The Chargé in Brazil (Daniels) to the Secretary of State

No. 5259

Sir: With reference to the Department’s telegram No. 758 of June 6, 7 p.m. [732 of June 1, noon]87 authorizing me to send a personal letter to Minister Rubens Ferreira de Mello of the Ministry of Foreign Affairs, commenting on certain clauses of the new Brazilian draft constitution affecting the investment of foreign capital in Brazil, I have the honor to enclose, for the Department’s records, a copy of my letter of today’s date87 to Minister Rubens de Mello, wdth enclosure,88 sending him these comments in the form as approved by the Department.

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Respectfully yours,

Paul, C. Daniels

The following clauses of the new draft constitution seem to have a direct bearing on the investment of foreign capital in Brazil. Undoubtedly many other clauses of the draft constitution will be of interest in this same connection, particularly those affecting the rights, privileges and opportunities of foreigners resident in Brazil, but for sake of brevity comments are submitted only on the following articles:

Article 164, paragraph 6. It seems likely that reference to the “progressive nationalization of banks, insurance and investment companies”, et cetera, will have the effect of deterring further foreign capital investments of such enterprises. While it is recognized that the Government of Brazil, as well as any other country, may wish to reserve to itself the right to nationalize such institutions at any time it deems convenient to do so, to insert into the constitution the phrase “progressive nationalization” might be interpreted as an indication of policy on the part of Brazil which would render it speculative and unattractive to invest private capital in these enterprises. Not only would there be a danger of discouraging foreign investment in these particular enterprises but also the policy of nationalization implied by the article might have a deterrent effect on foreign capital investment in all other types of enterprise. Furthermore, the broad constitutional powers granted the Union under paragraph 3 of the same article would seem to render unnecessary specific reference to the possibility of nationalizing certain specified types of enterprises.

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Article 164, paragraph 7. The same comments made above in regard to paragraph 6 apply with equal force to the first sentence of paragraph 7, which refers to the “nationalization of public services”.

In addition, to provide in the basic law of the land a procedure for determining the rate structure of the various types of public utilities would seem to be going beyond the normal scope of the Constitution, particularly when the entire question of rate fixing in public services is so highly technical, complicated and controversial.

Article 164, paragraph 9. It is understood that one of the major objectives of the Brazilian Government is to permit and encourage the participation of foreign capital in the development of Brazil’s mining and petroleum resources. A careful reading of this paragraph leads to the conclusion that the participation of foreign capital in such enterprises is permitted in the present draft, but doubts have been expressed as to whether such capital participation is encouraged. In other words, the interpretation of the phrase “empresas organizadas no país” appears to be susceptible of subsequent legal interpretation by the congress and the courts in such a way as to have an adverse effect on foreign capital participation. In such circumstances, foreign companies would be reluctant to make large-scale investments of capital unless their constitutional right to continue in business were more fully guaranteed by the constitution and not subject to the vicissitudes of congressional action at any given time. It would not seem difficult, by very slight rewording, to make this guarantee absolutely unequivocal and thereby give effect to the Brazilian Government’s desire to create conditions favoring the investment of foreign capital in the development of these major resources.

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