Cablegate: "Folha" Commentary Savages Gob Energy Model

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A

1. The bill to establish the GoB's would-be new energy-
model has been passed by the Chamber of Deputies and is now
in the Senate committee-stage (Septel.) Over most of the
model's key detail there continues to hang a heavy fog of
general unclarity. Increasingly, though, private-sector and
independent commentators are tending to pessimistic
judgments with regard to the GoB's designs. A February 1,
2004 column in top leftist daily `Folha de Sao Paulo' was
representative of this growing school of thought.
Following is Embassy's unofficial translation of the column.

2. (Begin Text of Unofficial Embassy Translation)

HEADLINE: The Pinocchio Energy Syndrome

Some statements and events that occurred in 2003 and the
beginning of 2004 show that (Brazil's) energy-sector
authorities have come down with the Pinocchio syndrome. As
everyone knows, Pinocchio has a personality disorder that
prevents him from telling the truth. With great innocence
and charm, Pinocchio doesn't have the courage to stand up
for his ideas and, consequently, loses the confidence of
those around him.

The current energy team, without the charm and less innocent
than Pinocchio, try to fool the market and even society with
talk that they are making changes that will assure the
necessary investments to regain sustainable growth.

In the electricity sector, at the beginning of 2003 the MME
(Ministry of Mines and Energy) team guaranteed that the
model proposed during the presidential campaign had been
discarded and that, accordingly, market mechanisms and
opinions of the agents would be considered in the
elaboration of the new model.

The first surprise came in July 2003, when the preliminary
document was divulged. Right away you could see that the
"Lula light" philosophy had not contaminated the MME team.
However, faced with criticisms from the market, society and
even other areas of the government, the MME continued to say
that the final version of the model would take into account
all the suggestions presented. This was because one of the
principal objectives of the new model would be the
attraction of private capital. Much to our surprise, at the
end of last year the MME sent two MPs (provisional measures)
proposing a centralizing and state model to the President of
the Republic. In its essence, the ideas contained in the
two MPs are similar to those that circulated (in the PT
platform) during the presidential elections.

Another event that forced the government to reconsider some
of its positions is the recent energy crisis in the
Northeast. It is good to remember that during the
presidential campaign, and even after Lula took office, some
of the current authorities in the sector proposed breaking
contracts both with the emergency thermal-plant operators
as well as with the PPT. Even some professors who currently
hold office in the government suggested bringing suits
against the contracts with the Public Ministry.

In light of these declarations, the start in operations of
the emergency thermal plants was delayed to the maximum,
obviously with costs to the consumers. However, with the
worsening of the crisis, the government "did an about face",
and during the second week of January (2004), more than 30
thermals were turned on, at a cost of R$230 to R$430 per

In the petroleum sector there are two stories. The first is
the lack of transparency in the policy for gasoline, diesel
and GLP prices. Petrobras claimed throughout 2003 that
their prices were the same or less than those on the
international market. However, when we compare the prices
of Petrobras with those of American golf, we verify that the
internal prices were always higher than the external ones.
This explains, in part, the result presented by Petrobras'
supply section. In 2003, this section, responsible for the
sale of derivatives, accounted for around 30% in the total
profit of the company, while in 2002 it was only 15%.

The second story is linked to the bidding on petroleum and
natural gas blocs. In July last year, on the eve of the
auction in these areas, the CNPE (Nacional Council on Energy
Policy) published Resolution No. 08. The resolution
contains two points that seem to have passed unnoticed by
the market. The first took away, in practice, ANP's
authority to grant concessions. The second created two
concepts emblematic of the current government's
interventionism: the concept of the ideal relationship (sic)
between reserves and production, and that of the adequate
volume (sic) of reserves in the country. In reality, this
resolution strengthens the MME and leaves it to be
understood that once self-sufficiency is attained, new
auctions (concessions) will no longer be necessary.

In the field of regulation, the government passed the year
alternating between being for and against autonomy and
independence of the agencies. However, at the end of 2003,
the government appeared to have opted for building a
regulatory standard through which the agencies have their
power reduced and their decisions politicized. This became
clear with the appointment of a politician with a position
against the opening of the petroleum and gas sector to the
ANP board of directors, and the dismissal of the president
of ANATEL for having disagreed with the Minister of

No matter how competent the government is in the art of
hiding its true intentions, it's not possible to fool
everyone all the time.

In this sense, it is a shame that after all the time and
work put into achieving macroeconomic stability, the
government lets a unique opportunity for attracting private
investment for the infrastructure sector get away.

In 2004, the government needs to assume an attitude
compatible with our real needs. This means separating the
Entrepreneur-state from the Regulator-state; establishing a
regulatory and tax model that offers incentives to private
investment; and stimulating competition. If not, we will be
promoting the break up of our macroeconomic equilibrium.

(End Text of Embassy Translation)


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