Foreign investors in Brazil were rethinking their positions Tuesday after the country's constitutional assembly approved a series of restrictive measures in sectors ranging from mining and petroleum exploration to general manufacturing.
Nationalistic sentiments predominated as the assembly failed Sunday and Monday to knock down provisions banning risk contract drilling for petroleum and limiting mining to companies that are majority owned by Brazilian residents or by the government.With even more sweeping potential impact in all sectors, delegates also approved a clause distinguishing between Brazilian companies, which are foreign owned but registered and operated under Brazilian law, and Brazilian companies of domestic capital, which are owned by Brazilian residents.
Companies based on domestic capital are to be given preferential treatment in government purchases, contracts and investments.
We had no champion, and the delegates were paying more attention to more popular issues with the voters, said Christopher Lund, president of the American Chamber of Commerce for Brazil in Sao Paulo, referring to the setback for the foreign investment climate despite a belated public relations campaign mounted by multinational investors.
Now we'll have to hunker down and live with it, Mr. Lund told The Journal of Commerce.
In reserving mining activities for majority-owned Brazilian companies, the new constitution gives foreign capital companies five years to take on local majority partners.
Foreign-owned companies also will be allowed to continue established mining activities if they vertically integrate their operations, moving into local processing of the resultant ores.
Critics warned that the provisions hoist a red flag for new foreign
investments, which account for 51 percent of mining investments in Brazil, and increase the dependence of a country that already imports 52 percent of its minerals needs other than petroleum.
In banning further exploration contracts between foreign oil companies and state oil company Petrobras, the assembly is closing the door on what has already become a less attractive investment area.
During the past 13 years, Petrobras signed 243 contracts for petroleum exploration with 43 different companies, 32 of them foreign. Subsequent drilling represented $1.7 billion worth of investments and a significant addition to the state oil monopoly's geological references.
However, only two companies - one international and one Brazilian - had any luck in their explorations, explaining the growing lack of interest among potential investors.
Today, only four companies, holding 42 contracts, maintain wildcatting accords with Petrobras.
An area under examination by Texaco, in the Marajo basin of northern Brazil, is considered the most promising. President Jose Sarney recently announced the discovery of a giant oil pool there, when what had actually been found were mere indications of petroleum.
Outstanding contracts will be maintained, companies indicated. However, the constitution also places in doubt the commercial value of some of them.
Wildcat drilling by Pecten, a subsidiary of Shell, disclosed commercial deposits of natural gas in the Santos basin near the Port of Santos.
However, the constitution will reserve to the state oil monopoly, Petrobras, the right to develop petroleum and natural gas deposits.