MINAS GERAIS: Franco the noisy populist

Coming to Belo Horizonte from Salvador, you see the more familiar and rich south-east of Brazil, which includes the states of São Paulo, Rio de Janeiro and Espirito Santo. The city of Belo Horizonte is in the idiom of São Paulo, with old buildings and churches jammed between skyscrapers, but it's more pleasant: - more trees, wider streets, fewer cars, cleaner air, less crime. Belo Horizonte is not a bit provincial despite being the capital of a conservative, inland state.

Minas Gerais means general mines and the state was a wilderness until the discovery of gold in 1693 by bandeirantes (explorers). The ensuing goldrush led to tension with São Paulo and a war, the Guerra dos Emboabos, in 1708, which São Paulo lost. The two centres have competed for power ever since and in the 20th century Brazilian power politics were often described as café com leite(coffee with milk) as the federal government was dominated either by the paulista (São Paulo) coffee elite or the cattle ranchers of Minas (occasionally challenged by Rio Grande do Sul). Indeed, in Minas, voters support state governor Itamar Franco as a counterweight to the paulistas in power led by Cardoso.

These days Minas has a lot more to offer than gold. The state has one of the largest mineral reserves (iron ore, bauxite, nickel) in Brazil and an industrial structure to match. Minas produces 35% of Brazil's steel (Usiminas, Acesita and Mannesmann are all there) and is home to auto-makers Fiat in Betim, near Belo Horizonte, and Mercedes-Benz in Juiz de Fora. The Minas economy has grown at an average of nearly 6% over the past three decades, and Mineiros like to talk about their education system, which they claim is the best in Brazil.

Asked what distinguishes Franco from other politicians, Brazilians often say "his honesty". Others describe him as erratic, emotional and a great generator of political propaganda. Franco, who grew up in Juiz de Fora, in south-west Minas, where he is a former mayor, strikes a chord with his voters. They gave him a resounding victory at the last election and the anti-Cardoso coalition he formed has a majority in the state legislature. His success offers another reminder that it is the individual not the party that counts in Brazil. For example, his coalition includes his own party, the PMDB, and the workers' party, the PT, something of an unholy alliance. Nationally the PMDB is part of the governing coalition but this small fact didn't prevent Franco from expending all his energies on opposing the president. That was possible because the PMBD, despite being Brazil's largest political party organization with branches everywhere, is empty of ideology.

"It's a confederation of local parties with many different factions. In fact it was originally more of a front than a party, a front against the military," says Francisco Panizza, a lecturer in Latin American politics at the London School of Economics.

Given Franco's reputation, many in Minas were expecting some excitement when he took office but even they were surprised by how far he went. Besides refusing to pay debts to both the central government and the international markets (Minas is one of the few Brazilian states that has been able to issue international bonds), the Franco government is contesting through the courts a shareholders' agreement involving foreign partners in majority state-owned electricity utility Cemig; it wants Cemig to be allowed to bid for the federal government-owned power company Furnas (which would rather defeat the object of privatizing it); and deputy governor Newton Cardoso has threatened to block the federal highways that run across the state if the transport ministry doesn't pay a debt the state feels it is owed. Not bad for nine months' work following Franco's declaration of war on the presidential palace.

But behind Franco's populism is a pragmatic philosophy that has enabled him to cut costs in the state and make a number of sound economic decisions. Many sections of the local business community support him and all plead for understanding in how state politics work. They are concerned that Franco's actions should not deter investment in what is already one of the most prosperous states in Brazil.

Luiz Fernando Rolla, the investment relations manager with Cemig, has the unenviable task of trying to explain Franco's antics to nervous foreign investors. Two-thirds of Cemig's preferred shares are owned by international investors who are constantly in touch with Rolla, trying to make sense of what they read in the newspapers. Thirty-three per cent of the voting shares are held by foreign strategic partners, mainly Southern Energy International and AES, a US utility.

An agreement with these foreign investors, whereby eight out of 11 votes on the board of directors are needed to make major changes and approve investments above R1.5 billion, is the cause of considerable problems. The state government owns 51% of voting shares, giving it a majority, but its six votes on the board are not sufficient to hold sway if the foreign partners with four votes are against. The state government has asked the courts to rule on the agreement's validity.

Rolla says that even if the state wins, it doesn't mean Cemig is going to be run differently: "They are not saying that they want to carry out new projects different from those already approved. They don't want to impose projects with low returns because they need the dividends. The largest damage is to credibility. Credibility is the point the state has used to attract industry here, that it has been stable for the last 20 or 30 years."

Franco has two aims, says Rolla, "to undermine the president's authority and to be selected as the presidential candidate for the PMDB for the next election. Politicians' strategies are above any logical thought. He doesn't care if the state is damaged by his strategy".