13 Nov, Tuesday
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Prices going down in Brazil? You must be kidding!

Prices going down in Brazil

Brazilian President Dilma Rousseff addressing the nation on television last September to announce cuts in power rates.

THERE has been on ongoing campaign by the federal Brazilian government to cut electricity rates in the country, some of the highest in the world. One has to wonder why electricity is so expensive in a country that produces the majority of it from dams, without the high costs of buying fuel to burn to generate power. Water in the many rivers of Brazil is after all free. The problem is that the regional power generators, who build the huge dams that produce the power, claim that building the dams is very capital intensive and thus have asked and been paid very high rates for their power to help defray their initial investments. But that was 30 years ago, and they still want to be paid those absurd rates for the power they generate. The federal government thinks otherwise.

And so too does Paulo Skaff, the president of the Sāo Paulo Federation of Industries, who has led a long campaign for lower power rates both in Congress and directly to the public through a website called ‘Energia a Preço Justo’ (Power at a Just Price) and appearing in primetime TV ads warning that certain power producers are plotting to stop a cut in power rates. Brazilian President Dilma Rousseff finally signed a provisionary measure in September ordering power rates to be cut in March 2013 by 19% to 38% for industry and 16% for residential consumers. She said the federal government would stop charging two types of taxes on electricity in order to pass on the savings to the public, from an array of taxes that are piled onto the price of electricity.

The federal government also tried to strong-arm regional power producers to sign new supply contracts at sharply reduced rates, in some cases 70% lower than the old ones. Most producers protested that they were still writing down their investments in building new dams, even though most of them are more than 20 years old. To lessen the alleged blow to their bottom line, the federal government is coughing up R$30 billion (around US$15 billion) in compensation to be paid to the regional power producers. Some have accepted, while others in the states of São Paulo, Minas Gerais, Santa Catarina and Paraná have outright refused to sign the new supply contracts. The federal government is now running TV ads with a famous Brazilian soap opera star, claiming that the power rate cuts are coming as announced in 2013.

Over-confidence, you say? Or just propaganda? A bit of both in my opinion.  After The Economist recently told President Rousseff she should fire Finance Minister Guido Mantega after GNP growth figures showed Brazil will barely grow much over 1%in 2012, it seems that the spin masters in Brasilia have been working overtime to assert how healthy the Brazilian economy is. Yet the warning signs that everything is not quite so great are all around for everyone to see. Petrobras, the state-controlled oil giant, has been complaining for months about the money it is losing at the pump because of the government-controlled prices. Brazil has been forced to import large quantities of gasoline this year after the high price of ethanol forced drivers across the country to switch to gasoline. Finally, after months of rumors that gasoline prices would be hiked, the government announced that a hike will take place for sure in early 2013. At R$2.85 a liter, gasoline in Brazil is already some of the most expensive in the world, and that’s mostly due to federal and local taxes on gasoline that reach up to 40% of the final price. I hear no one talking about slashing these taxes in order to make gasoline more affordable, certainly because governments have become addicted to the many taxes they levy across the nation.

To top all of this, O Globo newspaper reported in December that Rio de Janeiro consumers of electricity will actually face HIGHER power bills next year, up to 15% more expensive, because of the current lack of rainfall in some states that has led to low water levels in reservoirs at dams. In turn, this has forced power generators to fire up oil and gas powered power plants, which cost much more to run than dams.

The truth is that Brazilian governments, both state and federal, are addicted to all of the income they generate from the excessive taxes they charge on everything, in part because they need to pay the salaries of all of the government bureaucrats. It is estimated that the federal government uses 50% of its annual budget just to pay the salaries of the nearly 500,000 people who work for it, and the ridiculously generous pensions they get when they retire (100% of their last salary).

Brazilians are mostly rather apathetic about all of this, running up huge debts just to stay afloat in an economy that is overpriced and inefficient. The Brazilian real, which has finally breached the R$2 to a dollar level, is still overvalued and could easily reach R$2.70 to a dollar if the Central Bank would just allow it to do so. I don’t see why leaders in Brasilia cannot see the fact that many Brazilians who can afford it fly to Miami regularly to go on shopping binges ‑‑ snapping up clothes, sneakers, electronics and computers, that are 30 to 40% cheaper than in Brazil – would most likely buy locally if prices were reasonable.  If only they realized that by cutting local taxes and making Brazilian manufacturers more competitive, the country would export more and produce, for example, clothes which were affordable. Then instead of running off to America to shop, Brazilians would start to spend more of their money right here at home. Is that too hard to grasp?