Brazil to regulate infrastructure projects … without China?

. Aug 10, 2020
Brazil to regulate infrastructure projects … without China? Image: Gustavo Ribeiro/Canva/TBR

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This week, we are covering Brazil’s push to clear infrastructure projects. And the government’s moves to make life harder for Chinese companies.

Greenlighting new infrastructure regulations

There is a major divide within the Jair Bolsonaro administration over how to deal with the push for recovery in the post-pandemic economy.

The government&#8217;s military wing, which enjoys much prestige with the president, is in favor of massive infrastructure investments,&nbsp;even if that means smashing the federal spending cap created late in 2016 to rein in public expenditure. To deal with that impetus, Economy Minister Paulo Guedes and House Speaker Rodrigo Maia appear to have found a Solomonic solution: they want to change regulations on several infrastructure sectors as a way to boost private investment.</p> <ul><li>That would include new regulatory frameworks for the gas and electricity sectors, as well as altering the rules for concessions and PPPs (public-private partnerships).</li></ul> <p><strong>Why it matters.</strong> Mr. Maia argues that the federal spending cap is the only way Brazil will sustain long-term investments and move forward with structural reforms — such as overhauling its labyrinthine tax code and trimming the fat in public service.</p> <p><strong>Tug of war. </strong>The Economy Ministry agrees with the Speaker, but many sectors of the administration want to create exceptions in the spending ceiling, using the post-pandemic recovery as a justification. Mr. Maia spoke out against this possibility last week, saying that one exception could lead to several more, potentially causing public debt to balloon.</p> <p><strong>On the docket.</strong> During a <a href="https://www.youtube.com/watch?v=sYCEfsdV9tI">live broadcast</a> with the Brazilian Infrastructure and Base Industries Association, Mr. Maia said that new regulations for the gas and electricity sectors &#8220;will progress&#8221; this week after Congress reached an agreement with the Mines and Energy Ministry.</p> <p><strong>Harder. </strong>The framework to regulate concessions and PPPs will not go so smoothly. One bill has already gained the approval of a congressional committee — but the Economy Ministry asked for it to be revised. The government was expected to present suggestions by February 15 but still has yet to do so.</p> <ul><li>Lawmakers believe that the current framework for concessions and PPPs is &#8220;insufficient to attract private investments,&#8221; due to legal insecurity and the superposition of different watchdogs over the same contracts. The bill plans to define the role of each element of said contracts and create mechanisms to avoid litigation in case of conflict between parties.</li></ul> <p><strong>Yes, but … </strong>Congress&#8217; effort was not well received by the government —&nbsp;with Economy Minister Paulo Guedes publicly bashing it for &#8220;making the rules even more complex than they already are.&#8221;&nbsp;</p> <iframe src="https://open.spotify.com/embed-podcast/episode/66DG5Kk9N12VhzHQe2vRMG" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <h2>Creating barriers to Chinese investment</h2> <p>In his first year in office, President Jair Bolsonaro adopted a fairly pragmatic approach to China, choosing not to engage in conflict with Brazil&#8217;s top trading partner. But now, Brazil has become much less neutral in the current Cold War-like dispute between the Asian giant and the U.S. That shift is observed in many ways: from <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/04/06/china-request-official-retraction-racist-comments-brazil-education-minister/">racist comments</a> by members of the administration, to a <a href="https://brazilian.report/newsletters/brazil-daily/2020/07/22/brazil-joins-us-taking-wto-stand-against-china/">stand against China</a> at the World Trade Organization, or even the fact that the Brazilian government is meeting with 5G providers <a href="https://brazilian.report/newsletters/brazil-daily/2020/08/06/brazil-communications-ministry-snubbing-huawei-5g-talks/">while excluding China&#8217;s Huawei</a>.</p> <ul><li>Now, Brazil is imposing barriers on Chinese investments in two major infrastructure projects: the Angra 3 nuclear power plant and a fund for infrastructure investments.</li></ul> <p><strong>What is being done?</strong> Rest assured, there is no ban on Chinese companies … not explicitly. But according to finance newspaper Valor, the government is drafting rules for public procurement that would <a href="https://valor.globo.com/brasil/noticia/2020/08/09/brasil-cria-travas-que-dificultam-investimento-chins-no-pas.ghtml">make life harder for Chinese competitors</a>.</p> <ul><li>In the <strong>Angra 3 project</strong> — valued at BRL 17.5 billion (USD 3,200) — the idea is to prohibit the winning bidder from taking out loans with its own subsidiary companies or hiring these subsidiaries for construction work. That would favor Russia&#8217;s Rosatom, France&#8217;s EDF, or the U.S.&#8217;s Westinghouse over China&#8217;s CNNC, which tends to self-finance its projects. This would force CNNC to fragment its operations, making the contract less profitable for the company.&nbsp;</li><li>There is also the matter of a <strong>USD 20-billion fund for infrastructure development</strong>, created in 2017. The deal was that the Chinese would contribute with three-quarters of the money — and the Brazilian government would pick the projects the money would be spent on. But since the new administration took office in January 2019, the fund has simply stalled.</li></ul> <p><strong>Why it matters.</strong> China is responsible for a considerable chunk of foreign investment in Brazil. Between 2010 and 2019, USD 55.1 billion came through Chinese-led projects — mostly energy or oil ventures.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3430450" data-url="https://flo.uri.sh/visualisation/3430450/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Big stick diplomacy.</strong> Jair Bolsonaro&#8217;s seemingly unconditional will to align his government to the Donald Trump White House has given the U.S. some liberties: recently, Ambassador Todd Chapman said <a href="https://brazilian.report/newsletters/brazil-daily/2020/07/30/5g-united-states-big-stick-diplomacy-brazil-ban-huawei/">Brazil would face &#8220;consequences&#8221; if it chose not to ban Huawei</a> from its upcoming 5G spectrum auction.</p> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Markets eagerly await this week&#8217;s earnings reports. The list of expected results includes banks (BTG, Inter), construction companies (MRV, Cyrela, Eztec, Tecnisa), and the consumption sector (B2W, Via Varejo, Renner, Hering, Natura). Their results — very much tied to domestic demand — will help analysts get a clearer picture of how badly consumption fell during the pandemic. The early signs point to a dramatic drop: banks&#8217; provisions are sky-high, and payment companies reported a drop in transactions.&nbsp;</p> <hr class="wp-block-separator"/> <h2>Interest rate at all-time low: for whom?</h2> <p>Last week, the Brazilian Central Bank <a href="https://brazilian.report/newsletters/brazil-daily/2020/08/06/brazil-communications-ministry-snubbing-huawei-5g-talks/">slashed the country&#8217;s benchmark interest rate</a> to its lowest level ever: 2 percent a year. However, Brazil continues to have the highest average rate charged to consumers and companies worldwide, per the International Monetary Fund. And that is even <em>after</em> banks cut that average to the lowest point since 2011. Also last week, Congress limited the interest rates banks can charge on overdrafts and credit cards, a move some experts fear will reduce credit availability even more amid the coronavirus economy.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3429375" data-url="https://flo.uri.sh/visualisation/3429375/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Indicators. </strong>The week will bring updates to a multitude of economic indexes that will help assess the state of the Brazilian economy. They include a forecast of this month&#8217;s inflation (Monday); retail sales (Wednesday); services companies&#8217; performance (Thursday); and the Central Bank&#8217;s Economic Activity Index, a predictor of GDP growth (Friday).</li><li><strong>Taxes. </strong>Lawmakers could vote this week to strike down a presidential veto against extending cuts on payroll taxes for 17 business sectors until the end of 2021. President Bolsonaro&#8217;s decision kept the benefit valid only for this year. That&#8217;s because the federal government is trying to use payroll tax deductions as a bargaining chip to pass a <a href="https://brazilian.report/business/2019/09/11/cpmf-economy-ministry-central-bank-new-tax/">new levy on financial transactions</a> in Congress — an idea that is deeply unpopular among voters and politicians alike.</li><li><strong>Beirut.</strong> The Brazilian government is sending a <a href="https://g1.globo.com/sp/sao-paulo/noticia/2020/08/09/aviao-kc-390-decola-nesta-segunda-de-guarulhos-em-missao-de-ajuda-ao-libano-diz-itamaraty.ghtml">military aircraft</a> on Wednesday, carrying 5.5 tons of medicines, supplies, food products, and hospital equipment to Lebanon. President Bolsonaro named his predecessor, Michel Temer (the son of Lebanese immigrants), to head Brazil&#8217;s aid mission to Beirut, following the <a href="https://www.bbc.com/news/world-middle-east-53668493">massive August 4 blast</a> which killed over 150 people and left 5,000 injured in the Lebanese capital. It remains unclear if Mr. Temer will be on the military plane or if he will fly to the Middle East at a later date.</li><li><strong>Environment.</strong> A group of executives putting pressure on the government to adopt stricter environmental controls will meet with Supreme Court Chief Justice Dias Toffoli on Tuesday. Then, they will talk to the governors of Amazonian states. The movement is formed by 62 large corporations, five private equity funds, and five sector associations. They began voicing a pro-environment agenda after international investors <a href="https://brazilian.report/podcast/2020/07/16/explaining-brazil-podcast-deforestation-is-bad-for-business/">threatened to pull their assets from Brazilian companies not complying with ESG principles</a> (environmental, social, and governance).</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Coronavirus.</strong> Brazil reached the terrible milestones of 3 million coronavirus cases and 100,000 deaths. Last week, during a live social media broadcast alongside Interim Health Minister Eduardo Pazuello, President Bolsonaro urged the population to &#8220;get on with our lives and find a way out of this.&#8221; Mr. Bolsonaro added that he is &#8220;sorry&#8221; for the casualties. Mr. Pazuello mentioned that most patients recover and that &#8220;life goes on.&#8221;</li><li><strong>Scandal. </strong>Online magazine Crusoé revealed on Friday that money laundering enforcement agents came across a total of 21 checks from Fabrício Queiroz — a former cop tied to urban paramilitary militias and money laundering schemes — made out to First Lady Michelle Bolsonaro. Mr. Queiroz has been a friend of President Jair Bolsonaro for decades and worked as a sort of fixer for his family. <strong>The Brazilian Report&#8217;s </strong>Brasília correspondent Renato Alves had <a href="https://brazilian.report/power/2020/08/07/money-laundering-agency-ties-brazil-first-lady-to-shady-operator/">access to the investigation&#8217;s documents and confirmed the revelations</a>, which link the presidential couple to an alleged money-laundering scheme running within the office of Senator Flávio Bolsonaro, the president&#8217;s eldest son. The government has yet to comment on the issue.</li><li><strong>Coup? </strong>Monthly magazine Piauí published a story detailing a May 22 meeting between Mr. Bolsonaro and his closest advisers. The president is reported to have informed them <a href="https://brazilian.report/newsletters/brazil-daily/2020/08/06/brazil-communications-ministry-snubbing-huawei-5g-talks/">he was about to send troops</a> to the Supreme Court and vacate its 11 seats. Eventually, Mr. Bolsonaro is said to have been talked down by his cabinet members. The report only makes the president&#8217;s rocky relationship with the Supreme Court worse&nbsp;—&nbsp;in a moment when justices are about to hold trials that have the potential to trigger several crises for the government.</li><li><strong>Industry. </strong>Brazil&#8217;s industrial output grew 8.9 percent in June, following May&#8217;s 8.2-percent growth. But despite two very positive months, the truth is that Brazil&#8217;s industry remains far below its pre-pandemic level — which was already underwhelming. Brazil&#8217;s general industrial index, compiled by the country&#8217;s official statistics agency, remains almost 25 percent below January 2010 levels.

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