VZCZCXRO8885
RR RUEHRG
DE RUEHBR #1621/01 3521833
ZNR UUUUU ZZH
R 171833Z DEC 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 3119
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6997
RUEHSO/AMCONSUL SAO PAULO 3216
RUEHRG/AMCONSUL RECIFE 8813

UNCLAS SECTION 01 OF 03 BRASILIA 001621 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC, WHA/EPSC 
 
E.O. 12958: N/A 
TAGS: EAIR EINV ECON BR
SUBJECT: Brazil Civil Aviation: Liberalization/Privatization Update 
 
SENSITIVE BUT UNCLASSIFIED 
 
REF: A) BRASILIA 0169, B) BRASILIA 1160 
 
¶1. (SBU) Summary: Brazil is currently considering Brazilian civil 
aviation liberalization/privatization legislation that the 
government hopes would result in greater direct foreign investment, 
domestic market liberalization, transference of air traffic 
functions from military to civilian control, and the creation of a 
customer's bill of rights.  ANAC and BNDES are charged with 
delivering to President Lula the regulatory framework model 
proposing to privatize management of airport facilities through 
concessions by April 9, 2009, at which time Lula will make a 
decision on whether to pursue system-wide privatization or ad hoc 
privatization of individual airports. A potential model that grants 
concessions by grouping profitable airports with non-profitable ones 
may significantly reduce investor interest, while another potential 
model that would offer concessions on individual airports could 
leave GOB responsible for running unprofitable airports the private 
sector does not want. Brazil's Civil Aviation Regulator (ANAC) 
President Solange Paiva Vieira recently predicted in a meeting with 
U.S. Ambassador Sobel that there was insufficient time and political 
will to affect privatization changes before the conclusion of the 
Lula administration in 2010.  Vieira offered concrete proposals in 
the areas of market liberalization to shape the agenda for the next 
U.S./Brazil bilateral discussions, including frequency 
liberalization on a specific city/city pairing basis, liberalization 
of the cargo carrier sector, and mutual recognition of the 
certification of aircraft parts and maintenance.  Vieira also 
underlined that the GOB would need the United States to provide, as 
the EU has done, a report that examined the economic effects of an 
Open Skies agreement on the Brazilian civil airline industry as a 
precursor to starting Open Skies talks with Brazil. End summary. 
 
PROPOSED LEGISLATION 
-------------------- 
 
¶2. (U) At a November 9 public hearing on the proposed legislation 
attended by Econoff, co-chaired by Senate legislative consultant 
Victor Carvalho Pinto; Dr. Respcio do Esprito Santo Jr., president 
of the Brazilian Air Transportation Institute of Strategic Studies 
and Public Policy; and Senator Delcdio Amaral, primary sponsor of 
the legislation that created ANAC in 2005, revisions to the 
Brazilian civil aviation code were advocated that would allow for 
the sector to keep pace with growth, enhance operational 
efficiencies, address safety concerns and provide greater customer 
service.  Pinto, the author of the study, proposed repealing the cap 
of 20% foreign ownership/investment in Brazilian airlines as well as 
opening the domestic market to unrestricted foreign carrier 
participation.  While admitting that the latter is highly unlikely, 
Pinto commented that the industry needs to embrace free enterprise 
in order to achieve greater operational efficiencies. 
 
¶3. (U) Pinto's operational model called for the privatization of all 
airports, each with its own business plan.  The study claimed that 
by privatizing all Brazilian airports and not just the profitable 
ones, the less desirable inefficient airports would have to improve 
to attract needed investment capital. Pinto offered as acceptable 
options either private management or municipal management of the 
airports with no federal oversight in day to day business 
activities.  The study proposed that airport slots should be the 
property of the airlines to be sold initially to the carriers by the 
airports via auction and then traded freely among the carriers, a 
significant departure from the complex system that ANAC currently 
uses to allocate slots to carriers.  The model calls for carriers to 
bid on newly announced international routes and to abolish the 
international boarding fees currently collected (which the study 
claims are unconstitutional). Pinto suggested that INFRAERO, the 
Brazilian federal agency charged with managing airport 
infrastructure, should be converted to a private entity that 
continues to manage airports under a privatization model, given 
INFRAERO's wealth of assets and airport operational experience. 
¶4. (U) Referencing the aviation service meltdowns of 2007, including 
late flights and cancellations, Pinto advocated greater 
accountability on the part of the air carriers through the adoption 
of a passenger bill of rights. This proposal would establish a 
sliding scale of compensation levels for passengers whose flights 
were overbooked, delayed, or cancelled.  Passengers would be 
compensated depending on severity of the problem and the original 
purchase price of the ticket. Pinto argued that the traveling 
public's Brazilian airport experience, (which the study 
characterizes as "uncomfortable and tedious") would improve through 
increased operational efficiencies resulting from privatization, 
such as fewer extended layovers and more aesthetically pleasing 
passenger facilities. 
¶5. (U) Addressing the controversial measure of transferring air 
traffic control (ATC) responsibilities from military to civilian 
 
BRASILIA 00001621  002 OF 003 
 
 
control, Ponto and Amaral advocated a cautious approach.  Both 
recognized the challenges, from how to logistically divide shared 
military/civilian-use facilities and assets between two ATC groups 
to questions of national security and sovereignty.  The study 
proposed a methodical transfer beginning with the introduction of 
the ATC management system known as CNS-ATM. Ponto argued that this 
would provide a natural transition for the new management and allow 
time for the Ministry of Defense to reassign its officers.  Amaral 
cited the concern that ATC was a contributing factor in the 2006 
mid-air collision involving a GOL 737 and an executive jet as a 
reason to prioritize CNS-ATM implementation and transference to 
civilian control. 
 
¶6. (U) Dr. Espirito referenced the recent announcement by Rio de 
Janeiro's Governor Sergio Cabral that both President Lula and 
Minister of Defense Nelson Jobim had accepted the idea of 
privatizing Galeco airport in Rio and Campinas airport in Sao Paulo 
as an opportunity to extend the privatization model to the entire 
industry, not just the profitable ones.  Espirito cited INFRAERO 
concerns that by privatizing only profitable, large airports, the 
smaller, unprofitable ones would suffer because they would no longer 
receive the profits of others to cover their shortfalls (REFTEL B). 
Dr. Espirito proposed that privatization of the entire airport 
system would be more effective in raising needed investment capital 
(something particularly important for less profitable airports), 
would be more responsive to the local community's socioeconomic 
needs, and private entities would more effectively manage the 
various governmental operators within the airport, such as the 
Ministry of Defense, Agriculture, Federal Police, and Customs. 
 
VIEW FROM ANAC 
-------------- 
 
¶7.  (SBU) During a meeting with Ambassador Sobel, ANAC president 
Vieira acknowledged that airport privatization is inevitable, but 
questioned whether it will occur during the Lula administration. She 
explained that ANAC and BNDES were charged with delivering to 
President Lula the regulatory framework model under a market 
privatization scenario by April 9, 2009, at which time Lula will 
make a decision on whether to pursue airport privatization 
system-wide or on an ad hoc airport-by-airport basis.  Brazil's 
national development bank, BNDES would then be responsible for 
managing the concession process.  Vieira pointed out that the 
Brazilian constitution does not allow for private ownership of 
Brazilian airports, adding that the concession process would allow 
for private management of airports on a long term lease basis. 
Vieira noted implementing any privatization decision would be 
complex and would require careful management of interagency 
equities.  Vieira indicated she personally favored concentrating on 
liberalizing routes and pricing, and questioned if there was 
sufficient political will to finalize the debate and begin 
implementation of airport privatization before presidential 
elections in 2010. 
 
¶8. (SBU) Vieira expressed interest in discussing the agenda for the 
next aviation bilateral meeting.  Topics of interest included 
frequency liberalization on a specific city/city pairing basis, 
liberalization of the cargo carrier sector, and mutual recognition 
of the certification of aircraft parts and maintenance.  In 
mentioning Brazil's current Open Skies negotiations with the EU, 
Vieira confirmed that the agreement will have an aircraft 
parts/maintenance mutual recognition provision, but she did not 
provide any additional details on the talks or when the negotiations 
are expected to be concluded.  Vieira added that the EU submitted to 
ANAC an economic impact report that examined the economic effects of 
an Open Skies agreement on the Brazilian civil airline industry as a 
precursor to starting Open Skies talks with Brazil. Vieira 
underlined the U.S. would need to provide a similar study if Open 
Skies were pursued.  Vieira added that ANAC had recently approved 
full pricing liberalization for international flights.  The phase in 
of this over the course of 2009 will involve 20% of the 
international flights by January, 40% by April, 80% by August, and 
be complete by the end of the year.  Although Solange did not 
mention which routes/destinations would be liberalized first, she 
did predict that by 2010, liberalized frequencies between the U.S. 
and Brazil could be a reality. 
 
MEANWHILE, AT INFRAERO 
---------------------- 
 
¶9. (SBU) In response to a BNDES proposed restructuring of INFRAERO 
that was recently revealed in the Brazilian newspaper Valor on 
December 2, INFRAERO president Srgio Gaudenzi announced his 
resignation on December 3, providing as his reason his disagreement 
with the proposed airport privatization model and insisting that 
INFRAERO should instead become parastatal organization with publicly 
traded shares offered through an initial public offering.  The 
article reported that his resignation was accepted by Jobim and that 
 
BRASILIA 00001621  003 OF 003 
 
 
Jobim had formally offered the position to Guilherme Lagger, a 
former executive at Brazilian mining company Vale and beverage giant 
AmBev.  The BNDES report also recommended the dismissal of 
INFRAERO's 4 directors, its 28 superintendents, the airport 
administrators in 68 airports that INFRAERO manages and the 
logistics and baggage handling units. 
 
AIRPORT CONCESSION SEMINAR 
-------------------------- 
 
¶10.  (SBU) Airport concession models were the topic of discussion 
during the ANAC-sponsored Airport Concession Seminar held in Rio de 
Janeiro December 11-12. The message from the Minister of Defense 
Nelson Jobim, along with ANAC President Vieira, ANAC Director 
Marcelo Guaranys, and Director of Civil Aviation Policy of the 
Secretary for Civil Aviation Fernando Soares, emphasized the 
concession model's three goals of enhancing Brazilian civil aviation 
efficiencies, fostering competition and raising sufficient capital 
to finance needed infrastructure projects under the Growth 
Acceleration Program (PAC). Jobim emphasized the need for the model 
to be flexible in adapting to the real needs of Brazil's fast 
growing aviation sector and applauded ANAC for considering other 
countries' models before deciding on Brazil's.  Vieira stressed that 
the model must promote domestic airport competition in order to 
increase airport operational efficiencies.  She also underscored the 
developmental and implementation phases of the concession process 
must be transparent.  In touching on some of the specifics of the 
model, Guaranys mentioned that the model must take into account the 
non-profitable airports. Guaranys proposed to group performing and 
non-performing airports into bundled concessions to require 
potential investors to take on unprofitable assets and 
cross-subsidize their shortfalls from the profits of the performing 
airport.  The model, similar to the Mexican model, would address 
this vexing issue, in his view. (COMMENT: The proposal to bundle 
non-profitable airports into concessions for profitable airports may 
discourage investors, particularly since Brazilian law requires the 
airports to remain in operation (as opposed to, for example, UK 
privatization which permitted airports to be re-zoned for housing or 
other commercial purposes) END COMMENT).  Guaranys suggested that an 
individual airport concession model approach, similar to the Chilean 
model, could foster greater efficiencies at profitable airports, but 
possibly at the expense of leaving underperforming airports behind. 
Soares underscored the model's goal of raising needed capital 
through BNDES loans.  Soares acknowledged PAC funding shortfalls and 
suggested that the concession bidding process should encourage 
foreign participation (NOTE: BNDES funding requires the 
participation of Brazilian firms and inputs). 
 
¶11. (SBU) Comment: Privatization of the Brazilian civil aviation 
sector continues to face many obstacles, from GOB military concerns 
relating to airport asset sharing with civilian organizations to the 
difficulty in crafting a concession model that would achieve GOB 
operational priorities and also be attractive to private sector 
investors.  However, consensus is building that inaction is not an 
option, especially given that Brazil hosts the World Cup in 2012 and 
Rio is bidding to host the 2016 Olympics.  The departure of the 
anti-privatization head of INFRAERO and the recent airport 
concessions seminar suggests momentum toward privatization is 
building.  ANAC, SAC and BNDES will play key roles in this debate. 
The GOB is committed to maintaining the functionality of its 
sixty-eight commercially operating airports and required 
constitutionally to own them; a potential model that grants 
concessions by grouping profitable airports with non-profitable ones 
may significantly reduce investor interest.  The individual 
concession model approach is also fraught with downsides from the 
government perspective, as GOB would potentially be left to run 
unprofitable airports the private sector does not want. Given these 
challenges, ANAC seems more focused in the short-term on creating 
the conditions for market liberalization of pricing and routes, 
underscored by a President Vieira's comment to Ambassador Sobel: 
"privatization only equates to change in airport management, whereas 
market reform equates to progress." End Comment 
 
SOBEL