US embassy cable - 04BRASILIA808

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, Macroeconomics & Financial 
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