Report: Study Tour to Argentina and Brazil, dated 15 May 2002:

The Portfolio Committee on Public Enterprises, having undertaken a study tour to Argentina and Brazil from 14 to April 2002, reports as follows:

I. Background

The 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 SOEs, in view of the development needs of South Africa and of international trends in SOEs restructuring. Beyond this, the President in his State of the Nation Address last year reminded the 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 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.

II. Purpose

The two countries visited, 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 would assist the Committee in grasping the reasons for those failures so as not to repeat them. Essentially, this tour could help the Committee to familiarise itself with complexities that the other countries have faced and have dealt with.

III. Delegation

The members of the delegation were:

1. Mr B A D Martins, MP (Chairperson of Committee and the leader of delegation) (ANC)
2. Mr B M Komphela, MP (ANC)
3. Mr R J B Mohlala, MP (ANC)
4. Ms P N Mnandi, MP (ANC)
5. Mr M S M Sibiya, MP (IFP)
6. Dr W A Odendaal, MP (NNP)
7. Mr C T Thisani (Committee Secretary)

IV. Argentinian leg of tour

15 April 2002

A. Courtesy meeting at Embassy

The delegation received a briefing at the Embassy from Mr T Nyawose, Charge d'Affaires, and Mr P Pieterse, Trade Attaché. Mr Nyawose briefed the delegation on the current crisis in Argentina. After analysing the situation in Argentina, the mission came to the following conclusions as contributing factors to the crisis:

1. Pegging of peso (Argentinian currency) to dollar

The decision by the then government of Argentina to peg the peso to the dollar on a one-to-one basis meant in practice that when Brazil (Argentina's biggest trading partner) devalued its real (Brazilian currency) 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.

2. Extensive borrowing by 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 spiraling of domestic interest rates. The more the government was borrowing, the more expensive credit became for Argentine businesses. This forced many companies to close down.

3. 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 the 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 have not helped to resolve the problem.

4. Economic recession

The extensive programmeme 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 a 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 a 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 the IMF made it clear in mid-2001 that it would not bail Argentina out by making an advance payment on a previously agreed loan, to allow the government to make its next debt payment. This was after Argentina had 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; 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$1 000 per month. The limits on cash withdrawals, in turn, hurt consumer sales already battered by the country's four-year recession.

The limits on cash withdrawals 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.

B. Implications for South Africa

The financial crisis presently afflicting Argentina and the resultant financial regulations and restrictions imposed by the Central Bank regarding 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 figure in respect of bilateral trade last year stood at US$426,988 million with Argentina importing US$131,730 million worth of goods from South Africa and exporting US$295,258 million to South Africa. South African exporters will find it difficult to export on the 180 days' payment terms and may have to seek alternative markets. The South African Reserve Bank requires payment within 180 days of shipment. Argentine companies, however, have to pay only 180 days of receipt of goods (200 days after shipment).

A number of South African exporters might not be paid for exports shipped to Argentina prior to December 2001 (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:

* 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 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 a 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.

C. Meeting with Mrs M Alexander from 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. The rate of inflation was at 3 000%. The prevailing situation offered a dramatic setting for privatisation to take place. 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 the foundation for the following:

* Access to water was increased by $150 million

* Illegal electricity connections were reduced

* Railway locomotives were refurbished

* Changes Management in ports yielded better results

* Reduced debt burden on the State.

However, the following problems still lingered:

* A need to create a sound regulatory framework to monitor performance

* Too many regulatory bodies

* Many companies borrowed from Europe in dollars, and the current situation left them unable to pay their debt

* Ever-increasing demand on public service the 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 it has now changed to one dollar to three 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 a timetable for tariff adjustment

* Phasing-in of tariff adjustments

* A Commission was set up to assist the government

* 55 contracts are to be re-negotiated

It is Mrs Alexander's opinion that the dilemma faced by the companies cannot be apportioned to privatisation; problems are bound to be there regardless of whether 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 in order 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, the following happened:

* Social spending in the government budget improved because of a reduced deficit

* Debt was reduced by 16%

* 4% GDP growth

* Two million people more with water

* Number of call boxes increased from 24 000 to 81 000

* Number of telephone lines doubled

* Although some problems still persist, people agree that services have improved

* Electricity tariffs are one of the lowest in the world.

According to Mrs Alexander, the World Bank does not lend to companies. It only lends money to the government but there are World Bank agencies that lend money to companies. In her opinion, companies in Argentina took on too much debt and not enough 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 all 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 in the government, etc, cannot be ignored.

D. 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 weapons 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 black-outs

* New telephones were installed and suddenly almost everyone had access to telephones

* The Economy was doubled in seven 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 public utilities became expensive

* Foreign companies paid bribes to get contracts

* The regulatory framework became loose

* Officials were easily bribed

* 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.

E. Meeting with Mr C Cirigliano - Chairperson of 'Trenes de Buenos Aires'(TBA) (privatised railroad company)

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

* Management of 350 of rail lines

* Rebuilding of 96 stations

* Acquisition of new electric carriages

* Elimination of crossings between cars and rail.

The organisation employs about 3 000 workers. After privatisation, the number of commuters rose to one million but due to the 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 the 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, did 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.

F. 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 a seven-year monopoly, extendable to 10 years

* The National Commission on Telecommunication regulates the industry

* Telecom is owned by four consortiums (employees own 10%) with seven 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 million

Market cap $2,2 million

Employees 14 453

Fixed lines in service 3 892 000

Cellular subscribers 2 136 000

Internet subscribers 257 000

Fixed network 100% digital

G. Meeting with Mr M Montana, National Commission of Transport

This Commission regulates 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 estate (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 conflicts of interest

* Monitor conditions of service.

Mr Montana highlighted the following achievements:

* An increased number of commuters (50% of commuters depend on metro for transport)

* Improved customer service

* Low accident rate

* Subways 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 had filled the gap left by long haul service. He added that there was 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

H. Meeting with Parliamentary Committee on Public Enterprises

The chairperson this Committee is Deputy Courel. The delegation was briefed by:

* Mr O Junion, Head of the Water Commission

* Mr I de Carvalho, of Planning

* Mr E Fernandes, Director of Structured Products.

Innargas Briefing

Innargas is a $2,5 billion a year gas producing company. It controls over 1 000 km of gas networks. The company agreed to privatisation in 1992 so as to improve efficiency. The enabling law was passed in 1996 and at the same time the parliament of Argentina appointed a regulatory agency. The policy objectives of the agency was to:

* Protect the 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

* 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 the 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 started in the 90s. The targets against inflation were met until the recent crisis. As 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 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.

V. Brazilian leg of tour

17 April 2002

A. Meeting with Chairperson of 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.

B. 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 were:

* 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 substantial capital flight

* Some foreign companies decided to close down and relocated outside the country

* Lack of profit was 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

* Road conditions have improved, but this has 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 an obligation towards the poor

* A lack of clear accountability lines in the privatised companies.

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

* Strategic information and security systems should remain in State hands, e.g. the 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 (a minimal share held by the State to prevent the company from being taken over by a foreign country) should remain with the State.

18 April 2002

C. Meeting at 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:

1. 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 restructuring, which is taking place within the Brazilian economy, making it more efficient, productive and competitive.

However, more than a simple sale of assets to private investors, privatisation has been part of deep institutional transformation, which included 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, aimed at modelling and deregulating a number of sectors, such as telecommunications, oil and gas and electrical energy.

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

The Brazilian privatisation programme 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 policies in Brazil.

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

2. Foreign Participation

The first stage of the Brazilian privatisation programme focused on public sector industrial enterprises. This stage has started 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 programmeme entered its second stage focusing on the concessions of public services and infrastructure - including oil and 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 privatisation of the utilities started, the interest of foreign investors in the Brazilian privatisation programme increased dramatically, amounting today is much as 48%!

A great help was the stabilisation plan, Plano Real, that achieved lower inflation, to the one-digit level, and reduced dramatically the uncertainties regarding the Brazilian economy.

3. 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 Sao Paulo, which was sold for US$988 million, at a premium of 119%. In the electrical energy sector, there was the sale of the first two of CESP's generation companies, also in Sao Paulo state.

The year also marked the opening up of the oil and gas sector to private investors; the National Oil and 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 Sao Paulo, Banespa. The buyer was Banco Santander Central Hispano, with a bid 281,02% higher than the minimum price, arriving at US$3,6 billion.

Still, in 2000 the common shares of Petrobras that exceeded government 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 attaining 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 a 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 hydro-electric projects and new transmission lines during the past two years.

Overall proceeds up to 24 January 2002 were U$182,9 million. The amount refers to the sale of Banco do Estado do Amazonas S.A.(BEA), held on 24 January at the BVRJ (Rio de Haneior stock market), acquired by BRADESCO, the only competitor, for the minimum set price.

Up to now, 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 with capacity to stand on their own were privatised. Even privatised companies were 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. The plans are being initiated by the private sector in Brazil to get South Africa more engaged in bilateral trade with Brazil.

VI. Conclusion

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

* The democracies of both countries were preceded by dictatorships Brazil inherited massive state debt (8% to 10% of GDP, vs 2% for South Africa)

* Government overspending was of 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 transport, telephone, gas, water and electricity supply systems were outdated and inadequate to enable vigorous economic growth.

VII. Observations

1. 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.

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

3. South Africa should stick to its policy of fiscal discipline and never allow institutions like the World Bank to dictate its economic policy because of too much borrowing from foreign money sources.

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

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

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