Health sector faces structural changes amid rising costs

Regulatory, demographic, economic shifts trigger transformations in a market worth over R$300bn

06/21/2024

Fernando Torelly — Foto: Silvia Zamboni/Valor

Fernando Torelly — Foto: Silvia Zamboni/Valor

Since the pandemic, the health sector has undergone significant changes involving regulatory, demographic, and economic-financial issues, leading to structural transformations in a more than R$300 billion market. These changes are directly related to the soaring cost of healthcare, which reached R$239 billion last year considering only medical expenses paid via health plans.

From 2019 to 2023, the accumulated average adjustment of corporate health plans, which represent 70% of the sector, reached 68.72%—more than double the official inflation index for the period. The cost of healthcare is rising faster than the client’s ability to pay, putting the sustainability of this market at risk.

In this context, two noticeable changes are occurring in the sector: the depreciation of health plans, with a reduced offer of services such as reimbursements, services networks, and coverage scope; and a new wave of consolidation, now involving large groups.

With escalating costs and difficulties in passing prices on to consumers, hospital groups and health plan operators, historically on opposite sides, are now merging assets. In this market, when a hospital’s revenue rises, the health plan loses because it has a higher bill to pay. Ultimately, the patient may receive inadequate medical care and face steep price increases.

“Previously, there was a lot of fat in the sector, and costs were passed on to the client, but that’s no longer possible. Operators are now pressuring large hospital groups as well, which didn’t happen before,” said Vinicius Figueiredo, an analyst at Itaú BBA.

Dasa and Amil have merged their hospitals, and Rede D’Or and Bradesco Seguros have created a hospital company. The insurer also has partnerships with Mater Dei and Albert Einstein, BP, and Fleury, and is a shareholder of Grupo Santa in Brasília. Porto Saúde and Unimed Nacional have joined forces with Oncoclínicas to build specialized cancer hospitals. Medical cooperatives are also merging. “Now, we will see operations involving large groups, followed by smaller deals,” said Osías Brito of BR Finance.

“This movement was triggered by Rede D’Or’s acquisition of SulAmérica in 2022. At the time, there were questions about the sector’s future, and Rede D’Or provided an answer by creating a hospital company with Bradesco,” said Fernando Kunzel, co-founder of JGP Financial Advisory, the advisory arm of investment manager JGP. Also in 2022, Hapvida and NotreDame Intermédica announced a merger to create a vertically integrated operator with a national presence and potential to capture the clientele of insurers. This phenomenon has been occurring for about a year.

“Companies’ health plan expenses average 14%, potentially reaching 20%, of payroll. Maintaining an adjustment at the current level could lead to companies canceling the benefit. There is a risk that only those who need and use the health plan the most will remain in the system. However, without risk dilution, the cost will be even higher,” said Luis Fernando Joaquim, a partner at Deloitte.

The increase in healthcare prices is a global phenomenon due to an aging population, the emergence of new treatments and drugs, and long COVID cases. In Brazil, legislative changes have further intensified the rise.

“There was a failure to understand the impacts of COVID on the sector. Immediately after, in 2021 and 2022, regulatory changes allowed the inclusion of mandatory medical procedures by health plans, unlimited therapy sessions for autism spectrum disorder (ASD), and a national minimum wage for nursing. Additionally, several mergers and acquisitions were completed. In short, there were many movements in a short period, and the sector is still in the adjustment phase,” said Flávia Pareto Conrado, partner and founder of Setter Investimentos, a consultancy and adviser.

“The impacts of therapies for ASD patients are being measured now. It’s complicated to price a product with an unlimited number of therapies,” said actuary Luiz Feitoza, a partner at the consultancy Arquitetos da Saúde.

Those who have not closed a partnership agreement are forming commercial alliances. HCor, for example, conditioned the start of new unit construction on pre-approval from health plans to guarantee revenue. “The future lies in large clusters. Today, it’s necessary to form partnerships or strategic acquisitions,” said Fernando Torelly, CEO of HCor, noting that with the crisis, operators are avoiding licensing more hospitals.

Antonio Britto, president of Anahp, a hospital association, believes vertically integrated units, networks, and independent hospitals with strong reputations can coexist. Mr. Britto said that despite the improvement in operators’ results in the last quarter of 2023 and the first three months of 2024, pressure on hospitals remains.

Abramge, the health plan association, said that the recovery is partial and that more than a third of operators still report negative results.

*Por Beth Koike — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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After government measures, steel companies revise projections

Estimates for steel imports shift to a 7% decrease from a 20% increase

06/20/2024

Jefferson De Paula — Foto: Nilani Goettems/Valor

Jefferson De Paula — Foto: Nilani Goettems/Valor

The federal government’s decision to establish quotas for the import of 11 types of steel products, with a 25% tariff on surplus volume, is expected to bring moderate improvements to the Brazilian steel industry in the second half of the year, according to the Brazil Steel Institute (Aço Brasil).

Although imports had risen through May, driven by a global oversupply and unfair competition practices by some producing countries, the trade association expects that the measures implemented this month will reduce imports by 1.5 million tonnes this year.

“It’s not the best [agreement], nor the one we initially wanted. But we believe it’s an agreement that, if it works, will significantly improve the situation of the steel industry in Brazil,” said Jefferson De Paula, chairman of Aço Brasil and CEO of ArcelorMittal Brasil.

From January to May, steel product imports rose by 26.4% to 2.3 million tonnes, while domestic production saw a slight increase of 0.6%, reaching 13.6 million tonnes. Last year, total imports reached 5 million tonnes, mostly from China, 50% higher than in 2022, while domestic production shrank by 6%.

Marco Polo de Mello Lopes, managing director of Aço Brasil, noted that the 30% increase in the average imports of steel products between 2020 and 2022 used to define the quotas was not exactly what the Brazilian industry had sought. “The quota is generous, beyond what we thought was necessary to regulate the market, because of this 30% delta,” he said.

Industry representatives will meet with the government next week to discuss the results of the measure so far and any necessary adjustments. The industry has already detected, for example, an increase in rebar imports, which are not included in the initial list of products subject to quotas.

Nevertheless, there will be gains, and steel companies have revised their forecasts for 2024 upward. They now project a 0.7% increase in steel production, reaching 32.2 million tonnes, compared to the previous estimate of a 3% decline. For imports, the projection, which at the end of 2023 was for a 20% increase, has shifted to a 7% decrease, totaling 4.7 million tonnes. Domestic sales are expected to grow by 2.5% to 20 million tonnes, against an initial forecast of a 6% decline.

According to Mr. De Paula, steel consumption did not see significant growth in the first months of the year but could end 2024 with an accumulated increase of 1% to 3%. This outlook considers the strong performance of the construction sector, with more projects in the My Home My Life housing program and a resurgence of real estate launches, as well as a more active automotive market for both light and heavy vehicles.

With the impact of the measures on the domestic market, the sector is expected to gradually reduce idle capacity and maintain the planned R$100 billion investment package for the next five years. Asked about steel price increases in the domestic market, which have already started to be announced, the association’s leadership pointed to market economics.

“It wasn’t said that there would be no price increases. One thing was the claim by consumer sectors that the industry wanted to raise prices. Price speculation is not on the radar, but in a market economy, companies will have to make adjustments,” said Mr. Lopes.

As proof that Brazilian mills follow the international market, Aço Brasil noted a 12.7% drop in domestic hot coil prices from January 2023 to mid-June this year, in line with prices in other countries.

“In these 10 months [of talks with the government], there was a lot of discussion about price. But the price is set by the market, and it was agreed that our prices would be market-based,” said Mr. De Paula.

Faced with the surge in imports since the end of 2022, the industry had sought some form of trade defense from the government. In February this year, Aço Brasil requested the adoption of a quota-tariff system for 18 types—Mercosur Common Nomenclature (MCN)—of steel products and succeeded for nine of them. Two MCNs for tubes were also approved.

Now, said Mr. Lopes, the industry and the government are monitoring 27 other MCNs to prevent imports of similar products, not on the quota list, from circumventing the rules.

*Por Stella Fontes — Araxá

Source: Valor International

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CBMM advances in niobium batteries, equips new Volkswagen bus

Key advantage of niobium oxide use is ultra-fast charging

06/20/2024

Collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries — Foto: Divulgação

Collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries — Foto: Divulgação

One of the major challenges in the electrification of urban mobility is reducing vehicle recharge times. In many cases, batteries require hours to recharge, and for buses and trucks, this means long downtime periods, increasing costs, and larger fleets.

This challenge brought CBMM, a niobium products manufacturer controlled by the Moreira Salles family, together with Volkswagen Caminhões e Ônibus. The collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries. The prototype was unveiled on Wednesday at CBMM’s industrial and mining complex in Araxá, Minas Gerais.

While the bus has no set date for mass production, the battery, developed by CBMM in collaboration with Japan’s Toshiba Corporation and Sojitz Corporation, is expected to hit the market in larger volumes by the second half of 2025.

The primary advantage of using niobium oxide in batteries is ultra-fast charging—up to 10 minutes for light vehicles and up to 15 minutes for heavy vehicles, without the risk of overheating or explosion. During the prototype’s presentation, a real-time demonstration showed the e-Bus being recharged in 8 minutes and 37 seconds.

Rapid charging with niobium technology does not compromise battery life. “The evolution of these materials ensures competitiveness and quality for the batteries,” said CBMM CEO Ricardo Lima.

Since 2014, CBMM has been developing materials to enhance battery performance. In mid-2018, the company signed a research contract with Toshiba, which led to the technology used in Volkswagen’s electric bus.

The companies aim to use these buses for urban routes, given their estimated 60-kilometer range, which covers over 90% of routes in large Brazilian cities. The e-Bus prototype, built on an 18-tonne chassis, has four battery packs, each with a usable capacity of up to 30 kWh (kilowatt-hours). The bus charges via the front roof, connecting wirelessly to a 300-kW pantograph fixed to the ground and connected to the electrical grid.

According to Volkswagen Caminhões e Ônibus CEO Roberto Cortes, it typically takes about four years for a new electric vehicle to reach the market. He noted that the development of the E-Delivery electric truck began in 2017 and it was launched in 2021.

To date, CBMM has invested around R$450 million in niobium oxide production capacity, in addition to the R$80 million the battery program receives annually. Currently, the company has 41 battery projects under development, including applications for heavy vehicles, mining transport, and robots.

CBMM expects the battery sector to account for 25% to 30% of its revenue by 2030. Currently, approximately 80% of its revenue comes from steel products, as niobium addition enhances steel strength. The company does not plan to produce the niobium-lithium batteries themselves. Instead, the Minas Gerais government is in discussions with Toshiba, which currently manufactures the cells in Japan, to attract potential investment to Brazil.

The CBMM-Toshiba partnership has included pilot cell manufacturing plants in Japan and active material production in Araxá, along with a dedicated battery materials laboratory at the Minas Gerais factory.

Following the installation of the pilot niobium oxide plant, CBMM has built a factory with a capacity of 3,000 tonnes per year, which will begin operations in August. This volume is expected to meet demand for the first three years.

The reporter’s travel costs were covered by CBMM.

¨Por Stella Fontes — Araxá

Source: Valor International

https://valorinternational.globo.com/
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Embraer strategizes for U.S. market growth

Company sees expansion potential in commercial, business, and military aircraft

06/20/2024

Brazilian plane maker is exploring mergers or acquisitions to gain a foothold in the defense sector with the military C-390 aircraft — Foto: Divulgação

Brazilian plane maker is exploring mergers or acquisitions to gain a foothold in the defense sector with the military C-390 aircraft — Foto: Divulgação

Embraer is ramping up efforts to expand its presence in the United States. The plane maker’s strategies include increasing sales of commercial jets like the E-175 and business jets like the Praetor 500 and exploring mergers or acquisitions (M&A) to gain a foothold in the defense sector with the military C-390 aircraft. These plans were outlined during Embraer Day in São José dos Campos on Tuesday (18) and Wednesday (19).

The United States leads the aviation sector, with the largest airlines and business jet operators globally. North America accounted for 62% of Embraer’s revenue in the first quarter of this year.

Rodrigo Silva e Souza, the chief marketing officer of Embraer’s commercial division, noted that by 2030, an average of 40 aircraft in the sub-76-seat category will be retired annually in the U.S.

“Significant replacement demand is expected to favor Embraer, given U.S. market regulations,” Mr. Souza said. A union agreement limits the weight of regional jets to 39 tonnes, which is why the heavier E2 model does not compete in the U.S. regional market, unlike the E-175.

“While this demand is primarily for replacement, we also see interest in fleet expansion, as evidenced by American Airlines,” he added. According to Mr. Souza, American Airlines’s order has spurred interest from other groups in the country.

In addition to replacing older E1s, a model launched in 2004, the company aims to capture the market for renewing Bombardier’s CRJ 700 and 900 fleets.

Another focus area is the business jet division. Alvadi Serpa Junior, director of market and product intelligence for executive aviation, highlighted that the company aims to capture market share from Cessna’s Citation Latitude with increased sales of the Praetor 500.

Currently, the Praetor 500 holds 33% of the mid-size business jet market, with the Latitude holding the remainder. Mr. Serpa Junior attributed this to deliveries to NetJets, the world’s largest fractional jet ownership company.

NetJets has started converting part of its purchase options for Embraer jets into firm orders—so far, five orders have been confirmed. NetJets has options for 250 Praetor 500 jets, worth approximately $5 billion. These options are not included in Embraer’s disclosed executive aviation order book, valued at about $4.6 billion. “Delivering our models to NetJets naturally balances the market,” Mr. Serpa Junior told Valor.

North America and the Caribbean are Embraer’s primary markets for executive aviation, with 57% of the manufacturer’s jets (1,015 units) in operation. Latin America accounts for 17%.

In the defense division, Embraer is considering M&A strategies in the U.S. to introduce the C-390 military aircraft. U.S. defense operations must be conducted by local companies, necessitating a partnership with Embraer. The company already collaborates with Sierra Nevada Corporation to produce the Super Tucano.

“We have a Super Tucano production line in Jacksonville. We are expanding the team and are open to partnerships with the U.S. government and acquisition opportunities,” said João Bosco Costa Jr., CEO of Embraer’s defense and security division.

To date, Embraer has delivered seven C-390 units (six to the Brazilian Air Force and one to Portugal). The order book includes 13 more units for the Brazilian Air Force, two for Hungary, four remaining deliveries to Portugal, and orders from South Korea—though the total for South Korea has not been disclosed.

The reporter’s travel costs were covered by Embraer.

*Por Cristian Favaro — São José dos Campos

Source: Valor International

https://valorinternational.globo.com/
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Central Bank holds interest rate at 10.5% despite Lula’s critique

Monetary Policy Committee remains non-committal on future rate decisions

06/20/2024

Roberto Campos Neto — Foto: Fabio Rodrigues-Pozzebom/Agência Brasil

Roberto Campos Neto — Foto: Fabio Rodrigues-Pozzebom/Agência Brasil

In a unanimous decision, following criticism from President Lula, the Monetary Policy Committee (COPOM) paused its recent series of interest rate cuts and maintained the Selic rate (Brazil’s benchmark interest rate) at 10.5% per annum. This decision, halting the reduction sequence that began in August 2023 when the rate was 13.75%, was influenced by deteriorating inflation forecasts and diminishing market expectations.

The decision emerged a day after President Lula leveled fresh criticism at Central Bank President Roberto Campos Neto, accusing him of being “politically biased” and asserting that Mr. Campos Neto’s conduct was the only “thing out of place” in the country.

In their statement, the board highlighted that the current global uncertainties, combined with a domestic environment “characterized by persistent economic activities, escalating inflation projections, and unanchored expectations,” necessitated a more cautious approach.

The committee refrained from making specific commitments regarding the future trajectory of the Selic rate, emphasizing its vigilant stance and asserting that “any future adjustments” will be guided by “a firm commitment to converging inflation to the target.” It also highlighted that monetary policy should remain contractionary “for a sufficient period at a level that consolidates both the disinflation process and the anchoring of expectations around their targets.”

Recent data from the Focus report indicates a worrying trend in inflation expectations; for 2024, the projection has risen to 3.96% after six consecutive increases, and for 2025, it stands at 3.80% following seven weeks of continuous rises. Since the last COPOM meeting, Mr. Campos Neto and Gabriel Galípolo, the director of monetary policy, have both voiced their concerns over the escalating inflation expectations in public addresses.

In light of these developments, the COPOM emphasized the need for “serenity and moderation in the conduct of monetary policy.” The current economic climate is described as one where disinflation is “expected to be slower,” there is a “widening of the unanchoring of inflation expectations,” and the global scenario remains “challenging.”

The decision to maintain the Selic rate aligned with market expectations. A survey conducted by Valor, which included 132 financial institutions, revealed that only nine believed there was room for a 25-basis-point reduction, while the majority anticipated that the rate would remain unchanged.

Market observers also paid close attention to the voting dynamics within the committee following a split decision in May. At that time, Mr. Campos Neto, Carolina de Assis Barros, Diogo Guillen, Otávio Damaso, and Renato Gomes voted in favor of reducing the rate by 25 basis points. Conversely, directors appointed by the current administration, Ailton Santos, Gabriel Galípolo, Paulo Picchetti, and Rodrigo Teixeira, voted for a more substantial cut of 50 basis points.

Another point of interest was the ongoing debate on the balance of risks for inflation, which maintained factors pulling in both directions. In the minutes from the May meeting, it was noted that some members of the committee saw “merit” in discussing an asymmetrical balance of risks skewed upwards, suggesting that upward pressures on inflation were deemed more significant than downward influences.

In Wednesday’s announcement, the balance of risks was again described as symmetrical, with ongoing global inflationary pressures and persistent inflation in the services sector due to a tighter output gap—indicative of less economic idleness—highlighted as upward pressures. Conversely, the COPOM noted potential downward risks, including a pronounced slowdown in global economic activity and a more significant impact from synchronized monetary tightening on global inflation.

The COPOM outlined two scenarios for its inflation forecasts. Under the reference scenario, which assumes the Focus interest rate trajectory and an exchange rate starting at $5.30 per dollar based on purchasing power parity, inflation is projected at 4% for 2024 and 3.4% for 2025. This is a slight increase from May’s projections of 3.8% for this year and 3.3% for next year. For monitored prices, the projection was adjusted from 4.8% down to 4.4% in 2024, while the estimate for 2025 remains steady at 4%.

In the alternative scenario, where the Selic rate remains unchanged throughout the relevant period extending into 2025, the projections are 4% for 2024 and 3.1% for 2025, against a target of 3% for both years.

*Por Gabriel Shinohara, Alex Ribeiro — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Cimed in final talks to acquire Jequiti

Acquisition of Grupo Silvio Santos’s brand to open new business vertical for Marques family’s pharmaceutical company

06/19/2024

Cimed has accelerated acquisitions towards the goal of reaching R$5 billion in sales — Foto: Divulgação

Cimed has accelerated acquisitions towards the goal of reaching R$5 billion in sales — Foto: Divulgação

The final touches are being put on the deal between Grupo Silvio Santos and Cimed for the sale of Jequiti to the pharmaceutical company owned by João Adibe Marques. Initially discussed as a majority stake purchase, the negotiations have evolved in recent weeks toward a complete acquisition. The remaining adjustments now revolve around the price.

“There was already a consensus on the price for the majority stake, and Cimed has detailed plans for the operation. When discussions moved to shareholder agreement details, it became clear to both parties that a complete acquisition was more appropriate,” said a source.

Jequiti is being valued at around R$450 million, equivalent to its revenue, according to Pipeline, Valor’s business website. While Cimed is seeking a discount and Grupo Silvio Santos is aiming for a premium, the final check is expected to be in this range, sources say. The agreement also includes facilitated brand exposure during prime time on TV channel SBT, similar to the current arrangement. The brand has been boosted on TV over the past decade by the show “Roda a Roda Jequiti,” attracting customers and consultants seeking prizes.

Mr. Marques has also reached an agreement with Governor Romeu Zema of Minas Gerais to establish a factory and distribution center for cosmetics in the southern part of the state, benefiting from tax incentives, Pipeline found.

Jequiti, which had years of financial losses, has now returned to profitability. The new owner will integrate a national distribution network, bringing products from one of the main medium-class brands to small neighborhood pharmacies in rural towns.

On the other hand, Jequiti brings Cimed a robust outsourced sales force: the brand’s consultants, a door-to-door strategy Mr. Marques had on his radar for vitamins, baby products, and hygiene and beauty items. Jequiti boasts a team of over 200,000 consultants, and Mr. Marques plans to launch this direct sales initiative in the second half of this year, using pharmacy stock in what he describes as “the salesperson outside the store.”

“This is transformational for Cimed. The company was already growing with consumer products in addition to generics, but Jequiti opens an entire new vertical,” said an executive familiar with the matter.

Experience with Carmed lip balms has shown that Mr. Marques knows how to sell consumer items: Carmed generated R$400 million in revenue in the second half of last year through collaborations and limited editions. The goal is to reach an annual revenue of R$1 billion from this product alone.

For the Jequiti transaction, Cimed is receiving legal advice from Machado Meyer, without a financial advisor. Grupo Silvio Santos is being advised by Bradesco BBI and Lefosse Advogados.

Cimed benefits from low leverage, with room for M&A, and low financing costs in the capital market. The leverage ratio is below 0.8 times, and the group recently completed its third debenture issuance. Distributed by XP Investimentos, it raised R$600 million with a DI rate plus 0.75% per year (less than half the spread of the previous issuance) and a five-year term.

Cimed, which grossed R$3 billion last year, aims to reach R$5 billion by 2025, bringing it closer to a potential IPO. The company has been courted by banks.

Both Cimed and Jequiti did not respond to requests for comments.

The original story in Portuguese was first published on Valor’s business news website, Pipeline.

*Por Maria Luíza Filgueiras — São Paulo

Source: Valor International

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Sabesp privatization draws interest from Tanure, Aegea, and Equatorial

Tanure’s bid for 15% of the company takes market by surprise

06/19/2024

Sabesp’s privatization offering is scheduled for August, following the “roadshow” period, which involves formal discussions with investors — Foto: Victor Moriyama/Bloomberg

Sabesp’s privatization offering is scheduled for August, following the “roadshow” period, which involves formal discussions with investors — Foto: Victor Moriyama/Bloomberg

Businessman Nelson Tanure has shown interest in joining the race for Sabesp’s privatization, according to information obtained by Valor. Should he decide to proceed, Mr. Tanure would vie for the role of the primary shareholder in the sanitation company alongside Aegea and Equatorial, the two other entities currently interested in the asset. The deadline to express interest in this process concluded on Monday (17).

Sources close to the matter indicate that Mr. Tanure is exploring synergies with the Metropolitan Water and Energy Company (EMAE), which he acquired earlier this year in the first privatization auction under the Tarcísio de Freitas administration. However, the sources noted that the “unusual conditions of the auction” and “strong political opposition” have posed challenges. Mr. Tanure has declined to comment on the matter.

Given the substantial financing required and the hefty sum the winner must disburse, there is behind-the-scenes speculation about the possibility of forming a consortium with BNDESPar, the Brazilian Development Bank’s (BNDES) equity arm. However, the bank has stated that it “has not entered into and is not in the process of negotiating any agreement, covenant, or partnership with third parties for participation in the public offering of Sabesp.”

In the market, expectations suggest that Mr. Tanure’s potential bid might not generate significant interest during the “bookbuilding” process, where investors’ intentions are gauged.

This situation could diminish his chances of success, as one of the criteria for selecting the primary shareholder is the demand generated during the bookbuilding. Conversely, it also raises questions: if Mr. Tanure submits the highest bid but fails to secure the deal due to low volume in the book building, this could lead to further scrutiny, according to sources.

On Tuesday (18), news of the businessman’s interest in Sabesp emerged, catching the market off guard and resulting in a 2.97% decline in Sabesp shares, which closed at R$72.11. Similarly, when Mr. Tanure’s group secured the EMAE auction, the company’s preferred shares plummeted by 28.42%.

Beyond EMAE, Mr. Tanure holds significant stakes in the power distribution company Light and oil companies Prio and Azevedo & Travassos, among others.

The São Paulo government has crafted a privatization proposal with an innovative model that incorporates a mechanism designed to deter “adventurers” from seeking to become a primary shareholder.

The offering is structured in two phases: Initially, the two potential primary shareholders proposing the highest prices for a 15% stake in the company will be selected. Subsequently, for each candidate, two bookbuildings will be organized to accommodate other investors interested in becoming minority shareholders in Sabesp.

The primary shareholder who assembles the most advantageous bookbuilding will prevail based on criteria that meld the highest weighted price with the largest volume of demand. This means that a partner may fail to secure the position, even if they offer the highest price.

When the privatization rules were unveiled, market participants highlighted the potential for regulatory scrutiny and litigation, particularly concerning the non-priority of price as the sole decisive factor. Nonetheless, the government has stood by this approach, asserting that it enhances value for the state.

Upon inquiry, the São Paulo government mentioned that the “public offering is in a quiet period,” during which “all communications will be conducted through the prospectus and notices of material fact.”

Following the expression of interest, the contenders for the primary shareholder position are required to formalize their bids. Besides Mr. Tanure, Aegea is attempting to establish a consortium with its shareholders (Equipav, GIC, and Itaúsa) and partners from other ventures (Perfin and Kinea). Equatorial is also a contender, forming a consortium with partners including Squadra funds, Opportunity, and Canada Pension Plan.

Aegea and Sabesp declined to comment. Equatorial did not respond to inquiries.

Some potential bidders are still in discussions with the São Paulo government, seeking adjustments to the terms of the privatization. A major point of contention is the “poison pill” clause, designed to protect minority shareholders against hostile takeover attempts. This provision has been unpopular among some groups, who are advocating for its removal, sources told Valor.

Under the proposed terms, the primary shareholder would hold a 15% stake in Sabesp and one-third of the board of directors seats. A cap has been set on shareholder voting rights at 30%, which is also the threshold for initiating a public offering of shares.

“Even though the primary shareholder is acquiring only 15% of the company, it is treated as if they had reached the 30% threshold right from the start due to the shareholder agreement. With large funds behind the primary shareholder, it’s impossible to monitor everything happening within these funds constantly. These are offshore funds managed by dozens of managers simultaneously,” explained a source.

This rule impacts financial groups that might join the consortium of the primary shareholder while also managing various other stock funds that do not hold a stake in Sabesp’s controlling group. The “poison pill” clause is seen as a potential hurdle for these funds to invest in Sabesp. Any decision by a fund manager, anywhere in the world, to purchase even a single Sabesp share could activate the control mechanism due to the governance structure of the funds not covering such granularity.

Sabesp’s privatization offering is scheduled for August, following the “roadshow” period, which involves formal discussions with investors. This timing is intended to avoid interference from the election season on the operation.

*Por Fernanda Guimarães, Taís Hirata, Fábio Couto, Robson Rodrigues — São Paulo and Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Lula criticizes Central Bank chief ahead of policy meeting

President called monetary authority’s behavior “out of place”

06/19/2024

President Lula — Foto: Ricardo Stuckert/PR

President Lula — Foto: Ricardo Stuckert/PR

President Lula delivered sharp criticism of Central Bank President Roberto Campos Neto on Tuesday. At a time when financial market participants and experts express skepticism about Brazil’s economic policy, Mr. Lula said the behavior of the monetary authority is “the only thing out of place in the country.” He also criticized the volume of tax waivers and exemptions during a meeting with economic team members this week.

Mr. Lula’s comments were made in an interview with the radio station CBN, a day before the conclusion of Central Bank’s Monetary Policy Committee (COPOM) meeting. The market expects the key interest rate Selic to remain at 10.5% per year, amid worsening inflation expectations and uncertainties regarding government account management.

“We have only one thing out of place in Brazil right now. It’s the behavior of the Central Bank. This is a mismatch. A Central Bank president who lacks autonomy, who has political inclinations, and in my opinion, works more to harm the country than to help it. Because there is no justification for interest rates being as high as they are,” said the president.

Mr. Lula has been critical of the Central Bank’s decisions since the beginning of his administration. Former President Jair Bolsonaro appointed Mr. Campos Neto. With the institution’s autonomy approved in 2021, Mr. Campos Neto’s term is fixed by law and ends this year, with his successor to be appointed by Mr. Lula.

Under Mr. Campos Neto’s leadership, the COPOM also took unpopular measures in the previous administration. The committee raised interest rates in 2022, the last year of the Bolsonaro administration and an election year. In August of that year, the Selic rate reached 13.75% per year, ending a tightening cycle that reversed the monetary stimulus adopted during the COVID-19 pandemic.

Mr. Lula believes the current Central Bank chief has “political inclinations,” a view reinforced by Mr. Campos Neto’s attendance at a dinner hosted by Governor Tarcísio de Freitas of São Paulo, an ally of Mr. Bolsonaro. Commenting on the event, Mr. Lula said the economist “almost announced his application for a position in the São Paulo government.”

Mr. Freitas and Mr. Campos Neto are friends, and there has been speculation that the Central Bank president could become the Finance minister in a potential Freitas administration if the governor runs for president in 2026 and wins.

Mr. Lula questioned whether Mr. Campos Neto is willing to play the same role as former judge and current Senator Sergio Moro, who left the courts to join the Bolsonaro administration as minister of Justice. “A justice champion with political commitments?” criticized Lula.

Mr. Moro described President Lula’s remarks as a “personal attack” and “lack of institutional decorum,” claiming Mr. Lula is using the same tactics against him that were used when he was the judge in charge of the Car Wash anti-corruption task force.

In the interview, Mr. Lula said he would pick a Central Bank president committed to controlling inflation but also focused on growth targets. “The Central Bank president must be a serious and responsible figure. He must be immune to the market’s momentary restlessness,” he said.

Emphasizing his call for lower interest rates, Mr. Lula said inflation in Brazil is under control and current interest rate levels are harmful to the productive sector. According to data released last week by statistics agency IBGE, Brazil’s official inflation index IPCA rose 0.46% in May, above expectations, accumulating a 3.93% increase over 12 months.

“Inflation is under control. Now they invent future inflation scenarios. Let’s work based on reality: Brazil is currently in a good situation,” said Mr. Lula.

Mr. Lula’s comments on the Central Bank’s actions resonated in the political arena. Lower House Speaker Arthur Lira said at an event that the monetary authority’s autonomy “on the eve of the COPOM meeting increased the credibility of our monetary policy.”

Meanwhile, the government’s leader in the Senate, Jaques Wagner, said the president’s criticisms are legitimate. “I am not aware that the U.S. Federal Reserve chair engages in political acts for anyone. If autonomy is for that, it’s being misused,” said the senator.

Fiscal policy

Besides criticizing monetary policy, Mr. Lula defended his government’s fiscal decisions. He criticized the volume of tax waivers while addressing criticism of his administration for not advancing on spending cuts.

“The same people who say we need to stop spending are the ones with R$546 billion in tax waiver,” said Mr. Lula, specifically mentioning sectors like agriculture. “The rich take a portion of the country’s budget, and they complain about what is spent on the poor. That’s why I say, don’t tell me to make adjustments at the expense of the most unfavored people in this country.”

According to the 2025 Budget Guidelines Bill (PLDO), the volume of tax exemptions is estimated at R$536 billion for next year. Most of these tax expenditures are related to the Simples Nacional (a simplified tax regime for small businesses), with an impact of R$128 billion on the budget.

Exemptions for agriculture and agribusiness—sectors mentioned by President Lula—total R$66.6 billion, including the exemption for basic food staples. The Brazilian Confederation of Agriculture (CNA) did not respond to requests for comment on the president’s statements.

Earlier this week, Finance Minister Fernando Haddad said the economic team would conduct a comprehensive review of expenses, including tax expenditures. Planning Minister Simone Tebet, meanwhile, has been working on proposals to address budget rigidity, including evaluating changes in benefits raises linked to minimum wage increases. However, she ruled out changing social security benefits.

(Jéssica Sant’Ana contributed reporting.)

*Por Fabio Murakawa, Gabriela Pereira, Marcelo Ribeiro, Raphael Di Cunto, Caetano Tonet, Julia Lindner — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Einstein introduces generative AI at patient consultations

Developed in-house, the Hstory platform aggregates critical patient data to provide analytical reports to doctors within minutes

18/06/2024

Sidney Klajner — Foto: Silvia Zamboni/Valor

Sidney Klajner — Foto: Silvia Zamboni/Valor

A few days ago, a patient visiting surgeon Sidney Klajner was taken aback during his consultation. Before the patient could say anything about his medical history, the doctor began detailing past medical issues, diagnoses, and surgeries. “He asked me how I knew so much without him saying a word,” said Mr. Klajner, president of the Albert Einstein Israelite Hospital and a specialist in digestive system and coloproctology. The answer? Generative artificial intelligence.

While the use of AI in healthcare is not new, it has traditionally been focused on management, utilizing algorithms to enhance internal processes and improve institutional efficiency. Now, artificial intelligence is making its way into the consultation room, transforming the interaction between doctors and patients.

Einstein Hospital is launching an AI platform called Hstory, internally conceived and developed. It scans medical records, extracts the most relevant data, and presents it in minutes as an analytical report. The data can be organized chronologically, including all events regardless of medical specialty, or by body organ.

With Hstory, Einstein is the first hospital in Brazil to launch a platform that combines AI and Big Data for direct patient care, and one of the few worldwide. Stanford University School of Medicine was the first to launch such a system in January.

“There was a need to engage healthcare professionals, whose training is generally very traditional,” said Mr. Klajner. Given this background, many doctors view technology with skepticism. By demonstrating that AI can also offer benefits in patient care, the expectation is to overcome healthcare professionals’ resistance and pave the way for innovation. “From an adversary, the doctor becomes an ally,” said Mr. Klajner.

Time-saving is the primary advantage of Hstory. To make a reliable diagnosis, doctors must conduct lengthy interviews with patients and consult various systems for test results and other critical data. By automating this task, doctors can reallocate the time saved to other aspects of the consultation. Mr. Klajner reports having conducted a simulation using his own medical records and saving 20 minutes with Hstory.

The new platform is the result of a long-term investment plan. Efforts began in 2016 when Einstein’s directors traveled to the United States to observe other hospitals’ experiences and conceive their own project. This led to the creation of a Big Data department, which has grown significantly over time. From an initial team of six, it now comprises around one hundred members.

Asking the right questions is crucial in choosing the path forward, said Mr. Klajner. One question that Einstein’s doctors pondered was why many patients were readmitted shortly after discharge.

The hospital created an algorithm to determine whether patients were adhering to prescribed diets and medications at home, among other variables, which helped identify weak points and improve discharge procedures, said neuroradiologist Edson Amaro Junior, head of Einstein’s Big Data department.

The algorithm increased the likelihood of identifying patients at high risk of readmission within 30 days by four times and led to enhanced preventive actions for these patients. It also freed up space for 34 more short-duration surgeries per month by optimizing the use of beds and operating rooms. Another effect was a 20% reduction in “office time”—spent on bureaucratic tasks—for nursing teams, freeing up 83 hours of work per month, according to the hospital.

Einstein has already developed over one hundred Big Data algorithms, with 20 for prediction. Currently, 49 systems use AI across 16 areas of the institution. Of these, 18 systems are in use, while the rest are in the testing phase.

Hstory is now available to all doctors with access to Einstein’s electronic medical record system. This includes about 3,000 professionals, including those working at the public Vila Santa Catarina Municipal Hospital, managed by Einstein in partnership with the Unified Health System (SUS).

Despite rapid advances in AI in medicine, technology will not replace the doctor’s role in critical decisions such as treatment choices, medication prescriptions, or surgery recommendations, said Mr. Klajner. “This practice will not be replaced. Artificial intelligence will not do any of that.”

The future of AI in healthcare poses strategic challenges that companies, governments, and regulatory agencies must address. One such challenge is the interoperability of digital systems across institutions, which would allow for the creation of a single electronic medical record. When a patient arrives at a hospital, even for the first time, the doctor would have complete access to their history, including data from all hospitals and clinics they have visited.

Achieving this level of integration depends on public and private hospitals investing in Big Data and digital security and establishing common technological standards. Another consideration is who would finance the infrastructure necessary for this connectivity. “Israel has had a unified medical record for years, but it has 9.5 million inhabitants, not 200 million like Brazil,” said Mr. Klajner. “The future must always be pursued.”

*Por João Luiz Rosa — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Government eyes revenue shift amid “comprehensive” cost-cutting push

Idea is part of the menu of proposals under study to achieve zero deficit in 2025 by cutting expenses

06/18/2024

Simone Tebet and Fernando Haddad — Foto: Cristiano Mariz/Agência O Globo

Simone Tebet and Fernando Haddad — Foto: Cristiano Mariz/Agência O Globo

In the “comprehensive, general, and unrestricted” review of federal expenditures that it plans to undertake, the economic team is considering an old instrument designed to remove indexation from government revenues, known by the acronym DRU, as a way to alleviate the pressure of the growth of mandatory expenses on the budget, Valor has learned.

Created in 1994 as the “Emergency Social Fund,” the DRU allowed the federal government to reallocate up to 20% of revenues earmarked for healthcare, education, and social security to other areas.

The DRU is in effect until the end of this year, thanks to the so-called Transition PEC (proposal to amend the Constitution). However, it is very different from its original version, which served to make the budget more flexible for over a decade. Over time, the mechanism was watered down and no longer applies to revenues earmarked for social security and education, for example.

Now, the idea of something like the old DRU returns to the table as part of the wide range of proposals under study by economic sector experts to achieve zero deficit in 2025 and promote structural adjustment in the budget on the expenditure side.

These debates have been focused on modernizing indexation rather than removing them, as established by the DRU. However, the experts want to keep all proposals on the table to be filtered through political considerations. The debate is expected to continue over the coming weeks until the Annual Budget Bill (PLOA) for 2025 is finalized on August 31.

A preliminary discussion on the need to act on the expenditure side brought together President Lula and ministers Fernando Haddad (Finance), Simone Tebet (Planning), Rui Costa (Chief of Staff), and Esther Dweck (Management)—the members of the Budget Execution Board—on Monday.

“I felt the president much more in command of the numbers,” Mr. Haddad told reporters after the meeting. “An important space for discussion has opened.” As the economic team discusses reducing expenses, Ms. Tebet said that the ministers will present “solutions” to the president at a forthcoming meeting, without specifying which ones.

The importance of reviewing social program registries was also discussed, as eliminating irregularities is a way to create budget space.

The minister also highlighted the conclusions of the report by the public spending watchdog TCU presented last week. The document noted no increase in the tax burden in 2023. On the other hand, revenue waivers remained high: R$519 billion.

“The increase in the Social Security deficit is related to the increase in tax expenditure waivers,” said Ms. Tebet. The president, she said, was “extremely impacted” by the increase in federal subsidies, which total almost 6% of the GDP.

“The current situation is the chronicle of a death foretold,” said Marcus Pestana, executive director of the Independent Fiscal Institution IFI (a Senate-affiliated fiscal policy watchdog). According to him, the budget is heading towards a “full stranglehold” and a “shutdown,” after the government resumed the old rules of spending floors for health and education and the policy of increasing the minimum wage.

However, Mr. Pestana said the DRU is “an idea out of its time” and would only serve to “sugar-coat.” the problem. According to him, the measures indicated by Mr. Haddad and Ms. Tebet to tackle indexation are more consistent with the fiscal framework.

Bráulio Borges, an economist at LCA Consultores and researcher at FGV Ibre, advocated for a “supercharged DRU,” expanding its scope or the percentage of removal of indexation, as one of the measures that could create flexibility in the short term and improve budget rigidity already for 2025.

Among the currently indexed expenses that could be relieved via changes to the DRU, he said, are the constitutional floors for health, education, and the Fundeb (Fund for Maintenance and Development of Elementary Education). There is also the Federal District Constitutional Fund, in addition to congressional earmarks. “Obviously, it will be politically difficult to touch congressional earmarks and the Federal District Constitutional Fund. So, basically, the minimums for health, education, and perhaps Fundeb remain,” he said.

The discussion of the DRU, he said, could also be applied to the federal government’s revenue resulting from oil exploration under the production-sharing regime in the pre-salt, which has become more significant since 2018. This is a revenue stream that is estimated to reach nearly 1% of GDP by the end of the decade. “It would be interesting to remove indexation from oil profit in a new DRU to create more flexibility, not only from an expenditure management perspective but also to improve the primary surplus.”

It is important to note, Mr. Borges said, that, except for the profit from oil, other measures related to earmarked expenses help avoid increasing compression of discretionary expenses until 2026 and 2027, in a scenario that brings the risk of a shutdown.

“These are measures that create greater flexibility within the budget and extend the lifespan of the fiscal framework, which is not a perfect rule but provides some horizon of predictability for expenses. Alone, however, they do not generate the primary surplus that is needed. To really contribute to improving the primary result, it would be necessary to change the parameters of the fiscal framework. Expenses could no longer grow by 2.5% in real terms annually or 70% of revenue. A lower limit is needed, perhaps 1.5% or 2% for expense growth.”

(Renan Truffi, Guilherme Pimenta, and Gabriela Pereira contributed reporting from Brasília.)

*Por Lu Aiko Otta, Marta Watanabe — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/
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