Hungry for more: in Brazil, selling to government—a big business—is getting easier to do

Latin Trade, Jan, 2006 by Margarida O. Pfeifer

Positivo Informatica, Brazil's largest personal computer maker since 2004, owes its growth--and success--to the Brazilian government. The 17-year-old company sold 90% of its products to the government in 2004. Today, it sells 20% of its annual production of 300,000 computers and products to the government. It's not that the government is buying less. Instead, the company has grown to the point that it can produce more.

On the contrary, government deals have risen year after year. The company participates in every auction, selling a total of 47,000 personal computers at the federal, state and local levels in 2004, and 60,000 in 2005. Positive has jacked up production over the last few years, cutting down the percentage of government in its overall business. In 2005, it invested US$5 million in a new manufacturing plant that tripled production. "We focus hard on the government," says Helio Rotenberg, Positive Informatica's general director. Education, too, is fueling government demand to the tune of $260 million in 2005. "Government purchases in this area continue to grow. There have been many big auctions," he says.

Just like Positive, thousands of Brazilian companies are fighting for government business. In 2005, the Brazilian public sector spent $26 billion buying goods and services from private companies, $7 billion of that at the federal level. At press time, the government was putting the finishing touches on the 2006 budget; the total spending package for this year is estimated to be $592 billion, slightly more than the 2005 budget.

The government estimates that 60% of the budget will pay down domestic and foreign debts. Once debt payments, salaries and other administrative fees are taken away, the Brazilian government will have $233 billion to spend in 2006, 10% more than the year before. Historically, the Brazilian public sector has invested in healthcare, education and social development. After that, governments in the past tended to favor defense.

The federal government alone will spend $8 billion purchasing goods and services this year, $1 billion more than in 2005, while the country's 23 state-level governments and 5,000 municipalities will spend as much as $100 million, according to some estimates. Large government purchases have become the bread and butter of many companies in Brazil. They have made their livelihood selling goods and services as varied as food, medicines, medical equipment, educational materials, computers, automobiles, elevators and security services to public bodies. In some sectors of the economy, such as information technology, government purchases account for half of the total business right now.

Sole purchaser. When it comes to complex and socially sensitive pharmaceuticals like AIDS cocktails or drugs such as Interferon, which treats hepatitis, the government acts as the sole purchaser, according to analysts. All of these drugs are purchased via auction, and over the last two years a good number of pharmaceutical companies have made sales online, which became a priority for President Luiz Inacio Lula da Silva. As of July 2005, the government requires 3,000 public bodies to conduct their government procurement online.

Positivo Informatica, for example, participates in 60 public auctions a month. "More than 90% of them are bid and paid for online," says Rotenberg, citing a bid to supply the Universidade de Sao Paulo with computers. "Bidding has become quicker this way, athough profit margins have eroded." Electronic bidding and payments allow for more auction participants, which pressures prices downward, says Rotenberg.

Thinner margins aside, Rotenberg sees advantages in large-volume sales to the government. In just one fell swoop, Positiva can sell up to 1,000 computers to the government, like it did in August 2005, when the Brazilian tax authority bought 14,000 computers from Positivo. A month later, it would sell another 12,000 to the Secretary of Education in Parana state. Rotenberg expects government demand for information-technology to increase over the coming years. PC para Todos, a government program designed to bring computer and Internet access to low-income families, will fuel demand. Furthermore, the government has created funds that are specifically designed to triple the number of schools connected to the Internet.

With 840 employees, Positivo is a monster compared with Flow Tecnica, a Sao Paulo hospital-furniture maker with just 10 employees. The five-year-old company builds products to Brazilian regulations. While the company makes goods bound for public hospitals, it doesn't participate in government auctions since being a small outfit leaves it without the economies of scale necessary to deal with the government. "The government only cares about price. It doesn't care at all about quality," says Marcelo Lucas, a partner in Flow Tecnica.

Flow is not the only company to feel left out. Many large and medium-sized suppliers say the government is too aggressive in its campaign to lower prices. According to some analysts, there are actually three factors behind this trend. The first is that state-level accounting laws allow for limited disclosure. Secondly, new laws designed to improve fiscal discipline pressures governments at all levels to spend less. Lastly, auctions themselves are designed to encourage participants to strive to be the lowest bidder.