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### Viewing cable 08BRASILIA1621, Brazil Civil Aviation: Liberalization/Privatization Update

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08BRASILIA1621 | 2008-12-17 18:33 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    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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