US embassy cable - 05BRASILIA1696

UNCLAS SECTION 01 OF 02 BRASILIA 001696 
 
SIPDIS 
 
EB/IFD/OIA/JPROSELI 
L/CID/JNICOL 
 
E.O. 12958: N/A 
TAGS: EINV, ENRG, EFIN, OPIC 
SUBJECT: BRAZIL: SUBMISSION FOR INVESTMENT DISPUTES AND 
EXPROPRIATION REPORT 
 
REF: SECSTATE 70014 
 
The U.S. Mission in Brazil submits the following two (2) 
claims per Reftel for inclusion in the 2005 Section 527 
Report on investment disputes and expropriation claims. 
 
Claim 1 
------- 
 
a. Claimants A and B 
b. 1999 
c. Claimants A and B, along with a Brazilian partner, 
through a joint venture (JV), purchased 33 percent of the 
voting shares of the electric power company CEMIG from the 
state of Minas Gerais, for US$1.05 billion in 1997.  The 
acquisition was made through a public auction promoted by 
the national development bank (BNDES).  The purchase price 
included a Shareholders Agreement that the purchasers 
executed with the state of Minas Gerais, giving the JV 
certain negative control (i.e., veto) rights over the 
management of CEMIG and the ability to nominate some of the 
executive officers.  However, in 1999, a new state 
government took office and challenged the validity of the 
Shareholders Agreement in a suit filed in a lower state 
court, which overturned the Shareholders Agreement.  This 
left the JV with a 33% ownership stake but no influence over 
the management of the company.  In 2001, the Appellate Court 
of Minas Gerais rejected the JV's appeal and sought to deny 
the JV access to the Brazilian federal Superior Court and 
Supreme Court of Justice, where the JV has further appealed 
the decision.  Those appeals remain pending. 
 
According to the Claimants, the shares alone, in the absence 
of a Shareholders Agreement, were worth no more than US$400 
million.  According to the Claimants, the difference in 
value between purchase price of the JV's shares in CEMIG and 
the value stripped of the negative control rights 
approximates the outstanding balance (US$700 million) of a 
loan extended to the JV by BNDES to finance the share 
purchase.  Although BNDES rescheduled that loan, the JV 
subsequently went into default on this loan.  The JV is in 
negotiations with BNDES on ways to settle the outstanding 
debt. 
 
U.S. Mission officials repeatedly raised the dispute with 
senior GOB officials until the case went to court.  The GOB 
said there was little it could do to assist in resolving the 
dispute because the case is pending in Brazil's judiciary. 
 
Claim 2 
------- 
 
a. Claimant C 
b. 2003 
c. In 1998, the State of Parana auctioned off a 40% voting 
interest in the state's sanitation utility, Sanepar.  To 
induce private investors to provide the needed equity 
capital, the state offered the winning bidder a 15-year 
"Shareholders Agreement" that guaranteed certain customary 
minority shareholder protections as well as provided the 
investors a limited operating role through the appointment 
of three of the seven executive officers of Sanepar.  A 
consortium of investors purchased the Sanepar stake. 
Claimant C holds an indirect US$18 million indirect stake in 
the consortium.  A Joint Venture between a Spanish and a 
French company also invested in Sanepar through this 
consortium. 
 
In February 2003, the new Parana state governor, Robert 
Requiao, unilaterally terminated the Shareholders Agreement 
and subsequently replaced two of the three Sanepar executive 
officers that the investment consortium had the right to 
appoint.  Having effectively achieved ownership and 
management control of Sanepar, Governor Requiao also amended 
the company By-Laws without approval of the minority board 
members and undertook a debt-for-equity swap with the state 
government that diluted the minority shareholders' stakes. 
Following the annulment of the Shareholder's Agreement, the 
French company sold its interest in the company to its 
Spanish JV partner.  The JV has fought the state 
government's actions in the courts, which have not yet ruled 
definitively on the case. 
 
U.S. Embassy officials have met with Brazilian officials to 
discuss the case, but the GOB said it couldn't offer any 
assistance.  The U.S. Ambassador at the time the dispute 
arose also raised the case with Requiao, but Requiao 
defended the new management controls. 
 
List of Claimants 
----------------- 
 
Claimant A:  Mirant (known as Southern Electric at the time 
of the purchase) 
Claimant B:  AES 
Claimant C:  Overseas Private Investment Corporation (OPIC), 
through credit to the Global Environmental Emerging Markets 
Fund II (GEEMF II) 
 
DANILOVICH