BRASÍLIA – Candidates for the Presidency of the Republic Luiz Inacio Lula da Silva and Ciro Gomes have repeated, in several statements, that they would reverse the privatization of electrobras, if elected president in October. Contrary to the idea of losing control of the state-owned company, they have already stated that they would take back the company, to keep it under government control. But is this, in practice, possible?
Economists interviewed by the report say that, in addition to the political discourse, it is a practically unfeasible operation. A set of facts explains why this transaction would not succeed.
Today, the Union’s share in Eletrobras is 72%. The remaining 28% are dispersed in shares on the market, as the company is a publicly traded company. The privatization model chosen by the government was to sell its shares to the market, reducing its current share to 45%, that is, becoming a minority partner.
If a new government decided to take over Eletrobras, the way forward would be, therefore, to make an offer to buy back shares. It turns out that this is not a simple transaction, because it would involve a high cost not only political, but also financial.
On the political side, the attitude of the government to buy back shares would be seen in the financial market as an action of extreme legal and regulatory fragility. The consequence of this would be to alienate investors not only from Eletrobras, but from other possible investments, since it would be demonstrated that the country does not have regulatory certainty on decisions taken, especially in large businesses, such as Eletrobras.
“Reversing privatization would have an enormous cost to the country, it would show that there is no legal or regulatory certainty. This process is irreversible. Lula is a pragmatic person and, if she wins, she won’t do it. The chance is zero.” Adriano Piresdirector of the Brazilian Infrastructure Center (Cbie).
The attempt at renationalization would still run into strong difficulties in justifying the political act. In times of lack of resources to fund basic investments in areas such as health, education, security and infrastructure, the government would have no way of justifying why it decided to use billions in citizen money to buy back shares in a company already dispersed on the stock exchange, while the country needs resources in basic and urgent areas.
“It is also necessary to point out that it would be necessary, from a legal point of view, to edit a bill and send it to Congress, in order to obtain authorization from parliamentarians so that the Union could make this move”, he says. Marcelo Godke, lawyer specializing in business, corporate and capital market law. “I have zero doubt that this is all campaign speech.”
Outside the political balance, the constraints included in the offer model still weigh against an attempt to renationalise. In order to hamper any hostile attempt to take over the company by the Federal Government, the requirement was included among the rules that any public offer to purchase shares to obtain a controlling interest in Eletrobras will have to pay an amount three times higher than the highest price ever recorded for the company’s shares. This means that, in practice, it would be a bad deal for the government, which would be forced to pay a bill much higher than what it had until then.
Even if it decided to go ahead with the business and was successful in repurchasing shares from the other shareholders to keep more than 50% of Eletrobras’ capital, the government would have its voting power restricted to a maximum of 10%, according to rules included in the company offer. To change this rule, it would be necessary to call a shareholders’ meeting, proposing amendments to the bylaws that would allow for the expansion.
“One way could be to try to buy back the shares, but the question is how much money would that be done. The country is full of social problems, and would you spend money to renationalize Eletrobras, at these prices? It makes no sense,” says Pires.
Outside the rules of the market, there has already been talk of instruments such as issuing a presidential decree to make the company’s renationalization possible. The experts’ assessment, however, is that any action initiative of this type in relation to a publicly traded and dispersed company would be seen as a direct intervention by the government in a private business, that is, an extreme act that has no parallel in the Country.
“There is a great mysticism that the State has to be in control of everything and the political discourse explores this a lot. We must remember that we are already talking about a publicly traded company, in which the State will be a minority. In addition, there are instruments in the model that protect the country”, says Godke, who is also a professor at Insper, FAAP and CEU Law School.
“The Union has veto power, with its golden share, as happens at Embraer and at the Stock Exchange itself, for example. This action allows the government to prevent a certain controller, such as a foreign company, from taking control of Eletrobras,” he explains.
The history of recent privatizations also teaches that the federal government, whether from the PT or another party, has not rebelled against the privatization processes. “In recent decades, Brazil has gone through processes of privatization of large state-owned companies, such as Telebras, Vale and CSN, and there has been no attempt at renationalization. We are facing political speeches and electoral campaigns”, says Adriano Pires.
For Ricardo Teixeiracoordinator of the MBA in financial management at FGV in Rio, candidates are aware of the impossibility of what they are saying and the need to respect the laws that govern the public and private sector.
“We have a tradition that if the situation is legally perfect, there is no reason to reverse it. Any action against this would clash with the legally concluded process”, comments Teixeira. “Repurchasing shares that are on the market to nationalize again a company that the whole country understands can be very efficient, as long as it is not subject to political issues, would not make the slightest sense.”
His assessment is that, by the time this proposal was eventually put on the table, it would already be seen that it would make no sense. “It doesn’t stop standing, whether from an economic, financial or political point of view, and candidates know that. It makes no sense to believe such a thing.”
‘We’ve seen this before’
Economist and lawyer Elena Landau recalls that this is not the first time that former president Lula has promised to reverse a major privatization. “Lula has always said that he would reverse privatizations, ever since Vale, but he knows that this is just a political discourse. It never reversed,” he says.
Landau also comments that the electricity sector, where today the majority of the private sector is present, saw this participation of companies grow precisely after a 2003 law, enacted by Lula, which encouraged the holding of auctions and energy concessions. “If Lula wanted, then, to reverse the Eletrobras privatization process, he would have to change everything he has already done.”
The economist also highlights the effects of the “poison pill” included in Eletrobras’ capitalization rules, which make any kind of deliberate resumption of control very difficult. “One of these rules limits the voting power in the company to up to 10%, which does not allow for collusion. Therefore, the chance of renationalization is extremely small. It’s a campaign speech. We’ve been through this.”