Volume 5, Number 11, Page 1

Brazil's Move Toward Privatization

The privatization of state-owned companies in Brazil is proceeding at a rapid pace. The Brazilian government’s timetable for 1998 is already filled with enterprises seeking government licenses. Bidding for petroleum and gas licenses is scheduled to begin in June 1999.

Brazil’s privatization program has generated approximately U.S.$ 27 billion from 1991 to 1997. Of this sum, U.S.$ 7.8 billion was produced in 1997 alone. Dutch bank ING estimates that, if the Brazilian government adheres to its privatization program, receipts totalling U.S.$ 35-40 billion could be generated in 1998.

Brazil leads the world in the number of companies that have been privatized in the areas of telecommunications and electrical energy. The BNDES, the Brazilian bank organizing the privatization program, stands to collect approximately U.S.$ 80 billion from the privatization of the telecommunications and electrical sectors. The movement toward privatization in Brazil has also attracted foreign investors, who believe that privatization will lead to a strong national market.

The 1995 amendments to the Brazilian Constitution made the current privatization movement possible. The 1995 amendments to constitutional articles six and eight provide for equal treatment of all enterprises operating in Brazil, regardless of the origin of their capital. They also authorize the Brazilian government to grant licenses to the private sector in the area of telephone services. Subsequently, constitutional article nine was amended to allow private enterprise to prospect for, produce, refine, transport and internationally market natural gas as well as oil and its derivatives.

In 1996, constitutional article thirteen was amended, ending more than 55 years of government monopoly in the reinsurance sector. Preparations are underway for the sale of the Brazilian government’s fifty percent share in the Brazilian Reinsurance Institute (Instituto Brasileiro de Reseguros).

The most recent law relating to the National Privatization Program (Programa Nacional de Desestatização), Law No. 9491, was enacted in 1997. The new law maintains the basic regime established in previous foreign investment laws, permitting domestic or foreign enterprises to acquire a one hundred percent interest in a privatized activity unless otherwise provided by law. For example, in the area of telephone service concessions, bidding notices provide that a minimum of 51 percent of the capital of such an enterprise must be owned by Brazilians. This restriction will remain in effect until July 1999, pursuant to Article 11 of Law No. 9295. The telecommunications industry is regulated by Decree No. 2338, published in October 1997. That decree established rules for the privatization of the telecommunications sector. It also created the National Telecommunications Agency (ANATEL).

Regulatory agencies were created in other sectors now subject to privatization, including the energy and petroleum sectors. The National Energy Agency (ANEEL) was established by Law No. 9472, published in December 1996, and is regulated by Decree No. 2335. The National Petroleum Agency (ANP) was established pursuant to Law No. 9478, published in August 1997, and is regulated by Decree 2455. ANATEL, ANEEL and ANP are responsible for the administration and enforcement of regulations governing relevant activities in their respective areas. The creation of the ANP marked the end of the 44-year monopoly of the petroleum industry by Petrobrás. The ANP will supervise economic activities in the national petroleum industry, regulate that industry, administer contracts and conduct necessary inspections. The ANP is the government agency responsible for issuing licenses permitting private enterprises to exploit national petroleum reserves. Petrobrás will now compete with other private businesses to obtain petroleum concessions from the ANP.

Petrobrás has already requested 391 oil and gas concessions. However, the ANP has made it clear that Petrobrás will only be granted concessions in areas which Petrobrás can exploit efficiently and effectively. In order to obtain the required resources, Petrobrás will enter into joint ventures with other private enterprises. The Brazilian government will soon begin replacing approximately half the members of the Petrobrás Executive Board. It is anticipated that the entire Petrobrás administration, including its president, Joel Rennó, will be replaced over the next two or three years, as market conditions become more defined. The implementation of such measures signals the Brazilian government’s intent to eliminate any traces of the former petroleum monopoly.

Petrobrás currently operates four wholly-owned subsidiaries. BR Distributor is a fuel distributor. Petrobrás Internacional, S.A. (Braspetro) handles international sales of petroleum and petroleum derivatives. Petrobrás Química, S.A. (Petroquisa) produces chemicals. Finally, Petrobrás Fertilizantes, S.A. (Petrofertil) produces fertilizers. Each of Petrobrás’ four subsidiaries in turn owns other subsidiaries which are also in the process of being privatized.

Noronha Advogados is an international law firm based in São Paulo, Brazil, with offices in Rio de Janeiro, Brasilia, Miami, London, Lisbon and Buenos Aires.