New law to modernize Brazil’s telecom sector

. Sep 12, 2019
New law to modernize Brazil's telecom sector

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Good morning! The new legal framework for telecom companies. Just 24 hours after the idea of a new tax on financial transactions became public, President Bolsonaro buried it—for now. Brazil and the U.S. could strike a religious alliance. (This newsletter is for platinum subscribers only. Become one now!)

New law to modernize Brazil’s telecom sector

After over three years of stalling,

the new legal framework for telecom companies has finally passed in Congress. It replaces the current model, which is based on public concessions for landline telephone operators, for one of operating authorizations, which would give companies more freedom to set prices and choose the regions in which they want to operate.</p> <p><strong>Why it matters.</strong> Brazil&#8217;s legal framework dates back to 1997, when telecommunications were based on landline telephony and the internet had not yet caught on. It lifts outdated requirements on companies and could unclog BRL 34bn in investments. We break down the main changes:</p> <ul><li><strong>No more concessions. </strong>The current telecom framework imposes a series of obligations on companies, from pricing rules to the need to universalize services around the country. Companies have criticized the model, claiming that it imposes heavy investment costs on services such as public phone-boxes (which doesn&#8217;t make sense in a world based on mobile telephony and broadband).</li><li><strong>&#8220;Reversible goods.&#8221; </strong>Companies are responsible for their operational infrastructure, such as telecom towers, fibre optic networks, or even real estate. However, the model of concessions determines that, once the operation contract expires (which is bound to happen in 2025 for all four major telecom operators), infrastructure and equipment becomes property of the Brazilian state—hence the name &#8220;reversible goods.&#8221; The new regulation gives these assets to the telecom companies.</li><li><strong>Radiofrequency.</strong> The new law grants radio broadcasters the right to extend their rights for certain frequencies without a time limit—in exchange for commitments to invest in infrastructure, in order to improve the quality of services. They will also be allowed to sell rights for frequencies on the private market.</li><li><strong>Satellites.</strong> The new law includes new rules for satellite use, allowing the current time limit of 15 years to be renewed indefinitely. Rights to operate a satellite will be auctioned by Anatel, the telecom regulator, and the payment may be converted into investments in the sector.</li></ul> <p><strong>Regulation.</strong> Anatel is now in the spotlight—as it will have to set ground rules for the migration from a concession model to the new one, based on operating authorizations.</p> <p><strong>Oi.</strong> Brazil&#8217;s largest landline telephone operator Oi may be one of the big winners from the approval of the new law. Buried in BRL 20bn of debt, it can be relieved of its investments in payphones—and becomes a more attractive asset for a foreign group keen on setting a footprint in Brazil (AT&amp;T and Chinese companies are rumored to be interested).</p> <hr class="wp-block-separator"/> <h2>Bolsonaro fires tax secretary—kills new tax idea</h2> <p>The Economy Ministry&#8217;s idea to implement a new tax on financial transactions didn&#8217;t last 24 hours. From a hospital bed, where he is recovering from surgery, President Jair Bolsonaro announced on Twitter the firing of Marcos Cintra as tax secretary and said that the tax on financial transactions was no longer in the government&#8217;s plans.&nbsp;</p> <p><strong>Why it matters.</strong> Creating a tax on every financial transaction is a highly effective, low-cost way of raising money. But Mr. Bolsonaro, whose <a href="">approval ratings are down</a>, chose not to pick this battle. This new duty is rejected by 78 percent of voters. Not to mention that the government would be picking a fight with Congress, which has already begun analyzing two tax reform plans of its own—one in the House, and another in the Senate.</p> <p><strong>No direction.</strong> The case showed that the administration is somewhat lost on the tax reform. Congress didn&#8217;t consult it before starting deliberations on its own reform proposals—which are not geared toward creating more revenue, instead limited to simplifying Brazil&#8217;s super-complicated tax system. Now, the government doesn&#8217;t even have a tax secretary to gather support from states and municipalities to pass a reform.</p> <p><strong>Restructuration. </strong>The new tax controversy was the tipping point for President Bolsonaro to defenestrate Mr. Cintra, but the tax secretary was already not in the president&#8217;s good graces. Mr. Bolsonaro complained that tax authorities were scrutinizing people close to him, and wanted to interfere more in how the agency works. Mr. Cintra acted as a sort of buffer between the administration and disgruntled revenue officials. With him out of the picture, the plan is to change every top executive in the Federal Revenue Service.</p> <hr class="wp-block-separator"/> <h2>Education budget cuts to delay state-of-the-art facility</h2> <p>The cuts to the federal education budget have affected Brazil&#8217;s most ambitious scientific project ever: Sirius. The BRL 1.8bn structure is a synchrotron, a particular kind of accelerator which moves particles around a fixed, closed-loop pattern. In addition to providing a great source of energy, synchrotrons can be used for various applications, including oil extraction, research in brain formation, determining the composition of chemicals and geological materials, as well as certain treatments of cancer.</p> <p>According to the <a href="">Sirius Project</a>, the 2020 budget allocation will keep it going, but it won&#8217;t be fully operational next year, as intended.</p> <p><strong>Why it matters.</strong> With the government under severe budgetary restrictions, educational institutions have suffered a major hit. CNPq, a body to foster research and innovation, will suffer an 87-percent budget cut next year—affecting thousands of scientists. Without money to keep its most talented researchers, Brazil is undergoing a process known as a &#8220;<a href="">brain drain</a>,&#8221; when skilled workers leave a country.</p> <p><strong>History.</strong> Between 2000 and 2013, the budget for science and research grew at unprecedented levels, only to take a nosedive as the country was engulfed by its worst recession on record. But the particle accelerator had its budget somewhat preserved, allowing it to be inaugurated in 2018. To keep it fully functioning, it will take BRL 120 million a year—which is far from guaranteed.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <p><strong>Diplomacy. </strong>Brazilian Foreign Minister Ernesto Araújo meets with U.S. Secretary of State Mike Pompeo tomorrow, in Washington D.C. On the <em>ordre du jour</em> is the creation of a new alliance with U.S. partners focused on religious freedoms. While the initiative concerns fighting discrimination of all faiths, the matter is championed by Evangelical and Catholic groups—which are an important support base for both Brazilian President Bolsonaro and his U.S. counterpart, Donald Trump.</p> <p><strong>Retail. </strong>Investors&#8217; panic about stocks of retail companies didn&#8217;t last for long. After a horrible Tuesday, they bounced back on Wednesday, thanks to official data showing that the retail sector had recovered slightly, growing 1 percent—above expectations. The result pushed stocks up to a level that recovered Tuesday&#8217;s dip: Magazine Luiza (<a href="">MGLU3</a>) +6.46%, GPA (<a href="">PCAR4</a>) +6.06%, Lojas Americanas (<a href="">LAME4</a>) +5.21%, Via Varejo (<a href="">VVAR3</a>) +2.95%, and B2W (<a href="">BTOW3</a>) +3.26%.</p> <p><strong>Interests.</strong> A Bradesco report forecasts that should the Central Bank push the Selic benchmark interest rate from 6 percent to anywhere below 5 percent, it could allow for a GDP growth rate of up to 2 percent next year. The bank believes there are few inflationary risks at the moment, which permits a more active stance on interest rates. The Central Bank&#8217;s Monetary Policy Committee meets next week—and is expected to cut the Selic rate to 5.5 percent a year.</p> <p><strong>Bolsonaro.</strong> Rio de Janeiro prosecutors have opened two investigations (one criminal, one civil case) against City Councilor Carlos Bolsonaro, who is suspected of having dummy employees in his office, and of illegally garnishing the wages of his staff. Carlos Bolsonaro&#8217;s brother, Senator Flávio Bolsonaro, is also in the spotlight for the same suspicions.&nbsp;</p> <p><strong>Organized crime.</strong> Rio de Janeiro&#8217;s state courts will now have a department focusing on fighting organized crime—gathering all cases of money laundering, corruption, and concealment of assets. The move follows a recommendation of the National Council of Justice, and the new section will have three judges devoted exclusively to this area. 

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