NEXT STEPS ON OPIC-RELATED INVESTMENT PROBLEM IN

UNCLAS SECTION 01 OF 02 BRASILIA 002921

SIPDIS

SENSITIVE

STATE PASS OPIC FOR MRUBIO, BMCQUIRE, MABBEY
STATE FOR EB/IFD/OIA
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOS LON

E.O. 12958: N/A
TAGS: EINV ECON PGOV BR
SUBJECT: NEXT STEPS ON OPIC-RELATED INVESTMENT PROBLEM IN
SANEPAR

REF: A) BRASILIA 808 - Notal B) OPIC EMAILS


1. (SBU) Summary: The case of Parana State sanitation
utility SANEPAR, in which the U.S. Overseas Private
Investment Corporation (OPIC) holds an indirect $18 million
stake, remains a potential problem in the bilateral
relationship. The Brazilian Federal Government (GoB)
repeatedly has said that it has no legal leverage over the
Governor of Parana State, Roberto Requiao, who has abrogated
a Shareholders Agreement that gave private shareholders in
SANEPAR some say over management decisions and diluted their
ownership stake (reftels). Legal action challenging the
abrogation has been dragging through state-level courts,
which the private shareholders fear have been subject to
political pressure. Given substantial French and Spanish
holdings in SANEPAR, Post proposes further action on
parallel tracks: 1) a joint French-Spanish-USG approach to
the GoB; and, 2) pursuit, by the private shareholders, of
action through the Brazilian SEC-equivalent (CVM) to
challenge the dilution of the private shareholder stake.
End Summary.


2. (SBU) Background: OPIC, through a credit to the Global
Environmental Emerging Markets Fund II (GEEMF II),is a
financial investor in a joint venture called Domino, which
in turn holds a minority stake in SANEPAR. In addition to
GEEMF II, the Domino consortium include Proactiva (a joint
venture of French multinational Vivendi and Spanish firm
FCC),Brazilian construction company Andrade Gutierrez,
(Brazil's largest construction firm) and Opportunity Daleth,
another financial investor (which includes a CitiBank hedge
fund). The GEEMF II invested $18 million in SANEPAR, via
Domino, during a 1998 privatization, in which Domino
obtained 39.7% of SANEPAR shares. Domino's minority stake
gave it, through a Shareholders Agreement, the right to
nominate three of the seven SANEPAR executive officers. In
February 2003, newly-elected Parana governor Requiao
unilaterally abrogated the Shareholder Agreement. Court
action fighting the abrogation has been dragging on in state
courts since then. In January 2004, SANEPAR undertook a
debt-for-equity swap with the state government that diluted
the minority shareholders' stakes.

French (and Spanish) Connection
--------------


3. (SBU) Emboffs met November 12 with French Embassy
Economic Minister Patrick Berger, Commercial Counselor Marie-
Cecile Tardieu-Smith, and Financial Counselor, Roger Jean
Belbenoit, to discuss the Sanepar case. Berger explained
that the French Embassy has been advocating on behalf of
Vivendi in the Sanepar case for some time. The French
Ambassador wrote letters to, and met with, Finance Minister
Palocci, the Minister of Cities and Governor Requiao himself
to protest Requiao's actions. However, Governor Requiao had
not given the French Ambassador any satisfaction, while the
GoB told the French (as they have told us) that it has no
legal leverage over the governor.


4. (SBU) Vivendi, according to Berger, has decided to sell
its interest in to its Spanish partner, FCC. Berger said
the French Embassy would nevertheless be interested in a
joint approach with the US and the Spanish Embassies to
press for GoB action in the case. Berger suggested that the
three Ambassadors send a letter to the Minister of Finance
emphasizing the damage to Brazil's investment climate that
Requiao was causing. Berger agreed it would be useful to
send a copy to the CVM. Berger nevertheless opined that he
felt that it was very unlikely that the GoB will take any
action.

Comment
--------------


5. (SBU) We believe that the GoB is correct when it claims
it has no legal grounds to intervene to overturn Governor
Requiao's abrogation of the Shareholders' Agreement.
Moreover, the legal recourse has not yet been exhausted.
This leaves the GoB only moral and political suasion to use
to challenge Requiao, unfortunately a weapon to which he
seems immune. That said, the attempt should be made and a
joint approach with the French and Spanish to the GoB that
emphasizes the investment climate damage Requiao is causing
is our best shot at a GoB political-level effort. Raising
the potential impact of this case on the GoB's ability to
launch successfully the private public partnership program
may find some resonance with the GoB given its urgent need
to rebuild decaying infrastructure, including infrastructure
that supports export expansion. There should be a parallel
approach, led by the private shareholders, to challenge with
the CVM to the dilution of the private shareholders' equity.
Copying the three Ambassadors' letter to the CVM could
usefully reinforce the private shareholders' approach.

CHICOLA