CENTRAL BANK SEES NO FEDERAL LEVERAGE ON PARANA

UNCLAS BRASILIA 000808

SIPDIS

SENSITIVE

STATE PASS OPIC FOR MRUBIO, BMCGUIRE, MABBEY
STATE FOR EB/IFD/OIA
COMMERCE FOR 3134/USFCS/010/WH
COMMERCE FOR 4332/ITA/MAC/WH/OLAC

E.O. 12958: N/A
TAGS: EINV ECON PGOV BR
SUBJECT: CENTRAL BANK SEES NO FEDERAL LEVERAGE ON PARANA
GOVERNOR IN OPIC-RELATED INVESTMENT

REF: PLOWMAN-OPIC EMAILS

Sensitive but Unclassified, please protect accordingly.


1. (SBU) Econoff raised with Central Bank Deputy Governor
for International Affairs Alexandre Schwartsman on February
19 the difficulties that an OPIC-financed investment fund,
the Global Environmental Emerging Markets Fund II (GEEMF) is
experiencing with its $18 million investment in the state of
Parana sanitation utility, Sanepar. Econoff explained that
the OPIC-financed investment, made through two
intermediaries (Opportunity Daleth and the Domino group),
formed part of the purchase of a minority stake in Sanepar
during its partial privatization. The rights of the private
shareholders brought into the company were secured through a
shareholders agreement that was subsequently de facto
abrogated by state governor Requiao, who had in addition
removed from the Sanepar board the directors named by the
private investors.


2. (SBU) Schwartsman was very sympathetic and gave us to
understand that the GoB sees Requiao's actions as
indefensible. He went on to say, however, that the Federal
Government has limited means of dealing with Requiao's de
facto abrogation of the shareholders agreement. Schwartsman
clearly understood the potential for this to become a
central-government to central-government issue should OPIC
become subrogated to the U.S. private investor. He
also perceived the danger of decreased investor confidence
for purposes of promoting investment through Public-Private-
Partnerships (PPPs),currently under consideration by the
Brazilian Congress. Schwartsman recommended that the
private investors pursue action through the CVM (SEC-
equivalent) and/or local courts, but, when asked, did not
know if Brazilian law allows for the central government to
file an "amicus" brief supporting the investor's case. He
did not think Brazil's Fiscal Responsibility Law provided
any federal leverage, because Requiao's actions diluting the
private shareholders' stake in Sanepar do not affect the
State of Parana's net debt levels.


3. (SBU) Schwartsman drew a parallel to another infamous
case of a few years ago, that of the electrical company of
the state of Minas Gerais (CEMIG). Then-governor Itamar
Franco removed the board members representing the private
investors (which included U.S. company AES) who had bought
in during a partial privatization, as Requiao has now done
with Sanepar. Even though the federal government of the
time disagreed vehemently with the actions of the state
government, it was unable legally to intervene. Despite his
pessimism about finding a concrete option to help,
Schwartsman undertook to follow up within the Central Bank
and with colleagues in the Finance Ministry. Econoff left
with him an OPIC white paper on the case.


4. (SBU) In a March 25 follow-up meeting, Schwartsman
relayed that he and his Ministry of Finance colleagues had
concluded that the federal government has no way to act in
the Sanepar case, as the facts currently stand. He said all
his colleagues were aware of the potential damage to
Brazil's ability to attract investment. When pressed,
Schwartsman clarified that he and his colleagues had not
considered how the CVM might be brought into play in its
regulatory role. He suggested, since the Central Bank has
little or no enforcement power outside of its banking
supervision role, that post follow up with Finance Ministry
Executive Director Bernardo Appy.


5. (SBU) Comment. While post will follow up with the
Finance Ministry, the CEMIG precedent is illustrative of the
limits that the federal government faces in dealing with
governors whose actions, however egregiously a breach of
shareholders' agreements, do not apparently represent a
violation of federal law in the view of the GoB.

HRINAK