LULA AND BRAZILIAN CONGRESS HAVE A FULL PLATE FOR

UNCLAS SECTION 01 OF 03 BRASILIA 000043

SIPDIS

SENSITIVE

TREASURY FOR OASIA - FPARODI

E.O. 12958: N/A
TAGS: PGOV ECON SOCI BR
SUBJECT: LULA AND BRAZILIAN CONGRESS HAVE A FULL PLATE FOR
2005

REF: A. 04 BRASILIA 3048


B. BRASILIA 24

C. 04 BRASILIA 3115

D. 04 BRASILIA 2605

E. 04 BRASILIA 3031

F. 04 BRASILIA 3075

G. 04 BRASILIA 1971

H. 04 BRASILIA 3105

I. 04 BRASILIA 2774


1. (SBU) SUMMARY. By staying in session through Christmas,
the Brazilian Congress finally passed the 2005 budget and
went into recess until February. The budget process has
become dysfunctional and this year's experience may have
generated enough frustration to reform it before the next
cycle. Overall, Congress had a subpar 2004, although an
end-of-year bustle saw a few important bills (Judicial
Reform, a Bankruptcy Law, and Public-Private Partnerships)
pass into law. Several other key bills were left hanging
fire including biotechnology, regulatory agencies, and the
final pieces of the 2003 tax and pension reforms. President
Lula is likely to shuffle his cabinet in January, reflecting
changes in the governing coalition and its dynamic in
Congress. When Congress returns to work, it will select a
new slate of leaders in both houses and all the committees.
So, like last year, 2005 will begin with an overflowing
policy agenda. The question is whether, like last year, 2005
will end with that agenda largely unrealized. END SUMMARY.

BUDGET BILL MARKS END OF SESSION
--------------

2. (SBU) On December 29, after several brutal weeks of
negotiations and two weeks after the scheduled adjournment
date, the Brazilian Congress passed the 2005 budget and went
into recess until February 15. The procedure was so trying
that it sparked calls for a reform of the whole budget
process before next year's cycle. Post will report septel on
the fiscal implications, but politically the budget process
is increasingly dysfunctional and divorced from the realities
of GoB revenues and expenditures. The problems are manifold:
hundreds of pork amendments, secret side deals, and Members
resorting to extortion to force through amendments by
threatening quorum calls in the half-empty holiday-period of
Congress. In the end, in order to keep the ledgers balanced
while accommodating big-ticket administration items such as a
minimum wage increase and huge transfer payments to the
states, Congressional numbers' crunchers made unrealistically
rosy assumptions about next year's growth and revenue
figures. Since the Congressional budget bill only authorizes
--but does not mandate-- GoB expenditures, President Lula is
likely to do what he has done in the past: spend far less
than Congress authorized.

BUSY DECEMBER
--------------

3. (SBU) Congress had a subpar 2004, failing to make much
progress on key bills and wasting inordinate time in partisan
fighting before leaving Brasilia in mid-year to stump for
candidates in the October municipal elections (ref A). Not
until December did key bills finally pass into law:

- On December 2, the new Innovation Law came into force,
creating a new agency to stimulate industrial and scientific
research (septel).

- On December 8, Congress approved a Constitutional Amendment
of important judicial reforms (ref B) that streamlines the
overburdened Supreme Court, strengthens human rights
protections, and introduces structural reforms and oversight
to the courts.

- On December 14, after 11 years in committee, the Bankruptcy
Law passed. It should bring greater predictability to
creditors and investors, improve the likelihood that failing
companies can be restructured, and strengthen the position of
banks on the list of creditors (ref C).

- On December 22, Congress approved Public-Private
Partnerships, designed to fund large infrastructure projects
with a combination of government and private money (ref D).
The bill is close to the heart of President Lula, who
believes it will promote his development agenda for the
coming years. The administration has drawn up a list of 23
priority projects --mostly roads, railroads and ports.

2005 CONGRESS WILL HAVE A NEW LOOK
--------------

4. (SBU) In December, two parties in President Lula's
coalition, the PMDB and PPS, fractured between pro-government
and opposition factions (refs E,F). These events are still
playing out and will be affected by Lula's cabinet shuffle,
projected for late-January. Lula is likely to woo large
wings of these parties to remain in his camp, and to secure
their loyalty with cabinet slots and other favors. His
decisions will then be reflected in the new Congressional
lineup. In February, Congress will select new leaders in
both houses and in all committees. The new Senate President
is likely to be Sen. Renan Calheiros (PMDB),a Lula ally,
while the front-runner for Chamber President is Dep. Luiz
Eduardo Greenhalgh (of Lula's PT). The situation is too
fluid to submit to firm predictions, but the early math
suggests that the administration will be able to put together
narrow majorities in both houses on most votes.

FULL LEGISLATIVE PLATE FOR 2005
--------------

5. (SBU) The new Congressional leaders will face a dozen key
bills when they open the new session on February 15, many of
which are at the heart of the administration's agenda.
Unlike 2004, this year will not have any national elections
to empty Congress for months on end, but it will see
increased partisan jockeying in advance of the 2006 national
elections. Last month's defections by the PMDB and PPS were
but a prelude to these maneuvers. High on the 2005
legislative agenda are:

- Final pieces of the 2003 tax reform. The most important is
unification of the state ICMS tax rates to put an end to the
states' fiscal wars in search of investments. If this passes
in 2005, the administration may push for a VAT in coming
years to unify the federal IPI, the municipal ISS and the
state ICMS taxes.

- Final piece of the pension reforms. Not necessarily an
administration priority, but it was part of the deal that
resulted in the passage of the 2003 public sector pension
reforms. Now awaiting a Chamber floor vote.

- Biosafety law. A bill to regulate biotechnology crops and
stem cell research has been in Congress for over a year (ref
G). The latest iteration, more pro-biotech than previous
versions, is now awaiting a final vote in the Chamber and
could pass in early 2005.

- Further judicial reforms. The Constitutional Amendment
that passed in December 2004 was only the first of three
judicial reform packages, with two more slated for 2005 (ref
B).

- Regulatory agencies. A bill long awaited by investors to
establish operating rules for agencies regulating
telecommunications, energy, petroleum, transportation, and
water.

- Central Bank autonomy. In May 2003, in the first
legislative win of Lula's administration, Congress passed
Constitutional Amendment 40 that set the stage for a more
autonomous Central Bank. Now Finance Minister Palocci is
pushing for the necessary follow-on legislation that would
give Central Bank Directors fixed terms in office and
formalize what is currently only de facto independence on
interest rates.

- Political reform. Lula has said that strengthening the
electoral process and political parties is a priority (ref
H),so he may push bills that are now in committee dealing
with coalitions, campaign financing, and party registration.

- Union and labor reforms, to modernize Brazil's rigid and
obsolete laws. The administration had hoped to start
reforming the rules governing union activities, and then take
on the tougher and broader labor laws. Of the major reforms,
these are the least likely to pass in 2005.

- Abortion. The Supreme Court is considering a case that
would create just the third exception to the abortion ban
(allowing abortions in cases of fetal anencephaly, ref I).
The existing two exceptions are cases of rape and danger to
the life of the mother. But there are now calls for Congress
to assertively legislate the issue rather than leave it to
the courts.

- Budget process. As noted above, a reform of the unwieldy
budget process has now become a possibility. Although no
bill has been drafted, a bicameral working group is expected
to start work in February to fast-track this reform.

COMMENT - 2005 OR BUST
--------------

6. (SBU) As in the U.S., Brazil's political system is most
likely to yield legislative results in odd-numbered years
because they provide some insulation from election campaigns.
In 2003 Lula passed significant reforms, but 2004 was dead
time in Congress until after the October elections. With a
new cabinet and new congressional leadership in place by
mid-February, Congress will open its 2005 session as
well-positioned as ever to make progress on the raft of bills
awaiting its attention. When the 2005 session ends, all eyes
will turn to the October 2006 (presidential, congressional,
and gubernatorial) elections, meaning that partisan jockeying
will make it difficult to pass any tough bills in 2006. 2005
is a now-or-never year for Lula's first-term agenda.
DANILOVICH