Brazil’s privatization plan: a look under the hood

Brazil privatization plan

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Hello! You are reading The Brazilian Report‘s Weekly Report. In this issue: A deeper look into the Brazilian government’s privatization plan. The road to deforestation. How Brazilian markets performed. And the most important facts of the week. Enjoy your read! (This newsletter is for platinum and gold subscribers only. Become one now!)

The week in review

Amazon 1. The spike in Amazon wildfires

has drawn plenty of negative international attention to Brazil. There were 68 occurrences in protected areas over the past week. President Jair Bolsonaro blamed international NGOs, saying (without proof) that they set the forest on fire to smear his administration. </p> <p><strong>Amazon 2.</strong> Calls for a boycott of Brazilian agricultural products have gained traction, and countries such as France and Ireland talked about opposing the Mercosur-EU trade deal if Brazil doesn&#8217;t start fulfilling its environmental commitments. These moves worried local producers, who tried to distance themselves from the government (despite being one of Mr. Bolsonaro&#8217;s main groups of supporters). That forced the government to launch a task force to curb deforestation—with the Army leading the way, to reinforce the idea that Brazil will not yield its sovereignty.</p> <p><strong>Amazon 3. </strong>The idea is to carry out operations with drones and planes in the Amazon—anything that can produce strong images to appease international pressures. The country is reportedly negotiating with the U.S. and Israel for support in such activities. Agriculture Minister Tereza Cristina and the head of the ruralist caucus plan to visit at least five European countries next month to show that Brazilian agribusiness is not responsible for the fires.&nbsp;</p> <p><strong>Jobs.</strong> Brazil created 43,820 formal jobs in July 2019, according to official data from the Labor Ministry. The result is slightly lower than that recorded in July 2018, when net 47,319 jobs were created. The figures were unsurprising, falling within projections of job growth made by financial analysts.</p> <p><strong>Car Wash.</strong> Despite recent controversies, Operation Car Wash continues. On Friday, its 64th phase targeted former Petrobras CEO Graça Foster and investment banker André Esteves, a partner at BTG Pactual. According to former Workers&#8217; Party Finance Minister Antonio Palocci, Mr. Esteves paid a BRL 15m kickback to receive privileged information on pre-salt assets. He also said Ms. Foster was aware of corruption scandals, which was the object of a recent class-action lawsuit by investors, which Petrobras settled for USD 2.9bn.</p> <p><strong>Rio.</strong> A 20-year-old man hijacked a bus in Rio de Janeiro and held 37 passengers hostage, before being killed by the police. Governor Wilson Witzel was heavily criticized for celebrating the outcome, though the police operation was considered adequate. The hijacker didn&#8217;t want to negotiate and threatened to torch the bus. Rio&#8217;s police have never been deadlier than during Mr. Witzel&#8217;s administration, which started in January 2019. Law enforcement has been responsible for 30% of all violent deaths in the state, adding up to 1,075 people.</p> <hr class="wp-block-separator"/> <h2>The road to deforestation</h2> <p>The relationship between the opening of Brazil&#8217;s roads and Amazon deforestation is known in the country since the 1970s. It was at this time that the military government began its project to build the Trans-Amazonian Highway, which enabled access to areas never reached before. According to the World Wide Fund for Nature (WWF), 75% of deforestation happens in stretches adjacent to roads. And a study published by the Biological Conservation journal shows that, for every kilometer of official roads, there are three kilometers of clandestine ones.</p> <figure class="wp-block-image"><img src="" alt="progress amazon deforestation" class="wp-image-22806" srcset=" 982w, 300w, 768w, 610w" sizes="(max-width: 982px) 100vw, 982px" /></figure> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Brazil is about to have a spree of initial public offerings. Jewelmaker Vivara and fashion retailer C&amp;A have already hired banks to coordinate their IPOs—both expected for this year. C&amp;A aims at raising BRL 2 billion. Moreover, the Brazilian government plans to sell about 20 million shares of Banco do Brasil, which could be worth BRL 1 billion. Guide Investimentos, an investment consultancy, believes one company is set to benefit from this trend: B3 (<a href="">B3SA3</a>), which runs Brazil&#8217;s stock exchange. “We’re seeing a very positive window in Brazil’s stock market, which tends to be favorable for issuing stocks,” said analysts, who set the target price at BRL 50 per share.</p> <p style="text-align:center"><em><strong>Natália Scalzaretto, TBR markets</strong></em></p> <hr class="wp-block-separator"/> <h2>Brazil&#8217;s privatization plan: a look under the hood</h2> <p>On Wednesday, markets went into euphoria when the government announced privatization plans for nine federally-owned companies. Shares of Petrobras, Eletrobras, and Banco do Brasil spiked, despite the government having listing firms that have been on the privatization radar for years. Notwithstanding, the decision signals a strong commitment to Economy Minister Paulo Guedes&#8217; ultra-liberal agenda. And plans to reduce the size of the state are like music to the ears of market operators. So, what will the effects of this plan be? We explain.</p> <hr class="wp-block-separator"/> <h4>Eletrobras </h4> <p><strong>Why privatize?</strong> Eletrobras is Latin America&#8217;s largest energy company, operating in power generation, transmission, and distribution. Despite holding important assets, such as the Furnas generation system, the company has amassed losses for years and had to sell its six subsidiaries in the North and Northeast to avoid liquidation. Eletrobras&#8217; net debt was trimmed to BRL 23.2 billion as of June, thanks to cost-cutting measures such as a voluntary redundancy plan. Yet, privatization is seen as the best way to boost efficiency and avoid its use for political goals.</p> <p><strong>Potential downside.</strong> The government expects to raise BRL 12 billion from the sale of Eletrobras. However, since 2017, experts have warned that cash shouldn&#8217;t be the only motivator. Under President Michel Temer, the idea was to sell company shares on the market, but selling it in pieces may be a better option to prevent a private monopoly in the sector.</p> <hr class="wp-block-separator"/> <h4>Correios</h4> <p><strong>Why privatize?</strong> Correios&#8217; monopoly over postal services is singled out as a key reason for Brazil&#8217;s high freight costs. Supporters of privatization argue that more competition could boost e-commerce and improve the quality of the service, as consumers suffer constantly from employees’ strikes and long delays for deliveries. Correios currently has almost 104,000 employees and generated a BRL 161 million profit in 2018—the second consecutive positive results after a series of billionaire losses.</p> <p><strong>Potential downsides.</strong> Correios is a monopoly. Selling the entire company as it is now could mean replacing a state-owned monopoly with a private one—and that would be detrimental to customers and e-commerce companies.</p> <hr class="wp-block-separator"/> <h4>Brazilian Mint</h4> <p><strong>Why privatize?</strong> The institution was created in 1694 by Portugal&#8217;s Dom Pedro II in order to print money in Brazil. Since 2017, it has been registering losses after the Federal Revenue Service halted the obligation of Sicobe, a system to control the production of beverages that generated revenues for the Brazilian Mint.</p> <p><strong>Potential downsides.</strong> The Central Bank, which actually has the power to put money into circulation, will have to adopt severe criteria, based on international standards, to make sure there is no potential for fraud. In the UK, where the activity is private, the system works well, thanks to these controls.</p> <hr class="wp-block-separator"/> <h4>Codesp and Codesa</h4> <p><strong>Why privatize?</strong> Codesp and Codesa are the companies that manage port structures in the states of São Paulo and Espírito Santo. Codesp controls the port of Santos, the busiest in Latin America—and from where some of Brazil’s most important exports, such as sugar and orange juice, are shipped. The privatization plan walks hand in hand with the idea to boost <a href="">cabotage navigation</a> in Brazil and diminishing political influence in infrastructure areas—former President Temer was accused of receiving bribes related to Codesp activities in Santos.   </p> <p><strong>Potential downsides.</strong> Labor unions are afraid that selling the company may lead to a staff reduction (currently at 1,325 people) or long legal battles, should their rights not be guaranteed and recognized by private owners. According to the local newspaper <em>A Tribuna</em>, the company is planning a voluntary redundancy plan for this year and also needs to solve labor class actions before being privatized.

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