The SOE Law is far from perfect but poses a significant advance in governance

The debate about the governance of State-Owned Enterprises (SOE) and mixed-capital companies has picked up in the past few weeks amid the privatization of energy holding Eletrobras and conflicts of interest at Petrobras. However, for Fundação Getúlio Vargas’ Law School Professor Mário Engler Pinto Filho, as things stand, only regulation has the power to curb interferences, mitigate conflicts and even pave the way for privatizations.

A former State Attorney and Chairman of water utility Sabesp, Mr. Engler managed SOEs on several occasions and took part in the drafting of sectoral laws for them in the state of São Paulo. It is also worth mentioning that he drafted the concession model for the fourth line of São Paulo’s subway system.

In an exclusive interview with Viewpoint Amec, he analyzes the current scenario, talking about potential upgrades to the SOE Law, and the need for expanding the role of regulators in essential sectors. Check the main takes below:

Per definition, how complex is it to manage an SOE?

We must understand that an SOE is a “whole new ball game,” quite unlike a private company. Even though it has private shareholders or is listed does not change its state-run trait. The SOE must be efficient, sustainable, and bring profits. At the same time, there has to be some public interest to justify its existence. Without it, you can’t justify the existence of an SOE, and this point should be reviewed from time to time.

Why should we review the public interest justification from time to time?

When you create an SOE, that happens due to a goal that changes over time. The Organisation for Economic Co-operation and Development (OECD) has strongly reinforced this point of view. It makes no sense to keep a company as a state-owned enterprise due to ideological reasons, as it usually happens. There must be an apparent reason why it will remain as a state-owned enterprise, especially since the external regulation tools have progressed so much. It is often clear that the company should become private, like Eletrobras.

What is your view on Eletrobras’ privation? When is the right time to become private?

It should have happened long ago because there is solid regulation and a competitive market in the energy sector. The energy regulator Aneel has built a positive reputation. And the company was facing financial trouble and was vulnerable due to political interference. This privatization seems quite correct. On the other hand, oil maker Petrobras still has some homework to do to reach the same point, especially regarding regulation.

Is there any SOE that has been developing itself positively?

Sabesp, of which I am the current Chairman. It wasn’t regulated until 2007 when Brazil approved a legal sanitation framework, which was recently revamped, and there were important changes to Sabesp. Consumers can’t complain about the company because it is regulated. Managers can’t say “we don’t recognize the public mandate” because regulation took over that. The company’s management has become more transparent and protected from political interference.

How was Sabesp’s transition to becoming a regulated company?

The regulation solved the political influence because regulators began setting the fees instead of controlling shareholders or the management. When a company becomes regulated, considering the regulation is adequate, there is a discretionary review of the criteria every four to five years. And there are some mechanisms of incentive to demand more efficiency from the company.

Which measures could improve Petrobras’ governance?

I believe Petrobras will have to open up to face competition. Many debates regarding prices could be solved by competition. But competition is still quite limited in refining, despite the efforts Petrobras has promoted to try to sell assets to refineries. So, I believe governance is overloaded. The market puts too many hopes on governance which it will not be able to fulfill.

What’s your view on the SOE Law?

The SOE Law represents extraordinary progress. Has it solved everything? No, it has not. But we are far better off with than without it. This law brought clear rules on who can join the company’s management, which actually work in practice. It also brought other advances such as risk management and compliance rules. The law also helped companies move forward regarding transparency. However, I believe this is not really working in practice.

And are there any loopholes that the SOE Law should have solved, but it did not?

It could have gone further in defining how the company’s management interacts with the controlling shareholder. Because even here, we live in a fantasy world. The legislation says that the controlling shareholder cannot communicate with any director of the company to pass on their guidelines. But if this does not happen in a private company, why should it happen in an SOE?

Working with an unrealistic scenario does not seem to me to be the best attitude. The proper thing would be to create institutional channels of dialogue between the administration and the controlling shareholder, and not simply deny the possibility of dialogue. It is better to regulate, provide transparency, and formalize the discussions than to let them occur in an obscure, informal, and non-institutional manner.

How do you see the negotiations to change the SOE Law that are going on in Congress with the government’s support? Can they represent a setback?

As I have said before, the main progress brought by the law were the restrictions on nominations for SOE’s management which keep political agents away from top positions in the government. This worked in time to prevent SOEs from being used by political parties. Any changes in this regard will mean a setback. But I believe the chances of significant changes being approved are lower. Another aspect is that it does not solve the issue of the fuel pricing policy.  The federal government can pick most board members (at Petrobras), being able to perform its role as controlling shareholder. Changing the SOE Law will not impact the pricing policy.