Brazil & Southern Cone - September 2012 (ISSN 1741-4431)

The Rousseff administration is shifting its emphasis away from consumer stimulus measures towards efforts to tackle Brazil’s very costly business operating environment, known as ‘Custo Brasil’.

On 6 September President Dilma Rousseff announced a package to cut electricity rates in Brazil by up to 28%, starting next year. President Rousseff made the announcement in a nationally televised address to mark Brazil’s Independence Day (7 September). On average, residential electricity tariffs will fall 16.2% from 2013, while business rates will fall by up to 28%.  The president also pressed the local financial sector to pass on lower interest rates to consumers and investors.

Brazilian industry pays an average electricity rate of R$330 (US$162) per mega-watt hour, the fourth highest in the world after Italy, Turkey and the Czech Republic, according to the national industry confederation (CNI). The local business sector welcomed the news with open arms. The association of heavy industrial energy users and free consumers (Abrace) described the decision as “historic” and “signaling a new cycle of development in the country on the basis of structural measures that privilege competitiveness”.

The Rousseff government made the announcement amid talks with local energy operators about renewing contracts due to expire in 2015. The government argues that energy costs can fall under the new contracts, as initial investments have now been amortized.

On 30 August President Rousseff issued a decree allowing regulators to seize operating licenses from power utilities failing to meet their contractual requirements fast enough. A day later the energy regulator, Aneel, voted to intervene in eight units of the debt stricken power company, Grupo Rede Energia (see sidebar). The government insisted that it has no interest in breaking contracts or nationalising the sector, but the message was clear enough.

The national transport regulator also announced big reductions (of 25%-30%) in rail freight rates, the first in 15 years under a new revision of the sector. The changes will affect 11 railway concession operators.

Critics are still concerned about the level of official intervention in the domestic economy; on 4 September Finance Minister Guido Mantega temporarily lifted import tariffs on 100 industrial items in a bid to protect local industry.

Import duties on a range of items including iron pipes, petrochemicals, tyres and glass, were increased to 25% in most cases, up from the high teens previously, for a one year period. The industry and external trade minister, Fernando Pimentel, denied that the move was protectionist, noting that the import tariff ceiling under World Trade Organization rules is 35%.  The risk is that such protectionist measures will end up hindering rather than supporting local industry, not least by raising input costs.

Brazil’s index of industrial production (IP) rose for the second consecutive month in July (0.3% month-on-month), the first back-to-back increase in over a year, sparking hopes that the array of official stimulus measures are finally feeding through.  However industrial output was still down a sharp 3.7% year-on-year in the first seven months of 2012.

• Rede Energia

The regulators move to take control of Rede Energia is the biggest ever state intervention in the sector. Aneel immediately takes control of Bragantina, Caiuá, Celtins, Cemat, CFLO, Enersul, Nacional and Vale Paranapanema, all of which are suffering serious financial and operational problems. (Another company, Celpa, was not included in the intervention because it filed for bankruptcy protection last February). Aneel’s president, Nelson Hubner, said in a press conference that the regulator had given the companies 60 days to come up with a restructuring plan.