Seeds of growth: with new laws in play, Brazil's small businesses are earning more and more selling to the government.

Ten years ago, Sao Paulo businessman Rogerio Cesar Carli, owner of the Liligraph Artes Graficas, a graphic arts company, took on the challenge of making his small business grow. His father-in-law, who worked in the same sector, gave him some advice: sell to the government. What at first was an alternative aimed at diversifying services and boosting sales became the core business. Selling to the government accounts for 60% of his annual revenue these days, roughly US$1 million a year. "A completely new horizon opened for our shop," says Carli, who over the last few years created a team of five vendors dedicated to identifying opportunities to sell to the public sector at the federal, state and municipal levels.

With 25 employees, the design firm can print documents in a variety of colors and sizes for a client roster that includes 60 public-sector organizations, ranging from the electoral body to the Silo Paulo state health department. "At first, we took part in at least two auctions a week and now, it's twice a day and 600 a year," says Carli.

That number could rise. Liligraph will be able to sell more to the government. Earlier this year, new legislation was passed that made it easier for small and micro-business to sell to federal, state and municipal governments by offering favorable conditions. Micro-businesses are defined as selling at most $120,000 a year while small businesses are defined as selling up to $1.2 million a year. The law's big plus for these small companies are public tenders that come with contracts valued at no more than $40,000. When awarding those contracts, the government can require that small businesses be subcontracted to handle up to 30% of larger-scale public projects, such as infrastructure. Another requirement gives small businesses preference in the event of a tie in a public tender and also, the little guy takes priority even in cases where his bid is 10% higher than the winning bid, provided that the winner is a larger organization.

"The law is historic. Small businesses generate many jobs and favoring them is the best way to create employment," says Rogerio Santanna, secretary of logistics and information technology at the Planning Ministry and also in charge of getting small businesses to participate electronically in public tenders. The government's purchasing power--adding up the 5,650 governments in 27 states--is estimated to be $130 billion, roughly 13% of the country's gross domestic product. Last year, the federal government spent $10 billion on a handful of basic staples including medicines and healthcare supplies, foods and cleaning products.

Today, small businesses represent 98% of the 5.5 million companies in the country, account for 60% of Brazil's jobs and provide 15% of the public sector with its goods and services. "The government must stimulate economic growth through awarding tenders to the micro-businesses and small companies in sensitive and strategic sectors of the economy in the interest of generating jobs and income," Santanna says. The government wants that figure to rise, inspired by laws in the United States that require the government there to earmark a portion of its contracts for small businesses. In Brazil, the public sector can boost local economies by buying from small organizations. "This leads to incentives to innovate," Santanna. "NASA is supplied by many small businesses."

"With various areas of the U.S. public sector focusing on technology, the purchasing power of the government will spur innovation," says Bruno Quick, manager of public policy at Sebrae, a Brazilian small business support service. Quick has studied purchasing systems in different countries and feels the one that is closest to the ideal is in the United States. Approved in 1953, the Small Business Act requires that 23% of public tenders go to small businesses. That figure had risen to 31% as of 2005, according to Quick. "In Latin America, there are also positive examples, such as in Peru, where in five years the small-business representation rose from 23% to 46%, and there have been similar initiatives seen in Argentina, Chile, Colombia and Paraguay."

However, Quick points out that Brazil has gained the most ground in Latin America and is getting more small firms to do business with the public sector, with government purchases running from 15% to 34% during the last five years. "This movement will generate more than 1 million new jobs directly and more than 2 million new jobs indirectly," says Quick. That's why Sebrae and the Planning Ministry created a program designed to get 500 federal purchasers to do business with at least 10,000 small businesses in Brazil within one year.

One example is the four-star San Raphael hotel in Sao Paulo, which does steady business with municipal governments and the state's education departments and mail service. "We offer service, price and location," says Simone Gallo, the hotel's manager. The hotel's average occupancy rate runs at 60%, taking in 60,000 guests a year for events and meetings. It contains seven meeting halls complete with the necessary technology and has 214,000 rooms. "Purchases from the public sector account for 10% of our annual business and we expect that to climb," says Gallo.

Julio Durante, a Sebrae consultant, has no doubt Brazil's new law will bring new opportunities for small businesses in public tenders. Durante is currently working on a Sebrae program with municipal governments to get them to speed up implementing the new legislation. "The biggest challenge for small companies is competitiveness. The municipal government is the best road to multiplying the opportunities out there for small businesses," Duarte says. "There never was a market set aside for this segment of government purchases and some governments already have begun to place value on small local suppliers."

One example is the Pilar do Sul municipality, a 27,000-inhabitant town located 130 kilometers from Sao Paulo. In 2005, when elected mayor, Luiz Henrique de Carvalho wanted local businesses to supply schools with cafeteria food and to do so without affecting the quality of service. He divided the city up into four sectors and opened bidding in each one for producers interested in delivering products to the 14 schools, home to 6,000 students. "Today, for example, milk comes three times a week at each school. We eliminated the presence of the municipal government and cut the number of employees, leading to a monthly savings of $4,000," Carvalho says. The annual savings at Pilar do Sul has risen to $12 million. "The need for constant supply favors the small, local suppliers. Currently, 20% of the budget is purchases in the municipality itself."

MARGARIDA O. PFEIFER * SAO PAULO