Third Inauguration of Lula as Brazil's President

On January 1, 2023, following an extremely disputed presidential election, Luiz Inácio Lula da Silva took office as the President of the Federative Republic of Brazil. Although a popular Brazilian politician and former President for two consecutive terms (2003 until 2010), Lula’s third presidential term begins in a polarized political scenario.

On January 8, 2023, violent protests and riots by supporters of the outgoing President Jair Bolsonaro took place in the capital Brasilia targeting the principal buildings of the Executive, Legislative and Judicial federal branches. These demonstrations reflect the reality of the country’s severe political division which the new federal Brazilian administration is set to govern.

In this post, we discuss some key issues arising out of President Lula’s governmental plan including proposals made during his presidential campaign in connection with economic development, socio-environmental and climate sustainability initiatives, and recent developments in these same areas since the beginning of his new federal administration.

Political Division

Lula’s party, Worker’s Party (Partido do Trabalhador), did not achieve a majority in Congress in this latest electoral cycle.  Accordingly, we can expect many of Lula’s governmental proposals to be subject to delays and challenges by the opposition. The nation’s tense and polarized political environment, divisions which have deepened over the past four years with the former Bolsonaro presidential administration, are unlikely to ease soon, and may cause representatives to deviate from the legislative agenda.

Fiscal Policy and Reform

The new administration has announced plans to cut the budget deficit for 2023, focusing on increasing revenues rather than reducing expenditures, which is likely to include investments in governmental social programs.  Such measures aimed at increasing revenues, among others, include the facilitation and refinancing of certain tax payments for taxpayers and simplifying administrative tax dispute proceedings to extinguish the possibility of an ex officio administrative appeal on disputes involving certain threshold amounts^[1] in certain circumstances (Litígio Zero program).

On January 17, 2023, during the World Economic Forum, the Brazilian Minister of Finance announced that the new fiscal policy framework proposal should be submitted to Congress by April 2023.  During the first half of 2023, the federal government also intends to cause a fiscal reform to be approved by Congress, which is seen as fundamental for the country’s reindustrialization and economic growth.

Traditional and Renewable Energy

Lula has extended the exemption of federal taxes on fuels granted by the previous administration. However, this exemption will only last until February 2023.  As part of his campaign plan, the President espoused the view that the country needs a transition to a new fuel and gas price policy that accommodates national costs and considers the expansion of investments in refining and distribution activities to reduce fuel costs.

One of President Lula’s key proposals aims to guarantee the country’s energy sovereignty and security, by expanding the energy supply, deepening the diversification of the Brazilian energy matrix and intensifying clean and renewable sources at prices compatible with the national energy scenario.

As an example of the importance being given to the renewable energy sector as part of the administration’s pro-environmental efforts, Petrobras, Brazil’s state-controlled oil company, is to reposition itself for energy transition and focus its investment towards renewable energy.

The Ministry of Development, Industry, Commerce, and Services will create a specific agenda and office dedicated to green economy, decarbonization and bioindustry, to work in partnership with the Ministry of Environment.

Environmental-friendly policies

The new administration is expected to implement more stringent environmental policies, particularly in relation to environmental licensing and enforceability, that could prove burdensome for some industries, but beneficial to others, such as the renewable energy sector.

The pro-environmental agenda also seeks to fight deforestation in the Amazon region, affected in the past years by insufficient environmental inspections, through loosening environmental licensing and improving proper application of environmental laws. In line with such efforts, on his first day in office, President Lula executed a decree which reactivates Fundo Amazonia^[2], and authorizes the release of R$ 3.3 billion (US$ 611 million) from the fund to finance actions against environmental crimes in the Amazon region.

Transportation Infrastructure

The new government intends to guarantee the modernization and expansion of transportation infrastructure, both social and urban mobility, with public investment programs and the stimulation of private investments, by way of financing, concessions, partnerships and guarantees. For this objective, the federal government will allocate an infrastructure budget of R$ 20 billion (US$ 3.7 billion) for 2023, which is more than three times the budget allocated in previous years. Such actions are expected to foster infrastructure and construction sectors in the country, particularly on the private side.

Non-Privatization agenda

To protect national capital resources and redirect the role of the State in relation to control of State-owned companies, Lula is openly and strongly opposed to the privatization of Petrobras, Pre-Sal Petroleo S.A., Eletrobras (Latin America’s largest power generation company which is responsible for half of Brazil’s transmission lines) and Correios (the Brazilian post office company). The privatization of these public companies, among others, which was initiated during the former presidential administration has been suspended following Lula’s orders to revoke such processes on his first day in office.

Sanitation Industry

The Lula government’s plans propose to strengthen public policy on water and promote improvement of sanitation services. On January 1, 2023 Lula issued presidential orders which mandated changes to the regulatory competences of the Brazilian national water regulatory agency (Agência Nacional de Águas e Saneamento, ANA). However, following strong market criticism, the federal government has announced revocation of such orders to occur soon.

Those regulatory modifications should directly impact the federal sanitation legal framework enacted in 2020 (Novo Marco do Saneamento^[3]) and are likely to affect the private investment in sanitation concession projects. Government and private sector stakeholders are expected to hold public discussions on this matter.

Key takeaways

Lula’s recent measures demonstrate his progressive implementation of State-oriented policies. Portions of the Brazilian private sector show concern with respect to certain industries, such as sanitation, whereas others should benefit from the governmental agenda, as is the case for the renewable energy sector.  We shall continue to monitor upcoming developments arising from Brazil’s new federal administration actions in order to keep you informed.

[1] New proposals suggest fiscal debts lower than R$ 15 million (US$ 2.7 million) should no longer be subject to such mandatory ex officio review. A first level award in favor of the taxpayer should become conclusive and end the administrative dispute, which should expedite the administrative proceeding held by the Fiscal Appeals Administrative Council (Conselho Administrativo de Recursos Fiscais – CARF).

[2] Amazon Fund (Fundo Amazonia) is a REDD+ mechanism (Reducing emissions from deforestation and forest degradation) established in 2008 to raise donations for non-reimbursable investments in efforts to precent, monitor and combat deforestation, and promote preservation and sustainable use of the Brazilian Amazon region.

[3] Federal Act n. 14.026/2020, dated July 15, 2020.