Brasil
Eletrobras privatization threatens Bolsonaro's election with price hikes amid campaign
LPO spoke with Brazilian economist Paulo Dutra Constatin, who favored privatization, but acknowledged that it could affect Bolsonaro's election.

Brazil's Chamber of Deputies approved the privatization project of Eletrobras, the largest electricity company in Latin America. The project is promoted by the Government of Jair Bolsonaro as part of the privatization agenda that Paulo Guedes' economic team plans to carry out, although it has been postponed by the military wing.

The measure foresees privatization through a share issue and was approved by 258 votes in favor, against 136, one day before the deadline for its parliamentary treatment.

Bolsonaro faces a complex dilemma because privatizations are part of the government's initial agenda defended by the markets and a portion of Brazil's private companies, but also implies a risk ahead of next year's elections. "Raising tariffs amid an election year and the pandemic could be political suicide," sources close to the opposition told LPO.

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LPO spoke with Brazilian economist and Professor at Mackenzie University, Paulo Dutra Constantin, who said that "the process of reducing State control in the Brazilian economy is vital because, since the late 1980s, it has lost the ability to finance its current expenses and, consequently, to make any investments, whether for the replacement of capital or to expand/modernize its generation, transmission and distribution capacities." "Privatization developed under a strategically well designed model can increase production capacity and reduce the cost and price of electricity," the economist added.

Privatization developed under a strategically well designed model can increase production capacity and reduce the cost and price of electricity

However, Dutra acknowledged that the price increase may affect Bolsonaro during the election year. "The increase of electricity tariffs has already been determined because Brazil's main source of energy is hydroelectricity, and for the last two years the amount of rainfall has been inefficient to replenish the water supply in the reservoirs, even with the slow growth of the Brazilian economy," he said, adding that "the solution to try to avoid the lack of energy for the productive sector is to increase tariffs. This will also have a widespread impact on the production costs of goods and services, and increase the inflation rate."

Paulo Guedes, Brazil's Minister of Economy

"Yes, this tariff increase is bad for the president's re-election, however, the lack of energy will be worse, paralyzing and further disrupting the production process, already badly affected by the pandemic," he said.

For Dutra Constantín, "privatizations would contribute to the adjustment of public accounts and, consequently, to the cost of capital. We should recall that the economic agenda of the current government with the Minister of Economy has foreseen a series of privatizations due to the same reasons affecting Eletrobrás."

"However, we should keep in mind that the current president has always held public office, such as military and parliament posts, and believes in the state's ability to be the great economic agent, even without the financial conditions for it. There are also political agreements that benefit interested groups, politicians and businesses, which shall benefit from political power and subsidized prices. We will continue with distortions to incentives for economic development as well as income concentration," the specialist clarified.

Currently, the State holds 60% of the shares of the energy company whose open capital is listed on the SĂŁo Paulo Stock Exchange, but there are those who believe that, with this decision, its shareholding could fall to 45%, losing its status as a majority shareholder.

With privatization, shareholders will not be able to exceed 10% of the capital and the state will keep what is known as "golden share", which serves as a tool for government intervention, if necessary.

The State holds 60% of the shares of the energy company whose open capital is listed on the SĂŁo Paulo Stock Exchange, but there are those who believe that, with this decision, its shareholding could fall to 45%, losing its status as a majority shareholder.

The objective of the measure is to raise R$ 60 billion (U$ 11.8 billion) of which R$ 25 billion would remain in the company. The remainder will be earmarked for public tariff reduction and development programs. In turn, the Eletrobras group will need to divest itself of the Itaipu dam and the Eletronuclear nuclear plants, both state-owned under the Constitution. Also, privatization will maintain subsidies until 2035 for coal-based thermoelectric plants that are rejected by environmental organizations, and may generate a new front of conflict with the United States and its policy of preserving the environment.

The price increase estimated as a direct result of privatization is 30%. This is in addition to the open conflict over the low energy supply resulting from the drought and preceding an election year that puts Bolsonaro at his worst public image phase. 

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