Transcript Privatization in Argentina

Privatization in Argentina
LaVerne Cerfolio
Lesley Edwards
Michael Henderson
Shannon Logan
Dana Masterpolo
March 12, 2001
Overview
 Methods of privatization:
– Issuing stock to the public
– Auction for concession of public services
– Deregulation
 Two models:
– Foreign direct investment
– Portfolio investment
Concerns
 Will the public monopoly be replaced by a
private one?
 Will a market economy provide for
important public services to all?
 What are the wealth distribution
implications?
 What are the labor implications?
Key Success Factors
Complimentary Policies
 Avoiding creation of a natural monopoly
 Improving the efficiency before the sale to
maximize value
 Regulating the process to avoid problems
like banking sector experience
Reasons for Privatization
 Frees budgetary resources
 Reduce deficit gained from losses by state-
owned enterprises
 Opportunity to attract foreign direct and
indirect investment
 Eliminates managerial and allocative
inefficiencies of state-owned businesses
 Reduce the opportunity for corruption of
government contracts
Reasons, continued..
 Introduces modern managerial thinking and
technological improvements from industrial
nations
 In some cases, enables workers to
participate as owners and benefit from firm
appreciation / profits
 Move toward competition under condition
of efficient markets
History
Chile
1. First to begin privatization – met with resistance
2. Debt-led efforts failed in 1982; transition to
equity
3. Required foreign investors to improve services
4. Worker ownership improved wealth distribution
Argentina
1. Focused on speed to signal belief in market
economy
2. Complimentary policies lagged behind
3. Encouraged international competition
4. YPF – restructured before the sale – big success
Mexico
1. SOEs reduced from 1,155 to 80 by 1994
2. Labor ownership played a large role
3. Foreign ownership played small role
4. Success due to high-level government
commitment and transparency of process
Affected Industries & Strategies
 Aerolineas Argentinas (AA) and ENTEL –
Telephone Company
– Maximize sale price of companies
– Awarded temporary monopoly powers similar
to state-owned companies
– Regulatory issues unresolved initially causing
price increases (e.g. high telephone rates)
– Convinced markets of commitment to
economic reform but design of privatization
needed improvement
Affected Industries & Strategies
 Water and Electric Utilities
– Government created regulatory framework that
outlined quality and quantity requirements for
services
– Defined bidding process based on price offered
– Distribution margin was very low
– Goal to prevent government subsidies
– Annual gains from private operation utilities is
1.3% of GDP or $3.3 Billion
Affected Industries & Strategies
 YPF (Oil Company)
– Liberalization of rules governing foreign
participation in Argentine oil and gas
– New sources of investment and technology lead
to a reversal of declining oil production
• 1990 crude oil production at 483,000 barrels per day
• 1995 crude oil production rose to over 700,000
barrels per day
• US companies Amoco, Occidental, Chevron and
Enron involved in production, technical assistance
and transmission
Affected Industries & Strategies
 Railroads and Port of Buenos Aires
– Company does not pay to acquire the
infrastructure
– Strict quality and price commitments
 Pension Funds
– Joint Venture with foreign partner
– 63% of employees place money in private
pension funds
Affected Industries & Strategies
 Banking
– Public banks had 33% troubled loans (vs. 10.3% for
private banks) (1994)
– Improved availability of credit
• Most financial instruments had maturities of one week (1990)
– Privatized nearly half of the public provincial banks
– Cost of privatization less than cost of recapitalization
– Converted short-term liabilities to long-term obligations
using a special fund Fondo Fiduciario
• More attractive to private buyers
– Remaining public banks are subject to tight regulation
and annual on-site inspections
Disadvantages of Privatization
 Increased unemployment rate
– 1990-1993 29% total jobs lost
– Middle aged men out of work
– Lower and Middle SES women enter WF
 Disrupted family life
– 1980-1994 the % of women as primary
breadwinners rose from 19%-62%
– Gender replacement in economic provider
– Increased DV, ETOH, divorce, separation,
delay of marriage and same sex cohabitation
Disadvantages, continued...
 Ceding political power afforded by public
ownership
 Risking strategic industries to foreign
control
 Losing profits to foreign owners
 Without regulation, prices can actually
increase
 Profitability comes at the expense of the
workers
Implications
 Business Sector
– Competitive hiring based on education and
credentials
– Need for office regulations
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Sex Harassment
Child Labor Laws
Minimum Wage
 Create Social Welfare Organizations
– Food Stamp Program, SSI, Health Care
Takeaway Points
 Private ownership does not guarantee
performance improvement
 Industry structure may be more important
than ownership
 Monopoly structure can be mitigated by
deregulation and the encouragement of
private ownership
 Participation of trusted international entity
improves transparency and credibility