Regulatory Environment for Business in Brazil
In a country like Brazil where protectionism still has deep roots, some industries - specially infrastructure services - have strong state controlled companies dominating the national market, like Petrobras. In an attempt to increase the investment and improve the services level in these sectors the Brazilian government opened them to private investors, a measure that demanded regulatory tools. In this article, we will have an overview of the Regulatory Environment for Business in Brazil.
The transfer from the state to private companies in the operation of infrastructure has required the development of new regulatory frameworks. The government does it in order to secure the necessary investments, improve the well-being of the users and ensure positive results for the overall economy.
The profitability of infrastructure investments are normally lower than investments in other industries. Due to the overall impact of infrastructure to the domestic economy, the government wants to regulate service costs and quality as well as investment ratio.
Generally speaking, regulatory actions, such as price setting, occur in order to:
- Aim for economic efficiency, ensuring the service at the lowest cost for the user
- Prevent the abuse of monopoly power
Overview
Business activities in Brazil are generally only regulated for compliancy and, for most areas, anybody meeting the compliancy regulations of their business activity can freely operate their business in Brazil.
The most common tool that the Brazilian government regulate markets with is through public tenders, where the government sets the conditions under which it wants a service or merchandise to be provided. The government uses pre-defined parameters in order to decide to which private - national or foreign - company it will concede the “controlled monopoly” of the sector.
Apart from the public tender cases, street vendors and hunters require specific licenses that can only be obtained under very specific conditions. Hunting is forbidden in Brazil, except for cases of biological control where a certain species needs to have its numbers lowered. Street vendors need to have a specific license, that is only granted by the municipality after a thorough study of where the street vendor will work. The municipality also limits the number of street vendors in each city.
Price Setting
The price setting, as in regulation of rates for infrastructure services, is an important regulatory mechanism aiming for a more efficient operation of the market. Normally this is done based upon a concession contract between the government and the service provider but in some cases entire product categories or industries are subject to price regulation.
It is through these concession contracts that the National Regulatory Agencies entitle private entities to operate public infrastructure services.
Regulatory Agencies
These agencies aim to monitor the delivery of public services performed by private companies. Furthermore, they control the quality in service delivery and establish rules for the sector. There are currently ten regulatory agencies in Brazil:
- ANATEL (National Agency for Telecommunications) inaugurated in 1997.
- ANEEL (National Agency for Electric Power) inaugurated in 1996.
- ANP (National Agency for Petroleum, Natural Gas and Biofuels) inaugurated in 1998.
- ANVISA (National Agency for Health Surveillance) inaugurated in 1999.
- ANS (National Agency for Supplementary Health) inaugurated in 2000.
- ANA (National Agency for Water) inaugurated in 2000.
- ANTAQ (National Agency for Waterway Transportation) inaugurated in 2001.
- ANTT (National Agency for Terrestrial Transportation) inaugurated in 2001.
- ANCINE (National Agency for Cinema) inaugurated in 2001.
- ANAC (National Agency for Civil Aviation) inaugurated in 2006.
Note that although cinema does not provide an infrastructure service, there is a Regulatory Agency for Cinema. This is explained due to the low profitability and popularity of movies made by the Brazilian Film Industry in the beginning of the 1990s.
Sectors and Product Categories Subjected to Price Regulation
There are three different ways through which the government set prices for a specific merchandise:
- Setting a maximum price
- Setting a minimum price
- Setting a range of price
Areas subject to maximum sales prices regulation:
- Medicines
- Health Insurance Plans
- Interest rates
- Gasoline and Diesel
Areas subject to minimum sales prices regulation:
Areas with defined ranges price ranges:
- Notary office fees
- Public Transportation
- Telecommunications
- Electric Power
- Water
Ownership
In order to preserve the domestic economy, Brazilian law provides restrictions for foreign companies' participation.
One example of how the government works to protect the national economy is the reduction and limitation of products and services provided by foreign companies to the internal market. Another example is the percentage of equities that a foreigner can own in a company.
Economy sectors totally forbidden
The health care sector is protected to ensure the internal investments in researches and job generation. It is important to note that the Brazilian law grants some exceptions.
Security services are completely forbidden for any foreign company for ethical and patriotic reasons.
Economy sectors partially forbidden
Cable television can be operated by foreign companies if more than 51% of the total amount of equities are handled by locals.
Road Transportation can be provided by foreign companies, but foreigners can own only 20% of equities of the company. That measure is important to privilege the internal job generation.
Fishing is an exception that theoretically should be exclusive for Brazilians or naturalized citizens, but by filing some requirements foreigners can practice some fishing activities in the country.
Economy sectors not forbidden
Telecommunication licenses can be provided for foreign companies according to their technological and financial potential. The government issues regularly price setting policies to regulate this market.
Rural properties can be owned by foreign companies. The only exception is that the properties can not be bigger than one quarter of the municipality territory.
Interpretation and loopholes
Although Brazilian law provides clear restrictions, there is always room for interpretation and clever lawyers tend to find loopholes. One example of such a loophole is the English / Danish security company G4S, which acquired a major Brazilian security service company in 2010. This was possible only because the acquired company was established before the regulation forbidding foreign companies from acting in the security services sector.