The Week in Review

POLICY MONITOR October 21 – 25, 2013

The Week in Review

ON THE ECONOMIC FRONT Pre-Salt Round: The government held the first bidding round for the pre-salt field of Libra on Monday in Rio de Janeiro. The event was surrounded by protesters calling against foreign intervention in Brazilian oil reserves. The winning consortium was headed by Brazilian company Petrobras, french Total, Dutch Shell, and Chinese firms CNPC and CNOOC. See more below. Unemployment: September’s unemployment rate grew slighty from 5.3% to 5.4% due to higher interest rates, more expensive credit, and decreased consumer confidence. Despite the growth, the rate is still among the lowest historically in Brazil. State Debt: The House approved bill 238/13, written by the Executive branch, alters the correction index of states and municipalities debt to decrease the total amount due by states and cities. The city of Sao Paulo would be a big beneficiary of the law since it would be able to reduce in BRL$24 billion its current debt of from BRL$54 billion to BRL$24 billion. The bill still must approved by the Senate. IMF: The International Monetary Fund reduced potential growth projections for Brazil from 4.25% to 3.5% in 2014. According to the report “World Economic Outlook,” the IMF made the following assumptions for its projections: foreign savings can finance only part of the investment needs of the country, domestic savings will increase gradually but will remain relatively low, and the government will be successful in implementing its program of investment in infrastructure, with important positive effects on productivity. Guido Mantega, Minister of Finance, strongly criticized the IMF projection for the country. ON THE POLITICAL FRONT Internet: President Dilma Rousseff continues to use her Twitter account to publicly defend a free internet. One of the posts refered to Minister of Communications Paulo Bernardo’s attendance at the Internet Governance Forum (IGF) being held in Bali, Indonesia. The President emphasized that internet governance should envolve governments, the private sector, and civil society. On Friday, October 25th, the urgency requirement for the Internet Framework bill (Marco Civil da Internet) reaches its deadline. According to internal bylaws of the House, no other issue can be voted on before that bill. However, not only are there two other bills with the same requirement that have already expired, the procedures are not always entirely followed. Biographies: The bill which regulates the publishing of unauthorized biographies was once again removed from the House’s voting list and won’t be debated until November. The issue was brought up in 2007 when singer Roberto Carlos managed to obtain a judicial order forbidding the distribution of a non-authorized biography. Since then, the issue has been presented to the Supreme Court, and in 2011 Rep. Newton Lima introduced a bill that authorizes biographies without the consent of the person being profiled. Numerous Brazilian artists have expressed their position on the issue. Royal Institute: Last Friday, a group of 100 activists invaded and rescued 200 dogs from the Instituto Royal in Sao Roque, 60 kilometers from Sao Paulo. The Institute conducts research and testing of pharmaceutical and cosmetic goods on animals. The invasion triggered legislative and political backlashes as House and state representatives visited the institute and raised the issue of abolishing the practice of animal testing. The Minister of Science and Technology, Marco Raupp, stated that the invasion was a crime and that when the law on the issue was discussed, the necessity of the scientific community was also taken into account. The State legislature of Sao Paulo said that it will establish a Commission to investigate the condition of the Royal laboratory. See more below. Telecom Services Users: The National Agency of Telecommunications (Anatel) published Resolution 623/2013 establishing the Consumer Council. This action empowers consumer oversight and also aims to improve services by reducing the number of complaints. The councils will have to be implemented by concessionaries and authorized companies of pay TV, Internet, and mobile phone with over one million users. Electric Energy board: José Jurhosa Júnior was appointed as the new director of the National Agency of Electric Energy (ANEEL) board of directors with a four-year mandate. He was advisor to the board of directors and vice- president of the Special Committee on Bidding. He also worked with former director Edvaldo Santana and was personally nominated by him.

Brazil-U.S. Business Council 1615 H Street, NW PATRI WASHINGTON, DC 20062, Washington, DC 1101 17th St. Phone: (202) 463-5729 NW Suite 1010 www.brazilcouncil.org Phone: (202) 822-6420 [email protected] Fax: (202) 822-6423 www.patri.com.br [email protected]

Government Indigenous Land The indigenous land demarcation has been under discussion for a long time. This week, the Supreme Court decided that the 19 conditions established by the “Raposa Serra do Sol” case of indigenous land demarcation will not be applied automatically to other land demarcations, but it may be used to guide future situations. On this case, over 20,000 indigenous people were permitted to occupy the land indefinitely, requiring non-indigenous to leave without compensation.

Among these 19 conditions are the prohibition on the expansion of indigenous lands that have already been demarcated; and, the federal government guaranteed right to install roads, communication networks, and military bases without prior consultation with local communities.

Others rules and bills concerning the issue are:

» An ordinance by the Ministry of Justice with changes on demarcation rules has been expected since May. » In Congress, a group of parliamentarians want to install a committee to discuss the Constitutional Amendment Bill 215/2000 which transfers the decision on demarcation to Congress. » Complementary Bill 227/2012 is a rural caucus proposal on the issue. Nonetheless, the government considers it too biased as it ignores the rights of indigenous people. » The Administration wants to split the process of demarcation analysis among different Ministries to include the Brazilian Agricultural Research Corporation (Embrapa) and the Ministry of Agrarian Development, in addition to the National Indian Foundation (FUNAI), Railway concessions

Due to the distrust of investors and questions raised by the National Accounts Tribunal (TCU), the Administration published Decree 8129/2013 to consolidate railway concessions through the auction of 14 stretches. It involves 11,000 km² of new lines and BRL$ 99.6 billion in private investment. The Decree 8.129/2013 institutes the policy of free access to railways and aims to provide juridical security. Private investors are skeptical of the state-company Valec’s guarantee provisions for the purchase of transportation rights of the stretches. The Decree also separates the exploration of the railway infrastructure, the aim of the auction, from the provision of transportation services.

Tax & Investments Debt Payment Relief The Secretariat of Federal Revenue (RFB) regulated through Ordinance 9/2013 debts resulting from the taxation of profits of companies controlled abroad overdue until December, 31, 2012. The deadline for companies to accept the deal is November 29th.

This regulation is derived from Law 12.865/2013 which granted Brazilian multinational companies fined by the RFB for non-payment of taxes of its related and controlled companies abroad benefits to pay off their debts.

Energy Deep-Water Oil Spills Last Wednesday, after 13 years of debate and one day after the first pre-salt auction, the Administration published a National Contingency Plan to Combat Deep-Water Oil Spills through Decree 8127/2013. The Plan involves 17 governmental institutions and establishes a real-time monitoring system to be implemented by the Brazilian Institute of Environment and Renewable Natural Resources (Ibama) aiming to prevent, prepare, and respond to incidents. Some of the main provisions are:

» Creation of a guidebook in the next six months with detailed procedures concerning operational activities, and human and material resources in the event of oil spills; » Establishment of responsibilities to the polluter or responsible party for the emergency plans, such as logistical support, appropriate working conditions for environmental cleanups, equipment provision, sensible areas protection, and wildlife recovery, among others; » Provision of internal internal training programs related to the National Contingency Plan by the government;

» Establishment of penalties for ports and platforms that do not support the Administration in dealing with oil spills.

The Contingency Plan will be used only in incidents of national scope, as defined by a monitoring group according with the spill volume, environmental sensibility, efficacy of emergency plans, etc., and based on the accident, explosion, or fire which may have caused the oil pollution,. Sugarcane Subsidies Bill (MP622/2013) The House of Representatives approved Provisional Measure (MP) 622/13 which opens an extraordinary credit of BRL$380 million to enable the payment of a subsidy to the industrial units producing ethanol fuel in the Northeast region, as outlined in MP 615/13. The MP now goes to the floor of the Senate for appreciation and will expire on November 6th if not voted on in time. 12th Bidding Round On Wednesday, Magda Chambriard, director-general of the National Agency of Oil & Gas (ANP), announced that the 30 terrestrial blocks in the basin of the state of Sergipe totaling 938.22 km² will be part of the 12th bidding round of non-conventional oil.

The round is scheduled for the 28th and 29th of November and will offer 240 blocks, approximately 168,348, 42 km², with potential for natural gas in seven basins in the states of Amazonas, Acre, Tocantins, Alagoas, Sergipe, Piauí, Mato Grosso, Goiás, Bahia, Maranhão, Paraná, and São Paulo. It will also include blocks in new frontier areas aiming to attract investments to these areas in the basins of Acre, Parecis, São Francisco, Paraná, and Parnaíba.

Health Cancer Treatment On Tuesday, the National Health Agency (ANS) published a list of 37 oral medications for the treatment of cancer which must be covered by health plans. Fifty other treatments and drugs were also added to the list.The list is updated every two years. The measure will cause an impact on the price of such medications, but not before 2015. Animal Testing Last Friday, the Institute Royal laboratory had 178 beagles taken by animal activists under allegations of maltreatment and use as guinea-pigs for cosmetics and cleaning products. The episode was widely published on social media. The National Council for the Control of Experiments on Animals, linked to the Ministry of Science, Technology, and Innovation is responsible for regulating scientific activities with animals. The main legislation is Law 11.794, Lei Arouca, as well as the rules created by the Research Ethics Committee. The penalties vary from warranty and suspension of official funding to a definitive ban on laboratories and fines varying from BRL$5,000 to BRL$20,000.

Despite being responsible only for regulation on health surveillance and the registration of products, the National Agency for Health Surveillance (ANVISA) is analyzing the legislation to find any loopholes related to the oversight of research for the production of medicines and cosmetics with negative effects on guinea- pigs.

Quotes of the week "On Monday, the agenda will be blocked due to the bill on Internet Framework which has constitutional urgency. Our concern now is to come to an agreement on voting on the bill on Wednesday (30th of October), free up the agenda, and then return to all other important matters.” - Henrique Eduardo Alves, President of the House of Representatives “According to the auction results, 85% of all revenue from the Libra area will belong to the State and Petrobras. This is quite different from privatization.” President Rousseff “Petrobras can afford the BRL$ 6 billion [bonus for exploration of Libra] without readjusting the price of fuel and without support of the National Treasury”. Graça Foster, president of Petrobras.

The Pulse Libra Bidding Round: What it is and how it went

On Monday, the government held the first round of bidding for the pre-salt Libra field. Analyst opinions diverged on whether the auction was a failure, but the government and the President herself emphasized the success of the event despite violent protests and the fact that only one consortium offered a bid.

The Field

The Libra Field is located on the coast of the state of Rio de Janeiro, about 100 miles from the coast. The area is around 1,500 square kilometers. According to an estimate by the Director of the National Agency of Oil & Gas (ANP) Magda Chambriard, exploration can yield up to 1.4 million barrels a day, and the total volume of oil is between eight and 12 billion barrels.

The Sharing Regime

The field was auctioned off under the sharing regime in which companies split the results of the oil exploration with the government. A minimum of 41.65% of the oil must be handed over to the Brazilian State, allowing that the winning companies and Brazil to share both the risks and the benefits of the results of the exploration. This is the first time the regime is being implemented in the country, and the winning consortium offered exactly 41.65%.

The Bid

One month ago, eleven companies signed up and paid the BRL$2 million fee to participate in the bidding round, contradicting Chambriad’s initial statement that around 40 companies would participate. They were CNOOC, CNPC, Ecopetrol, Mitsui, ONGC Videsh, Petrogal, Petrobras, Petronas, Repsol, Shell, and Total. Brazilian company Petrobras had to be a part of the consortium with at least 30% participation. On the day of the event, Repsol stated that the company would not be making a bid during the auction.

The Winning Consortium

The winning consortium is composed of Petrobras (with 40% participation), Shell (20%), Total (20%), CNPC (10%), and CNOOC (10%). The group must pay a signature bonus of BRL$15 billion and will be able to explore the field for 35 years. Petrobras, according to the RFP, will be the field’s operator.

Petrobras

Share prices of Petrobras rose by five percent the day of the auction. The company’s participation in the consortium was within the expected range. Before the auction, market analysts had expressed concern over Petrobras’ capacity to deliver on this contract, especially because of the company’s growing debt (rising from BRL$49 billion to BRL$176 billion between 2007 and 2013) and its decreasing oil production.

The Protests

The bid was surrounded by protests, some of which turned violent, in front of the Windsor Hotel where the government held the auction. Last week, the oil sector workers union had already announced a strike against the bidding round. The main motivation appears to have been nationalist, against handing Brazilian oil into foreign hands.

The Government’s Reaction

President Rousseff, in a nationwide speech, called the bid a “historical step” for Brazil and a “success.” Rousseff also emphasized the fact the majority of all resources raised by the exploration of the field will be directed towards investments in education and health.