The Brazilian government's commitment to its privatization program will be tested by the speed with which it breaks up and sells off it electricity monopoly, Centrais Eletricas Brasileiras SA.
The big state-owned sector should prove attractive to both domestic and foreign investors.
So far, foreigners have been responsible for only $400 million of the just more than $8.5 billion used to buy 34 firms privatized since 1991, mostly steel mills and petrochemical companies. But the foreign investment profile is expected to change with Eletrobras.
"All over the world, foreigners have invested in public service companies - mostly telecommunications and electric power companies - because the growth potential of these sectors far surpasses that of goods-producing firms like steel mills," said Luis Nelson Porto Araujo, a director of Trevisan Associados, a consulting firm acting as a privatization adviser to the government. "Foreign interest in Brazil's public service companies will be no different. In Brazil, you can far more easily double the amount of energy generated than the amount of steel turned out."
Indeed, the Brazilian electric energy sector is brimming with growth potential. Eletrobras officials estimate Brazil needs to invest $30 billion - in everything from dams to transmission lines to - sustain the growing (5% per year) energy consumption spurred by economic recovery. Privatization will go a long way toward supplying the money needed, because the cash-strapped government can't afford it.
President Fernando Henrique Cardoso's new administration began the electric sector privatization in July by selling off its just more than 50% stake in Espirito Santo Centrais Eletricas, or Escelsa, the regional power company of southern Espirito Santo state. The buyers were Iven, a commercial/investment bank consortium (also involving Citicorp), which bought 25% and Geracao Transmisao e Distribuicao de Energia Eletrica, or GTD, a consortium of pension funds from state-owned companies, which bought 25% (Pensions & Investments, Sept. 4). What's more, the government plans, by late this year or early next, to sell its 78% controlling stake in Light Servicos de Eletricidade, the regional power company of southern Rio de Janeiro state. GTD and Iven likely will bid on Light. So might another consortium, composed of Brazilian investment banks, construction companies, steel mills and U.S. companies, including Houston Industries Inc. and Chase Manhattan Corp., that bid unsuccessfully on Escelsa.
Escelsa's and Light's sales were scheduled before that of other Eletrobras subsidiaries because of the comparative ease in selling electricity distributors not connected to state-owned electricity generators. (Escelsa and Light are the only two power distribution companies independent of generating companies owned by the federal government. The other distribution companies independent of power companies are owned by state governments.)
After Light is sold, the government likely will try to sell 18 unfinished hydroelectric plants, both because of high maintenance costs of $1 billion a year and because of the need to generate more electric power as soon as possible. But the government will find it difficult to sell unfinished dams because of financing problems.
"Buying an unfinished dam means having to sell power through a grid of state distributors, which means having to finance them," said Renata Moraes, a vice president in charge of energy projects at Chase Manhattan's Sao Paulo branch. "Buying into regional power companies like Escelsa and Light means selling to the consumer directly."
The government's plans to begin privatizing the rest of Eletrobras' holdings in 1996, a sell-off that likely will mean breaking up the monopoly into sellable parts.
Eletrobras is studying a plan to split into two separate entities: Eletrobras, which would continue to regulate the sector and be kept in state hands, and Eletropart, comprising the four regional Eletrobras energy generating/distributing subsidiaries - CHESF, Eletronorte, Eletrosul and Furnas, which runs the government's nuclear power plant, would be sold as a bloc, or more likely, as four separate companies.
Then the government would create a national grid of all transmission assets, which it would keep, and allow all independent power producers (the buyers of Eletrobras energy generating/distributing subsidiaries) access to it.
If the four generating/distributing subsidiaries are sold separately, and if a new law allows private electricity generators to sell most of their energy, these companies should attract lots of investment interest, particularly among foreigners.
"If CHESF or Furnas were to be sold individually by putting their shares up for sale on local exchanges, foreign investors looking for liquidity might likely invest in these firms," said Ruy Souza e Silva, the director of merchant banking at Citibank's Sao Paulo office.
