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Brazil: State-owned enterprises

Carlos Augusto JunqueiraEduardo Abrantes

Recent investigations into a high-profile corruption scandal in Brazil have spurred discussions surrounding the quality of the management of the country's state-owned enterprises (SOEs). These discussions mainly focus on the nomination of public office candidates by political patronage. As a result, federal Law 13.303, published on July 1 2016, creates a new regime for SOEs that play a role in strategic sectors of Brazil's economy.

The new law, which the interim government considers a priority, has become known as the SOEs' Governance Law. It is now the main legislation ruling government-controlled enterprises. With a view to aligning SOEs' management practices with those of the private sector, the new law requires independent auditing of balance sheets.

Express rules of governance have been introduced. They establish minimum requirements for transparency in relation to how SOEs conduct business. Points concerning financial data, risk factors, management compensation and control structures must be disclosed to the market. These requirements are similar to those that the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, or CVM) applies to publicly-held companies. SOEs must adopt risk management and internal control structures by setting up a statutory audit committee.

The so-called professionalisation of the management of SOEs is also one of the targets of the new law. It seeks to disengage the management of SOEs from party politics by prohibiting the increase in campaign expenditure in election years for federal government offices to which any given SOE is linked. Board members and executive officers must have qualifications and experience compatible with their functions. Likewise, political patronage will be prohibited.

The new law also establishes rules addressing bid proceedings and contracts entered into by SOEs. These will complement the existing general rules for bid proceedings. This is an important point given the dual structure of SOEs: while they compete alongside private enterprises in certain economic sectors, given that they are maintained largely by public resources, they do not have an unfettered discretion to enter into contracts.

SOEs have until July 2018 to adjust to the new rules. The introduction of this new law is a decisive step towards bettering not only the reputation of SOEs but also their power to attract investment in key sectors of the Brazilian economy.

Carlos Augusto Junqueira and Eduardo Abrantes

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