Brazilian privatizations

The federal government aims to divest 75 state-owned assets by December 2018; including states and municipalities, 238 disposals are slated altogether.

• The Temer government is prioritizing the divestment of Eletrobras, Latin America's largest power company, with the operation expected to raise USD3.8 billion.
• Other assets listed for sale include airports, railways, offshore oil fields, and a state lottery operator.
• Despite political will and severe fiscal pressures, the process is likely to be slowed by resistance involving political vested interests, regulatory hurdles, and uncertainty caused by the October 2018 presidential election.

On 29 March 2018, Brazil completed an oil auction (the 15th round) within which global oil majors such as Exxon Mobil, Chevron, Repsol, and Royal Dutch Shell secured dozens of oil blocs. The auction netted the Brazilian government approximately USD2.4 billion of signing bonuses. The auction was part of the Temer administration's privatization plan, crucial for its efforts to tackle its excessively large fiscal deficit of more than 9% of GDP.

The federal government plans to divest approximately 75 state assets in 2018. Out of that, 15 involve outright privatization, while the remaining sales will offer private concessions lasting 30 years. The process is expected to attract USD41 billion in investment in 2018, while netting USD8.85 billion in government proceeds.

In addition to federal government asset sales, dozens of states and large cities are planning to privatize companies, public services, highways, parks, stadiums, and schools. A recent media report showed that at least 238 assets are slated for privatization by the federal, state, and major municipal governments. Most of the planned disposals are at a very early stage and therefore will take several years to materialize.

The main asset to be divested is Eletrobras, Latin America's largest electricity company, together with the airport concessions of Zumbi dos Palmares, Vitoria, and Várzea Grande; the North-South and São Paulo railway concessions; and two rounds of oil field auctions.

Strong resistance to Eletrobras privatization

The utility company is by far the most attractive asset on sale: it has 13 subsidiaries and generates one-third of Brazil's electricity. The government expects to receive USD3.8 billion from its sale. However, Congress and several political leaders are demanding involvement in planning the company's sale. This reflects the political culture in Brazil, whereby it is common practice for leaders of political parties to have political "quotas" in state-run companies, involving the right to nominate directors and managers. There also are strong objections to the planned sale of Eletrobras' distribution subsidiaries prior to the firm's own privatization, slated by the government for late this year. This is being strongly resisted by federal deputies from the North and Northeast regions, who fear that unpopular privatizations of local entities would damage their chances of re-election in the general election taking place in October this year.

To reduce opposition, the government has suggested privatizing Eletrobras by listing the firm at holding company level on the Brazilian stock exchange, B3, and ring-fencing parts of the company to remain in state hands. The latter would include Itaipu Binacional – the hydroelectric plant built and run in partnership with Paraguay–, and nuclear plants in Angra dos Reis (in Rio de Janeiro). Itaipu's sale would require the approval of both the Paraguayan government and Congress, while the Brazilian constitution states that only the federal government can operate nuclear power plants.

Other assets on the federal privatization program face different problems. This applies to the eight railways lines – some of them having been listed for sale since 2012, under the government of former president Dilma Rousseff. Some of the lines need large-scale investments from buyers. As an example, Ferrograo – the railway line planned to connect the grain-producing region in the Central-West of Brazil to a port in North of the country – will need to be constructed almost entirely by future investors. By contrast, the North-South Railway, which is more mature with large parts already built by the state, is likely to attract greater investor interest.

According to railway-sector sources, the privatization tenders are likely to be postponed until after the October presidential election as most investors would prefer a clear political scenario before committing to invest. Buyers also fear judicial injunctions and further opposition to the sale of the lines.

Outlook and implications

The Temer government is committed to privatization, but there are significant headwinds including opposition from labor unions, politicians in Congress, and legal constraints that need to be addressed before the assets will be for divestment. In Brazil, the sale of state assets needs to be subjected to public consultation and analysis by the relevant 'court of accounts', with federal injunctions to block disposals being a common occurrence. Several projects also would need to have approval from the local legislative powers.

Despite the multiple challenges, we assess that several assets are likely to be divested this year. These should include many of the 21 airport concessions and highways listed along with the federal lottery, Lotex. However, delays in the schedule at federal level appear likely to be the norm. This is a major problem in meeting the central government's budget projections and its planned fiscal deficit target for 2018.

Indeed, this year's budget projections include privatization revenues that are highly unlikely to materialize. The complexity and likely delay to the program is clearly indicated by review of the degree of preparation. Out of the slated 75 federal sales, 40 are still at the very early stages of preparation, and only one has been completed so far: the 29 March auction of oil fields. Out of the 238 national projects identified for privatization, 146 are at the early stage of evaluation, which may require detailed studies that likely will take months or years. Only three planned asset disposals are open for bidding.

For Eletrobras, approval of the congressional bill required for its divestment is highly unlikely to be passed this year. Given the sensitivity of the issue during an electoral year, most political leaders are inclined to postpone such a decision until 2019, making it very unlikely that the company will be sold in 2018.