Brazil: Two-year balance of infrastructure in Brazil: refocus of state-owned enterprises

Author: | Published: 11 Dec 2018
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President Bolsonaro took office on January 1 with an agenda mixing economic liberalism and anti-corruption reform. However, his administration will also have to face existing challenges.

This article is the first in a series of three on achievements of the Temer administration in the infrastructure sectors. The articles also take into account some topics that the incoming administration will have to consider. This first article focuses on state owned enterprises (SOEs), developments during the Temer administration and what lies ahead. The second will comment on the government as accelerator and financier of infrastructure projects. The third article will look at the changes into regulated sectors on logistics and energy.

Perhaps the most significant developments for Brazilian infrastructure during the Temer government were the evolution of corporate governance rules for SOEs. A law was passed outlining rules for the election of directors and procurement guidelines. The largest SOEs (like Petrobras and Eletrobras) were agile in adopting new standards of procurement and nominations. Other SOEs are following in their steps, at different paces.

The new law provides that corporate officers have a minimum time of experience before being invested as directors or board members. Before the law, the government's controlling interest was often used to promote governmental interests ahead of minority shareholders' and the company's own. Since the law came into force, Petrobras, Eletrobras and other SOEs significantly enhanced their governance. A good example is a reduction of investments influenced by political interests rather than rates of return.

Despite the efforts to distance the management of SOEs from politics, SOEs are still embedded into political discussions – and will continue to be under the new administration. For instance, Eletrobras' power distribution concessions in some northern and northeastern states end on December 31 2018. Under its current structure, the operation is unprofitable and the company is trying its best to withdraw from the concessions at the original due date. As the discussion reaches public opinion, certain groups insist Eletrobras should stay performing the services at low fees, instead of having a private concessionaire charging higher fees. The situation has reached a deadlock. As a way out for Eletrobras, the government published a Provisional Measure to allow procurement of short-term distribution services whilst the long-term contract is not agreed.

A second hallmark of the SOEs' turnaround is their divestments programmes, particularly Eletrobras and Petrobras. Although the original Petrobras divestment programme started in 2015, it was only during Pedro Parente's term as Petrobras chief executive that it gained its current form after rounds of negotiation with the Court of Accounts. The Court of Accounts was opposed to various aspects of the programme, but, with the worsening of Petrobras' financial situation, agreed to adapt traditional public procurement rules for complex asset sales. The federal government followed and issued decrees regulating the procedure and increasing legal certainty. The divestments programmes are important steps both for Petrobras and Eletrobras in reducing their debt, and for other market players to assume operation of the assets and to invest. Yet, dissenting groups have been trying to halt the sales, raising a myriad of arguments in various lawsuits, which, overall, have been rejected by the higher courts.

Divestment programmes matter not only for SOEs to refocus on their core activities, but also as a liberalising force. Before it started divesting, Petrobras owned virtually every natural gas molecule that came in transportation pipes in the midstream sector, as well as the transportation pipelines and the natural gas regasification terminals. Petrobras also had indirect interests in 19 of the 27 state natural gas distributors, which are entitled to monopolies. With the divestment programmes still underway, it is expected that the incoming federal administration will spend some time finalising the SOE reforms and reducing the their dominance in their respective markets.

de Andrade