Over the last few weeks, a scandal without precedent
has been engulfing Brazil. I am
referring to the so called petrolão
at the center of which stands Petrobras.
Several years ago, a large vote buying scheme, the
so called mensalão, threatened to
bring down the Lula government. But as a
top Brazilian jurist noted recently, the mensalão
amounted in total to R$170 million (US$65 million) while just one
Petrobras executive is being asked to return R$250 million (US$95 million) in
skimmed money.
The petrolão
not only involved corrupt executives pocketing huge amounts of money but a well
organized conspiration aimed at channeling 2% to 3% of the value of large
investment contracts to the political parties in power, the PT, PMDB and PP. Whether all the monies received by these
parties were used for political purposes or partly appropriated by individuals
remains to be seen.
This couldn’t have worked without the complicity of
the country top engineering and construction firms. The inquiry into the petrolão soon unveiled the anti-competitive practices of these
firms as they colluded to raise the value of contracts and take turns in
winning them.
As Petrobras executives and their acolytes were
offered reduced sentences for their cooperation, it came to light that the same
corrupt practices extended to capital intensive sectors controlled by the state
such as electric generation and railways.
Clearly, the most serious issue for Brazil is that its
economic model has turned out to be fraught with inefficiencies, waste and
corruption. Since the extent of this
scandal is yet to be determined, I will stick to Petrobras.
For many years, Petrobras was the cash cow of the
state. It was not unusual for it to make
investments which were not the best use of its capital; it often “deworsifed”
in fields where it didn’t have a particular expertise; more than one politician
or ex-government official got his pension, or part of it, paid or complemented
by Petrobras.
To get it into shape, President F. H. Cardoso partially
privatized Petrobras in 2000. He succeeded in the face of huge opposition,
particularly from the PT and its leader, Mr. Lula da Silva. The Cardoso administration even considered
changing the company name to Petrobrax to dramatize the hoped for break with
the past.
And for several years, it worked. Thanks to its technical expertise and tighter
management, the company made major offshore discoveries and achieved a good
level of profitability. These
discoveries were made even more valuable by the global commodity boom.
The prospects of a highly profitable Petrobras,
while welcome by minority shareholders didn’t go down well with President Lula;
he publicly lamented that so much of Petrobras money was distributed to
foreigners in the form of dividends. Before
the end of his second mandate, his government engineered a highly controversial
capital increase, the purpose of which being to increase government control
over the company. Ironically, despite
the bad press this operation received, the government didn’t succeed in gaining
a two thirds majority of the voting common share capital.
Greater control over the company, both at the corporate
level and via new offshore oil and gas legislation proved disastrous. Petrobras was saddled with huge investment
obligations which were beyond its financing and management capacities. As a result, it embarked on a massive debt
raising program while consistently missing its production commitments. The new legislation also took away Petrobras’
ability to prioritize its offshore investments, giving that authority to a
newly formed government agency.
Over the last years, global liquidity, rock-bottom interest
rates and high oil prices let Petrobras borrow huge sums of money, and that
pactole attracted the attention of many: as the French humorist Sasha Guitry
once said, “I can resist everything except
temptation”. The old practice of placing well connected people within the
Petrobras hierarchy took a more ominous turn: as top executive positions -
division heads – were allocated among the various political parties within the
government coalition, it was just a (very) small step to use this connection to
siphon money out.
The solution to this catastrophic situation is to
privatize Petrobras, the French way.
Manolito may think he can’t speak French, but when
it come to economic culture and policy, translating French into Brazilian
Portuguese is very easy.
I have always been impressed by how France and
Brazil converged in that regard: both countries have a strong centralized
government and administration, large public sectors, share a vision of economic
dirigisme
mixing interference with subsidized financing; finally, both like to nurture
national champions.
Now, both know that politics and national oil champions
shouldn’t mix.
For many years, Elf Aquitaine was the French national
oil champion, and that brought it rewards, such as the award of foreign oil
concessions. In the early 1990s, it was very close to the government and often
played an active role in French foreign policy in the Middle East and Africa. In part, this was due to its history as Elf
was born from the merger of two government agencies. By comparison, the second largest oil
company, Cie Française des Pétroles (later renamed Total) played second fiddle;
Total was also run by a no-nonsense CEO who knew how to keep some distance with
the French government.
In 1994, all hell broke loose, when the press
revealed that billions of dollars had been siphoned from Elf and spent on payments
to African, European and French politicians as well as executive “perks”. The story ended badly for Elf. Its executives were brought to court and
jailed, and it was absorbed by Total in 2000.
Brazilians will immediately see a pattern here.
Mindful of the dangers of letting politicians too
close to very rich companies, Total was privatized in a way which could and
should apply to Petrobras. The basic
idea was that the company would be run as a major publicly held company by
professional managers not state appointees.
To that end, the state would sell its majority stake down. At the same time, steps would be taken to
ensure that it would remain an effective national champion.
The initial step was to assemble a nucleus of stable,
long term French institutional investors.
In the case of Petrobras, these institutions exist and include major
pension funds, large banks and insurance companies. They could hold 10% to 15% of the common
shares. The government would retain a large minority
ownership and the balance of the shares would be allocated to retail and
institutions both domestic and foreign.
The second step entails the state selling most of
his shares in the company but retaining a golden share to veto such major
decisions as change of control, bankruptcy or the sale of entire divisions such
as refining, exploration, etc. Total
went public in 1991 with the French government holding a 30% stake. That stake was gradually reduced to 1% by
1996.
Golden shares were declared illegal by European courts
in 2003. But there is little risk of a
similar ruling in Brazil. Indeed, given
Brazilian politics and sensitivities, and the size of the financial commitments,
I think that a golden share is necessary to facilitate a true privatization.
It would be a monumental fight, but given the
staggering and pervasive degree of corruption within the company and the threat
to democracy that control of Petrobras clearly entails, a real privatization of
Petrobras is not only feasible but crucial.
Ask any international oil company, it will tell you
that Total is still very much the French national champion, that in large international
project tenders, it enjoys the full backing and lobbying of the French
administration. But it is professionally
run and Division Heads are not allocated among the Socialist, Green or other
political party.
Little translation from French to Portuguese is
needed; if the French can do it, so can the Brazilian.
Although Argentine, the economist Raul Prebisch has
had a huge influence on Brazilian economics, and indirectly on its political
system. His essential belief was that
less developed countries were in a structurally disadvantaged position vis-à-vis
developed ones because of the lower value added of their exports. The proposed remedy was import substitution
and economic integration (don’t import engine blocks from the US or Germany,
build up plants locally to manufacture them for regional markets).
