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### Viewing cable 05BRASILIA447, BRAZIL MAKES REFORMING REGULATORY AGENCIES A PRIORITY

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
05BRASILIA447 | 2005-02-18 19:45 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

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

` `

    UNCLAS SECTION 01 OF 05 BRASILIA 000447

    SIPDIS

    SENSITIVE

    NSC FOR RENIGAR, SHANNON
    TREASURY FOR OASIA - DAS LEE AND FPARODI
    STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
    USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
    USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON
    DOE FOR SLADISLAW
    FCC FOR ETALAGA

    E.O. 12958: N/A
    TAGS: ENRG EINV EFIN PGOV EWWT ECON BR
    SUBJECT: BRAZIL MAKES REFORMING REGULATORY AGENCIES A PRIORITY

    REFS: A) 03 BRASILIA 3405

          B) 04 BRASILIA 186
          C) 04 BRASILIA 38
          D) 04 BRASILIA 59

    ¶1. (U) SUMMARY:  The Brazilian Congress is considering a new law
    governing the functioning of Brazil's nine regulatory agencies.
    The legislation aims to bring greater social accountability,
    operational transparency, and financial oversight to their
    operations.  The law includes, however, controversial changes
    that would limit the operational and financial independence of
    these agencies.  While there is acceptance of the need for new
    legislation, some provisions have sparked concern over the
    extent to which the GOB will be able to exert political
    influence over the agencies.  The most contentious aspects of
    the proposed changes include shifting concessionary
    responsibility from the regulatory agencies to the ministries,
    reduction of operational and financial independence, the
    establishment of an Ombudsman appointed by the President, and
    mandatory public consultations.  In addition, through another
    law, the conversion of personnel at the regulatory agencies to
    the GOB civil service is already underway and may impact the
    agencies' ability to hire and retain high-caliber staff.  While
    there is a need to harmonize the regulatory agency framework,
    the Lula administration comes at this task with some of its
    traditional suspicions regarding the involvement of the private
    sector and the independent role of the regulatory agencies. END
    SUMMARY.

    NINE REGULATORY AGENCIES
    ------------------------

    ¶2. (U) Brazil has nine independent regulatory agencies that have
    evolved since the mid-1990s:  National Electric Energy Agency
    (ANEEL), National Telecommunications Agency (ANATEL), National
    Petroleum Agency (ANP), National Agency of Sanitary Monitoring
    (ANVISA), National Supplementary Health Agency (ANS), National
    Water Agency (ANA), National Land Transportation Agency (ANTT),
    and National Aquatic Transportation Agency (ANTAQ).  The
    creation of the agencies complemented GOB privatizations begun
    under the previous administration.  All but two of the agencies
    were established by separate laws, and the result has been an
    inconsistent regulatory-agency regime.  For example, the
    directors have appointments that vary from three to five years
    and not all of the agencies were created with an ombudsman
    office.  There is widespread agreement on the importance of
    having a general law governing regulatory agencies.  As always,
    the devil is in the details.

    OVERHAUL OR SIMPLY IMPROVEMENTS?
    --------------------------------

    ¶3. (SBU) Early on, the Lula administration opposed the idea of
    granting broad latitude to the regulatory agencies.  According
    to Worker's Party (PT) legislative adviser Luiz Fernando
    Linares, the Cardoso administration created a regulatory
    "monster" without sufficient oversight.  According to one of the
    ANEEL directors, Isaac Averbuch (protect), the Lula
    administration came into office very suspicious of the
    regulatory agencies because of its lack of understanding of the
    regulatory agencies' role and sought to change the regulatory
    agencies for various reasons, the first being ideology.

    ¶4. (U) In September 2003, the GOB published draft legislation
    (Reftel A) and subsequently, in February 2004, a general law
    over the regulatory agencies (PL 3.337/04) was presented to
    Congress.  The initial response to the proposals was generally
    negative, coming at the same time that the Lula administration
    had forced out the previous president of ANATEL (Reftels B, C,
    D).  Although it appeared that the proposed regulatory reform
    had lost momentum, the general law is now a priority on the
    administration's legislative agenda.  (Note: The National
    Industrial Confederation (CNI) has published a lengthy study, in
    Portuguese, of the history of Brazil's regulatory regime and the
    changes proposed in the Bill. End Note.)

    ¶5. (SBU) The Lula administration is preparing for the upcoming
    legislative debate.  A delegation from the GOB's executive
    branch will be traveling in February 2005 to the United States,
    Mexico and Bolivia to learn from other regulatory models.  The
    delegation includes Helcio Tokeshi (Secretary for Economic
    Oversight, Ministry of Finance), Luis Hiroshi Sakamoto
    (Secretary for Management, Ministry of Planning, Budget and
    Management), Nelson Jose Hubner Moreira (Chief of Staff of the
    Minister of Energy), Mr. Marcio Wohlers de Almeida (Special
    Advisor to the Minister of Communications), and Rodrigo Augusto
    Rodrigues (Assistant Deputy Chief of Staff, President's Office).

    FIVE AREAS OF CONCERN
    ---------------------

    ¶6. (U) Interlocutors from the executive branch, industry, and
    political circles have highlighted five principle concerns: (1)
    shifting concessionary responsibility from the regulatory
    agencies to the ministries, (2) reduction of operational and
    financial independence, (3) creation of an Ombudsman appointed
    by the President, (4) mandatory public consultations, and (5)
    through another law, the conversion of personnel at the
    regulatory agencies to the GOB civil service.

    (1) CONCESSIONARY AUTHORITY
    ---------------------------

    ¶7. (U) The Bill proposes to place concessionary authority for
    public services in the ministries.  For the regulatory agencies
    that do not have a concessionary role, there would be little
    impact.  Industry analysts, however, point out that this will
    create a potential conflict of interest in some of the larger
    agencies such as ANEEL and ANP that regulate powerful state-
    owned companies such as Eletrobras and Petrobras.

    ¶8. (SBU) EmbOffs met with Rodrigues from the President's Office
    to discuss the upcoming trip.  Rodrigues said that he expected
    the most resistance from the regulatory agencies in terms of
    concessionary authority.  He stated, however, that although the
    agencies have considerable technical expertise, in the final
    analysis it is the State that grants concessions for public
    services.  Rodrigues noted that although the law would place
    concessionary authority in the ministries, the ministries could
    delegate the authority back to the agency as the Ministry of
    Mines and Energy (MME) did with ANEEL.  Rodrigues said that an
    agency like ANATEL would also most likely have the authority
    delegated back because ANATEL is a highly-respected
    organization; in contrast, an agency like ANTT may not because
    it does not have the capacity to handle the work. (Note:
    Rodrigues also stated that legislative process for transfer of
    Civil Aviation Department (DAC) into a proposed National Civil
    Aviation Agency (ANAC) was farther along than the proposed
    general law, and there is a general consensus that ANAC is
    needed. End Note.)

    ¶9. (SBU) ANATEL, ANEEL, CNI and AmCham all told EmbOffs that
    concessionary authority should remain in the regulatory
    agencies.  ANEEL Director Averbuch said MME was forced to re-
    delegate concession authority back to ANEEL for lack of capacity
    to deal with the scope and technical aspect of the operation.
    One of the directors of ANATEL, Jose Leite Pereira Filho, said
    that ANATEL has less concern about the concessionary role
    because ANATEL grants only one "concession" (for fixed line
    services) and that is already contracted; ANATEL's other
    licenses (e.g., for cellular services) are granted under
    "authorizations."  Leite is more concerned about the law's
    ambiguity regarding regulatory authority over the concessions;
    Leite prefers having both concessions and regulatory authority
    reside in one organization.  In addition, Leite says that
    delegating the authority back from the ministries to the
    agencies creates too much uncertainty because politics may cause
    the authority to bounce back and forth between the two; the
    concessionary authority should either be in the ministry (and
    its full responsibility) or remain fully in the regulatory
    agencies.

    (2) REGULATORY INDEPENDENCE MEANS...
    ------------------------------------

    ¶10. (U) The Bill proposes a few measures that many analysts
    think will reduce the operational and financial independence of
    the regulatory agencies.  These measures include centralizing
    policy-making authority in the ministries and mandating a
    strategic/performance contract between the regulatory agencies
    and the executive branch.

    ¶11. (SBU) EconOff met with a PT adviser in the Camara dos
    Deputados, Luiz Fernando Linares, whose primary concern was the
    role of the regulatory agencies in policy formation.  Linares
    said that one of the Lula administration's first initiatives was
    to return the policy role from the regulatory agencies to the
    ministries; the government formulates policies, and the
    regulatory agencies implement and monitor.  Linares declared
    that it was not proper to have policy decisions being made by
    technical experts and only on technical grounds as the policy
    implications are often deeper.  In contrast, ANATEL Director
    Leite thought that the placement of the regulatory agencies in a
    new hierarchical relationship was the most serious problem with
    the bill.  According to both Leite and the CNI report, the
    general Telecommunications Law created ANATEL as a "special"
    autonomous agency; under the proposed law, ANATEL (and the other
    regulatory agencies) would no longer have the final word.

    ¶12. (SBU) Linares made clear that he thought the proposed
    strategic/performance contract was "naive, unnecessary, and
    inefficient," adding that others in Congress were looking
    askance at the contract idea as well.  AmCham Sao Paulo also
    expressed concern that the contract would be too inflexible and
    called instead for a Work Plan to be developed in conjunction
    with the respective ministries.  AmCham opposes any linking of
    funding of the regulatory agencies to their achievement of the
    contract's goals.  As far as ANATEL's head of Legislative
    Affairs, Edvaldo Miran da Silva (protect), he said that ANATEL
    already reports to Congress, the ministry and the National
    Accounting Tribunal (TCU), and that expanding requirements to
    report to the executive branch would reduce its autonomy.

    ¶13. (SBU) Of much greater to concern to Averbuch is ANEEL's lack
    of full financial independence.  According to Averbuch, ANEEL
    has seen its budget control erode during the last few years.
    ANEEL's budget comes from a fee, a percentage of each
    electricity bill, charged to consumers and paid to the federal
    treasury.  The GOB may then authorize an expenditure of that
    money or prohibit it.  Money not passed to ANEEL reverts to the
    general treasury after five years.  During recent years, the
    government has increasingly retained a slice of the consumer
    charges paid for ANEEL and allocated that amount to other uses.
    Averbuch said this has limited ANEEL's operations, especially in
    areas such as customer service and its ability to conduct audits
    of the concessionaires.

    (3) OMBUDSMAN OFFICE
    --------------------

    ¶14. (SBU) The bill calls for a presidentially-appointed
    ombudsman in each of the regulatory agencies.  According to PT
    adviser Linares, this is the most important aspect of the law
    because the regulatory agencies currently have too intimate of a
    relationship with industries and business associations, and are
    not responsive enough to the public (to whom they are providing
    service).  Linares said that one year ago only ANEEL and ANATEL
    had ombudsman offices, but only ANATEL's was actually
    functioning adequately.  Under the Lula administration, however,
    all of the agencies now have ombudsman offices at least in
    theory.

    ¶15. (SBU) Averbuch is concerned that the appointed ombudsman
    will simply become a plant for the Executive, influencing
    decision-making for political purposes.  AmCham shared the
    concern that an executive branch representative would constitute
    State interference in agencies' operational independence.  To
    ensure its independent role, ANATEL Director Leite said that the
    Ombudsman should either by appointed by Congress or at least
    approved by Congress if appointed by the president.

    (4) POWER TO THE PEOPLE
    -----------------------

    ¶16. (SBU) The bill proposes greatly expanding public
    participation in the regulatory agencies through mandatory
    public consultations, funding of studies, and more transparent
    reporting.  Edvaldo Miran da Silva told EmbOff that this
    expansion is the real thrust of the proposed law and that it
    would have an even greater impact than the Ombudsman office.
    According to Silva, ANATEL currently opens some meetings to the
    public, such as when new regulations are being proposed.  The
    proposed law, however, would greatly expand public access to the
    decision-making process, including proposed rate hikes.  Silva
    did not consider this as very "radical" and compared it to the
    current judicial system in which non-sensitive court proceedings
    are open to the public.  Silva said that the regulatory
    agencies, however, are not accustomed to the public eye and that
    this would take some getting used to.  As an example, Silva said
    that prices for fixed-line services have sky-rocketed in recent
    years; if the proposed law passed, ANATEL (and the
    concessionaires) which be required to be much more transparent
    in justifying the price hikes.

    ¶17. (SBU) According to the bill, the regulatory agencies would
    have to fund studies by associations or local districts that do
    not have adequate resources.  Silva cited the example of a city
    that wanted to conduct a study of its telephone services; under
    such a scenario, ANATEL (and the concessionaires, by extension)
    fund the necessary technical specialists to conduct the study.
    AmCham opposes the regulatory agencies bearing such costs.

    (5) REFORM OF PERSONNEL SYSTEM
    ------------------------------

    ¶18. (SBU) As part of the effort to bring the regulatory agencies
    under greater state control, Law 10.871/04 requires that agency
    personnel be civil servants by the end of 2005.  Previously, the
    agencies had hired personnel under contracts, with wages more
    similar to those of the private sector.  Averbuch predicts that
    only 30% of the current staff will still work for ANEEL by the
    end of the year because they will either seek more lucrative pay
    in the private sector or fail to pass the civil service exam.
    Although Averbuch predicts higher turnover in administrative
    positions than the direct-mission related positions (only a 50%
    turnover predicted), the loss of institutional memory and
    expertise is worrisome.  Linares defends the new personnel law
    for the regulatory agencies as correcting a flaw dating back to
    the Cardoso administration, which was in a rush to form the
    agencies and did not want to be restricted by the civil service
    hiring system.  Linares somewhat counter-intuitively defended
    the low salaries as a deliberate strategy to attract personnel
    who are committed to the specialized field.  He said salaries
    could be raised again later to be more competitive with the
    private sector.

    ¶19. (SBU) Silva of ANATEL was much more upbeat about the
    personnel changes.  According to Silva, around one-half of
    ANATEL's staff has been working on temporary contracts because
    the personnel system passed under the Cardoso administration was
    suspended by the Supreme Court, crippling the agency's ability
    to hire and retain personnel.  Silva said employees were often
    trained only to leave for the private sector because of the lack
    of job security at ANATEL.  Although Silva predicted that there
    would be some turmoil in the short-term, he thought that in the
    long-run the integration of ANATEL personnel into the civil
    service system will bring much more stability and create a
    career development track at the agency.  AmCham praised the
    personnel changes for providing improved hiring procedures and
    professional development, but called for more competitive
    salaries.

    COMMENT
    -------

    ¶20. (SBU) Most successful regulatory systems depend upon a
    stable regulatory law with transparency and regulatory
    independence.  Although the Lula administration has maintained
    the previous administration's economic course in many regards,
    some wings of the administration still are suspicious of the
    influence of the private sector and of the independent role of
    the regulatory agencies.  The proposed law and the personnel
    reform is an attempt to legitimately bring more consistency to
    the regulatory regime in Brazil, but is also a clear attempt to
    rein in the independent authority of the agencies.

    ¶21. (U) This cable was coordinated with Consulate General Sao
    Paulo.

    DANILOVICH

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