The Brazilian federal government is set to “fire the privatization cannon” at all state-owned companies, according to the country’s economy minister, Paulo Guedes, by launching the largest privatization program the country has ever seen, which will be unmatched anywhere in the world in terms of funds raised. Guedes has warned he will not spare the country’s big fish and vows to reduce the number of state-owned companies from 134, the largest figure in the Americas, to a mere 12.
Brazil’s new economically liberal government scored a big hit with the first necessary approval of its market-friendly pension reform and is now planning its next move: a game-changing privatization program. Despite not being the world’s largest program by number of companies to be privatized, it is by far the largest in terms of asset value, estimated at R$470 billion ($117bn) by investment bank Bradesco BBI.
What’s been done
The program, announced in early July, will only be fully implemented once the pension reform is formally approved by congress, however, the government has already taken significant steps in privatizing certain assets. On the back of a key ruling recently proffered by the Supreme Court stating that congressional approval is only required for the sale of directly-owned state companies, the federal government began privatizing Petrobras subsidiaries.
Two of the most eye-catching divestments took place within the first semester and were both emblematic in their own fashion. Firstly, in June, Petrobras’ gas pipeline subsidiary, TAG, was sold to a group led by France’s Engie SA and Canada’s Caisse De Depot Et Placement Du Quebec (CDPQ) for $8.7 billion. This transaction, which sparked the aforementioned Supreme Court ruling, was Brazil’s largest M&A deal of 2019 so far. Soon after, in July, Petrobras sold off a 30% stake in its fuel distribution branch, BR Distribuidora, reducing its position from 71% to 41% for a total of $2.27 billion in what is Latin America’s largest equity offering of 2019 to date. According to the oil giant’s CEO, Roberto Castello Branco, by July, Petrobras had already raised $15 billion in sales.
Despite these record-breaking transactions, Guedes has assured Brazilians that fully privatizing Petrobras – one of Brazil’s ‘crown jewels’ – would be a step too far. With that being said, his privatization program does target other state-owned heavyweights.
What’s to come
Over the next semester, Brazil’s federal government will simultaneously push for its privatization program to go from strength to strength as well as drive its nationwide campaign for pension reform before congress. The sale of indirectly controlled state assets, such as the subsidiaries of state companies and the shares state banks own in a range of publicly-listed companies, is expected to continue at a steady rhythm.
What’s more, the government has indicated the next state-owned companies on its privatization spree are heavyweights such as Correios, Brazil’s postal service, and Eletrobras, Latin America’s largest power utility. Privatizing these national monoliths will prove far more challenging as not only will it require explicit approval from Congress but it will also face internal resistance from within certain ranks of the Bolsonaro administration.
With respect to Eletrobras, the federal government estimates approximately R$12 billion should be raised from its sale. The privatization model for Eletrobras was set to be presented to congress in August and should follow BR Distribuidora’s capitalization model in which the government concedes control over the company but remains a shareholder.
Is privatization the answer?
Minister Guedes argues for privatization as a means of reducing government expenditure, by ridding the public sector of several highly inefficient and often corruption-plagued companies, all whilst raising funds to alleviate Brazil’s public debt which has skyrocketed from 51% in 2011 to 77% in 2018. Today, Brazil’s government debt coupled with public pension expenditure consumes roughly R$1 trillion per year from the federal budget.
This would be a challenging economic scenario for any administration. The questions which remain are whether other means of sanitizing public expenditure exist, what effect a privatization overhaul of such magnitude will have on the economy in the long-term and just how far Mr. Guedes will be able to deliver on his promises.