Investors’ Brazilian love affair?

The energy industry is at the forefront of Brazil’s privatisation programme. The monopoly status enjoyed by state oil and gas company Petrobras and its electricity counterpart Eletrobras has now been removed, and these markets are opening to competition.

This, added to the new currency stability after devaluation of the Brazilian real in January 1999, has attracted much-needed foreign investment (see box, page 21). But risks inherent to nascent energy markets and emerging countries threaten to keep investors at bay.

Certainly Vittorio Perona, director of utilities, Latin America, at Rio-based investment bank Dresdner Kleinwort Wasserstein, feels the climate is right for investment in Brazilian energy. “A lot of people see Brazil as a very promising market,” he says. “Despite the devaluation of the real, inflation has not shot up and the investment climate in Brazil is looking as good as it has been for 15 years.”


Currency risk

But Brazil’s attempts to lure investors have been hindered by the currency risks faced by entrants to the energy markets. Amerada Hess, the New York-based independent energy company, is just one example of a firm that nearly reconsidered participating in the country’s energy market after discovering the tight controls due to be enforced by the government.

Under its original rules, the government would not allow foreign companies to hold non-real denominated accounts, thereby forcing the companies to convert money every time they wanted to trade internationally. After negotiations with the government, a compromise was reached.

Tim Kieft, Amerada Hess’ director for Brazil, explains: “We now have a halfway-house solution where we are allowed nominated dollar accounts for certain activities and our currency risk is reduced, but it is still there.”

Another major currency stumbling block in the Brazilian natural gas market comes at the Bolivian border, where gas is bought from Bolivia in US dollars by companies dealing in Brazilian reais. But Dresdner Kleinwort Wassterstein’s Perona says this currency clash might soon be resolved. “The government is meeting with the industry and regulators to address the currency mismatch. There are many proposals and one or two ideas are looking pretty promising,” he adds.

As well as currency risk, companies also have to contend with each of the local taxes imposed by the country’s 26 states. This tax can be traded off against business units in other states, but there is industry pressure on the government to act to reduce this added cost. Amerada Hess’ Kieft says: “Everyone is waiting to see if the government can revamp the tax structure to bring in a federal value-added tax, in place of the current individual state taxes, which we would definitely see as a benefit.”