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Deep Float | Petrobras Underwater, Fire

A napkin outline of the Pasadena scheme

A back of the napkin outline of the Pasadena scheme


There is curiosity today as to the identity of a “deep throat” witness in the Petrobras corruption megascandal.

One month after Operation Car Wash was carried out, in the middle of this year, a career public servant with 30 years of service approached federal agents in charge of the task force and denounced Petrobras for ignoring “signs of criminal behavior” and “intentional mismanagement” inside the state-run petroleum giant “in order to divert funds without awakening the suspicions of auditors and inspectors.”

Together with the acquisition of the Pasadena Refinery in the U.S. – the most emblematic of the charges involving the case — the witness named former Mines and Energy minister Edson Lobão as the “godfather” of one of the suspects and [alleged that] current Petrobras CEO Graça Foster was responsible for the nomination of two other senior executives in the foreign trade division, supposedly responsible for a sale of assets to Nigeria that had led to losses for the company.


Was it a note with awful grammar from some General Nigeriano Ubuntu offering you a handsome sum for laundering some huge amount of cash through your account?

This is the Nigerian Third World Corruption scam. Purge it from your e-mail client. A variant is the wealthy but oppressed damsel in distress, for those more responsive to an emotional stimulus, and might be called the Rwandan Woman in Fear for her Life gambit.

During a four-hour closed session held on April 28 in Rio de Janeiro, – the transcript was appended to the Car Wash case file on Tuesday — the «informant», whose name will not be released during continuing investigations, described six cases of alleged criminal misconduct, chief among them the acquisition of  Pasadena, initiated in 2005. The deal, valued at US$ 359 million at the outset, wound up cost US$ 1,2 bilhão, causing Petrobras to suffer a US$ 793 million, according to the federal accounting tribunal (TCU).

[ … translation to come …]

Continue reading


Libra | The Morning After


Source: Jornal O Globo.

BRASÍLIA – This Monday, President Dilma Rousseff said in  prepared remarks for radio and television, that the auction of the Libra field does not entail the privatization of Brazilian oil, as the opposition claims. In the president’s view, the auction “represents a historical landmark in Brazilian history,” and “its success” will be repeated in future auctions of deep water pre-salt fields. The president made a point of saying that Brazil protects its sovereignty, but that it is open to private investments and respects contracts.

— According to the results of the auction, 85% of revenues produced at Campo de Libra will belong to the Brazilian state and to Petrobras. This is a far cry from privatization. The private companies with which we partner will also benefit, because they will realize significant profits from the deal, compatible with the risk assumed and the investments they will make in Brazil,” the president said.

Business journalist Luis Nassif details criticisms of the project, which weathered 24 petitions for an injunction halting the auction. Continue reading

Latifúndio | Counting the Beans

Senator Kátia Abréu: "Miss Deforestation"

Senator Kátia Abréu: “Miss Deforestation”

Source:  Brasil de Fato

At least six of the major foreign and domestic groups in the agribusiness, mining and firearms industries invested  R$ 1.395 million in the 2010 election campaigns of nine of the 17 federal deputies who signed  PLP 227.

The bill weakens protections of indigenous rights to ownership of their traditional territories.

Data from the federal elections tribunal (TSE):  See the complete list of campaign donors to the 17 authors of PLP 227.

Dozens of other companies and multinationals involved in grain, pesticides, meatpacking, mining and construction are well represented among the principal donors of the lawmakers who signed PLP 227. As the Parliamentary Agriculture Front denounces the supposedly corrupt interests of native peoples and environmentalists, without ever naming names, the TSE donation figures indicate who should really be questioned about conflicts of interest. Continue reading

Electricity In the Air | A Hard Charging Government Plan Takes Shape



“It’s reckless to say that there’ll be rationing, but it’s also reckless to say there won’t be,” –Ricardo Correa, Ativa Corretora

Source: Carta Capital.

President Dilma Rousseff has signed the law that extends the concessions of electricity generators and reduced taxes on the sector in order to offer electricity at a reduced cost to the consumer. Under Law 12,783, date January 11, 2013 and published in the Official Diary on January 14, 2013, generation concessions can be renewed one time only, for a period of 30 years, in order to ensure continuity, efficiency and lower prices.

In order to get their concessions renewed, the concession holders must meet the requirements of the federal energy regulator, ANEEL, with respect to rates and quality of service. ANEEL will also oversee the passing on to the end user of investments needed to maintain the quality of service and continuity of operation of the nation’s hydroelectric plants.

Naturally, capital market operators and the government have sparred over the risks and costs of the new regulatory regime.

As Luis Nassif accuses the mainstream media of exaggerating the risk of rationing due to an unusually dry tropical autumn, stock market analysts interviewed by two reporters from O Globo lament the effects of the new policy on the profitability and dividend payout of the affected companies — colorfully described as a «dividend blackout».

The Panic Newsroom

Andre Barrocal of CartaCapital writes:

What President Rousseff could not have imagined is that 2013 would begin with  electricity transformed into a major headache. This happened thanks to the combination of real factors — hydroelectric construction projects behind schedule and very little water in the reservoirs after a dry spell — together with an erroneous reading of the scenario by certain sectors of the mainstream media, who reported that a return to the energy rationing of 2001 was imminent.

Confident that talk of a return to rationing was «ridiculous», Dilma put together a political initiative while on vacation in Bahia — a vacation she decided to interrupt and return to Brasília to supervise directly. Energy regulators and other officials in the area were instructed to offer reassurances to the public and calm the concerns of citizens and the business community. The keystone of this initiative was a press conference held on January 9 with Mining & Energy minister Edison Lobão “There is no risk of an imminent shortfall and I expect there never will be,” he said.

Absolute confidence, however, depend on the summer rains, which were less than generous in late 2012, to the point that reservoirs … were at their lowest level since 2001. ONS, the National Electrical System Operator, which manages the flow of energy throughout Brazil from areas of oversupply to areas of shortfall, was obliged to modify its planning for this eventuality.

Nassif reprises an embarassing moment for Globo and the Folha de S. Paulo, both of which reported that an «emergency» meeting of the technical oversight committee of the E&M ministry had been called. The meeting was routine and went off as scheduled. Globo, Veja, and the FSP were obliged to issue a correction.

Nassif explains:

The electrical energy market is divided into two segments. There are long-term contracts, negotiated between major consumers — including energy distributors — and their suppliers. The other is the so-called spot market, used for short-term transactions.

Incorrect information such as was published by the FSP can cause volatility in the prices fixed by the spot market. It can also cause companies to suspend investments and activate contingency plans.

In this case, the market was not affected because big business and major investors have their own sources of information, and the Internet was effective in defeating the rumor and correctly reporting the MME’s response to reports on the supposedly «extraordinary» nature of the meeting.

As Bloomberg reported recently, this state of affairs is not exactly a zero-sum game.

A dry spell that’s emptying Brazilian hydropower dams is poised to turn Cia. Energetica de Sao Paulo, the second-worst generator stock last year, into one of the industry’s biggest winners.

Cesp, as the utility is known, and other producers that can sell extra electricity in the spot market may be able to profit after prices surged to a record, said JPMorgan Chase & Co. and Banco BTG Pactual SA. Net buyers of energy in the spot market — from billionaire Eike Batista’s MPX Energia SA (MPXE3) to steelmaker Usinas Siderurgicas de Minas Gerais SA — stand to lose the most, analysts said.

Nassif concludes:

Even so, the inaccurate report was used to support the argument that  problems with energy supply were the result of the plan to cut energy bills — a plan that has not even gone into effect yet.

The Corretores


Writing in O Globo today — «A Dividend Blackout», how clever —  João Sorima Neto &  Eliaria Andrade round up reactions from major brokerages to the impending implementation of price controls partially subsidized by tax breaks.

Analysts predict shortfall in energy sector dividends in the face of government actions and the risks of rationing.

Oliveira, of the Magliano brokerage house: The brokerage has sold off electricity companies in its portfolio.

After taking a beating in the stock market since September, when the government announced measures to reduce the cost of energy to the consumer, share prices continue to suffer well into the New Year.  In the first seven Bovespa sessions of 2013, shares in energy sector companies lost R$ 2.5 billion in market value. In 4Q2012, the same companies lost $34.8 billion in market capitalization.

In this case, the specter of energy rationing was behind the stampede.  Paradoxical is the situation of a sector that has always proven attractive to investors because of the dividends it pays.  In the current scenario, however, dividends will likely suffer, say experts in the field.  The energy investor, these experts say, will have to carefully select companies whose revenues are less affected by the policy.

—  Before 2011, the electric companies paid dividends of 10% to 12%, on average. That number now stands at 6% to 7%. And some companies may forgo paying dividends altogether  — according to William Alves, an analyst at XP Investimentos.

Dividends are the percentage of company profits distributed to shareholders.  They represent extra income not dependent on the market price of shares.

The electric companies have always paid healthy dividends because  they generated large amounts of cash and required few investments.

Required few investments of themselves, perhaps. Many have taken a beating from a newly activist crew of regulators in recent years over quality of service.

Even now, as I type this paragraph, we are under fire from torrential rains likely to have a dual effect: It will help swell reservoirs and it might well produce those marvelous serial explosion of electrical transformers to which we have become accustomed over the years.

Energy-sector companies were also considered a low-risk, defensive investment, with stable share prices even during moments of market volatility. This has changed, as we have seen in recent months.  [The sector’s] stock exchange losses are approaching 50%.

The tumble occurred [in September.] when government action threatened the profitability of these companies, explains Júlio Oliveira, a partner at the Magliano Corretora brokerage house.

In order to reduce electrical bills by 20% starting in February, the federal government rescheduled the renovation of concessions expiring in 2017 or earlier, and ordered generators and transmitters to accept 70% of their current income.  With that, companies that adhere to the new plan will see profits decline.  Energy rationing could also reduce sales and impact profits, although the government denies there is any risk of rationing.

—  Bringing thermoelectric plants online [as a back-up measure]  also concerns the shareholders of the distribution companies.  The cost of production of these plants is much higher, and the sector will have higher costs until rates are readjusted, according to Pedro Galdi, a market strategist at SLW.

The entire sector has suffered in the stock market, but even so, market analysts are not recommending a massive sell-off.  They are closely studying the impact of the regulatory changes on each and every company in the sector and have reached certain conclusions. There is consensus that Eletrobras shares are not a good buy option at the moment.  Some expect that the state-owned company will pay no dividends at all.  The recommendation is for investors in Eletrobras to trade their shares in for other stocks.

— Eletrobras was the first company to adhere to the government reform.  This new reality reduces cash generation, which affects the payment of dividends, says William Alves of XP.

Julio Oliveira, of the Magliano brokerage, believe that if Eletrobras does pay dividends, these will be the minimum demanded by law: 25% of net profits.

CTEEP — the São Paulo energy transmission company —  has already paid out 100% of profits in the form of dividends, but it is highly unlikely to do so again, says Beatriz Nantes, an energy specialist at Empiricus Reserach/Investmania.

According to Nantes, CTEEP’s acceptance of the government plan will affect its earnings. Nantes also does not believe that Eletropaulo will offer satisfying dividends.  CTEEP, though not so heavily affected by the government plan, recently concluded its third cycle of rate readjustments, in which the company’s prices are reevaluated.  The price was cut by 9%, on average.

—  Eletropaulo is no longer a reliable payer of dividends, — Nantes says.

Among those energy-sector stock that may still pay attractive dividends are Tractebel, TAESA and AES Tietê, the analyst says. Nantes believes that these companies were not heavily affected by the government-mandated changes.

The XP brokerage house is recommending Taesa and Tractebel.

Tractebel carries very little debt, which enables it to generate more cash.  The concessions held by Taesa, meanwhile, expire in 2030, which reduces the company’s regulatory risk exposure, says Alves.

Magliano Corretora has removed all energy-sector stocks from its portfolio of recommended investments.

— You should not sit on these stocks for four or five years, especially in view of these changes in the industry.  We have a portfolio of dividend-paying shares that, while not as generous as electricity dividends once were, still present a favorable opportunity cost.

Among these are Ambev, Souza Cruz, Sabesp and Vale. Souza Cruz, for example, will pay 100% of its profits as dividends. This is one option to consider while the profitability of the electric sector remains unclear,  Oliveira says.

Beer, cigarettes, sanitation and nickels. Who can live without them?

«A New Regulatory Framework for Mining and Minerals: Why?»


… the existence of regulatory agencies in the Brazilian  administrative structure is itself a very controversial issue. After more than 10 years of  institutional experience, the regulatory system has changed and improved but it is still a  very complex problem to balance autonomy and political control. —Rodrigo Abijaodi Lopes de Vasconcellos

Source: Le Monde Diplomatique |  Brasilianas

I think it is fair to say that the current Brazilian federal government, more so than even its predecessor, the Lula regime, is engaged in a systematic overhaul of regulatory agencies intended to cut red tape while at the same time increasing enforcement powers.

Recent newsflow along these lines includes the electricity sector — ANEEL — the telecoms sector — ANATEL — and the petroleum sector — ANP.

I have been too lazy to do the math, but I have the impression that it would show more federal agencies using expanded and expedited powers to levy more sanctions.

The present article is from the lefty Diplo in Portuguese, but is worth a read nevertheless.

A new regulatory framework for mining and minerals: Why?

by Julianna Malerba and Bruno Milanez
Partial translation: C. Brayton

In the process of  creating new mechanisms to ensure the growth rate of mineral exploration, the federal government, citing the generation of revenues that can be used to reduce poverty and social inequality, is in fact fomenting a policy of expropriation against the interests of social movements in mining territories, a policy that is often authoritarian and violent  .

In 2000, the northern state of Pará was producing some R$ 4 billion in minerals. By December  2011, this figure had grown to R$ 25 billion. In the last decade, countless areas of mineral extraction sprang up in Amazônia. In  Carajás, the growth in iron and manganese was accompanied by the opening of new copper and nickel mines. This permitted Vale, which produced not a single gram of copper in 2000, to triple national production of the mineral. In Juruti, Alcoa began mining bauxite, the raw material of aluminum, contributing to production already underway at its mines in Paragominas and Oriximiná.

This boom in mineral extraction is directly connected to the promotion of extractive industries, which are highly energy-intensive. Albrás, for example, which recently expanded the installed capacity of its plant in Barcarena, consumes the same quantity of electrical energy as the cities of  Belém and Manaus combined, and  1.5% of electricity consumption in  Brasil as a whole. Continue reading

Brazilian Electricity Wars | The R$ 5 Billion Feud


Surprisingly informative:


The history lesson is especially useful, as are the league tables — which may need touching up, however. The Brazilian government has set up a useful informational page on the New Model for the Electricity Sector, passed in 2004. Three of the largest state-owned — as opposed to federally-owned — generation groups are refusing to play ball.

IstoÉ Dinheiro magazine leads with a mocking headline:

Honey, I Shrank CESP

São Paulo electricity concessionaire will lose nearly 80% of its revenues by 2015. Learn how other companies who refused the federal plan to reduce electricity bills are faring.

After a period of intense political gamesmanship, scores of Excel spreadsheets and a sharp decline in their share prices — an estimated R$19.2 billion — Cesp, Cemig e Copel decided last week not to accept the federal goverment’s new rules for the electricity sector.

The three companies represent 60% of the generation capacity in play as part of Dilma Rousseff’s plan to reduce energy prices by 20% in 2013.

The most emblematic of these is Cesp, whose directors are overseen by governor Geraldo Alckmin of the opposition PSDB. In saying no to the proposal, the state-owned CESP will lose 77.8% of its revenues starting in 2015. Based on data from 2011, this implies a loss of R$ 2.3 billion in cash reserves, currently at R$ 3 billion.

[Caption] Alckmin: Govenor prefers to reduce the size of CESP rather than reduce the lighting bill of São Paulo residents.

“CESP will become a minor company,” says Ricardo Corrêa of the Ativa Corretora brokerage firm.

In Minas Gerais and Paranhá, respectively, Cemig and Copel have renewed their transmission concessions but plan to give up a number of generation plants, and so will suffer the same effects in 2015.

The three companies have three PSDB state governments as majority shareholders: the Alckmin government, in São Paulo, along with Antonio Anastasia in Minas Gerais and Beto Richa in Paraná. In turning down the concession renewals, these state-owned firms may make it impossible for Dilma Rousseff to keep her promise to reduce the average energy bill by 20,2% starting in March 2013.

Leaving out Cesp, Cemig and Copel, the guaranteed savings would be just 16.2%, according to data from the ministry of mines and energy.

We will take it, for now, and thank you very much.

The president, however, seems firm in her desire to provide cheaper electricity. “Reducing the price of energy is a decision from which the government will not back down, although it laments the lack of sensitivity on the part of those who fail to recognize the importance of this step for the sustainable growth of our economy,”Dilma told a group of business executives in Brasilia on Wednesday.

To realize its target, the government has a tax gambit up its sleeve, market analysts say.

“All it takes is a reduction of the PIS/Cofins tax on the energy bill,” says Nivalde de Castro, coordinator of the energy studies group at UFRJ.

Amid an exchange of accusations with the federal government, São Paulo says that the CESP decision was entirely technical.

Proof of this, according to state energy secretary José Aníbal, is that another of São Paulo’s state-owned firms, EMAE, accepted the federal government’s conditions and signed the contract. In the case of Cesp, the difference between the indemnity for unamortized investments offered by the feds and the sum judged correct by the state is R$ 5.4 billion.

Márcio Zimmermann, federal executive secretary for mines and energy, says: “We cannot understand the logic that led this company not to renew its concessions.” But CESP accepted lower energy prices, according to Anibal, it would have difficulty honoring existing energy contracts, worth R$130 Mw/h on average. “They suggested we buy this energy on the free market, but the price there is R$ 200 Mw/h,” Anibal said. “I challenge the federal government to show us their calculation. The situation of Cemig and Copel and very different from that of CESP. On Wednesday, Djalma de Morais, CEO of Cemig, took part in an analyst conference call and said that eventual losses, and especially those in the area of transmission, will be compensated with internal adjustments.

“Our plan provides for a 20% reduction of operating expenses in this segment, as a method of controlling costs,” Morais said. The CESP executive announced that the company will maintain its investment plan and, if necessary, will go to court to guarantee the right to renew concessions under the old rules, which apply to 3 of its 21 generation plants.

In the Senate, Aécio Neves (PSDB-MG) gave a speech in which he accused the presidency of “committing a foolish act in tryiing to reduce the price at the cost of bankrupting the sector.”

Currently, generation is responsible for 40% of Cemig revenues. Transmission accounts for another 20%. The rest is accounted for under “other businesses,” which include supplying natural gas to residences and industry.

“In the future, gas may also be used to generate electricity,” says Luiz Fernando Rolla, Cemig COO, who does not rule out the acquisition or construction of new plants.

Copel is already traveling down that path. By year’s end, the Mauá and Cavernoso 2 generating plants, with joint capacity of 380 MW, will begin operations. That is more than the 272 MW in capacity that Copel did not renew. Like Cemig, Copel adhered to the federal program only with respect to its transmission assets. In this case, the company took a hard blow. “Our revenues in this area are down 58%,” the company said in a note to investors.

Though they did not release their spreadsheets, Mines and Energy and ANEEL affirmed that the sums offered are more than sufficient to guarantee the profitability of the generation sector. “We do not understand the logic behind the refusal of these companies to renegotiate and renew,” said Márcio Zimmermann

Eletrobras, controlled by the federal government, adhered in full to the new rules, reasoning that a state-owned firm must take into account not only its balance sheet but is social role as well. Eletrobras intends to compensate for reduced income with cost-control measures.

“We will review our expenses and investments in the short, middle and long term,” said José da Costa, CEO Eletrobras. Investors did not like this news and Eletrobras shares plummeted 50%, costing it R$ 11.6 billion in market cap. Cesp, meanwhile, by not renewing its concessions, has laid to rest a persistent dream of the PSDB: to privatize the company.

“Not viable,” said Aníbal. “Who would want to buy a company with two concessions expiring in the next two and a half years?” The only other asset in the company’s portfolio is a large hydroelectric plant in Porto Primavera, whose concession expires in 2028. If it wants to rebuild its profile, CESP will have to compete in future auctions, a possibility no discarded by the S. Paulo state government.

The Pits? | Brazil’s New Energy Trading Rules

Jornal da Energia has the following report on the terms for the migration of energy pricing to private-sector electricity trading in Brazil.

Decree 455 of the Mining and Energy ministry, which limits energy consumers in the open market to trading in ex-ante contracts — i.e., contracts dated prior to the date of execution — will have a significant effect on Brazil’s two electronic energy trading platforms.

I wonder whether CME Group has an appetite for this market as well? It has an operational agreement with the merged Bovesa-BM&F.

The provisions referred to are, roughly translated,

Starting on November 1, 2012, contracts executed in the context of the Free Electricity Market … must be registered with the CCEE — Chamber of Electrical Energy Trading — in accordance with the rules and regulations thereof and within the following timetable:

I. By June 30, 2013, all contracts will be registered on a monthly basis and the sums contracted for may be altered after the sale contract is registered and the contract amount is verified

II. Starting June 1, 2013, contracts will be registered on a weekly basis and the amounts contracted for may not be adjusted except during the week before the energy contracted for is delivered.

The CCEE is an industry-supported clearing house, it seems — it says it cleared some BRL 1.4 billion in transactions in 1Q12.

Jornal da Energia fills in some additional  back story:

Currently, the Balcão Brasileiro de Comercialização de Energia (BBCE) and the Brix trading platform deal mainly with short-term spot contracts, in which a client seeks an ex-post contract to satisfy a preexisting call.

Brix is an organized OTC market venue bankrolled by Brazilionnaire Eike Batista and the IntercontinentalExchange (NYSE: ICE), among others.

This market gambit, in which energy is contracted for after being consumed and the price is based on the PLD –the «liquidation of differences price» — is often used in the free market and has its own nickname. Traders call this gambit “surfing the PLD.” It may be used to take advantage of lower prices when surprised by a sudden spike in price, given that this short-term indicator takes into account such short-term variables as rainfall.

“They won’t be able to do this any longer because they will now have to enter into the contract before knowing the PLD,” says the president of industry group Conselho da Câmara de Comercialização de Energia Elétrica (CCEE), Luiz Eduardo Barata Ferreira.

But Barata recalls  that  the federal regulatory order will still allow ex-post adjustments on a weekly basis, prior to the beginning of the week in which delivery is made. “This reduces the margin of error,” he said..

On the Brix, which has business mogul Eike Batista as a partner, “spot” contracts make up some 75% of transactions. Brix CEO Marcello Mello, however, says he has no way of calculating the number of ex-post transactions, which will be banned starting in July 2013

Even so, the executive is optimistic about the rule change. “We were already thinking of offering a weekly contract, so this regulatory action actually feeds into our own aspirations … by creating a weekly adjustment. In this sense, the change will be positive. I believe the spot pricing will change from monthly to weekly,” he said. Mello also says that Brix aims to facilitate the execution of contracts that used to be closed over the telephone and required more time and effort. “This weekly adjustment will be harder on those who lack an efficient trading mechanism, such as Brix. It will take four times the work it takes our platform.”

At the BBCE, recently appointed CEO Victor Kodja says that Decree 455 is one of the first challenges he faces in his new position. “This change impacts not only the BBCE but the market as a whole, altering its customary trading methods These are changes we are still digesting.”

BBCE is responsible for more than 80% of the trading volume for spot contracts. “We are studying new products and trading mechanisms, how to make them more flexible, how to help BBCE users [to adapt],” Kodja says. “We, who run the platform, will adapt, and quickly,” he guaranteed.

Meanwhile, both Brix and BBCE are trying to push long-term contracts such as energy futures for an entire year. These sorts of deals should become more frequent as the trading platforms enter their second stage of development, with the creation of bona fide, fully functional energy markets. From here on out, under this model, financial institutions will be able to speculate in energy, which should shake up trading volume in medium and long term contracts.

“We are very confident about this,” says Brix’s Mello, who says he would rather not set a deadlinefor this stage of development. At the BBCE, meanwhile, Kodja has set the goal of completing the changeover sometime in 2012.

In October, Brix introduced two new contracts.

Rio de Janeiro, 25 de Outubro de 2012 – BRIX, the electronic trading platform for electrical energy, is rolling out two new trading mechansims: (1) Conventional Contract + Spread ILBRIX and (2) Premium Swap Indexed to the BRIX liquidation index.

ILBRIX is the arithmetic mean of the BRIX premium conventional contract divided by the PLD as of the final business day of the month and the first two business days of the following month.

Under the PLD + Spread ILBRIX contract  it will be possible to define, in advance, long or short positions based on the average monthly PLD — the weighted PLD published by the CCEE + the average price during the momento of greatest liquidity during the month.

This contract therefore uses a completely “post-fixed” pricing mechanism.

Overall, the ministry of mining and energy appears to support a transition to a mixed-market public-private model … about which more later.