Brazilian govt proposes funding reform for struggling state firms

The Brazilian government is aiming to make several loss-making state firms profitable via a reform that is causing concern among some analysts regarding its potential fiscal impact.

The government submitted a bill to congress that allows state enterprises that rely on treasury funding to sustain their operations, to generate revenues that would not go back to the public coffers during a transition period.

Besides being able to reinvest their revenues into their business, the loss-making companies would also develop plans to make their operations financially sustainable, set financial goals, and have greater freedom to explore new business opportunities.

“Today, we have some companies that rely [on the treasury] that are unable to sign contracts for selling products and services because the rules prevent them from investing in the necessary inputs and processes to meet these demands that would certainly generate profits for them," said Elisa Leonel, coordination and corporate governance secretary at the ministry of management and public services innovation, in a statement.

According to a government spokesperson consulted by BNamericas, of the 44 companies under direct control of the federal government, 17 depend on funds from the treasury to be able to maintain their operations, including São Francisco and Parnaíba valley development company Codevasf, communications firm EBC, and telecoms company Telebras.

“What we’re proposing is a transition period, in compliance with all the fiscal rules, so companies that currently consume treasury resources can become profitable in a few years,” Leonel said. 

Despite the government's reassurances, some analysts are concerned that it is looking for ways to avoid complying with fiscal rules. The resources currently used by the treasury to fund these companies would no longer be included in the calculation of the federal budget, and there is no guarantee of when or if the companies will become profitable. 

“The government is maneuvering for room in the budget, but these maneuvers are never associated with actual reductions in public spending. This causes a lot of distrust among investors and that is why the prices of assets, shares, and the currency, are always very volatile," Reginaldo Galhardo, manager of local brokerage Treviso Corretora, told BNamericas.

From 2003 to mid-2016, past administrations of the ruling Workers Party (PT) received a lot of criticism for using controversial accounting maneuvers to manage the budget. 

Furthermore, the government’s latest move comes at a time when market participants have cited lack of control over public spending as one of the chief risks for the Brazilian economy.

In 2023 and so far this year, the economy under the administration of President Luiz Inácio Lula da Silva has performed better than expected. However, analysts have warned that the expansion is largely being fueled by social programs and increased public spending, which will increase the country's debt and pose a risk to the economy’s medium-term prospects.