Government proposal to privatize Petrobras looks like a ‘donation’ to private partners, says economics legal body

The Ministry of Economy’s legal advisors issued a stern warning to the government after analyzing Petrobras’ privatization proposal and stated, in an opinion obtained by the Sheetthat the model discussed so far resembles a “donation” to the company’s private partners.

The PGFN (National Treasury Attorney General’s Office) listed a series of risks and stressed that the proposal’s progress could leave the government exposed to legal questions, including for “possible damage to the treasury”, given the disregard for any possibility of financial gain for the Union.

The plans for the privatization of Petrobras were announced by Minister Adolfo Sachsida (Mines and Energy) on the day of his inauguration, on May 11, as a response to the successive increases in fuels practiced at that time by the company. Minister Paulo Guedes (Economy) is also enthusiastic about the operation.

The bill has not yet been sent to the National Congress, but it has been debated in the ministries’ internal bodies. Although the measure was left out of President Jair Bolsonaro’s (PL) government plan in the event of reelection, Guedes’ interlocutors say that the project “is more alive than ever”.

as showed the Sheet in June, the model being analyzed by the technicians provides for the conversion of the company’s preferred shares (prioritized in the distribution of dividends, but without voting rights) into common shares (with voting rights at the shareholders’ meeting).

This transaction alone would be enough to dilute the Union’s stake in the company. With that, Petrobras would no longer be a state-owned company.

In their demonstrations, the technical bodies of the Ministry of Economy did not oppose privatization on the merits, but questioned the format and warned of the risks.

The National Treasury Secretariat, for example, pointed out that the absence of studies on alternative models can generate legal questions and also on the part of control bodies, such as the TCU (Union Court of Auditors).

According to the technicians, if the Brazilian government chose to sell the shares it holds today, this could “generate significant revenue for the Union, which does not occur in a share conversion process”.

The PGFN added to the warnings and said that the Petrobras privatization project prepared by the ministries “lacks more in-depth data to demonstrate the financial relevance of the measure”.

“The Union will be, unequivocally, renouncing its current shareholding control over Petrobras (which would no longer be a federal mixed capital company), without receiving any value or financial compensation as an immediate consideration for this loss of control”, said the legal body. , in an opinion of 29 June.

“As a matter of fact, it is envisaged that the proposal for privatization of Petrobras, established in article 1 [do projeto analisado]implies the alienation of state control through a legal act that actually amounts to a non-onerous donation, insofar as the Union will transfer, free of charge, its current permanent share control to its current private partners in the company “, he added.

In addition to the potential damage to the Union, the body also indicated that the conversion of shares could have a “material negative financial impact” on Petrobras, since the company’s current shareholders who disagree with the operation will be able to exercise their right of withdrawal. In this case, the law requires the company to reimburse them.

In PGFN’s assessment, privatization through the conversion of shares will take place “for the exclusive benefit of the company’s current minority shareholders”, leaving doubts as to its reasonableness.

Sought, the Ministry of Mines and Energy directed the questions to the Ministry of Economy, which preferred not to comment.

Privately, government sources say that the share conversion model was prioritized in the discussions given the perception that it would be the fastest way to ensure the privatization of the company.

The economic team wanted to advance as much as possible, even if it is the last year of Bolsonaro’s current term. The president is seeking re-election but is in second place in polls, behind former president Luiz Inácio Lula da Silva (PT) — who is against any attempt to privatize Petrobras.

The government’s haste was frowned upon by the PGFN, for whom the absence of studies that support the chosen format exposes a “legal vulnerability of the proposal”.

Technicians in favor of privatization seek to minimize the questions and claim that, with more time, the government will be able to debate the convenience of adopting other privatization models, such as selling shares or capitalization – as was done in the case of Eletrobras. These sources, however, consider that it is feasible to proceed with the stock conversion plan.

Minister Paulo Guedes intends to use the resources from privatization to supply a fund to fight poverty. However, the position of Organs technical bodies demonstrates that this money may not even enter the Union’s coffers.

Guedes has also argued that the proposed share conversion could place Petrobras on the Novo Mercado, a segment of the B3 that brings together companies that adhere to the highest standard of governance. This justification was even used by the Special Secretariat for Privatization, Divestment and Markets to submit the project to technical analysis.

But this point is also criticized by the PGFN, which sees “precariousness in the motivation of an act as relevant as the privatization of the largest Brazilian state-owned company”. The agency also states that there is no guarantee that the company will receive the seal of good governance after the operation, as this depends on other factors.

In its technical opinion, the Attorney’s Office also listed other problems in the Petrobras privatization project. In addition to the absence of financial compensation, the conversion of shares would be an “absolutely innovative” model, never before foreseen in the PND (National Privatization Program).

The agency also said it was not aware of “any corporate precedent whereby the conversion of shares has resulted in the loss of controlling interest in a company, let alone a privatization”.

“The proposal […] reveals itself to be unusual in society, not complying with the current normative standards, neither of private corporate legislation, nor of public legislation, which leaves it more exposed to criticism and judicial questioning”, says the document.

The Attorney’s Office also pointed out the government’s inconsistency in trying to move forward with the project soon, since the PPI (Investment Partnerships Program) Council recommended, in early June, Petrobras qualifying for the program precisely to carry out studies for its privatization –including suggesting the creation of an inter-ministerial committee.

Another criticism of the body is the fact that the conversion of shares is an operation conducted by the company itself, unlike what happens in other privatization processes, commanded by the government through the PPI and, in many cases, with the assistance and expertise of the BNDES ( National Bank for Economic and Social Development).

“Considering, then, everything that has been explained so far, the judicial questioning of this proposal becomes feasible, whether for possible damage to the treasury, to be determined, including, based on legitimacy and economy, or for possible violation of implicit constitutional principles of the supremacy and unavailability of the public interest and of reasonableness/proportionality”, said the PGFN.