Brazil has a total of 418 state-owned companies, which employ 800 thousand people. Out of these 418, 138 belong to the federal government, and have a total of half a million employees.
In an interview to GloboNews last week, Economy minister Paulo Guedes stated that president Jair Bolsonaro was maturing the idea of privatizing more state-owned companies. According to news portal G1, the inclusion of Empresa Brasileira de Correios e Telégrafos (“Brazilian Mail and Telegraph Company”, ECT) into the privatization program headed by Salim Mattar, Secretary of De-Statization, rekindling the debate on which would be the best path to be taken by the company.
Brazil has a total of 418 state-owned companies, which employ 800 thousand people. The country has more state companies than ten other countries who are members of the Organization for Economic Co-operation and Development – a group made up of developed economies. Out of these 418, 138 belong to the federal government, and have a total of half a million employees.
State-owned companies inherently operate without having to cater to the system of profit and losses, lacking an adequate system of incentives which stimulates productivity. Therefore, between 2012 and 2016 they had revenues of R$ 89 billion but their expenses were R$ 122 billion; which means they had a loss of around R$ 33 billion, which was paid by money from the National Treasury.
Correios stands out as one of the worst among all state-owned companies. We have selected four reasons to prove why the government should privatize the company as quickly as possible.
1 Corruption scandals
Correios was in the center of several corruption scandals during the last decade and a half. The Mensalão scandal itself was discovered through the company, after a video which showed a former Correios employee negotiating bribery with a businessman, and mention the go-ahead he had received from then-federal congressman Roberto Jefferson. It was the beginning of a process that resulted in the creation of a Parliamentary Committee of Investigation (CPI) to investigate the accusations, and the later discovery of a scheme in which the Workers’ Party (PT) was buying support in Congress.
Another case happened during the 2014 elections, when Correios handed out campaign material for Dilma Rousseff without any declaration of costs. Over 4.8 million pamphlets for the PT candidate were distributed in the Greater São Paulo area, as well as other cities in the state.
Operation Mailing List, which began in 2016, detected a R$ 647 million fraud in a scheme involving the clandestine shipment of goods. The structure of Correios was used to embezzle funds for other similar service provider companies.
Another, more recent, scandal, happened in the Correios Pension Fund, Postalis, which registered a R$ 7 billion loss. Most of this was caused by fraudulent and negligent investments in complete disagreement with the fund’s own internal investment policy. The orientation of these investments was political and ideological, with contributions made to liquidated banks, companies from Eike Batista’s EBX group, and even in public bonds from Argentina and Venezuela. The cases are countless.
In the opinion of attorney Carlos Henrique Barbosa, who holds a master’s degree in Corruption and Governance from the University of Sussex, so many scandals make it even more difficult to sell the company.
The Anticorruption Law caused possible investors to take into consideration the possibility of corruption within the company, because the legal entity that is being acquired will be held accountable in case of later discoveries of corruption schemes, regardless of whether these schemes happened before the sale of the state-owned company.
This means that, in an eventual sale, the value tends to be less than it would be expected – and there is even the possibility of no buyers showing any interest in face of the risks caused by a complete lack of a minimum compliance system in a state-owned company such as Correios.
“The passive – the fear of buying Correios – is huge: due to so many scandals in which the company is involved, no serious investor will be interested in buying it,” warns Barbosa.
The political influence in Correios is extremely high. A survey made by Exame magazine in 2016 has shown that all 25 positions in the company’s board of directors were held at the time by political appointees. All eight vice-presidencies were occupied by people appointed by PDT, PSD, PTB and MDB, in that which was considered to be “the most politicized of all state-owned companies”.
The then-president of the company, Guilherme Campos (PSD), acknowledged that, in order to put an end to the company’s politicization, it would be necessary to privatize it. Michel Temer’s government considered selling the company, but did not move forward with the idea. Besides, the company has around 700 positions destined for union members, who are lobbying for the maintenance of the company’s state-owned status.
Barbosa says that there are political obstacles to de-politicize Correios: “Since there are many people who exert their influence on the company, it is very difficult for politicians to waive this sphere of influence. All parties, or at least most of the major ones, dominate the company, and their support is needed to approve its privatization.”
He also claims that the privatization could be the first step to reduce political interference, but that it is essential for the mail market to be opened, so that there’s no chance of a private monopoly.
In order to improve management and reduce political interference in state-owned companies, in 2016 the so-called State-Owned Companies Law was created, establishing specific rules for the appointment of directors, board members, and a strict program of rules of conduct. Barbosa praises this piece of legislation, but warns about the necessary period of time for it to show any positive effects:
“The State-Owned Companies Law made it evident the need for management, separating it from public policies: for a long time, there was the discourse that these state-owned companies existed to implement a series of public policies, and not to provide good services and be profitable. After the approval of this law, whose message is that business management is necessary, as well as the hiring of people with technical skills, state-owned companies ceased to be seen as instigators of public policies, and began to be seen as a profit-seeking object, which is the function of any business activity. In this sense, therefore, there was a de-politicization. The rigorous application of the legislation may help to clean up the company. However, the applicability of any compliance regime takes times, an average of at least two cycles.”
Among the common justifications made by those who oppose the breaking of the company’s monopoly, is that some areas which are more isolated and has less demand would not entice the interest of the private sector, and maintaining the providing of the postal service under control of the public administration would be strategic.
However, from the point of view of the universalization of the service – which should be the goal – the granting of the monopoly to Correios may have an entirely opposite effect: it restricts this universalization by suffocating any form of competition.
Fundação Getúlio Vargas’ Gesner Oliveira calculates that the lack of competition against Correios costs R$ 766 million per year to the consumers: this is the opportunity cost of the legal monopoly, which has been in effect since 1978 in Brazil. It establishes the exclusivity throughout the national territory by the federal government in the receiving, transportation, delivery, and expedition of letters.
The practical results and the crisis faced by the company raised questions regarding its business model. As well as frequent strikes with demands for wage raises, delays and losses of items are commonplace. In only six years, the number of financial compensations by the state-owned company for delays, losses of items and thefts increased by 1,054 percent, incurring in a loss of R$ 201.7 million only in the loss of goods in 2016.
On average, in every seven minutes one package is stolen from Correios’ vehicles or employees in the state of Rio de Janeiro. From January to October 2017, 62,577 such cases were registered in that state.
All this costs a lot, not only to the federal government, but also to consumers, and most of them are companies who depend on Correios to deliver or receive their products.
Economist Elena Landau, known for coordinating the privatization program during Fernando Henrique Cardoso’s government, has expressed her concern in case of the establishment of a private monopoly: “We cannot abandon a state monopoly to create a private one, since both of them are harmful. The process of the sale of a state-owned company creates the possibility of redesigning the company’s operation: as well as privatizing, we must ensure competition.
She also draws attention to the fact that the popular pressure is bigger when those who are providing a service are the public authorities: “When the service is provided by the state, there is a bigger complacency from the people, as if there was no problem in providing a bad service. Perhaps that is due to the patrimonialist culture of the Brazilians. But when this service is shifted to the private sector, there is a bigger level of exigency, as well as competition, since newer and bigger channels for the complaint of customers appear, as it happened in the telecommunications sector.”
Between 2012 and 2016 the state-owned company registered R$ 4.4 billion. From 2000 to 2016 Correios were able to close their annual accounts with profits in only five opportunities. This happened even considering that part of the service portfolio provided by the company has a legal monopoly.
In view of the dramatic situation of the company, several measures were taken, such as the shutting down of more than 500 offices throughout the country, among the more than 6 thousand currently in activity. There was also the sacking of 5 thousand employees, among the more than 100 thousand people employed by the company. It should be pointed out that Correios is the company with the largest number of employees in the country.
Due to the losses accumulated by the company, a new tax on international deliveries was stipulated, equivalent to R$ 15. This amount must be paid regardless of the weight, size, or any other aspects of the good or letter being sent, and is charged on all deliveries. It is estimated that, with this measure, the state-owned company will gain more than R$ 90 million per month, since it received between 100 and 300 thousand international deliveries per day – which amounts to over one billion reais per year. After this new tax, the Rio de Janeiro Consumer Protection Office (PROCON) has opened an investigation for a possible abuse from the public company.
There are no justifications for such an arbitrary attitude, except for the fact that Correios are able to implement this measure. And such actions will continue to happen as long as many Brazilians refuse to support the privatization of Correios, as well as the complete de-statization and opening of this market.
Landau contests the claims of those who defend the company should not be sold, since it registered a profit in 2017. “We must look at the long term. With labor liabilities and holes in the pension funds, as well as the need to reinvent oneself in order to compete in the modern world, and in areas in which there is no legal monopoly, the operation of Correios tends to become unmanageable.”
4 The worldwide tendency is the breaking of monopolies
Despite criticisms made to the privatization of Correios being due to an alleged inability of the private sector of acting in areas with a low financial return, that difficulty did not prevent 56 countries which are members of the Universal Postal Union – made up of 192 countries – from breaking the monopoly which still exists in Brazil. Out of these 192 countries, 18 have a mixed-capital state-owned company or a fully private market.
In some European countries, a fund was created to compensate losses in less rentable regions. Another solution would be a gradual opening of the market, slowly attracting competition.
One such example was that of the German postal service, privatized in 1995. It reinvented itself through the provision of other services, such as financial ones, partnerships, convenience stores, and so forth. In 2002, Deutsche Post acquired DHL and now acts in around 200 countries. The monopoly of the sending of letters of up to 50 grams, the only one that remained, was ended in 2007.
The state-owned company of the sector in Portugal, Correios, Telégrafos e Telefones (CTT), was also privatized in 2014.
The intention in both these cases was to seek for more cash generation and maximizing the efficiency of the service provision. In other words: the privatization of the sector seeks to improve the quality of services and avoiding excessive prices. It is a process that should begin to be observed and sought after in Brazil.
Privatizations face internal resistance
In an interview with Veja magazine, Salim Mattar claimed to be frustrated with the internal resistance faced by members of the government regarding privatizations.
Science and Technology minister Marcos Pontes, for instance, is one of the voices against privatization: he doesn’t want to sale any of the companies under his influence. Among them is Correios, in which he defends caution.
“It is an important decision, which affects tens of thousands of families, and needs to be done in a responsible and logical way, with no hurry,” he told Estadão.
Vice-president Hamilton Mourão also expressed his opposition to the idea of privatizing the company: “not for now”, he answered, when questioned about it in an event celebrating the 365 years of the company.