Are fuel price controls back in Brazil?

Author

Gustavo Ribeiro
April 11, 2019 • Reading Time: 6 minutes

Good morning! The Jair Bolsonaro government has interfered with Petrobras’ fuel pricing policies. Corruption allegations against the House Speaker. The cost of retired civil servants in Brazil. 

Are fuel price controls back in Brazil?

When the new government took over on January 1, it promised to shield Petrobras from political interference. But, fearing the risk of disgruntled truckers calling a strike, the administration asked the state-owned oil and gas company to withhold a coming 5.7% bump in diesel prices (a hike larger than in all of February).

The change was published on Petrobras’ website but was later rectified. The company, however, reinforced its commitment to its policy of reflecting international prices.

This is not the first time the government has interfered with Petrobras pricing to avoid a possible truckers’ strike. A few weeks ago, Petrobras decided that new prices will be calculated every 15 days—instead of weekly. At the time, disgruntled truck drivers—who complained about more expensive fuels since the beginning of the year—threatened to call another stoppage. Fuels were one of the driving forces of March’s high inflation (0.75%).

While it is understandable that the government would want to avoid a new truckers’ strike, the move bears a worrisome resemblance to the Dilma Rousseff years, when fuel price controls were adopted to tame inflation. The policy cut Petrobras revenue, helping debts balloon to nearly USD 130bn. Moreover, once controls were impossible to sustain, price hikes were brutal—and very unpopular.

1.4m obstacles to the pension reform

Brazil’s Prosecutor General Raquel Dodge has asked for 60 days to analyze evidence against House Speaker Rodrigo Maia and his father—both of whom might have received BRL 1.4m in kickbacks from the Odebrecht construction group. The link between Mr. Maia and the money was established from documents of Odebrecht’s so-called “bribery division.”

According to a collaborator, Mr. Maia received payments in cash in his own flat. Four former Odebrecht executives will give statements in the coming weeks.

This piece of news could represent a high risk for the administration. When cornered, the Speaker could use the pension reform bill as leverage to get political support from the government. In recent days, Mr. Maia said he would no longer whip votes for the reform, saying that this was the president’s role. Next week, the House’s Constitution and Justice Committee is set to vote on the constitutionality of the reform.

The cost of retired civil servants in Brazil

Eyeing the 2020 municipal elections, state-level politicians have yet to fully embrace the pension reform bill proposed by the government. However, state administrations are the ones which need the reform the most. In 14 states, the average salary of an active civil servant is lower than the average amount paid in pensions. In three states (Santa Catarina, Minas Gerais, and Rio Grande do Sul), there is an additional problem: there are more retired public servants that active ones.

By today’s rules, civil servants’ pensions match their last salary—which is much higher than their average salary throughout their careers. And taxpayer money is used to fund these pensions. In Rio Grande do Sul, for example, each resident “pays” the equivalent of BRL 1,038 per year in taxes just to fund state-level pensions.

Economy Minister Paulo Guedes said yesterday that the government is drafting projects to create voluntary dismissal programs in many of Brazil’s 135 state-owned companies. Today, over 450,000 people work for federal companies.

  • Go deeper: 100 days of Jair Bolsonaro: Pension reform

Why doesn’t Sequoia invest in Brazil?

Venture capital firm Sequoia has invested in companies that now control over USD 1.4 trillion of combined stock market value. Just this week, it has invested—alongside Tiger Global—a combined USD 26m in a Mumbai-based company. In Brazil, though, Sequoia is shy, only paying attention to a few companies, such as food delivery service Rappi and fintech NuBank. During the Brazil at Silicon Valley conference, Doug Leone, a partner at Sequoia, explained why.

“Back in 2013, we didn’t see much innovation from Brazil. Most players are look-alikes—which tend to have a shorter life span.”

Another barrier is the sheer lack of software programming engineers. “Brazil has about 170,000 new graduates in STEM careers (science, technology, engineering, and mathematics) every year. In the U.S., which is no benchmark country, has 600,000—and China has 6m. So we may invest in Brazil, but having a local team could be too much of a headache.”

Despite the still problematic lack of qualified labor, Brazil has made strides in recent years in entrepreneurship. Local startups are more focused on solving Brazilian problems—instead of replicating what it is being done in the U.S. and Europe—which explains the blossoming of the agrotech and fintech ecosystems.

  • Go deeper: The growing pains of Brazil’s fintech market

What else you need to know today

Budget. The Supreme Court is ready to try a case which could cause a BRL 40bn hole in public finances. The court debates whether or not the government should be responsible for the inflation adjustment of old registered warrants. So far, 6 of 11 justices voted against the government—but the trial had been interrupted after one justice asked for more time to analyze the matter.

Healthcare. The pension reform, as it is, creates hurdles to the distribution of high-cost medicines to patients who sue the government. Today, 80% of plaintiffs win—and the number of lawsuits nears 100,000 per year. In 2018 alone, the government spent BRL 1.4bn on such medicines.

Energy. Brazil and Paraguay have not reached a deal about energy consumption in Itaipu—one of South America’s biggest dams. The contract between the two countries setting the prices for electricity runs out in 2023, and both countries need a new agreement before it expires. [/restricted]

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