Bringing the Government to Market

There are not that many jobs in the Brazilian public sector that attract high-flying investment bankers at the peak of their careers. But for the first time in years, market-hardened professionals occupy the top echelons of the central bank and the powerful Banco Nacional de Desenvolvimento Economico e Social, known as BNDES.

Francisco Gros quit as Morgan Stanley Dean Witter’s top man in Brazil in March to head BNDES. A month later, he recruited Eleazar de Carvalho Filho, 42, from UBS Warburg where he headed the bank’s Rio de Janeiro office for two years, to run BNDESPar, the bank’s investment arm.

BNDES, which disburses about R$20 billion ($11 billion) annually, is the only source of long-term local currency finance in Brazil. BNDESPar controls an equity portfolio currently worth around $9.4 billion and also helps run the federal government’s privatization program. This means Carvalho is in a position to shape the future of Brazilian industry and financial markets.

 His role is all the more important now as Brasília tries to gets it privatization policy back on track, delayed for more than a year by economic upheaval and political opposition. He says: “the commitment remains absolute. We’ve seen a delay and we certainly want to catch up.”

Eighteen months ago, the real’s devaluation and the government’s confrontation with powerful state governors forced President Fernando Henrique Cardoso to freeze plans to auction off the federal government’s three big hydroelectric generating companies. Now, the downturn in world financial markets has introduced another element of uncertainty. Carvalho says the government has looked at ways that might make the process politically workable and technically sound. “Maybe there is less enthusiasm, given the volatility and there may be higher discount rates, but there are still interested parties,” he says.

A background in corporate finance certainly comes in useful at times like these. Carvalho says that as an investment banker, “you are familiar with selling assets. You know the word flexibility is important. By flexibility I mean we have to implement different alternatives for various assets, [such as] proposals to spin off assets to make them smaller to find more competitive buyers.”

The electric privatizations – assuming they actually take place – will likely be among the last big-ticket asset sales for some time in Brazil. The government is determined to soon sell a 30% stake in Petrobras, the national oil company, for about $4 billion. But privatizing Petrobras or banking group Banco do Brasil, the country’s two biggest businesses, is too costly in political terms for Cardoso to contemplate.

The soft-spoken Carvalho shares a number of traits with other highly successful former investment bankers now populating the upper reaches of the Brazilian public sector. Armínio Fraga, the central bank president and some of his closest advisers, as well as the courtly Gros, combine disarming modesty with a fierce intellect and considerable determination to modernize the country’s financial system and the real economy.

Although the investment banking elite’s grasp on the levers of power looks firm enough, turnover in public service, especially BNDES, is high. The bank has gone through four presidents in 18 months and each change brought wrenching policy shifts. Imposing control on an agency set up nearly 50 years ago and which now has some 20,000 employees is not easy either. Although Gros and Carvalho are shrewd operators – their predecessors were toppled by indiscretions and political misjudgments – their market-oriented approach is not shared unanimously in Brasília, particularly in Congress.

Given this and the fact that Brazil has already privatized huge chunks of the public sector, Carvalho may make more of a mark in redesigning BNDESPar’s investment policies. He describes managing the bank’s minority stakes in dozens of companies and banks as an “option on Brazilian growth.” This means realizing capital gains as he sells stakes in some sectors and plowing these profits into other areas that are growing and need capital.

But how is BNDESPar meant to select investments if Brazil’s capital markets are still so rudimentary? He says “one approach is to invest through [investment] funds to leverage third party funds.” For instance, the bank recently launched a R$1.2 billion energy fund, committing 20% of the capital itself and raising a further 20% from Petros, the Petrobras retirement fund, with the remainder coming from private investors.

Carvalho says that by investing indirectly through funds, BNDESPar can also “develop an active shareholder base and professional asset managers.” By favoring investments in companies that respect shareholder rights, Carvalho wants to buttress government reform of corporate law and capital markets.

A stronger capital market would naturally help BNDESPar to invest and manage its portfolio more efficiently. Carvalho says: “we intend to be in the vanguard in projects in which private sector investors are not present, by investing in convertible securities and the market would be able to take us out as risk declines and positions grow in value.”