PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES STUDY TOUR TO ARGENTINA AND BRAZIL – 14 APRIL – 21 APRIL 2002

Having undertaken a study tour to Argentina and Brazil, the Portfolio Committee on Public Enterprises reports as follows:

Background

Government confirmed its strategic vision for restructuring of state-owned enterprises (SOEs) in November 1999. This vision sets out the role of the state in the restructuring of the SOEs, in light of the development needs of South Africa and of international trends in SOEs restructuring. Beyond this, the President of this country, in his State of the Nation Address – 2001, has reminded government and stakeholders about the need for an accelerated agenda for restructuring of SOEs. Drawing logical conclusions from the President’s reminder, it is therefore imperative for those in the mainstream of restructuring of these SOEs to follow international trends and perhaps adopt and adapt administrative and economic models or devices used in other countries. This can be achieved by, inter alia, drawing lessons from those countries with respect to challenges and shortcomings and particular models utilised by those countries.

Purpose

The two countries visited are classified as developing countries like South Africa, are relatively wealthy countries. Their restructuring models have served these countries well. However, restructuring, particularly in Argentina, has not been problem-free thus certain SOEs deteriorated and their poor performance severely eroded confidence in the financial sector. The tour to the two countries will assist the committee in grasping the reasons for these failures in order not to repeat them. Essentially, this tour could help the committee to familiarise itself with complexities that the other countries have faced and dealt with.

Delegation

The members of the delegation were:
Mr. B A D Martins MP (Chairperson of the Committee and the leader of the delegation, ANC)
Mr. B M Komphela MP (ANC)
Mr. R J B Mohlala MP (ANC)
Ms. P N Mnandi MP (ANC)
Mr. M S M Sibiya MP (IFP)
Dr. W A Odendaal MP (NNP)
Mr. C T Thisani (Committee Secretary)

Argentina leg of the tour

15 April 2002

Courtesy meeting at the Embassy

The delegation had a briefing at the Embassy by Mr. T Nyawose – Charge d’Affaires and Mr. P Pieterse – Trade Attache. Mr. Nyawose briefed the delegation on the current crises in Argentina. After analysing the situation in Argentina, the mission came to the following conclusions as contributing factors to the crisis:

Pegging of peso to the dollar.

The decision by the then government of Argentina to peg the peso to United States’ dollar on a one to one basis meant in practice that when Brazil (Argentina’s biggest trading partner) devalued its real in 1999, foreign investors and buyers found their dollars could buy more in Brazil than in Argentina. This led to the drying up of foreign direct investment and buyers of Argentine exports (beef, grain and other agricultural commodities) could get more for the same price in other countries, particularly in neighbouring Brazil.

Extensive borrowing by the Government

The government of President Menem (1983 – 99) acquired a lot of debt, both foreign and domestic, particularly during its second term. This resulted in the upward spiralling of domestic interest rates. The more the government was borrowing, the more expensive credit became for Argentine business. This forced many companies to close.

Failure to balance government spending with tax revenue

Government expenditure on civil servants is amongst the highest in Latin America. An estimated 70% of the 23 provinces’ revenue is spent on salaries for civil servants, causing deficits in financing of basic services. Non-compliance with tax laws – a combination of evasion and arrears – is regarded as one of the causes of the deficits. Lengthy delays in prosecuting tax evaders and poor performance by the tax agency has failed to resolve the problem.

Economic recession

The extensive programme of privatisation undertaken in the 1990s resulted in a significant number of job losses. For example, employment in the railway sector fell from 90 000 to less than 20 000 in 1994. However, according to the World Bank, productivity in this sector increased by a factor of seven or eight.

As the result of the fact that most of the privatised companies were public utilities, prices for such basic services such as electricity and telephones spiralled upwards. This sparked recession which grew steadily worse as domestic demands went on a downward spiral and as more companies were compelled to lay off even more people.

The downward spiral increased the debt burden because the government’s tax revenues were shrinking. On the other hand, IMF made it clear in mid-2001 that it will not bail Argentina out by making an advance payment on previously agreed loan, to allow the government to make its next debt payment. This was after Argentina has missed fiscal targets set out in loan agreements.

Consequently, the three problems converged to the point that there were massive capital flights and savers rushed to the banks late last year to convert their pesos to dollars at a one – to – one rate and some even began withdrawing their dollars.

Fearing a run on the banks, the then economy minister issued a proclamation in late November last year limiting withdrawals to US$1000 per month. The limits on cash withdrawals, in turn, hurt consumer sales that were already battered by the country’s four-year recession.

The limits on cash withdrawals also sparked a wave of uncertainty and anger throughout the country, which led to protests and civil unrest that often, turned violent and led to the resignation of two presidents in December 2001

Implications for South Africa

The financial crisis presently afflicting Argentina and the resultant financial regulations and restrictions imposed by the Central Bank regarding the payment for imports creates an unfavourable environment for doing business with Argentina.

This might lead to a decrease in the volume of bilateral trade. The volume of bilateral trade last year stood at US$426.988 – with Argentina importing US$131.730 worth of goods from South Africa and exporting US$295.258 to South Africa. South African exporters will find it difficult to export at the 180 days payment terms and might have to seek alternative markets. The South African Reserve Bank requires payment within 180 days of shipment. Argentine companies can, however, be able to pay only after 180 days of receipt of goods, that is 200 days after shipment.

A number of South African exporters might not be paid for exports shipped to Argentina prior to December 2001 and payable in March 2002 because Argentine importers will not be able to pay them at the new exchange rate. Meanwhile, South African importers would not be adversely affected by Argentine Central Bank’s regulations and restrictions.

In his response to the following issues:

What happened to the proceeds from privatisation?
Whether quality of service has improved after privatisation.
Contraband activities.
Any way out of the current crisis?
Any culture of non-payment for services?
Reason for selling the companies back to the state.

Mr. Petersen pointed out that before the peso was floated many industries disappeared to the neighbouring Brazil. Due to the current crisis it’s going to take a few years before other countries start to export to Argentina. Fortunately for South Africa a good export base has already been established. The current situation resulted in 20% increase in contraband activities. More people had access to public utilities and equality of service dramatically improved but due partly to lack of money in circulation and bad debt, companies could not repay their creditors. The government, in order to reduce public debt, used the proceeds from privatisation.

E. MEETING WITH MRS. M ALEXANDER FROM THE WORLD BANK.

Mrs. Alexander and the World Bank have been involved in the process of privatisation since 1990. Before their involvement Argentina was embroiled in a serious economic crisis. Rate of inflation was at 3000%. The prevailing situation offered a dramatic setting for privatisation to take place and some contributing factors were:
A suffocating fiscal burden on the state (8% of GDP in debt).
Less or no money for basic services.

Privatisation laid foundation for the following:

Access to water was increased by $150 million.
Illegal electricity connection was reduced.
Railway locomotives were refurbished.
Change of management in ports yielded better results.
Reduced debt burden on the state.

But the following problems still lingered:

A need to create sound regulatory framework to monitor performance.
Too many regulatory bodies.
Many companies borrowed from Europe in dollars and the current situations left them unable to pay their debt.
Ever-increasing demand on public service - demand for water is huge.
Costly sewage collection.
Inability to expand rail service.
Privatisation only managed to improve the existing infrastructure instead of expanding it.
The system was dollar-based but now all changed to 1 dollar to 3 pesos.
Protracted renegotiations on debt owed by companies and cost structures.
Tariffs at the moment are too high for the poor.
Some companies have reneged on their debt payment agreement.

Proposed solutions:

The World Bank is currently working with the government and companies on tariff impacts and tariff re-engineering.
The government has set up timetable for tariff adjustment.
Phasing in of tariff adjustments.
Commission was set up to aide the government.
55 contracts to be re-negotiated.

It is Mrs. Alexander’s opinion that the dilemma faced by the companies cannot be apportioned to the privatisation; problems are bound to be there regardless of whether the companies are in private hands or are state-owned. She pointed out that the problems were there for many years and every solution applied is going to be a long term one. She added that for any economy to function relatively smoothly, policies need to be consistent but in Argentina policies change almost everyday so as to come up with quick solutions.

She also stressed a need for stronger regulatory agencies. At the moment there are too many agencies and a debate at the moment suggests grouping of similar agencies. To illustrate her point, that privatisation brought forth more good than ills; she mentioned that, after privatisation:

Social spending in the government budget improved because of reduced deficit.
Debt was reduced by 16%.
4% GDP growth.
2 million people with water than before.
Call boxes increased from 24 000 to 81 000.
Number of telephone lines doubled.
Although some problems still persist, people agree that services improved.
Electricity tariffs are one of the lowest in the world.

According to Mrs. Alexander, the World Bank does not lend to the companies. It only lends money to the government but there are World Bank agencies that lend money to the companies. In her opinion, companies in Argentina took too much debt and less equity. She believes that in an ideal situation the poor should be protected against high tariffs but in most cases it is difficult to determine who are the poorest. In as far as best practices are concerned, she believes that they are around the world and can be copied to suit our needs.
She believes that other factors, which are bigger than privatisation, played a role in the current situation in Argentina. Privatisation, she argues, improved a lot of things but other factors such as the legal system, tax related problems, lack of trust on the government and other things cannot be ignored.

F. Meeting with S. Kiernan – Managing Editor: Pagina 12 Newspaper

In his narration of early events, Mr. Kiernan informed the delegation that the stage was set in the 1940s when the Peronist party started taking over companies from private sector. That move did not yield any good results, for example the telephone services were the worst in the world. By the 1980s public utilities were cheap but not easily accessible. It became evident that companies were not getting enough money to be competitive.

The above situation set a new stage for privatisation. The government started an across the board privatisation process in 1990. Everything from airlines, water, rail and other utilities were privatised. The only things that were not sold were those related to state security such as nuclear stations and weapon manufacturing companies. The stated interest was to get capital injection and to a certain degree it succeeded. To illustrate the point:

There were fewer electricity blackouts.
New telephones were installed and suddenly almost everyone had access to telephones.
Economy was doubled in 7 years

According to Mr. Kiernan, the downside of privatisation was:

Privatisation resulted in people losing jobs.
Unemployment jumped from 12% to 24%.
From day one all the public utilities became expensive.
Foreign companies paid bribes to get contracts.
Regulatory framework became loose.
Officials were easy to bribe.
Companies refused to offer affordable basic services such as water and electricity; instead they were prepared to sell to the government at market rate. It was left to the state to cater for social responsibilities.

G. Meeting with Mr. C Cirigliano – Chairperson of ‘Trenes de Buenos Aires’ TBA (privatised railroad company)

TBA was formed in 1995 after they won a national and international bid. The president of TBA claims that before they took over the service was in bad state and their aim was to meet minimum safety and comfort standards. Their plans involved:

Management of 350 kilometres of rail lines.
Rebuilding of 96 stations
Acquisition of new electric carriages
Elimination of different crossings between cars and rail.

The organisation employs about 3000 workers and after privatisation the number of commuters rose to 1 million but to recession the number has decreased to 650 000.

On the issue of road use versus rail use, the chairperson argued that the two should not compete but rather complement each other, as is the case in the United States. As far as regulatory framework is concerned, he argued that the matter is complicated and the fact that laws governing regulations were passed about 80 years ago without being amended does not help either. A working regulatory model is non-existent. There is no minister of transport in Argentina, the company reports to the national regulation agency.

H. Meeting with TELECOM (privatised telecommunication company)

The delegation was met by Mr. A C Sierra, Director: Business Strategy. In his briefing he outlined the following:

Telecom controls the northern part of Argentina.
They enjoy 7 year monopoly and extendable to 10 years.
National Commission on Telecommunication regulates the industry.
Telecom is owned by four consortiums (employees own 10%) with 7 affiliates.

Mr. Sierra informed the delegation that before privatisation, the company was inefficient, facilities were obsolete and quality of service was unacceptable. The company was also faced with operating difficulties, lack of capital investment and no network drawings.

After 1995 the company emerged with:

Increased efficiency and strong profitability.
Increased volume of lines and better technology.
More capital investment
Improved customer service

Present situation of Telecom:
Revenue : $3.049 M

Market cap : $2.2 M

Employees : 14 453

Fixed lines in service : 3 892 000

Cellular subscribers : 2 136 000

Internet subscribers : 257 000

Fixed network : 100% digital
Meeting with Mr. M Montana: National Commission of Transport.

The above-mentioned commission regulates the activities of the transport activities. Mr. Montana is an expert in rail transport with 20 years in public rail.

As it stands at present, rail is divided into four units:

Metro rail
Goods transport
Real state (property management)
Long haul (cancelled at the beginning)

Metro and goods services were concessioned after a national and international bidding process. The role of the Commission is to:

Ensure that safety standards are met.
Eliminate conflict of interest.
Monitor conditions of service

Mr. Montana highlighted the following achievements:

Increased number of commuter (50% of commuters depend on metro for transport).
Improved customer service.
Low accident rate.
Subway runs more efficient service.
Comprehensive use of the infrastructure.

On what happened to the cancelled long haul, Mr. Montana pointed out that road and air transport has filled the gap left by long haul service. He added that there is a huge growth in road transportation. The industry does not enjoy any subsidy from the government but fares are fairly competitive. On rail versus road, he explained that if the two are carefully planned, both could be used profitably. Rail and road should not run parallel to each other; instead they should cross and converge only at the ports.

16 April 2002

J. Meeting with Parliamentary Committee on Public Enterprises

The chairperson of the above mentioned Committee is Deputy Courel. The delegation was briefed by:

Mr. O Junion: Head of the Water Commission
Mr. I de Carvalho: Planning, and
Mr. E Fernandes: Director of Structured Products.

Innargas Briefing

Innargas is a $2.5 billion a year gas producing company. It controls over 1000 km of gas network. The company agreed to privatisation in 1992 so as to improve efficiency. The enabling law was passed in 1996 and at the same time parliament of Argentina appointed a regulatory agency. The policy objectives of the agency was to:

Protect interests of the public.
Promote an environment suitable for competitiveness.
Encourage investment.
Ensure fair tariffs.
Ensure free access to gas transportation.
Encourage growth and diversity in the industry.

After privatisation the industry achieved the following:

Gas production rose to 160 million cubic metres.
Network was increased by more than 50%.
Six million consumers (33% growth)
Investment grew to 3 billion dollars.
Technology improved.

The Chairperson pointed out that in his opinion, privatisation in Argentina was handled in the best possible manner.

Water Commission briefing

A framework for water regulation was started in 1990s. Among other things, the agency was tasked to regulate tariffs, curb widespread inefficiency and corruption in the industry and devise means to counter hyperinflation that started in the 90s. The targets against inflation were met until the recent crisis. As it was the case with other services before privatisation, water services were under the following conditions.

Low water pressure.
Poor quality of water.
High rate of water contamination.
Management inefficiency.
Low investment.
Service rendered was not measured.
Few people had access to water.
Sewage collection was low – only one sewage plant.

Mr. Junion informed the delegation that after privatisation most of the problems mentioned above were solved. In addition to that, since last (2001) a social tariff was introduced. He conceded that there are still lot of challenges that need to be tackled such as:

High levels of water loss.
Sewage blockages.
Expansion of services is at slow pace.
Access to water services is dropping.
Sewage treatment is not effected as planned.

BRAZIL LEG OF THE TOUR

17 April 2002

Meeting with the Chairperson of the Committee on Economy – Deputy C Sobrinho

Deputy Sobrinho explained to the delegation the general structure of the Brazilian government and some aspects of their tax collection. Pressed to comment on privatisation, he conceded that privatisation in Brazil was not handled in the right manner. He said that it is his view that privatisation should have been slow and gradual.

Meeting with Deputy A Rebelo – President: National Defence and Foreign Relations.

Deputy Rebelo expressed his views on the process of privatisation in Brazil. His assessments of the process are:

Brazil undertook the largest privatisation process in the world in the shortest period.
$120 billion worth of companies were sold.
The desired objectives of privatisation were never realised.
The poor became poorer and the rich became richer.
There was no effort to keep some companies under national control.
In the process there was a substantial capital flight.
Some foreign companies decided to close down their companies and relocated outside the country.
Lack of profit is forcing some companies to hand them back to the state.
The argument for privatisation was to pay state debt; instead debt is double than before.
Service from public utilities is worse than before, e.g. access to telephones has increased but expenses are high.
Conditions of roads has improved but not extended to other areas.
Cargo transportation became too high.
Foreign capital was preferred to local capital.
The regulatory agencies are ineffective.
Companies never bothered about social responsibilities, the state still shoulders obligation towards the poor.
Lack of clear accountability lines on the part of the privatised companies.

On what could have been done differently, Deputy Rebelo suggested that:

Strategic information and security systems should remain in the state hands, e.g. satellite system (an important national defence related tool) cannot be under a foreign company.
Local Consortiums should have been formed so as to take control of the privatised companies.
Golden share should remain with the state.

18 April 2002

Meeting at the Department of Economic Affairs

The delegation was briefed on the whole process of privatisation since it started to the present. The briefing went as follows:

Privatisation in Brazil: 1991 – 2002

Privatisation in Brazil has completed its eleventh consecutive year. From 1991 up to 2002, 139 Brazilian state-owned enterprises and concessions have been transferred to the private sector, with results amounting to US$ 103.4 billion – when considering all the proceeds from federal and state level privatisation plus the debts transferred from the public to the private sector.

These results show the relevance of the restructuring, which is taking place within the Brazilian economy, making it more efficient, productive and competitive.

But more than a simple sale of assets to private investors, privatisation has been part of a deep institutional transformation, which includes the reduction of public debt, the creation of new investment opportunities, the stimulation of competition and the strengthening of market mechanisms.
Since 1995, the government has submitted bills, and the Congress has passed laws, aiming at modelling and deregulating a number of sectors, such as telecommunications, oil & gas and electrical energy.

The Congress has also authorised the creation of Regulatory Agencies such as ANATEL (telecommunications), ANEEL (electric sector) and ANP (oil & gas), which are already operating in this new environment where corporate competition has replaced public monopolies.

The Brazilian privatisation program has been developed under the strict eye of Congress, audited by the Federal Audit Court, and managed by a wholly government-owned institution, BNDES – the Brazilian Development Bank responsible for implementing government long-term financing polices in Brazil.

BNDES has also collaborated with the efforts of the state governments to privatise their own companies, providing technical advice and financial support.

Foreign Participation

The first stage of the Brazilian privatisation programme focused on public sector industrial enterprises. This stage has started up with the sale of USIMINAS, in October 1991 and ended with the privatisation of one of the world’s largest mining corporations, Companhia Vale do Rio Doce – CVRD, in May 1997.

In 1995 the programme entered its second stage focusing on the concessions of public services and infrastructure – including oil & gas, power utilities, railroads, telecommunications, ports, highways and banks.

When industrial enterprises were being privatised, up to 1995, foreign participation in total proceeds was less than 5%.

Once the privatisation of the utilities started, the interest of foreign investors in the Brazilian privatisation program increased dramatically amounting today as much as 48 %!

Great help was given by the stabilisation plan, Plano Real that achieved to lower inflation to the one digit level, reducing dramatically the uncertainties regarding the Brazilian economy.

Privatisation in Brazil: brief retrospect

The impressive performance of Brazilian privatisation in 1997 and 1998 was mainly due to the sale of TELEBRÁS – the Brazilian telecommunications system monopoly, the electricity generation assets of GERASUL and several state-owned electricity distribution utilities.

In 1999, one of the most important events was the sale of COMGAS, the gas distribution company owned by the state of São Paulo, which was sold for US$ 988 million, with a premium of 119 %. In the electrical energy sector, there was the sale of the first two of CESP’s generation companies, also in São Paulo state.

The year also marked the opening up of the oil & gas sector to private investors; the National Oil & Gas Agency – ANP, conducted the first round of concessions, authorising new players to explore and develop new oil and gas fields. Presently, around 67 fields have already been conceded.

In November 2000, the Central Bank successfully privatised the Branco do Estado de São Paulo – Banespa. The buyer was Banco Santander Central Hispano with a bid 281,02% over the minimum price, arriving at US$3.6 billion.

Still in 2000 the common shares of Petrobras that exceeded Government’s control were sold. The shares were sold through international public offer in the United States and in Europe simultaneously to a domestic offer with total revenues attained US$ 4.03 billion. Part of the domestic offer went to 312,194 individuals. The Federal government remains with 55,76% of Petrobras voting capital.

In 2001 the Petrobras non-voting shares owned by BNDES were sold through global public offer in the United States, Europe and Brazil. A total of 41.4 million shares corresponding to 3.5% of total capital were sold for US$ 806,9 million.

In addition the Brazilian Electricity Regulatory Agency – ANEEL, granted concessions to develop and construct new hydroelectric projects and new transmission lines during the past two years.

Overall proceeds in 2002, up to January 24^th are R$ 182.9 million. The amount refers to the sale of Banco do Estado do Amazonas S.A. – BEA, held on January 24^th at the BVRJ (rio de Haneior stock market), acquired by BRADESCO, the only competitor, for the minimum set price.

Up to the present date, 139 companies and concessions have been transferred to private investors, with total results of more than US$ 103 billion.

On why other companies were not privatised, the delegation was informed that only those companies with capacity to stand on their own were privatised. Even the privatised companies are not allowed to sell without the permission of the state; the state holds a golden share on all privatised companies.

The delegation met with a representative from the Brazilian Department of foreign Affairs. He informed the delegation about the role played by MERCOSUR (a forum that oversees trade between Latin American countries and the rest of the world) in promoting trade agreements between Southern Africa and Brazil. There are plans being initiated by the private sector in Brazil to get South Africa more engaged in bi-lateral trade with Brazil.

Conclusion:

The circumstances under which the privatisation of the economy and state enterprises in Argentina and Brazil were undertaken differed from that in South Africa:

The democracies of both countries were preceded by dictatorships and inherited a legacy of massive state debt (8 to 10 % of GDP vs 2% for South Africa).

Government overspending was the order of the day while South Africa boasted strict fiscal discipline.

A backlog in the maintenance of public services had built up to such an extent that the transport-, telephone-, gas-, water and electricity- supply systems were outdated and inadequate to enable vigorous economic growth.

OBSERVATIONS

South Africa basically does not need to privatise/restructure in order to pay off excessive state debts or to recapitalise the country’s infrastructure, it can restructure to enhance black economic empowerment, provide developmental capital for future development and bring in working capital, managerial skills, expertise and experience from the private sector.

South Africa should never allow the wholesale sale of state enterprises without at least retaining a strategic say (the golden share) for government in state enterprises – for the sake of sustained future development of the region and the continent.

SA should stick to its policy of fiscal discipline and never allow institutions like the World Bank to be able to dictate its economic policy because of borrowing too over borrowing from foreign money sources.

Privatisation of basic services, like water and electricity, resulted in high
Tariffs.

Privatisation of state information utilities, like military satellite systems, should be avoided at all cost to preserve state security.

After privatisation more people had access to public utilities and quality of service improved, but privatisation in both countries resulted in job losses.