BR Distribuidora: A small step for Petrobras, a great leap for Brazil

On December 14, the giant state-run Petrobras’ fuel distribution unit BR Distribuidora launched its IPO. The company that owns renowned BR fuel stations is now trading on the Brazilian stock exchange. The decision to IPO this company responds to a strategic plan carried out by Petrobras aiming to reduce its debt through the sale of its assets (or certain assets) and go back to being a company with focus.

The direction Petrobras is taking with its new administration led by Pedro Parente, is without a doubt encouraging, with net debt decreasing almost 6 times its Ebitda in 2015 to 3.6 currently and 2.5 expected for the upcoming year. What is even more significant than this clear improvement in its debt ratio, which definitively distances it from the danger zone of the past couple of years, is the role controllers are defining for the company. In this instance, the Brazilian state (controller of Petrobras) has given the administration a mandate similar to that of any private company globally: to maximize shareholder value. Gone are the days (not too many quarters ago) when Petrobras was a company with multiple purposes: from controlling inflation to promoting economic development in certain areas of the country. This was generated through the manipulation of fuel prices, a situation involving a loss of 20 billion reais in 2013 for Petrobras. The Abreu refinery is a prime example of how the company was used to promote investments, particularly in the northeast region (a bastion of the PT political party), through the construction of large-scale works that ended up costing well over the original budget (as much as 7 times over!).

To some extent, the change Petrobras is currently undergoing is a reflection of the role of the State in the country’s economy. Thus, this profound strategic change in Brazil’s leading company is easily extrapolated to other public companies. Similarly, what may happen with troubled Eletrobras and everything related to private concessions, will undoubtedly provide a boost to ailing investment and economic growth in general.

Ultimately, examples like that of BR Distribuidora’s IPO are a clear indication of the kind of macroeconomic reforms the current Brazilian government is implementing. While a fair amount of headlines from foreign media outlets focus on the macro, such as controlling inflation or reforming the pension system, there are a series of micro reforms that have an even greater impact on the economy at the aggregate level (without disregarding the importance of the former). That is why the current government is set to exceed the previous period of major economic reforms. Just over 20 years ago, the government of Itamar Franco undertook a reform agenda of a similar scope, which managed to put an end to hyperinflation and restore order to fiscal accounts with the Real Plan. Today, Brazil is following a similar path and could go down in history as the moment that formed the basis for a country that definitely returns to growth and development.