17th World Petroleum Congress Petroleum Industry: Excellence and Responsability in Serving Society September 1-5, 2002, Rio

de Janeiro, Brazil Block 4 - Excellence & Responsability in Managing the Petroleum Business with Economic, Environmental and Social Dimensions Forum 24 (F24) - Financing Mechanisms Chair: Mrs. Liz Airey (UK)

Brazilian Pension Funds and the Financing of Domestic Investments in the Oil and Gas Industry in Brazil: the Case of Petros
Eliane Aleixo Lustosa
Chief Financial Officer Fundao Petrobras de Seguridade Social - Petros

Brazilian Pension Funds and the Financing of Domestic Investments in the Oil & Gas Industry in Brazil: the Case of Petros1
Eliane Aleixo Lustosa
Chief Financial Officer Fundao Petrobras de Seguridade Social - Petros

ABSTRACT
This paper aims at discussing the role that brazilian Pension Funds as a whole and Petros in particular have been playing in the financing of upstream and downstream projects in the Oil & Gas industry and also in the energy sector in Brazil from the mid 90s through the early 00s, as a result of broader changes that have been implemented by the brazilian goverment both in the institutional and regulatory framework, as well as in the ownership structure regarding state-owned enterprises (SOEs) and also in the provision of public utilities. The first section of the paper will address the issue of the regulatory changes mentioned above, with a focus on reviewing the main steps that were followed in order to reinstate a favorable economic and legal environment so that investment decisions in strategic sectors could be taken accordingly. As largely known, the fiscal and indebtedness constraints that prevailed in the early 90s continuosly prevented the brazilian state to carry on its historic role as the main player in the financing of large amounts of capital expenditures flows both in manufacturing SOEs (i.e., steelworks, petrochemicals, aeronautics, mining) and economic infraestructure (i.e., highway and railroad transportation, water & sanitation, energy, telecommunications). The Law 8.031 as of March, 1990, which established the brazilian National Privatization Program (PND), followed by the enactment of Law 8.987 in February, 1995 (Concessions Law for the ruling of public services) are deemed to be the regulatory milestones that account mostly for the recovery tracked in the investment figures relative to the aforementioned sectors ever since, now based on a private funding-return rationale. The enactment of Law 9.478 in August, 1997, in as much as it rules on the Oil & Gas monopoly by the brazilian state, as well as sets up a legal framework and also a regulatory agency (ANP) that is incumbent upon the management of new concession contracts in the upstream Oil & Gas industry,
1

Petros is a non-profit private organization, established in 1970 as the pension fund for the employees of Brazils state-owned oil company, Petrobras. It is a multi sponsored Plan and it has 23 sponsors currently (17 are private companies and 6 are state-owned). Petros is the second largest pension fund in Brazil (US$ 6.0 billions in assets) and has more than 90 thousand participants.

adds strongly to the foregoing regulation with a view to the resumption of long depressed strategic capital expenditures. With a basis on this broader picture, brazilian pension funds investment regulation, starting with Resolution 2.720, in April, 2000 up to its present form, the Resolution 2.829, as of March 30, 2001, has consistently changed towards the establishing of a set of asset allocation guidelines, portfolio limits on diversification and dispersion, and risk-return analysis requirements/techniques that would allow the design and implementation of investment policies with a focus on assets other than the traditional mix of fixed-income (government securities and corporate bonds), listed stocks and real estate. As a matter of fact, under the Resolution 2.829 directives, brazilian pension funds were formally entitled to duly invest in the business opportunities that arose from the deregulation, privatization and modernization measures taken by the brazilian Government and the Congress in the past decade. Also, its noteworthy that the enactment of Law 10.303, in October, 2.001, in as much as it alters main provisions of the brazilian Corporate Law (Law 6.404/76), is a true step towards the disclosure and the adoption of best practices of corporate governance by brazilian publicly owned companies, which compares and adds accordingly to the new investment scenario faced by brazilian pension funds. As a result of the above, the second section of this paper will highlight the main financing mechanisms that pension funds can employ in order to take part in the investments allowed by the new regulation: Private Equity and Project Finance. According to Resolution 2.829 both classes of assets must be ranked in the equities portfolio. The third section of this paper will address both the current status of Private Equity and Project Finance investments ascribed to pension funds in Brazil under the 2.829 ruling, with a special focus on Petros achievements regarding Oil & Gas related projects, including the funding of Marlin Oilfield Project and the financing of thermoelectric power plants belonging to the brazilian Thermoelectric Priority Program (PPT) in which Petros partners its sponsor Petrobras by means of a project finance scheme. In the fourth section, relating this paper to the broader theme that guides this Forum, i.e., as far as excellence and responsability in managing is concerned, well highlight some of Petros principles, policies and tools regarding to the best practices required both by the corporate governance and the social responsability of its investments. The discussion will be complemented by the presentation of a couple of cases that exemplify Petros commitment to this subject. Last but not least, the last section of the paper will present the concluding remarks and discuss some regulatory and macroeconomic breakthroughs that should take place so as to enlarge brazilian pension funds role in the financing of investments in the Oil & Gas industry. The authors view on the outlook and the possibilities regarding project financing mechanisms available to pension funds in Brazil in the near future will be addressed as well.

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