State-Owned Investors are being challenged over their role in buying up assets sold off by Brazil’s Bolsonaro administration amid mounting social and governance concerns and political polarization.

With ESG factors increasingly at the forefront of SOI priorities, political risk in Brazil has heightened in recent years due to the "Lava Jato" corruption investigations that began in 2015. The election of populist Jair Bolsonaro as president in 2018, amid a decline in trust in the Brazilian establishment, has further polarized public opinion and his response to the pandemic has merely added fuel to the fire. SOIs are negotiating privatization deals that are a lightning rod for anti-Bolsonaro sentiment as the country approaches the 2022 presidential election.

This week, the Canadian Union of Public Employees (CUPE) demanded the managers of the Canada Pension Plan (CPP Investments) scrap investment in Brazil’s water privatization program. CPP Investments recently snapped up a 45% stake in Iguá Saneamento, a Brazilian private water and wastewater company, worth US$216 million. The proceeds from the transaction will be used to buy a public water system in Rio de Janeiro in a public auction later this week.

CUPE National President Mark Hancock said, “It’s outrageous that our public pension plan is using workers’ retirement funds to profit from people’s need for clean water and safe sewage treatment. These are human rights that are essential for survival. Access to water services is already fragile and unequal in Brazil. Privatization will make things worse and we want it scrapped.”

The auction is subject to legal challenges by Brazil’s National Federation of Urban Workers (FNU), which won a temporary injunction because the public water utility had not negotiated with the workers about the mass layoffs. The FNU is appealing to Canadians to put pressure on CPP Investments to stop the acquisition. Public pension funds are more sensitive to the opinions of policyholders and the electorate and Canada’s largest PPF is finding itself drawn into a dilemma over its investment.

Mubadala’s purchase of the 333,000bpd Landulpho Alves Refinery (RLAM) in Mataripe for US$1.65 billion has also aroused controversy. Brazilian trade unions have lodged legal challenges over "possible damage to the public interest", arguing that the price was below the market value; they claim it is worth US$3.2-3.8 billion.

Unions also fear job losses and planned refinery sales – of which RLAM is the first of eight – are increasingly a focus of attack by the opposition Workers Party (PT). PT leader ex-president Lula da Silva has warned potential refinery buyers that deals struck by state oil company Petrobras could be revoked if he wins the 2022 presidential election. Petrobras is selling its refineries to address its huge debt levels and enabling it to develop pre-salt oil plays.

Political sensitivities are likely to rise as Brazil progresses towards the 2022 elections with a clear ideological clash between the incumbent President Jair Bolsonaro and his left-wing challenger amid the fall-out of Brazil’s Covid-19 crisis.

Yet, SOIs are seeking to ramp up exposure to Latin America’s biggest market and not every transaction is marked by opposition. Canadian public pension fund Caisse de dépôt et placement du Québec (CDPQ) signed a joint venture deal with Telefónica Brasil and Telefónica Infra – subsidiaries of Spain’s Telefónica – last month to create FiBrasil Infraestrutura e Fibra Ótica, which will develop a fiber-to-the-home network in Brazil. It will launch this project in medium-sized cities outside the state of São Paulo. The deal has been well-received in Brazil as it will contribute towards the development of telecommunications networks and could generate similar fiber deals in other Latin American countries.

The political environment is likely to remain fractious even after the presidential election. Brazil also faces severe structural economic weaknesses: the lower demand for commodity exports; an ageing demographic; endemic corruption and weak domestic security; and the high cost of doing business due to high taxes and infrastructural and regulatory obstacles. As long-term investors, SWFs like Mubadala and the Canadian PPFs could play a significant role in addressing these problems, but there is popular resistance to policies intended to address these structural deficiencies and generate investment.

Related funds CDPQ CPP Mubadala