Brazil regulatory agencies

President Michel Temer will appoint at least 15 directors to several regulatory agencies before the end of his term in December 2018.

• The new directors are likely to be political appointees close to President Michel Temer and his Brazilian Democratic Movement (Movimento Democrático Brasileiro: MDB) party.
• New legislation that would bring technical criteria for the selection of the new directors has stalled in the Chamber of Deputies, and is unlikely to pass this year.
• The regulatory agencies oversee important sectors such as mining, energy, telecommunications, and health, but a lack of expertise and political interference are likely to undermine current regulatory stability.

According to media reports, outgoing President Michel Temer, whose term ends in December 2018, will soon fill the open positions of at least 15 directors in eight different regulatory agencies. These highly influential bodies are tasked with overseeing important sectors of the economy such as mining, electricity, transport, and telecommunications.

There is intense lobbying and bargaining going on among politicians for the right to choose the candidates, who need to be approved by the Senate and will have a fixed mandate of four or five years depending on the agency. Local media reported recently that the president's Brazilian Democratic Movement (Movimento Democrático Brasileiro: MDB) party wanted to appoint every name for those posts. The party sees this as a strategic move to retain influence after Temer is replaced by a new president in the October general election. But even if the MDB's plan fails, there is very little doubt that most of the new directors will be political appointees linked directly to powerful senators and other leaders within the ruling coalition.

The agencies have a say in important regulatory decisions that have a significant effect on Brazil's business environment. These include the Brazilian Electricity Regulatory Agency (Agência Nacional de Energia Elétrica: ANEEL), the National Telecommunications Agency (Agência Nacional de Telecomunicações: ANATEL), and the newly created National Mining Agency (Agência Nacional de Mineração: ANM), among others. Other regulators that will have new appointments are the National Complementary Health Agency (Agência Nacional de Saúde Suplementar: ANS), the National Film Agency (Agência Nacional do Cinema: ANCINE), and transport regulators National Land Transport Agency (Agência Nacional de Transportes Terrestres: ANTT) and the National Waterway Transportation Agency (Agência Nacional de Transportes Aquaviários: ANTAQ).

ANEEL has the responsibility to oversee the privatization of the state energy holding company Eletrobras, Latin America's biggest electricity utility company, and six of its regional distributors. The privatization process is unlikely to be completed this year due to political opposition in Congress, but the divestment is expected to be one of Brazil's biggest business deals in the coming 12 months.

The mandates of ANEEL's president and two others senior positions come to an end in August and Temer has already nominated his candidates; but the Senate is still to vote on the appointments, with a lot of political bargaining behind the scenes by MDB senators.

The mandate of the president of ANATEL ends in November. Who the authority to nominate his replacement lies with is disputed by several politicians within the ruling coalition. The agency regulates new concession contracts across the country pertaining to private broadband investments.

Another appointment pending is head of ANM, created in 2017 when Congress approved a new mining code. The agency will have five directors and will have to oversee the implementation of the new code. The names of the nominated president and the directors have been sent to the Senate for approval.

The other important agency with pending vacancies is ANTT, which has been in the spotlight as it was involved in the complex negotiations with the lorry drivers who went on strike in May. The agency edited the controversial minimum price list for cargo freights, which was criticized by several economic sectors in the country.

A highly politicized process
The creation of regulatory agencies in the 1990s, in the context of an ambitious privatization program, brought regulatory certainty to the country, helping to mediate between private investors and the government.

However, politicians have always used the agencies for political gains. A study by the business school Getúlio Vargas Foundation in 2016 showed that one-third of the agencies' directors came directly from government bodies, and that a similar number were politicians, with only 6% coming from the private sector.

As the recent delays indicate, the process to select directors of regulatory agencies in Brazil raises transparency concerns. Currently, Minister of the Secretary of Government Carlos Marun is reported oversee negotiations with several politicians to shortlist the names to be presented to Temer. The only two legal requirements for a person to be appointed as a regulatory agency director are a university diploma and a good reputation. No technical knowledge or any specific experience is required, making it much easier for politicians to use the posts for patronage.

A bill that tightens the rules on the appointments and gives agencies more overall autonomy has stalled in the Chamber of Deputies after more than four years waiting to be approved in the Senate, and it is highly unlikely to be passed this year. The bill requires candidates to have at least 10 years' experience in the relevant sector or at least four years' experience in executive posts in the sector. The proposal would also fix all mandates to a five-year term without the possibility of reappointments.

Outlook and implications
IHS Markit assesses that the appointments Temer is seeking to engineer are intended to cement his and his party's influence over important agencies after his term ends in December, and irrespective of the October general election results. Unless the appointment reform bill passes the Senate, which remains unlikely, the influence peddling that has characterized these appointments is set to remain and create uncertainty as to the efficiency and capability of these agencies to provide regulatory decisions based on technical criteria and without undue political interference

The appointments will take place before the October general election, which remains highly uncertain. If an outsider wins office - be it from the extreme right or the left - it would put the autonomy of regulatory agencies at risk. Political appointees would be more exposed to undue influence from congress persons that nominated them, worsening the regulatory environment. If these politicians decide to align themselves with the new government they will be used to put pressure on the agencies they dominate - and businesses in sectors such as electricity, telecoms, and mining could suffer from decisions based on non-technical assumptions.