away," Landers says.
Lula wants to keep it that way. And he blames the TCU for delays that cost Brazil thousands of jobs. "We won't let workers be unemployed because someone suspects something is wrong," he said on March 12 at a ceremony to unveil the expansion of Petrobras's Presidente Getulio Vargas refinery in southern Parana state.
The refinery, known as Repar, went online in 1977 and produces 12 per cent of Brazil's petrochemicals. In last year's audit, the TCU found billing fraud and an incomplete budget for the refinery's expansion. It recommended work be halted until the issues were addressed. Lula included 1.7 billion reais for the project in the 2010 budget anyway. "We are talking about 25,000 jobs that would be lost if this project were suspended," he said.
Lula is the only president who has challenged the TCU and he has done it twice. In 2005, he defied Congress by ignoring an order to halt construction of Angra III, Brazil's third nuclear power plant. The facility, based 157 kilometres from Rio in Angra dos Reis, lacked a proper environmental licence, according to TCU documents.
When Lula approved Brazil's 2010 budget, he ignored Congress by including four Petrobras projects that are funded at 13.1 billion reais. The TCU had recommended that Repar and another refinery, a petrochemical plant and a gas pipeline be suspended for overbilling and shoddy measurement of the costs of materials and services.
At a refinery called Abreu e Lima, which Petrobras is building with Venezuela's Petroleos de Venezuela SA, the TCU found 145 million reais in billing fraud and no explanation for 1.1 billion reais of expenses.
Petrobras CEO Jose Sergio Gabrielli denies the irregularities. He says the TCU used different criteria to assess the refinery's costs.
Lula says the projects are essential, especially with the proposed stock sale. Brazil's government controls 55.6 per cent of Petrobras's voting shares. Nongovernmental shareholders own 77 per cent of Petrobras preferred stock and 42 per cent of the common shares.
Petrobras share sale
Gabrielli is pushing to schedule the sale before July. The government wants to increase Petrobras's capital so the oil giant can fund a $220 billion plan to increase drilling and improve production and distribution through 2014. On March 2, Brazil's Lower House approved a bill that would exchange the rights to oil reserves for shares in the company; the Senate had 45 days to consider the measure. Investors are waiting for details on where the oil rights will be as lawmakers squabble over how much their states will get from future production.
Petrobras has become even more important after the 2007 discovery of the Tupi field. The area may hold as much as 8 billion barrels of oil and gas trapped beneath 2 km of salt, according to the company.
If Tupi and Brazil's other so-called pre-salt finds of more than a billion barrels apiece pan out, Petrobras says they may make Brazil the world's fourth-largest oil producer after Saudi Arabia, Russia and the US. It's now 13th, according to London-based BP, which ranks countries by production.
The TCU's Aguiar says the court will continue to do its job and investigate Petrobras's contracts. "We cannot condone companies or people who misappropriate or misuse public funds," Aguiar, 68, says, speaking from his office overlooking Brasilia's Square of the Three Powers. "We'd be stimulating fraud and the waste of our own money."
Skirmishes with the TCU may worsen as the government prepares for the 2014 World Cup — and the 2016 Olympics in Rio. The Olympics will need at least $11 billion in investments, according to the organising committee. Lula's PAC programme has committed as much as 70 per cent of that total for the Olympics.
Lula wants to remove environmental screening and government oversight that could slow projects for the sports events.
"We need to create some accord or code of conduct among the control agencies and the executing agencies in the government so that we don't give the same treatment to these events — be it on the financial audits, or the environmental issues, or the internal controls, or at the TCU," he said.
For environmentalists, that's another example of how Lula is overstepping his authority. Already, he has weakened Brazil's environmental agency Ibama and removed some of its power to review giant hydroelectric power dams proposed for the Amazon.
If Lula's campaign blitz works, Brazil's workers may not have to worry about a change of course for another four years. Brazil's popular pro-growth president, though, may risk a lasting blot on his legacy.
