• February 2011
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CEMIG | The New Model PPP?

Something you don’t see every day in a lot of countries are firms like Sabesp, the multilisted public-private sanitation department, and, according to a tip from the carioca feuilleton Relatório Reservado, CEMIG, a listed PPP from Minas Gerais in the electricity sector.

Firms of this type have great political significance — sometimes to the detriment of their good governance. Sabesp was and is to be a model of its kind, reflecting positively on the administration of the PSDB over the past 16 years by universalizing access to basic sanitation — and doing so more efficiently than the federal government, which is less open to private-sector participation in planning and management.

In Sambodia, a “turn key” contract was adopted for new subway construction to have been completed by now. A giant smoking hole opened up in the ground and now the new quilometragem will not be delivered until some hazy point in the future, it seems to me.

With the advent of the CGU — an audit office oft the federal executive parallel to the audit tribunals run by the judiciary branch, which are always causing a scandal — the countryside is swarming with bean counters.

This creates a certain virtuous circle of political one-upsmanship that bodes well for the Sambodian future, I think.

The problem with Sabesp is that its duty to shareholders and its duties to customers make it what I call an example of a “multiple pesonality order.”

On the TV, an advertising blitz for Sabesp as the crowning achievement of the state government, at a time when the ex-governor was running for president. In the newspapers, whole small towns being washed away in torrents of mud and feces, and beaches closed for exceeding the allowable limits on the presence of human fecal coliform bacteria.

In Guarujá recently, over 1,000 cases of dysentery were being reported per day. Sabesp preferred to stick to its utopian future-oriented RI — “this model will be exported throughout the Amerias!” — and just plain ignore the difficult questions. This is an infallible sign of a bad crisis communicator, I always think. You have to be ready to knock the screwball into left for a clean single when these things come up.

Now, according to RR, there are signs of restructuring for similar purposes at Cemig, the electrical power utility part-owned by the state and partially floated on the Bovespa. I will see if I can gist what they believe they know, with the caveat that I have no way of knowing whether they actually know it.

The state government is joining with government contractor Andrade Gutiérrz, they say, with an eye to slicing the equity pie a little differently in order to create the conditions for listing Cemgi on the Novo Mercado, the highest governance rating on the S. Paulo Stock Exchange — where Sabesp will be found already listed. 

Andrade is said to want to raise capital though an IPO in order to make new acquisitions, possibly even outside Brazil, the tipsheet says. To qualify Cemig for a higher listing standard, Andrade will have to sell off 7%, brining its hare in the company below 25%. The rule sounds vaguely familiar, but I forget what that is about. I have a lot on my mind.

This transaction should occur this quarter and will be followed by an exchange of non-voting for voting shares, RR claims, strengthening the capitalization of the major shareholders. .In this way — I did not quite get this explanation — the state government can avoid exceeding the statutory 51% stake in Cemig while raising more capital for its expansion plans.

Shareholders hope the maneuver will bring down the cost of capital.

In the second quarter, Cemig reportedly plans to put together $1.5 billion in convertible debentures and go after Grupo Rede, while working to privatize CESP, the Cia. Energétic de S. Paulo, in which it has a large stake. The company also owns Light of Rio outright.

Closed-end funds will be established to control and manage the flow of capital. Or so the cariocas say.

Today, more rumors swirling about takeover targets, include Escelsa, the state electrical utility of Espirito Santo. RR says a political deal — involving ex-governo Aécio Neves, one imagines, now the opposition leader in the Senate — has already cleared the way to take it off the hands of EDP and is partner, the state of ES. The company adds little to EDP’s business, but would consolidate Cemig’s operations geographically, cuttting a ontinuous swath through the Southeast.  .

Escelsa might be worth an additional R1.5 billion to Cemig, they say.

I only mention it in case someone out there is interested.

It is interesting to watch the Brazilians try their hand at a “development for export”game in which the sons of Uncle Sam are the New York Yankees. My hunch — totally out of left field — is that Sabesp faces a day of reckoning sooner or later, and has been held perhaps too closely by the state for political reasons. Holders of its listed shares see the negative headlines and will want to know, for example, whatever happened to the billion-dollar dredging of the Tietê River that was supposed to keep it from overflowing on the beltway, reeking of human shit.

When you stand outside the State Department of the Environment, near the Pinheiros River, the same thing — an overpowering stench of human shit.

The smell of shit trumps even the best television advertising.