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

UNCLAS SECTION 01 OF 05 BRASILIA 000447 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR RENIGAR, SHANNON 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
DOE FOR SLADISLAW 
FCC FOR ETALAGA 
 
E.O. 12958: N/A 
TAGS: ENRG EINV EFIN PGOV EWWT ECON BR
SUBJECT: BRAZIL MAKES REFORMING REGULATORY AGENCIES A PRIORITY 
 
REFS: A) 03 BRASILIA 3405 
 
      B) 04 BRASILIA 186 
      C) 04 BRASILIA 38 
      D) 04 BRASILIA 59 
 
¶1. (U) SUMMARY:  The Brazilian Congress is considering a new law 
governing the functioning of Brazil's nine regulatory agencies. 
The legislation aims to bring greater social accountability, 
operational transparency, and financial oversight to their 
operations.  The law includes, however, controversial changes 
that would limit the operational and financial independence of 
these agencies.  While there is acceptance of the need for new 
legislation, some provisions have sparked concern over the 
extent to which the GOB will be able to exert political 
influence over the agencies.  The most contentious aspects of 
the proposed changes include shifting concessionary 
responsibility from the regulatory agencies to the ministries, 
reduction of operational and financial independence, the 
establishment of an Ombudsman appointed by the President, and 
mandatory public consultations.  In addition, through another 
law, the conversion of personnel at the regulatory agencies to 
the GOB civil service is already underway and may impact the 
agencies' ability to hire and retain high-caliber staff.  While 
there is a need to harmonize the regulatory agency framework, 
the Lula administration comes at this task with some of its 
traditional suspicions regarding the involvement of the private 
sector and the independent role of the regulatory agencies. END 
SUMMARY. 
 
NINE REGULATORY AGENCIES 
------------------------ 
 
¶2. (U) Brazil has nine independent regulatory agencies that have 
evolved since the mid-1990s:  National Electric Energy Agency 
(ANEEL), National Telecommunications Agency (ANATEL), National 
Petroleum Agency (ANP), National Agency of Sanitary Monitoring 
(ANVISA), National Supplementary Health Agency (ANS), National 
Water Agency (ANA), National Land Transportation Agency (ANTT), 
and National Aquatic Transportation Agency (ANTAQ).  The 
creation of the agencies complemented GOB privatizations begun 
under the previous administration.  All but two of the agencies 
were established by separate laws, and the result has been an 
inconsistent regulatory-agency regime.  For example, the 
directors have appointments that vary from three to five years 
and not all of the agencies were created with an ombudsman 
office.  There is widespread agreement on the importance of 
having a general law governing regulatory agencies.  As always, 
the devil is in the details. 
 
OVERHAUL OR SIMPLY IMPROVEMENTS? 
-------------------------------- 
 
¶3. (SBU) Early on, the Lula administration opposed the idea of 
granting broad latitude to the regulatory agencies.  According 
to Worker's Party (PT) legislative adviser Luiz Fernando 
Linares, the Cardoso administration created a regulatory 
"monster" without sufficient oversight.  According to one of the 
ANEEL directors, Isaac Averbuch (protect), the Lula 
administration came into office very suspicious of the 
regulatory agencies because of its lack of understanding of the 
regulatory agencies' role and sought to change the regulatory 
agencies for various reasons, the first being ideology. 
 
¶4. (U) In September 2003, the GOB published draft legislation 
(Reftel A) and subsequently, in February 2004, a general law 
over the regulatory agencies (PL 3.337/04) was presented to 
Congress.  The initial response to the proposals was generally 
negative, coming at the same time that the Lula administration 
had forced out the previous president of ANATEL (Reftels B, C, 
D).  Although it appeared that the proposed regulatory reform 
had lost momentum, the general law is now a priority on the 
administration's legislative agenda.  (Note: The National 
Industrial Confederation (CNI) has published a lengthy study, in 
Portuguese, of the history of Brazil's regulatory regime and the 
changes proposed in the Bill. End Note.) 
 
¶5. (SBU) The Lula administration is preparing for the upcoming 
legislative debate.  A delegation from the GOB's executive 
branch will be traveling in February 2005 to the United States, 
Mexico and Bolivia to learn from other regulatory models.  The 
delegation includes Helcio Tokeshi (Secretary for Economic 
Oversight, Ministry of Finance), Luis Hiroshi Sakamoto 
(Secretary for Management, Ministry of Planning, Budget and 
Management), Nelson Jose Hubner Moreira (Chief of Staff of the 
Minister of Energy), Mr. Marcio Wohlers de Almeida (Special 
Advisor to the Minister of Communications), and Rodrigo Augusto 
Rodrigues (Assistant Deputy Chief of Staff, President's Office). 
 
FIVE AREAS OF CONCERN 
--------------------- 
 
¶6. (U) Interlocutors from the executive branch, industry, and 
political circles have highlighted five principle concerns: (1) 
shifting concessionary responsibility from the regulatory 
agencies to the ministries, (2) reduction of operational and 
financial independence, (3) creation of an Ombudsman appointed 
by the President, (4) mandatory public consultations, and (5) 
through another law, the conversion of personnel at the 
regulatory agencies to the GOB civil service. 
 
(1) CONCESSIONARY AUTHORITY 
--------------------------- 
 
¶7. (U) The Bill proposes to place concessionary authority for 
public services in the ministries.  For the regulatory agencies 
that do not have a concessionary role, there would be little 
impact.  Industry analysts, however, point out that this will 
create a potential conflict of interest in some of the larger 
agencies such as ANEEL and ANP that regulate powerful state- 
owned companies such as Eletrobras and Petrobras. 
 
¶8. (SBU) EmbOffs met with Rodrigues from the President's Office 
to discuss the upcoming trip.  Rodrigues said that he expected 
the most resistance from the regulatory agencies in terms of 
concessionary authority.  He stated, however, that although the 
agencies have considerable technical expertise, in the final 
analysis it is the State that grants concessions for public 
services.  Rodrigues noted that although the law would place 
concessionary authority in the ministries, the ministries could 
delegate the authority back to the agency as the Ministry of 
Mines and Energy (MME) did with ANEEL.  Rodrigues said that an 
agency like ANATEL would also most likely have the authority 
delegated back because ANATEL is a highly-respected 
organization; in contrast, an agency like ANTT may not because 
it does not have the capacity to handle the work. (Note: 
Rodrigues also stated that legislative process for transfer of 
Civil Aviation Department (DAC) into a proposed National Civil 
Aviation Agency (ANAC) was farther along than the proposed 
general law, and there is a general consensus that ANAC is 
needed. End Note.) 
 
¶9. (SBU) ANATEL, ANEEL, CNI and AmCham all told EmbOffs that 
concessionary authority should remain in the regulatory 
agencies.  ANEEL Director Averbuch said MME was forced to re- 
delegate concession authority back to ANEEL for lack of capacity 
to deal with the scope and technical aspect of the operation. 
One of the directors of ANATEL, Jose Leite Pereira Filho, said 
that ANATEL has less concern about the concessionary role 
because ANATEL grants only one "concession" (for fixed line 
services) and that is already contracted; ANATEL's other 
licenses (e.g., for cellular services) are granted under 
"authorizations."  Leite is more concerned about the law's 
ambiguity regarding regulatory authority over the concessions; 
Leite prefers having both concessions and regulatory authority 
reside in one organization.  In addition, Leite says that 
delegating the authority back from the ministries to the 
agencies creates too much uncertainty because politics may cause 
the authority to bounce back and forth between the two; the 
concessionary authority should either be in the ministry (and 
its full responsibility) or remain fully in the regulatory 
agencies. 
 
(2) REGULATORY INDEPENDENCE MEANS... 
------------------------------------ 
 
¶10. (U) The Bill proposes a few measures that many analysts 
think will reduce the operational and financial independence of 
the regulatory agencies.  These measures include centralizing 
policy-making authority in the ministries and mandating a 
strategic/performance contract between the regulatory agencies 
and the executive branch. 
 
¶11. (SBU) EconOff met with a PT adviser in the Camara dos 
Deputados, Luiz Fernando Linares, whose primary concern was the 
role of the regulatory agencies in policy formation.  Linares 
said that one of the Lula administration's first initiatives was 
to return the policy role from the regulatory agencies to the 
ministries; the government formulates policies, and the 
regulatory agencies implement and monitor.  Linares declared 
that it was not proper to have policy decisions being made by 
technical experts and only on technical grounds as the policy 
implications are often deeper.  In contrast, ANATEL Director 
Leite thought that the placement of the regulatory agencies in a 
new hierarchical relationship was the most serious problem with 
the bill.  According to both Leite and the CNI report, the 
general Telecommunications Law created ANATEL as a "special" 
autonomous agency; under the proposed law, ANATEL (and the other 
regulatory agencies) would no longer have the final word. 
 
¶12. (SBU) Linares made clear that he thought the proposed 
strategic/performance contract was "naive, unnecessary, and 
inefficient," adding that others in Congress were looking 
askance at the contract idea as well.  AmCham Sao Paulo also 
expressed concern that the contract would be too inflexible and 
called instead for a Work Plan to be developed in conjunction 
with the respective ministries.  AmCham opposes any linking of 
funding of the regulatory agencies to their achievement of the 
contract's goals.  As far as ANATEL's head of Legislative 
Affairs, Edvaldo Miran da Silva (protect), he said that ANATEL 
already reports to Congress, the ministry and the National 
Accounting Tribunal (TCU), and that expanding requirements to 
report to the executive branch would reduce its autonomy. 
 
¶13. (SBU) Of much greater to concern to Averbuch is ANEEL's lack 
of full financial independence.  According to Averbuch, ANEEL 
has seen its budget control erode during the last few years. 
ANEEL's budget comes from a fee, a percentage of each 
electricity bill, charged to consumers and paid to the federal 
treasury.  The GOB may then authorize an expenditure of that 
money or prohibit it.  Money not passed to ANEEL reverts to the 
general treasury after five years.  During recent years, the 
government has increasingly retained a slice of the consumer 
charges paid for ANEEL and allocated that amount to other uses. 
Averbuch said this has limited ANEEL's operations, especially in 
areas such as customer service and its ability to conduct audits 
of the concessionaires. 
 
(3) OMBUDSMAN OFFICE 
-------------------- 
 
¶14. (SBU) The bill calls for a presidentially-appointed 
ombudsman in each of the regulatory agencies.  According to PT 
adviser Linares, this is the most important aspect of the law 
because the regulatory agencies currently have too intimate of a 
relationship with industries and business associations, and are 
not responsive enough to the public (to whom they are providing 
service).  Linares said that one year ago only ANEEL and ANATEL 
had ombudsman offices, but only ANATEL's was actually 
functioning adequately.  Under the Lula administration, however, 
all of the agencies now have ombudsman offices at least in 
theory. 
 
¶15. (SBU) Averbuch is concerned that the appointed ombudsman 
will simply become a plant for the Executive, influencing 
decision-making for political purposes.  AmCham shared the 
concern that an executive branch representative would constitute 
State interference in agencies' operational independence.  To 
ensure its independent role, ANATEL Director Leite said that the 
Ombudsman should either by appointed by Congress or at least 
approved by Congress if appointed by the president. 
 
(4) POWER TO THE PEOPLE 
----------------------- 
 
¶16. (SBU) The bill proposes greatly expanding public 
participation in the regulatory agencies through mandatory 
public consultations, funding of studies, and more transparent 
reporting.  Edvaldo Miran da Silva told EmbOff that this 
expansion is the real thrust of the proposed law and that it 
would have an even greater impact than the Ombudsman office. 
According to Silva, ANATEL currently opens some meetings to the 
public, such as when new regulations are being proposed.  The 
proposed law, however, would greatly expand public access to the 
decision-making process, including proposed rate hikes.  Silva 
did not consider this as very "radical" and compared it to the 
current judicial system in which non-sensitive court proceedings 
are open to the public.  Silva said that the regulatory 
agencies, however, are not accustomed to the public eye and that 
this would take some getting used to.  As an example, Silva said 
that prices for fixed-line services have sky-rocketed in recent 
years; if the proposed law passed, ANATEL (and the 
concessionaires) which be required to be much more transparent 
in justifying the price hikes. 
 
¶17. (SBU) According to the bill, the regulatory agencies would 
have to fund studies by associations or local districts that do 
not have adequate resources.  Silva cited the example of a city 
that wanted to conduct a study of its telephone services; under 
such a scenario, ANATEL (and the concessionaires, by extension) 
fund the necessary technical specialists to conduct the study. 
AmCham opposes the regulatory agencies bearing such costs. 
 
(5) REFORM OF PERSONNEL SYSTEM 
------------------------------ 
 
¶18. (SBU) As part of the effort to bring the regulatory agencies 
under greater state control, Law 10.871/04 requires that agency 
personnel be civil servants by the end of 2005.  Previously, the 
agencies had hired personnel under contracts, with wages more 
similar to those of the private sector.  Averbuch predicts that 
only 30% of the current staff will still work for ANEEL by the 
end of the year because they will either seek more lucrative pay 
in the private sector or fail to pass the civil service exam. 
Although Averbuch predicts higher turnover in administrative 
positions than the direct-mission related positions (only a 50% 
turnover predicted), the loss of institutional memory and 
expertise is worrisome.  Linares defends the new personnel law 
for the regulatory agencies as correcting a flaw dating back to 
the Cardoso administration, which was in a rush to form the 
agencies and did not want to be restricted by the civil service 
hiring system.  Linares somewhat counter-intuitively defended 
the low salaries as a deliberate strategy to attract personnel 
who are committed to the specialized field.  He said salaries 
could be raised again later to be more competitive with the 
private sector. 
 
¶19. (SBU) Silva of ANATEL was much more upbeat about the 
personnel changes.  According to Silva, around one-half of 
ANATEL's staff has been working on temporary contracts because 
the personnel system passed under the Cardoso administration was 
suspended by the Supreme Court, crippling the agency's ability 
to hire and retain personnel.  Silva said employees were often 
trained only to leave for the private sector because of the lack 
of job security at ANATEL.  Although Silva predicted that there 
would be some turmoil in the short-term, he thought that in the 
long-run the integration of ANATEL personnel into the civil 
service system will bring much more stability and create a 
career development track at the agency.  AmCham praised the 
personnel changes for providing improved hiring procedures and 
professional development, but called for more competitive 
salaries. 
 
COMMENT 
------- 
 
¶20. (SBU) Most successful regulatory systems depend upon a 
stable regulatory law with transparency and regulatory 
independence.  Although the Lula administration has maintained 
the previous administration's economic course in many regards, 
some wings of the administration still are suspicious of the 
influence of the private sector and of the independent role of 
the regulatory agencies.  The proposed law and the personnel 
reform is an attempt to legitimately bring more consistency to 
the regulatory regime in Brazil, but is also a clear attempt to 
rein in the independent authority of the agencies. 
 
¶21. (U) This cable was coordinated with Consulate General Sao 
Paulo. 
 
DANILOVICH