Banks, a Food Wholesaler-Even a Condom Factory: Brazil’s Government Is Big Business

By Paulo Trevisani

President-elect Jair Bolsonaro vows to make significant cuts to Brazil’s bloated, indebted state-and the fate of an array of government-owned companies hangs in the balance.

Brazil’s government is involved in a range of businesses. It owns or has a stake in Latin America’s largest produce and fish wholesaler, a condom factory in the Amazon, banks, real estate agencies, drugmakers, hospitals and a firm created years ago to build a $16 billion bullet train that never became a reality.

In all, the federal government controls 138 companies that employ 505,135 people. Of those firms, 26 depend on taxpayer funds, $5.3 billion last year, dwarfing the $1.9 billion in dividends the government received last year from profitable state firms, according to official figures.

The web of government enterprises is so vast that even after 31 years in politics, current President Michel Temer didn’t know the federal government owned ice-making factories.

“I must confess I had no idea,” he said during a recent news conference. “Why?”

The factories provide ice to cool fish in state-owned markets and ports. After hearing the rationale, Mr. Temer said, “It kind of makes sense, then. But it should be handled by the private sector.”

Investors in Brazil and abroad are watching closely to see if Mr. Bolsonaro will keep his pledge to transform Brazil’s moribund economy and sell off government-owned companies that economists say are a costly burden and a throwback to a statist past.

“Brazil’s history of state meddling in business is rooted in the still-present notion that the government has a strategic duty to take care of certain activities,” said José Carlos Oliveira, an economist in Brasília. “Now the government is broke, and it needs to get rid of things it shouldn’t possess.”
But government ownership is as much a part of Brazil’s culture as samba and soccer. The firms have thrived under right-wing dictators, left-wing democrats and populists of various persuasions.

State and local governments also own many enterprises, sometimes in joint ventures with the federal government. More than 400 companies in Brazil are owned by government in one way or another-more than any country except China-according to the Getúlio Vargas Foundation think tank in São Paulo.
Privatization has always been met with skepticism and protests. In a survey by Ipsos Institute in July, 68% of Brazilians disapproved of privatization, even though polls repeatedly show Brazilians distrust their government.

“I think the government offers terrible services,” said Carla Carvalho, 45, a party organizer in Brasília. “But I fear privatization would end up being a rigged sale lining the pockets of corrupt politicians.”

Mr. Bolsonaro, who will take office in January after winning over voters with his promises to fight corruption and rampant crime, says a large-scale selloff is vital for Brazil, which has suffered through recession and feeble growth since 2014.

“Some state-controlled enterprises will be made extinct, others privatized and only a strategic minority will be preserved,” said the official political platform Mr. Bolsonaro filed as a candidate. “The public sector swelled up in recent years…As a result, it became slow, inefficient and wasteful. We can do more with much less.”

The wave of support for Mr. Bolsonaro in October’s elections also helped elect a number of regional leaders who openly call for selling government-owned enterprises.

A congressman for 27 years, Mr. Bolsonaro had never shown much of a fancy for privatization. He is a former army captain who is nostalgic about the dictatorship he served, which created many of Brazil’s state firms before giving way to democracy in 1985.

Mr. Bolsonaro and his economic team-led by a University of Chicago-trained economist, Paulo Guedes, a champion of open markets-say that Brazil’s debt can be reduced by 20% through privatizations, concessions, the sale of government real estate and other measures. His administration plans to create a special department in the Economy Ministry to focus on privatizations.

Some of the government-owned companies are hugely profitable-among them Petrobras, the giant oil company, formally known as Petróleo Brasileiro SA-and widely considered important to national security. Mr. Bolsonaro hasn’t said which firms are in his sights, though he has said that companies the government considers strategic won’t be sold off.

Analysts say a number of firms weigh heavily on state finances with little to show in return, such as EPL, whose mission once was to build a bullet train from Rio de Janeiro to São Paulo. EPL employs 136 people and costs the government $19 million a year; it is now working on, among other things, designing a traditional national rail system to link the whole country, which Brazil currently lacks.

“EPL has restored the Brazilian state’s capacity to plan its logistic infrastructure, a fundamental need in any country,” the company said in response to questions.

Brazil’s high degree of government involvement in the economy crowds out the private sector, said Samar Maziad, a credit-rating analyst at Moody’s. In the World Economic Forum’s 2018 competitiveness index, Brazil ranked 72nd among 140 nations.

“Brazil needs to privatize to boost competitiveness,” said Ms. Maziad.
Opposition to privatization comes from well-paid public employees and suppliers that charge the government above-market prices, said economist Elena Landau, who worked on a prior privatization wave in the 1990s. Politicians sometimes also try to appoint associates to positions in state companies, despite rules meant to curb the practice.

“Nobody wants to lose their perks,” she said.

Proponents of privatization say state companies have been used by executives to rig bids and engage in other acts of corruption. “These companies have been abused by their controlling shareholder, are heavily influenced by politics and have recurrent corruption scandals,” said Marcio Holland, an economist from the Getúlio Vargas Foundation.

In a country where the government developed oil and agriculture and built a modern capital in the heart of the wilderness, closing down state firms or selling them is politically challenging. Even when the government in the past sold off major assets-such as aircraft maker Embraer SA or mining giant Vale SA -it has kept a minority share with special voting rights.

Advocates for condom-maker Natex, a joint venture between the federal government and the remote Amazonian state of Acre, argue that it is vital in the fight against HIV while providing income for 2,500 rubber tappers whose work in the rain forest offers protection against deforestation.

“Natex is very symbolic,” said Tião Viana, the current governor in Acre, who supported its creation in 2012. “It helps the forest guardians protect the Amazon.”

The government pays Natex about 8 cents for each condom it makes, twice what private suppliers charge. Natex’s 150 factory workers can make up to 100 million condoms annually, and they are handed out free.

Its days as a state-run firm, though, could be numbered.

“The new administration will hand over to the private sector any assets the state isn’t supposed to own,” said Gladson Cameli, Acre’s governor-elect, a Bolsonaro supporter. “Natex is one of them.”