PT wants Eletrobras “as it was”. What is the company’s past under the PT

Summary of this report:

• Lula questions in the STF points of the privatization of Eletrobras, which passed to private control in June 2022
• Since the election, common stocks have dropped nearly 30%
• PT president Gleisi Hoffman says the party’s position is for the resumption of the company “as it was”
• In PT governments, Eletrobras accumulated a history of losses, inefficiency and episodes of corruption

On the same day that President Luiz Inácio Lula da Silva (PT) filed a lawsuit at the Federal Supreme Court (STF) questioning provisions of the law that authorized the privatization of Eletrobras, PT President Gleisi Hoffman stated that the party’s position it is for the resumption of the company “as it was”.

Eletrobras ceased to be controlled by the Union in June 2022, under the government of Jair Bolsonaro (PL). Critical of the initiative, Lula won the election four months later, promising to review the privatization process and defending a resumption of the leading role that state-owned companies had in PT governments.

“We don’t have conditions to carry out development in Brazil without a company like Eletrobras controlled by the Brazilian State”, said Gleisi to “Valor Econômico”.

Responsible for 23% of the country’s energy generation capacity, the company no longer has state control after a history of losses, inefficiency and episodes of corruption in previous PT governments. The possibility of returning Eletrobras to the condition “as it was” has already caused the company’s common shares to fall by almost 30% since Lula’s election.

“At the time of Eletrobras’ capitalization, investors saw the paper’s potential with more efficient management, without government control”, says economist Bruno Monsanto, partner at RJ+ Investimentos. “The stock was also priced with this horizon. Now, the government wants to increase its voting power and influence in the company, being able to appoint directors and directors again.”

The market’s distrust in relation to a return of state management over the company comes from recent history, especially under the last PT governments. In this sense, the most notable episode was the provisional measure (MP) 579/2012, edited by then-president Dilma Rousseff (PT) to reduce the price of energy tariffs by 20%.

At the time, the government proposed to renew in advance, for another 30 years, concessions for companies in the electricity sector that were due to expire, under the condition that the companies sell energy at cost price. The largest companies in the sector, such as Copel, Cemig and Cesp, did not join the plan, and Eletrobras, under government control, paid the bill alone.

That same year, the company closed its balance sheet with a negative result of R$ 6.8 billion, the first loss in almost two decades. With open capital, the company saw its market value melt in the following years. From the Treasury account, R$ 20 billion came out to compensate for the 20% reduction in Eletrobras tariffs.

The issue of MP 579, which took place on September 11, 2012, became known as the “September 11 of the electricity sector”. But it was not the only decision under state management to generate losses for Eletrobras, according to industry analysts.

In 2017, the investment manager 3G Radar released a study that pointed to losses of BRL 85 billion (value at the time) due to general inefficiencies at Eletrobras. To arrive at the number, the state-owned subsidiaries were compared with their private competitors, taking into account expenses, assets and works, and how much the two groups of companies returned to the country, whether in payment of taxes or in dividends.

“Three private companies generated revenue for the country by paying fees higher than what the Eletrobras subsidiaries paid by adding the fees and the dividend”, states the study. That is, if the private companies had acted instead of Eletrobras, the federal government would have received more taxes and dividends than with the company under state management.

In a report to clients, the investment manager stated that between 2002 and 2016, Eletrobras would have added R$ 186 billion in losses, resulting from errors, inefficiencies and corruption, citing evidence raised by the Lava Jato task force in the construction of the plants Belo Monte, Jirau and Santo Antônio.

“We concluded that during the last 15 years, the true shareholders of Eletrobras were corrupt contractors (…), suppliers and politicians, together with those who benefited from inefficiencies, who created value for themselves without giving anything back to the country”, wrote the manager’s analysts in a letter in English at the time.

Lula wants to increase the government’s decision-making power at Eletrobras

Precisely to avoid control of Eletrobras by political groups, in the capitalization process the company’s bylaws were changed so that no shareholder can determine the course of business alone. The company’s policies are defined by a Board of Directors, which is represented by both majority and minority shareholders.

In addition, one of the new rules in the bylaws states that each shareholder has a limit of 10% of the votes at the General Meeting, regardless of the number of common shares held. Thus, although the government has retained 40.3% of the company’s voting shares, its decision-making power is restricted to one tenth of the composition of the assembly.

“This limitation prevents any shareholder with an interest in the electricity sector from raising its stake to influence decisions to the detriment of Eletrobras itself,” says Monsanto. “At the time of the capitalization of Eletrobras, investors saw the paper’s potential with more efficient management, without government control”, he recalls.

It is exactly this rule that the Lula government is now questioning in the STF. In March, the president classified Eletrobras’ capitalization process as a “crime against the country”. On the last day 11, he called it “slutty”.

“Now look at the slutty: the government owns 43% of Petrobras shares [Eletrobras], but in the council only has the right to 1 vote. our forty [porcento] only worth 1 [voto]. Those who have 3% have the same rights as the government. We are going to court so that the government has the number of votes for the number of shares it has”, declared Lula in Salvador, during the launch ceremony of the Participatory Pluriannual Plan and the Brasil Participativo digital platform.

In the direct action of unconstitutionality (ADI) proposed by the Advocacy-General of the Union (AGU), Lula, represented by the Advocate General of the Union, Jorge Rodrigo Araújo Messias, maintains that the rule limiting the right to vote, along with other characteristics of the process privatization of Eletrobras, generates a “disproportionate burden on the Union” and “serious damage to the public interest”, in clear violation of the right to property of the federative entity, “the principles of reasonableness, proportionality, and of several constitutional commandments that govern the performance of Public Administration”.

At the STF, the rapporteur for the case is Minister Nunes Marques, who has not yet ruled on the case. In a relevant fact statement to investors, Eletrobras stated that its privatization process “faithfully followed all the legal procedures provided for”.

For the company, if a preliminary injunction is granted or the ADI is upheld, “the Union and its group would potentially regain preponderance in the deliberations of the general meeting (…), which goes against the legal and economic premises that supported the investment decisions of the market – including the thousands of workers holding FGTS accounts – based on a model developed by the Union itself”.

The note refers to the R$ 6 billion that were invested by 370,000 beneficiaries of the Severance Indemnity Fund (FGTS) who expressed interest in buying Eletrobras shares with funds from the fund during the company’s share offering.

“What the Lula government is trying to renationalize Eletrobras is absurd from any point of view. It is destroying the company’s value, bringing tremendous legal uncertainty to the business environment, and shooting itself in the foot, by pushing away investments for the sector”, analyzes Monsanto.