World Economy

Brazil Looks Closer at Privatization

Brazil Looks Closer at PrivatizationBrazil Looks Closer at Privatization

Cash-strapped Brazilian states, struggling with falling revenues during the worst recession in decades, may look to privatize power assets if state-controlled utility Eletrobras succeeds in selling distribution company Celg-D in March.

The sell-off could be similar to the 1990s when President Fernando Henrique Cardoso sold federal government stakes in several utilities to help ease a fiscal crisis and open the way for investments to improve services, CNBC reported.

Centrais Eletricas Brasileiras SA, as Eletrobras is formally known, said it intends to sell six other power distribution companies after Celg-D. Experts say a successful first auction could spur a wider privatization drive.

“The whole question is if this move by the federal government could be echoed by the states; I think so,” said Goldman Sachs power sector analyst in Brazil, Marcos Severine. “We’re seeing the financial difficulties state governments are facing, but they still control a large amount of assets.”

Marcos Coimbra, a partner at KPMG Consultancy, sees high potential for asset sales in the power distribution sector.

“This is clearly a capital intensive business, so it makes sense considering the states’ finances and Eletrobras’ cash situation that companies in the area should be privatized,” he said.

New requirements published by Brazilian electricity regulator Aneel might also encourage the sale of state-run companies to the private sector.

Aneel is pushing for improvements to the services provided by distributors in Brazil, which will require additional investments.

A compilation of government data regarding power distribution services shows that Eletrobras companies such as Celg-D, Ceal, Cepisa and Eletroacre are the ones most in need of improvements.

Also in this situation are state-owned firms such as CEEE, from Rio Grande do Sul, and Companhia Energetica de Brasilia.

Foreign companies are seen as the likely buyers in any privatization wave, since local companies are heavily indebted and high interest rates in Brazil make financing prohibitively expensive. Chinese firms are hot candidates to increase holdings in Brazil.

“They see Latin America as a new commercial frontier, including the possibility of selling hardware. On distribution you need to add new equipment quite frequently,” said Tiago Figueiro, a lawyer specialized in the power sector at Veirano law firm.