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Cablegate: Brazil Civil Aviation: Liberalization/Privatization Update

VZCZCXRO8885
RR RUEHRG
DE RUEHBR #1621/01 3521833
ZNR UUUUU ZZH
R 171833Z DEC 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 3119
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6997
RUEHSO/AMCONSUL SAO PAULO 3216
RUEHRG/AMCONSUL RECIFE 8813

UNCLAS SECTION 01 OF 03 BRASILIA 001621

SIPDIS
SENSITIVE

STATE FOR WHA/BSC, WHA/EPSC

E.O. 12958: N/A
TAGS: EAIR EINV ECON BR
SUBJECT: Brazil Civil Aviation: Liberalization/Privatization Update

SENSITIVE BUT UNCLASSIFIED

REF: A) BRASILIA 0169, B) BRASILIA 1160

1. (SBU) Summary: Brazil is currently considering Brazilian civil
aviation liberalization/privatization legislation that the
government hopes would result in greater direct foreign investment,
domestic market liberalization, transference of air traffic
functions from military to civilian control, and the creation of a
customer's bill of rights. ANAC and BNDES are charged with
delivering to President Lula the regulatory framework model
proposing to privatize management of airport facilities through
concessions by April 9, 2009, at which time Lula will make a
decision on whether to pursue system-wide privatization or ad hoc
privatization of individual airports. A potential model that grants
concessions by grouping profitable airports with non-profitable ones
may significantly reduce investor interest, while another potential
model that would offer concessions on individual airports could
leave GOB responsible for running unprofitable airports the private
sector does not want. Brazil's Civil Aviation Regulator (ANAC)
President Solange Paiva Vieira recently predicted in a meeting with
U.S. Ambassador Sobel that there was insufficient time and political
will to affect privatization changes before the conclusion of the
Lula administration in 2010. Vieira offered concrete proposals in
the areas of market liberalization to shape the agenda for the next
U.S./Brazil bilateral discussions, including frequency
liberalization on a specific city/city pairing basis, liberalization
of the cargo carrier sector, and mutual recognition of the
certification of aircraft parts and maintenance. Vieira also
underlined that the GOB would need the United States to provide, as
the EU has done, a report that examined the economic effects of an
Open Skies agreement on the Brazilian civil airline industry as a
precursor to starting Open Skies talks with Brazil. End summary.

PROPOSED LEGISLATION
--------------------

2. (U) At a November 9 public hearing on the proposed legislation
attended by Econoff, co-chaired by Senate legislative consultant
Victor Carvalho Pinto; Dr. Respcio do Esprito Santo Jr., president
of the Brazilian Air Transportation Institute of Strategic Studies
and Public Policy; and Senator Delcdio Amaral, primary sponsor of
the legislation that created ANAC in 2005, revisions to the
Brazilian civil aviation code were advocated that would allow for
the sector to keep pace with growth, enhance operational
efficiencies, address safety concerns and provide greater customer
service. Pinto, the author of the study, proposed repealing the cap
of 20% foreign ownership/investment in Brazilian airlines as well as
opening the domestic market to unrestricted foreign carrier
participation. While admitting that the latter is highly unlikely,
Pinto commented that the industry needs to embrace free enterprise
in order to achieve greater operational efficiencies.

3. (U) Pinto's operational model called for the privatization of all
airports, each with its own business plan. The study claimed that
by privatizing all Brazilian airports and not just the profitable
ones, the less desirable inefficient airports would have to improve
to attract needed investment capital. Pinto offered as acceptable
options either private management or municipal management of the
airports with no federal oversight in day to day business
activities. The study proposed that airport slots should be the
property of the airlines to be sold initially to the carriers by the
airports via auction and then traded freely among the carriers, a
significant departure from the complex system that ANAC currently
uses to allocate slots to carriers. The model calls for carriers to
bid on newly announced international routes and to abolish the
international boarding fees currently collected (which the study
claims are unconstitutional). Pinto suggested that INFRAERO, the
Brazilian federal agency charged with managing airport
infrastructure, should be converted to a private entity that
continues to manage airports under a privatization model, given
INFRAERO's wealth of assets and airport operational experience.
4. (U) Referencing the aviation service meltdowns of 2007, including
late flights and cancellations, Pinto advocated greater
accountability on the part of the air carriers through the adoption
of a passenger bill of rights. This proposal would establish a
sliding scale of compensation levels for passengers whose flights
were overbooked, delayed, or cancelled. Passengers would be
compensated depending on severity of the problem and the original
purchase price of the ticket. Pinto argued that the traveling
public's Brazilian airport experience, (which the study
characterizes as "uncomfortable and tedious") would improve through
increased operational efficiencies resulting from privatization,
such as fewer extended layovers and more aesthetically pleasing
passenger facilities.
5. (U) Addressing the controversial measure of transferring air
traffic control (ATC) responsibilities from military to civilian

BRASILIA 00001621 002 OF 003


control, Ponto and Amaral advocated a cautious approach. Both
recognized the challenges, from how to logistically divide shared
military/civilian-use facilities and assets between two ATC groups
to questions of national security and sovereignty. The study
proposed a methodical transfer beginning with the introduction of
the ATC management system known as CNS-ATM. Ponto argued that this
would provide a natural transition for the new management and allow
time for the Ministry of Defense to reassign its officers. Amaral
cited the concern that ATC was a contributing factor in the 2006
mid-air collision involving a GOL 737 and an executive jet as a
reason to prioritize CNS-ATM implementation and transference to
civilian control.

6. (U) Dr. Espirito referenced the recent announcement by Rio de
Janeiro's Governor Sergio Cabral that both President Lula and
Minister of Defense Nelson Jobim had accepted the idea of
privatizing Galeco airport in Rio and Campinas airport in Sao Paulo
as an opportunity to extend the privatization model to the entire
industry, not just the profitable ones. Espirito cited INFRAERO
concerns that by privatizing only profitable, large airports, the
smaller, unprofitable ones would suffer because they would no longer
receive the profits of others to cover their shortfalls (REFTEL B).
Dr. Espirito proposed that privatization of the entire airport
system would be more effective in raising needed investment capital
(something particularly important for less profitable airports),
would be more responsive to the local community's socioeconomic
needs, and private entities would more effectively manage the
various governmental operators within the airport, such as the
Ministry of Defense, Agriculture, Federal Police, and Customs.

VIEW FROM ANAC
--------------

7. (SBU) During a meeting with Ambassador Sobel, ANAC president
Vieira acknowledged that airport privatization is inevitable, but
questioned whether it will occur during the Lula administration. She
explained that ANAC and BNDES were charged with delivering to
President Lula the regulatory framework model under a market
privatization scenario by April 9, 2009, at which time Lula will
make a decision on whether to pursue airport privatization
system-wide or on an ad hoc airport-by-airport basis. Brazil's
national development bank, BNDES would then be responsible for
managing the concession process. Vieira pointed out that the
Brazilian constitution does not allow for private ownership of
Brazilian airports, adding that the concession process would allow
for private management of airports on a long term lease basis.
Vieira noted implementing any privatization decision would be
complex and would require careful management of interagency
equities. Vieira indicated she personally favored concentrating on
liberalizing routes and pricing, and questioned if there was
sufficient political will to finalize the debate and begin
implementation of airport privatization before presidential
elections in 2010.

8. (SBU) Vieira expressed interest in discussing the agenda for the
next aviation bilateral meeting. Topics of interest included
frequency liberalization on a specific city/city pairing basis,
liberalization of the cargo carrier sector, and mutual recognition
of the certification of aircraft parts and maintenance. In
mentioning Brazil's current Open Skies negotiations with the EU,
Vieira confirmed that the agreement will have an aircraft
parts/maintenance mutual recognition provision, but she did not
provide any additional details on the talks or when the negotiations
are expected to be concluded. Vieira added that the EU submitted to
ANAC an economic impact report that examined the economic effects of
an Open Skies agreement on the Brazilian civil airline industry as a
precursor to starting Open Skies talks with Brazil. Vieira
underlined the U.S. would need to provide a similar study if Open
Skies were pursued. Vieira added that ANAC had recently approved
full pricing liberalization for international flights. The phase in
of this over the course of 2009 will involve 20% of the
international flights by January, 40% by April, 80% by August, and
be complete by the end of the year. Although Solange did not
mention which routes/destinations would be liberalized first, she
did predict that by 2010, liberalized frequencies between the U.S.
and Brazil could be a reality.

MEANWHILE, AT INFRAERO
----------------------

9. (SBU) In response to a BNDES proposed restructuring of INFRAERO
that was recently revealed in the Brazilian newspaper Valor on
December 2, INFRAERO president Srgio Gaudenzi announced his
resignation on December 3, providing as his reason his disagreement
with the proposed airport privatization model and insisting that
INFRAERO should instead become parastatal organization with publicly
traded shares offered through an initial public offering. The
article reported that his resignation was accepted by Jobim and that

BRASILIA 00001621 003 OF 003


Jobim had formally offered the position to Guilherme Lagger, a
former executive at Brazilian mining company Vale and beverage giant
AmBev. The BNDES report also recommended the dismissal of
INFRAERO's 4 directors, its 28 superintendents, the airport
administrators in 68 airports that INFRAERO manages and the
logistics and baggage handling units.

AIRPORT CONCESSION SEMINAR
--------------------------

10. (SBU) Airport concession models were the topic of discussion
during the ANAC-sponsored Airport Concession Seminar held in Rio de
Janeiro December 11-12. The message from the Minister of Defense
Nelson Jobim, along with ANAC President Vieira, ANAC Director
Marcelo Guaranys, and Director of Civil Aviation Policy of the
Secretary for Civil Aviation Fernando Soares, emphasized the
concession model's three goals of enhancing Brazilian civil aviation
efficiencies, fostering competition and raising sufficient capital
to finance needed infrastructure projects under the Growth
Acceleration Program (PAC). Jobim emphasized the need for the model
to be flexible in adapting to the real needs of Brazil's fast
growing aviation sector and applauded ANAC for considering other
countries' models before deciding on Brazil's. Vieira stressed that
the model must promote domestic airport competition in order to
increase airport operational efficiencies. She also underscored the
developmental and implementation phases of the concession process
must be transparent. In touching on some of the specifics of the
model, Guaranys mentioned that the model must take into account the
non-profitable airports. Guaranys proposed to group performing and
non-performing airports into bundled concessions to require
potential investors to take on unprofitable assets and
cross-subsidize their shortfalls from the profits of the performing
airport. The model, similar to the Mexican model, would address
this vexing issue, in his view. (COMMENT: The proposal to bundle
non-profitable airports into concessions for profitable airports may
discourage investors, particularly since Brazilian law requires the
airports to remain in operation (as opposed to, for example, UK
privatization which permitted airports to be re-zoned for housing or
other commercial purposes) END COMMENT). Guaranys suggested that an
individual airport concession model approach, similar to the Chilean
model, could foster greater efficiencies at profitable airports, but
possibly at the expense of leaving underperforming airports behind.
Soares underscored the model's goal of raising needed capital
through BNDES loans. Soares acknowledged PAC funding shortfalls and
suggested that the concession bidding process should encourage
foreign participation (NOTE: BNDES funding requires the
participation of Brazilian firms and inputs).

11. (SBU) Comment: Privatization of the Brazilian civil aviation
sector continues to face many obstacles, from GOB military concerns
relating to airport asset sharing with civilian organizations to the
difficulty in crafting a concession model that would achieve GOB
operational priorities and also be attractive to private sector
investors. However, consensus is building that inaction is not an
option, especially given that Brazil hosts the World Cup in 2012 and
Rio is bidding to host the 2016 Olympics. The departure of the
anti-privatization head of INFRAERO and the recent airport
concessions seminar suggests momentum toward privatization is
building. ANAC, SAC and BNDES will play key roles in this debate.
The GOB is committed to maintaining the functionality of its
sixty-eight commercially operating airports and required
constitutionally to own them; a potential model that grants
concessions by grouping profitable airports with non-profitable ones
may significantly reduce investor interest. The individual
concession model approach is also fraught with downsides from the
government perspective, as GOB would potentially be left to run
unprofitable airports the private sector does not want. Given these
challenges, ANAC seems more focused in the short-term on creating
the conditions for market liberalization of pricing and routes,
underscored by a President Vieira's comment to Ambassador Sobel:
"privatization only equates to change in airport management, whereas
market reform equates to progress." End Comment

SOBEL

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