By: Leonardo Neri

On February 23, the President of the Republic enacted the infamous MP 1.031, with the aim of accelerating the privatization process of Eletrobras, a giant in the generation and transmission of energy in the country and which was recently the subject, in January 2021, of the resignation of its president, Wilson Ferreira Junior, who remains in office until March 5, 2021 for the transition to take place.

Wilson's long-standing demand was for the government to become effectively involved in the process of privatizing the Company. Thus, the President of the Republic published the MP with the aim of meeting the market's desires, mainly in relation to increased investment and the need for greater competition.

The power struggle in the Eletrobras privatization process, now driving the discussion through the MP, refers to the dispute between the Minister of Economy and the former President of the Chamber of Federal Deputies, which was reported by all the country's economic newspapers.

Initially, it is worth highlighting that the instrument used by the presidency has already become controversial, as deputies have already questioned the constitutional requirement of urgency and relevance.

If the Speaker of the House decides that the provisional measure meets the constitutional requirements, the legislative process will follow its legal course, without preventing opposition parties or class entities from taking the issue to the Judiciary to resolve the controversial point.

Regardless of the formal issue, the MP has some relevant points for investors in the energy market, whether for generators and consumers, or for investors in energy transmission.

It is important to note that the privatization will not be complete, nor will all assets be subject to privatization, especially nuclear energy, which, according to the Constitution, is the exclusive responsibility of the government. There is also the issue of investment and participation in Itaipu, a binational company resulting from an international agreement between Brazil and Paraguay. In other words, these assets will be excluded from the economic group formed by Eletrobras.

The privatization model presented by the MP will be through a capital increase, with the objective of diluting the Union's shareholding, and if the reduction in shareholding intended with the primary issuance of shares and the waiver of subscribing to new shares is not carried out, the Union will be authorized to sell shares on the secondary market.

In this sense, the legislation does not clarify what the Union's dilution would be, nor does it impose the limit necessary for the dilution process to be considered effective.

In order to guarantee the investment to be made, the Provisional Measure grants the Union authorization to extend for thirty years the concessions provided for in: art. 1 of Law no. 12,783, of January 11, 2013; in item II of § 2 of art. 22 of Law no. 11,943, of May 28, 2009; in § 3 of art. 10 of Law no. 13,182, of November 3, 2015; and Concession Agreement no. 007/2004-Aneel-Eletronorte.

The MP also limits the political power of shareholders to 10% (ten percent) of the share capital, in addition to guaranteeing preferred shares for the Union with the right to veto any intention to change the maximum political title by ten percent. In addition, it vetoes shareholder agreements that aim to exceed the percentage of political power by ten percent of the share capital.

Furthermore, the MP still requires several counterparts for the privatization of the Company, among them there are fixed obligations and gradual obligations, which will be exhausted over time, which will require an excellent study to analyze the Company's capacity to comply with the requirements, special attention should be paid in these studies regarding the behavior of the National Operator and the National Interconnected System which could, disregarding the orders of merit and also the state's inability to invest, turn the Company from an excellent potential into a Company with no or little capacity to comply with the counterparts.

The provisional measure was forwarded to the National Congress and, despite not presenting any urgency – a formal defect, it received 570 amendments from the legislative houses. Therefore, investors should be vigilant when acquiring part of the share capital, especially with the requirements that will be established for the privatization, because as mentioned in the explanatory memorandum signed by the Minister of Economy and Minister of Mines and Energy, Eletrobras' investment capacity has deteriorated over time.

Currently, according to the Ministers, the company does not have the capacity to compete, however, to date, combined with the absence of an economic-financial study that demonstrates the necessary investment capacity, as well as the total lack of demonstration of the projects that should receive the amounts to be contributed, the initiative of the Executive Branch lacks clarity and transparency.

It is clear that the proposal presented did not stand out for its quality, and did not define the levels of necessary investment. It simply seeks a liberal agenda without economic foundations, turning the important process into political vanity and without a transparent objective.

Therefore, it is of utmost importance to monitor the legislative process with the aim of legally analyzing the capacity