BY LATIN AMERICA
The government of Brazil's Sao Paulo state [on March 24] cancelled the planned sale of a controlling stake in electric utility Cesp after potential bidders were reportedly turned off by the 20 billion-real price tag for the stake and uncertain prospects for the renewal of licenses for two hydroelectric plants that account for nearly two-thirds of Cesp's generation capacity. What is the future of Cesp and of the planned privatization? What would be sufficient to attract foreign investors to bid for a stake in the company?
Georges Landau, Head of Prismax Consultoria in Brazil: The cancellation of the tender to privatize Cesp illustrates two distinct trends: 1) the murkiness of Brazil's normative-regulatory framework, where rules are uncertain and change as a function of the political whims of the current administration; and 2) the federal government's unwillingness to oblige Sao Paulo state Governor Jose Serra of the opposition PSDB party, who is the leading contender for the presidency in the 2010 election, by enabling him to cash in a minimum of $3.8 billion, the proceeds of which would go to finance infrastructure projects that would add to Serra's popularity. The government's reluctance to endorse the Cesp tender takes several forms; all of them dissuasive to investors both domestic and foreign, who do not wish to embark on a venture of this magnitude without long-term assurances about the investment risk. Given the lack of such assurances, they showed no interest in participating in the auction. The administration's refusal to commit itself to the renewal of several of Cesp's concessions reflects a recurrent problem, as such concessions can often not be renewed unless a specific authorization law is enacted, and if there is no political will to do so Congress will abstain. Partisan politics complicate the situation; one should bear in mind that Brazil's federal electric power system is under the thumb of senator Jose Sarney of the PMDB party, a former president who wields significant influence over Lula. Moreover, there is in this second term of Lula's tenure a tendency toward consolidation of federal public enterprises, in this case Eletrobras and its affiliates; it can be surmised that the expired concessions would be ascribed to these enterprises. That is the real reason why the Cesp tender was allowed to fail.
André Segadilha, Head of Research at Banco Prosper in Brazil: I believe that, operationally, Cesp continues to be an excellent long-term investment option. What was confirmed in Cesp's privatization auction was the state government's great inability—or worse, overconfidence that the auction would have been a success even without the renewed concessions—to perceive that ... the risk of holding the auction without all the concessions being renewed was very high and that failure could seriously affect investors and the credibility of the process. In fact, Cesp's shares suffered greatly with the auction's failure, which we believe reflects not just frustration with the auction in the market, but also the future of the company as a state-owned enterprise and all the benefits derived from that status. I believe the market over-reacted to the auction failure and that Cesp, even as a state company and considering all the aspects and positive prospects for the electric energy market, is still an excellent company and a long-term option within the electricity sector.
Claudio Frischtak, President of Inter.B Consultoria Internacional de Negocios in Brazil: The future of Cesp—the state of Sao Paulo's 7,456 MW installed capacity generation utility—remains undetermined. The reason for the third unsuccessful attempt at privatization—canceled on March 25, as no bidder presented financial guarantees—is well known: the regulatory uncertainty regarding the concession renewal of a significant chunk of its capacity, expiring in 2011 (Tres Irmaos with 808 MWs) and 2015 (Ilha Solteira and Jupia with 3,444 MWs and 1,551 MWs, respectively). Uncharacteristically, the state government botched the auction by rushing the sale without filing for concession renewals. What does the future hold? Basically, the government can stay put and do nothing until the concession renewal issue is resolved. Although it was counting on the 6 billion reais in revenues (the steep minimum price for the state's stake in Cesp) to strengthen its investment program and Governor Jose Serra's political fortunes (Mr. Serra is the likely candidate from the opposition PSDB in the 2010 presidential elections), the revenues are not essential in view of the strong economic and fiscal position of Sao Paulo. Alternatively, the government could: lower the minimum price or change the payment conditions, highly unlikely due to the political fallout; sell ON shares in a secondary offering, not very attractive in view of the deep discount; or spin off the remaining 22.2 percent of its capacity and sell it as an independent unit, a non-trivial exercise in view of the high debt of the company tied to the Porto Primavera hydropower plant.
Republished with permission from the Inter-American Dialogue's weekly Latin America Energy Advisor newsletter.