BRAZIL: Vivendi Moves to Keep Water Company

Vivendi Environnement will today launch last-ditch negotiations to
recover control of a Brazilian water company after a state government
said it would take over management from the French utility.

The showdown with local authorities is indicative of growing
regulatory and financial difficulties that private utilities are
facing years after Brazil's privatisation boom. Investors are closely
watching the federal government's reaction and its policy proposals
for the energy and water sectors as a sign of its commitment to
secure private capital.

The government of the southern state of Parana on Friday said it
would take over management in Sanepar, the local water company, from
a consortium led by Vivendi Water.

The consortium, which includes Brazilian investors, bought a 40 per
cent voting share in 1998 but had control over the company through a
shareholders' agreement.

The Parana governor, who is from the centrist PMDB party, alleges
that the consortium has paid excessive dividends at the cost of
infrastructure investment. Vivendi rejects the claims, saying its
return on investment has been only 3 per cent in dollar terms.
Olivier Orsini, Vivendi's representative, will today seek a new
shareholders' agreement, offering among other things increased
technology transfer. The outcome of talks could affect the company's
future in several other Brazilian projects.

However, the Parana government said it would not backtrack on its
decision, which some analysts consider a political move to gain
popularity. The governor also ordered the state power company to
suspend payments on a R$1.2bn (US$330m, 307m, 209m) contract, under
which it buys energy for as much as US$42 per kilowatt/hour but sells
part of it for only R$4.

Both cases reflect regulatory uncertainty that the federal government
will have to address. "The message is: be careful what you buy in
Brazil," says Wilson Passeto, director of Agua e Cidade, a group
promoting public awareness on water management.

The government of President Luiz Incio Lula da Silva, which took
office on January 1, is walking a fine line between investor
interests and widespread scepticism over private companies managing
public services, often as a monopoly.

Mr Lula da Silva's administration has signalled its opposition to
further privatisation of water companies. "Privatisation has not
resolved the water problems of most of the population," Olvio Dutra,
minister of cities, told Valor, the business daily. It is also
seeking to revise increasing utility rates which have been fuelling
inflation in recent years.

So far the government has respected contracts. "For now the new
government has complied with contractual tariff adjustments. I
realise there's nervousness in the market but I'm not sure it's
entirely warranted," said Ricardo Kobayashi, with Banco Pactual, a
local investment bank.

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