This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 BRASILIA 000043 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - FPARODI 
 
E.O. 12958: N/A 
TAGS: PGOV ECON SOCI BR
SUBJECT: LULA AND BRAZILIAN CONGRESS HAVE A FULL PLATE FOR 
2005 
 
REF: A. 04 BRASILIA 3048 
 
     ¶B. BRASILIA 24 
     ¶C. 04 BRASILIA 3115 
     ¶D. 04 BRASILIA 2605 
     ¶E. 04 BRASILIA 3031 
     ¶F. 04 BRASILIA 3075 
     ¶G. 04 BRASILIA 1971 
     ¶H. 04 BRASILIA 3105 
     ¶I. 04 BRASILIA 2774 
 
¶1. (SBU) SUMMARY.  By staying in session through Christmas, 
the Brazilian Congress finally passed the 2005 budget and 
went into recess until February.  The budget process has 
become dysfunctional and this year's experience may have 
generated enough frustration to reform it before the next 
cycle.  Overall, Congress had a subpar 2004, although an 
end-of-year bustle saw a few important bills (Judicial 
Reform, a Bankruptcy Law, and Public-Private Partnerships) 
pass into law.  Several other key bills were left hanging 
fire including biotechnology, regulatory agencies, and the 
final pieces of the 2003 tax and pension reforms.  President 
Lula is likely to shuffle his cabinet in January, reflecting 
changes in the governing coalition and its dynamic in 
Congress.  When Congress returns to work, it will select a 
new slate of leaders in both houses and all the committees. 
So, like last year, 2005 will begin with an overflowing 
policy agenda.  The question is whether, like last year, 2005 
will end with that agenda largely unrealized.  END SUMMARY. 
 
BUDGET BILL MARKS END OF SESSION 
-------------------------------- 
¶2. (SBU) On December 29, after several brutal weeks of 
negotiations and two weeks after the scheduled adjournment 
date, the Brazilian Congress passed the 2005 budget and went 
into recess until February 15.  The procedure was so trying 
that it sparked calls for a reform of the whole budget 
process before next year's cycle.  Post will report septel on 
the fiscal implications, but politically the budget process 
is increasingly dysfunctional and divorced from the realities 
of GoB revenues and expenditures.  The problems are manifold: 
hundreds of pork amendments, secret side deals, and Members 
resorting to extortion to force through amendments by 
threatening quorum calls in the half-empty holiday-period of 
Congress.  In the end, in order to keep the ledgers balanced 
while accommodating big-ticket administration items such as a 
minimum wage increase and huge transfer payments to the 
states, Congressional numbers' crunchers made unrealistically 
rosy assumptions about next year's growth and revenue 
figures.  Since the Congressional budget bill only authorizes 
--but does not mandate-- GoB expenditures, President Lula is 
likely to do what he has done in the past: spend far less 
than Congress authorized. 
 
BUSY DECEMBER 
------------- 
¶3. (SBU)  Congress had a subpar 2004, failing to make much 
progress on key bills and wasting inordinate time in partisan 
fighting before leaving Brasilia in mid-year to stump for 
candidates in the October municipal elections (ref A).  Not 
until December did key bills finally pass into law: 
 
- On December 2, the new Innovation Law came into force, 
creating a new agency to stimulate industrial and scientific 
research (septel). 
 
- On December 8, Congress approved a Constitutional Amendment 
of important judicial reforms (ref B) that streamlines the 
overburdened Supreme Court, strengthens human rights 
protections, and introduces structural reforms and oversight 
to the courts. 
 
- On December 14, after 11 years in committee, the Bankruptcy 
Law passed.  It should bring greater predictability to 
creditors and investors, improve the likelihood that failing 
companies can be restructured, and strengthen the position of 
banks on the list of creditors (ref C). 
 
- On December 22, Congress approved Public-Private 
Partnerships, designed to fund large infrastructure projects 
with a combination of government and private money (ref D). 
The bill is close to the heart of President Lula, who 
believes it will promote his development agenda for the 
coming years.  The administration has drawn up a list of 23 
priority projects --mostly roads, railroads and ports. 
 
2005 CONGRESS WILL HAVE A NEW LOOK 
---------------------------------- 
¶4. (SBU) In December, two parties in President Lula's 
coalition, the PMDB and PPS, fractured between pro-government 
and opposition factions (refs E,F).  These events are still 
playing out and will be affected by Lula's cabinet shuffle, 
projected for late-January.  Lula is likely to woo large 
wings of these parties to remain in his camp, and to secure 
their loyalty with cabinet slots and other favors.  His 
decisions will then be reflected in the new Congressional 
lineup.  In February, Congress will select new leaders in 
both houses and in all committees.  The new Senate President 
is likely to be Sen. Renan Calheiros (PMDB), a Lula ally, 
while the front-runner for Chamber President is Dep. Luiz 
Eduardo Greenhalgh (of Lula's PT).  The situation is too 
fluid to submit to firm predictions, but the early math 
suggests that the administration will be able to put together 
narrow majorities in both houses on most votes. 
 
FULL LEGISLATIVE PLATE FOR 2005 
------------------------------- 
¶5. (SBU) The new Congressional leaders will face a dozen key 
bills when they open the new session on February 15, many of 
which are at the heart of the administration's agenda. 
Unlike 2004, this year will not have any national elections 
to empty Congress for months on end, but it will see 
increased partisan jockeying in advance of the 2006 national 
elections.  Last month's defections by the PMDB and PPS were 
but a prelude to these maneuvers.  High on the 2005 
legislative agenda are: 
 
- Final pieces of the 2003 tax reform.  The most important is 
unification of the state ICMS tax rates to put an end to the 
states' fiscal wars in search of investments.  If this passes 
in 2005, the administration may push for a VAT in coming 
years to unify the federal IPI, the municipal ISS and the 
state ICMS taxes. 
 
- Final piece of the pension reforms.  Not necessarily an 
administration priority, but it was part of the deal that 
resulted in the passage of the 2003 public sector pension 
reforms.  Now awaiting a Chamber floor vote. 
 
- Biosafety law.  A bill to regulate biotechnology crops and 
stem cell research has been in Congress for over a year (ref 
G).  The latest iteration, more pro-biotech than previous 
versions, is now awaiting a final vote in the Chamber and 
could pass in early 2005. 
 
- Further judicial reforms.  The Constitutional Amendment 
that passed in December 2004 was only the first of three 
judicial reform packages, with two more slated for 2005 (ref 
B). 
 
- Regulatory agencies.  A bill long awaited by investors to 
establish operating rules for agencies regulating 
telecommunications, energy, petroleum, transportation, and 
water. 
 
- Central Bank autonomy.  In May 2003, in the first 
legislative win of Lula's administration, Congress passed 
Constitutional Amendment 40 that set the stage for a more 
autonomous Central Bank.  Now Finance Minister Palocci is 
pushing for the necessary follow-on legislation that would 
give Central Bank Directors fixed terms in office and 
formalize what is currently only de facto independence on 
interest rates. 
 
- Political reform.  Lula has said that strengthening the 
electoral process and political parties is a priority (ref 
H), so he may push bills that are now in committee dealing 
with coalitions, campaign financing, and party registration. 
 
- Union and labor reforms, to modernize Brazil's rigid and 
obsolete laws.  The administration had hoped to start 
reforming the rules governing union activities, and then take 
on the tougher and broader labor laws.  Of the major reforms, 
these are the least likely to pass in 2005. 
 
- Abortion.  The Supreme Court is considering a case that 
would create just the third exception to the abortion ban 
(allowing abortions in cases of fetal anencephaly, ref I). 
The existing two exceptions are cases of rape and danger to 
the life of the mother.  But there are now calls for Congress 
to assertively legislate the issue rather than leave it to 
the courts. 
 
- Budget process.  As noted above, a reform of the unwieldy 
budget process has now become a possibility.  Although no 
bill has been drafted, a bicameral working group is expected 
to start work in February to fast-track this reform. 
 
COMMENT - 2005 OR BUST 
---------------------- 
¶6. (SBU) As in the U.S., Brazil's political system is most 
likely to yield legislative results in odd-numbered years 
because they provide some insulation from election campaigns. 
 In 2003 Lula passed significant reforms, but 2004 was dead 
time in Congress until after the October elections.  With a 
new cabinet and new congressional leadership in place by 
mid-February, Congress will open its 2005 session as 
well-positioned as ever to make progress on the raft of bills 
awaiting its attention.  When the 2005 session ends, all eyes 
will turn to the October 2006 (presidential, congressional, 
and gubernatorial) elections, meaning that partisan jockeying 
will make it difficult to pass any tough bills in 2006.  2005 
is a now-or-never year for Lula's first-term agenda. 
DANILOVICH