BRAZIL MAKES REFORMING REGULATORY AGENCIES A PRIORITY

UNCLAS SECTION 01 OF 05 BRASILIA 000447

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SUBJECT: BRAZIL MAKES REFORMING REGULATORY AGENCIES A PRIORITY

REFS: A) 03 BRASILIA 3405

B) 04 BRASILIA 186
C) 04 BRASILIA 38
D) 04 BRASILIA 59


1. (U) SUMMARY: The Brazilian Congress is considering a new law
governing the functioning of Brazil's nine regulatory agencies.
The legislation aims to bring greater social accountability,
operational transparency, and financial oversight to their
operations. The law includes, however, controversial changes
that would limit the operational and financial independence of
these agencies. While there is acceptance of the need for new
legislation, some provisions have sparked concern over the
extent to which the GOB will be able to exert political
influence over the agencies. The most contentious aspects of
the proposed changes include shifting concessionary
responsibility from the regulatory agencies to the ministries,
reduction of operational and financial independence, the
establishment of an Ombudsman appointed by the President, and
mandatory public consultations. In addition, through another
law, the conversion of personnel at the regulatory agencies to
the GOB civil service is already underway and may impact the
agencies' ability to hire and retain high-caliber staff. While
there is a need to harmonize the regulatory agency framework,
the Lula administration comes at this task with some of its
traditional suspicions regarding the involvement of the private
sector and the independent role of the regulatory agencies. END
SUMMARY.

NINE REGULATORY AGENCIES
--------------


2. (U) Brazil has nine independent regulatory agencies that have
evolved since the mid-1990s: National Electric Energy Agency
(ANEEL),National Telecommunications Agency (ANATEL),National
Petroleum Agency (ANP),National Agency of Sanitary Monitoring
(ANVISA),National Supplementary Health Agency (ANS),National
Water Agency (ANA),National Land Transportation Agency (ANTT),
and National Aquatic Transportation Agency (ANTAQ). The
creation of the agencies complemented GOB privatizations begun
under the previous administration. All but two of the agencies
were established by separate laws, and the result has been an
inconsistent regulatory-agency regime. For example, the
directors have appointments that vary from three to five years
and not all of the agencies were created with an ombudsman
office. There is widespread agreement on the importance of
having a general law governing regulatory agencies. As always,
the devil is in the details.

OVERHAUL OR SIMPLY IMPROVEMENTS?
--------------


3. (SBU) Early on, the Lula administration opposed the idea of
granting broad latitude to the regulatory agencies. According
to Worker's Party (PT) legislative adviser Luiz Fernando
Linares, the Cardoso administration created a regulatory
"monster" without sufficient oversight. According to one of the
ANEEL directors, Isaac Averbuch (protect),the Lula
administration came into office very suspicious of the
regulatory agencies because of its lack of understanding of the
regulatory agencies' role and sought to change the regulatory
agencies for various reasons, the first being ideology.


4. (U) In September 2003, the GOB published draft legislation
(Reftel A) and subsequently, in February 2004, a general law
over the regulatory agencies (PL 3.337/04) was presented to
Congress. The initial response to the proposals was generally
negative, coming at the same time that the Lula administration
had forced out the previous president of ANATEL (Reftels B, C,
D). Although it appeared that the proposed regulatory reform
had lost momentum, the general law is now a priority on the
administration's legislative agenda. (Note: The National
Industrial Confederation (CNI) has published a lengthy study, in
Portuguese, of the history of Brazil's regulatory regime and the
changes proposed in the Bill. End Note.)


5. (SBU) The Lula administration is preparing for the upcoming
legislative debate. A delegation from the GOB's executive
branch will be traveling in February 2005 to the United States,
Mexico and Bolivia to learn from other regulatory models. The
delegation includes Helcio Tokeshi (Secretary for Economic
Oversight, Ministry of Finance),Luis Hiroshi Sakamoto
(Secretary for Management, Ministry of Planning, Budget and
Management),Nelson Jose Hubner Moreira (Chief of Staff of the
Minister of Energy),Mr. Marcio Wohlers de Almeida (Special
Advisor to the Minister of Communications),and Rodrigo Augusto
Rodrigues (Assistant Deputy Chief of Staff, President's Office).

FIVE AREAS OF CONCERN
--------------


6. (U) Interlocutors from the executive branch, industry, and
political circles have highlighted five principle concerns: (1)
shifting concessionary responsibility from the regulatory
agencies to the ministries, (2) reduction of operational and
financial independence, (3) creation of an Ombudsman appointed
by the President, (4) mandatory public consultations, and (5)
through another law, the conversion of personnel at the
regulatory agencies to the GOB civil service.

(1) CONCESSIONARY AUTHORITY
--------------


7. (U) The Bill proposes to place concessionary authority for
public services in the ministries. For the regulatory agencies
that do not have a concessionary role, there would be little
impact. Industry analysts, however, point out that this will
create a potential conflict of interest in some of the larger
agencies such as ANEEL and ANP that regulate powerful state-
owned companies such as Eletrobras and Petrobras.


8. (SBU) EmbOffs met with Rodrigues from the President's Office
to discuss the upcoming trip. Rodrigues said that he expected
the most resistance from the regulatory agencies in terms of
concessionary authority. He stated, however, that although the
agencies have considerable technical expertise, in the final
analysis it is the State that grants concessions for public
services. Rodrigues noted that although the law would place
concessionary authority in the ministries, the ministries could
delegate the authority back to the agency as the Ministry of
Mines and Energy (MME) did with ANEEL. Rodrigues said that an
agency like ANATEL would also most likely have the authority
delegated back because ANATEL is a highly-respected
organization; in contrast, an agency like ANTT may not because
it does not have the capacity to handle the work. (Note:
Rodrigues also stated that legislative process for transfer of
Civil Aviation Department (DAC) into a proposed National Civil
Aviation Agency (ANAC) was farther along than the proposed
general law, and there is a general consensus that ANAC is
needed. End Note.)


9. (SBU) ANATEL, ANEEL, CNI and AmCham all told EmbOffs that
concessionary authority should remain in the regulatory
agencies. ANEEL Director Averbuch said MME was forced to re-
delegate concession authority back to ANEEL for lack of capacity
to deal with the scope and technical aspect of the operation.
One of the directors of ANATEL, Jose Leite Pereira Filho, said
that ANATEL has less concern about the concessionary role
because ANATEL grants only one "concession" (for fixed line
services) and that is already contracted; ANATEL's other
licenses (e.g., for cellular services) are granted under
"authorizations." Leite is more concerned about the law's
ambiguity regarding regulatory authority over the concessions;
Leite prefers having both concessions and regulatory authority
reside in one organization. In addition, Leite says that
delegating the authority back from the ministries to the
agencies creates too much uncertainty because politics may cause
the authority to bounce back and forth between the two; the
concessionary authority should either be in the ministry (and
its full responsibility) or remain fully in the regulatory
agencies.

(2) REGULATORY INDEPENDENCE MEANS...
--------------


10. (U) The Bill proposes a few measures that many analysts
think will reduce the operational and financial independence of
the regulatory agencies. These measures include centralizing
policy-making authority in the ministries and mandating a
strategic/performance contract between the regulatory agencies
and the executive branch.


11. (SBU) EconOff met with a PT adviser in the Camara dos
Deputados, Luiz Fernando Linares, whose primary concern was the
role of the regulatory agencies in policy formation. Linares
said that one of the Lula administration's first initiatives was
to return the policy role from the regulatory agencies to the
ministries; the government formulates policies, and the
regulatory agencies implement and monitor. Linares declared
that it was not proper to have policy decisions being made by
technical experts and only on technical grounds as the policy
implications are often deeper. In contrast, ANATEL Director
Leite thought that the placement of the regulatory agencies in a
new hierarchical relationship was the most serious problem with
the bill. According to both Leite and the CNI report, the
general Telecommunications Law created ANATEL as a "special"
autonomous agency; under the proposed law, ANATEL (and the other
regulatory agencies) would no longer have the final word.


12. (SBU) Linares made clear that he thought the proposed
strategic/performance contract was "naive, unnecessary, and
inefficient," adding that others in Congress were looking
askance at the contract idea as well. AmCham Sao Paulo also
expressed concern that the contract would be too inflexible and
called instead for a Work Plan to be developed in conjunction
with the respective ministries. AmCham opposes any linking of
funding of the regulatory agencies to their achievement of the
contract's goals. As far as ANATEL's head of Legislative
Affairs, Edvaldo Miran da Silva (protect),he said that ANATEL
already reports to Congress, the ministry and the National
Accounting Tribunal (TCU),and that expanding requirements to
report to the executive branch would reduce its autonomy.


13. (SBU) Of much greater to concern to Averbuch is ANEEL's lack
of full financial independence. According to Averbuch, ANEEL
has seen its budget control erode during the last few years.
ANEEL's budget comes from a fee, a percentage of each
electricity bill, charged to consumers and paid to the federal
treasury. The GOB may then authorize an expenditure of that
money or prohibit it. Money not passed to ANEEL reverts to the
general treasury after five years. During recent years, the
government has increasingly retained a slice of the consumer
charges paid for ANEEL and allocated that amount to other uses.
Averbuch said this has limited ANEEL's operations, especially in
areas such as customer service and its ability to conduct audits
of the concessionaires.

(3) OMBUDSMAN OFFICE
--------------


14. (SBU) The bill calls for a presidentially-appointed
ombudsman in each of the regulatory agencies. According to PT
adviser Linares, this is the most important aspect of the law
because the regulatory agencies currently have too intimate of a
relationship with industries and business associations, and are
not responsive enough to the public (to whom they are providing
service). Linares said that one year ago only ANEEL and ANATEL
had ombudsman offices, but only ANATEL's was actually
functioning adequately. Under the Lula administration, however,
all of the agencies now have ombudsman offices at least in
theory.


15. (SBU) Averbuch is concerned that the appointed ombudsman
will simply become a plant for the Executive, influencing
decision-making for political purposes. AmCham shared the
concern that an executive branch representative would constitute
State interference in agencies' operational independence. To
ensure its independent role, ANATEL Director Leite said that the
Ombudsman should either by appointed by Congress or at least
approved by Congress if appointed by the president.

(4) POWER TO THE PEOPLE
--------------


16. (SBU) The bill proposes greatly expanding public
participation in the regulatory agencies through mandatory
public consultations, funding of studies, and more transparent
reporting. Edvaldo Miran da Silva told EmbOff that this
expansion is the real thrust of the proposed law and that it
would have an even greater impact than the Ombudsman office.
According to Silva, ANATEL currently opens some meetings to the
public, such as when new regulations are being proposed. The
proposed law, however, would greatly expand public access to the
decision-making process, including proposed rate hikes. Silva
did not consider this as very "radical" and compared it to the
current judicial system in which non-sensitive court proceedings
are open to the public. Silva said that the regulatory
agencies, however, are not accustomed to the public eye and that
this would take some getting used to. As an example, Silva said
that prices for fixed-line services have sky-rocketed in recent
years; if the proposed law passed, ANATEL (and the
concessionaires) which be required to be much more transparent
in justifying the price hikes.


17. (SBU) According to the bill, the regulatory agencies would
have to fund studies by associations or local districts that do
not have adequate resources. Silva cited the example of a city
that wanted to conduct a study of its telephone services; under
such a scenario, ANATEL (and the concessionaires, by extension)
fund the necessary technical specialists to conduct the study.
AmCham opposes the regulatory agencies bearing such costs.

(5) REFORM OF PERSONNEL SYSTEM
--------------


18. (SBU) As part of the effort to bring the regulatory agencies
under greater state control, Law 10.871/04 requires that agency
personnel be civil servants by the end of 2005. Previously, the
agencies had hired personnel under contracts, with wages more
similar to those of the private sector. Averbuch predicts that
only 30% of the current staff will still work for ANEEL by the
end of the year because they will either seek more lucrative pay
in the private sector or fail to pass the civil service exam.
Although Averbuch predicts higher turnover in administrative
positions than the direct-mission related positions (only a 50%
turnover predicted),the loss of institutional memory and
expertise is worrisome. Linares defends the new personnel law
for the regulatory agencies as correcting a flaw dating back to
the Cardoso administration, which was in a rush to form the
agencies and did not want to be restricted by the civil service
hiring system. Linares somewhat counter-intuitively defended
the low salaries as a deliberate strategy to attract personnel
who are committed to the specialized field. He said salaries
could be raised again later to be more competitive with the
private sector.


19. (SBU) Silva of ANATEL was much more upbeat about the
personnel changes. According to Silva, around one-half of
ANATEL's staff has been working on temporary contracts because
the personnel system passed under the Cardoso administration was
suspended by the Supreme Court, crippling the agency's ability
to hire and retain personnel. Silva said employees were often
trained only to leave for the private sector because of the lack
of job security at ANATEL. Although Silva predicted that there
would be some turmoil in the short-term, he thought that in the
long-run the integration of ANATEL personnel into the civil
service system will bring much more stability and create a
career development track at the agency. AmCham praised the
personnel changes for providing improved hiring procedures and
professional development, but called for more competitive
salaries.

COMMENT
--------------


20. (SBU) Most successful regulatory systems depend upon a
stable regulatory law with transparency and regulatory
independence. Although the Lula administration has maintained
the previous administration's economic course in many regards,
some wings of the administration still are suspicious of the
influence of the private sector and of the independent role of
the regulatory agencies. The proposed law and the personnel
reform is an attempt to legitimately bring more consistency to
the regulatory regime in Brazil, but is also a clear attempt to
rein in the independent authority of the agencies.


21. (U) This cable was coordinated with Consulate General Sao
Paulo.

DANILOVICH