US embassy cable - 04BRASILIA2921

UNCLAS SECTION 01 OF 02 BRASILIA 002921 
 
SIPDIS 
 
SENSITIVE 
 
STATE PASS OPIC FOR MRUBIO, BMCQUIRE, MABBEY 
STATE FOR EB/IFD/OIA 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOS LON 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, PGOV, BR, Macroeconomics & Financial 
SUBJECT: NEXT STEPS ON OPIC-RELATED INVESTMENT PROBLEM IN 
SANEPAR 
 
REF: A) BRASILIA 808 - Notal  B) OPIC EMAILS 
 
1.  (SBU) Summary: The case of Parana State sanitation 
utility SANEPAR, in which the U.S. Overseas Private 
Investment Corporation (OPIC) holds an indirect $18 million 
stake, remains a potential problem in the bilateral 
relationship.  The Brazilian Federal Government (GoB) 
repeatedly has said that it has no legal leverage over the 
Governor of Parana State, Roberto Requiao, who has abrogated 
a Shareholders Agreement that gave private shareholders in 
SANEPAR some say over management decisions and diluted their 
ownership stake (reftels).  Legal action challenging the 
abrogation has been dragging through state-level courts, 
which the private shareholders fear have been subject to 
political pressure.  Given substantial French and Spanish 
holdings in SANEPAR, Post proposes further action on 
parallel tracks:  1) a joint French-Spanish-USG approach to 
the GoB; and, 2) pursuit, by the private shareholders, of 
action through the Brazilian SEC-equivalent (CVM) to 
challenge the dilution of the private shareholder stake. 
End Summary. 
 
2.  (SBU) Background:  OPIC, through a credit to the Global 
Environmental Emerging Markets Fund II (GEEMF II), is a 
financial investor in a joint venture called Domino, which 
in turn holds a minority stake in SANEPAR.  In addition to 
GEEMF II, the Domino consortium include Proactiva (a joint 
venture of French multinational Vivendi and Spanish firm 
FCC), Brazilian construction company Andrade Gutierrez, 
(Brazil's largest construction firm) and Opportunity Daleth, 
another financial investor (which includes a CitiBank hedge 
fund).  The GEEMF II invested $18 million in SANEPAR, via 
Domino, during a 1998 privatization, in which Domino 
obtained 39.7% of SANEPAR shares.  Domino's minority stake 
gave it, through a Shareholders Agreement, the right to 
nominate three of the seven SANEPAR executive officers.  In 
February 2003, newly-elected Parana governor Requiao 
unilaterally abrogated the Shareholder Agreement.  Court 
action fighting the abrogation has been dragging on in state 
courts since then.  In January 2004, SANEPAR undertook a 
debt-for-equity swap with the state government that diluted 
the minority shareholders' stakes. 
 
French (and Spanish) Connection 
------------------------------- 
 
3.  (SBU) Emboffs met November 12 with French Embassy 
Economic Minister Patrick Berger, Commercial Counselor Marie- 
Cecile Tardieu-Smith, and Financial Counselor, Roger Jean 
Belbenoit, to discuss the Sanepar case.  Berger explained 
that the French Embassy has been advocating on behalf of 
Vivendi in the Sanepar case for some time.  The French 
Ambassador wrote letters to, and met with, Finance Minister 
Palocci, the Minister of Cities and Governor Requiao himself 
to protest Requiao's actions.  However, Governor Requiao had 
not given the French Ambassador any satisfaction, while the 
GoB told the French (as they have told us) that it has no 
legal leverage over the governor. 
 
4.  (SBU) Vivendi, according to Berger, has decided to sell 
its interest in to its Spanish partner, FCC.  Berger said 
the French Embassy would nevertheless be interested in a 
joint approach with the US and the Spanish Embassies to 
press for GoB action in the case.  Berger suggested that the 
three Ambassadors send a letter to the Minister of Finance 
emphasizing the damage to Brazil's investment climate that 
Requiao was causing.  Berger agreed it would be useful to 
send a copy to the CVM.  Berger nevertheless opined that he 
felt that it was very unlikely that the GoB will take any 
action. 
 
Comment 
------- 
 
5.  (SBU) We believe that the GoB is correct when it claims 
it has no legal grounds to intervene to overturn Governor 
Requiao's abrogation of the Shareholders' Agreement. 
Moreover, the legal recourse has not yet been exhausted. 
This leaves the GoB only moral and political suasion to use 
to challenge Requiao, unfortunately a weapon to which he 
seems immune.  That said, the attempt should be made and a 
joint approach with the French and Spanish to the GoB that 
emphasizes the investment climate damage Requiao is causing 
is our best shot at a GoB political-level effort.  Raising 
the potential impact of this case on the GoB's ability to 
launch successfully the private public partnership program 
may find some resonance with the GoB given its urgent need 
to rebuild decaying infrastructure, including infrastructure 
that supports export expansion.  There should be a parallel 
approach, led by the private shareholders, to challenge with 
the CVM to the dilution of the private shareholders' equity. 
Copying the three Ambassadors' letter to the CVM could 
usefully reinforce the private shareholders' approach. 
 
CHICOLA