Brazil to cut electricity taxes to boost industrialization

Brazilian President Dilma Rousseff plans to cut and simplify taxes for electricity producers and distributors, two senior officials told Reuters, as part of a strategy to reduce Brazil's high business costs and stimulate its struggling economy. Electricity prices are a big component of the so-called "Brazil cost" - the mix of taxes, high interest rates, labor costs, infrastructure bottlenecks, and other issues that have caused the economy to become less competitive.
After a decade of strong performance, Brazil grew below the Latin American average in 2011 and so far this year. Brazil's average electricity cost of $180 per megawatt hour is exceeded only by Italy and Slovakia, the Getulio Vargas Foundation, a private think-tank, said in a 2011 study based on data from the International Energy Agency.
High electricity rates have contributed to stagnant investment and production in energy-intensive industries. Despite Brazil's bauxite and alumina resources, no new aluminum factories have been built in Brazil since 1985 and two have closed, keeping production levels stagnant, the Getulio Vargas study said. It said electricity accounts for 35 percent - "an insane proportion" - of the industry's production costs.
U.S.-based aluminum producer Alcoa (AA.N) said in April it was considering big production cuts at two of its Brazil factories in part because of high electricity costs.
One of the officials who spoke to Reuters said the situation at Alcoa had added urgency to Rousseff's plan to cut taxes.
All told, taxes account for about half of the cost of electricity in Brazil, studies show. The taxes themselves are roughly evenly split between the federal and state level.
Cutting or simplifying taxes at the federal level will be relatively straightforward for Rousseff. However, she also believes she can push through tax cuts at the state level by using leverage from upcoming debt negotiations. Several states are asking for lower interest rates on debt they owe the federal government. Rousseff will likely ask the states to simplify or cut their taxes on electricity in return, one of the sources said.
The left-leaning president will also ensure that any tax relief is fully passed along to consumers, the officials said. Although the electricity sector is partly privately controlled, Rousseff believes she can use the pricing power of state-run companies to effectively push rates lower if needed, they said. An upcoming renegotiation of concessions in the industry could also be an opportunity to push for lower rates.
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Rousseff's tactics are similar to those she used to cut interest rates in recent months - another pillar of her strategy to reduce the "Brazil cost."
Her government has frozen billions of dollars in spending, allowing the central bank to slash its benchmark interest rate by 3.5 percentage points since August. When some private-sector banks balked at lowering interest rates for consumers, Rousseff and senior officials publicly hectored them for having some of the world's largest spreads. State-run banks then announced lower interest rates for customers, and the private banks soon yielded and followed suit.
Such tactics have caused friction between Rousseff and some members of the business community, especially banking executives, who privately accuse her of trying to bully the private sector.
Yet the officials said Rousseff is using the best tools available to her to restore Brazil's competitiveness. Congress blocked attempts at a comprehensive tax reform by her predecessor, and Rousseff, herself a former energy minister, believes the only politically viable alternative is to move one sector at a time, they said.
"We know the resistance there is in Brazil to tax reform," Rousseff said on Tuesday. "That's why we've resolved now to act, instead of sitting around arguing about whether the reform goes out or not. ... We've decided to act in a very specific manner in some areas."