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Puzzling privatizations: Readying bid for state company is no easy chore
The Miami Herald / July 21, 1995

By Larry Luxner

ROCKVILLE, Md. -- Bolivia's not exactly a household name in Baltimore, and when Constellation Energy Inc. -- a subsidiary of Baltimore Gas & Electric -- began scouting around for overseas acquisitions, most of BG&E's officials didn't know a thing about the landlocked South American nation.

That certainly has changed, says Doug Perry, Constellation's vice-president for development.

"We looked at Europe and the Pacific Rim, but finally decided to focus on Latin America," Perry said in an interview here. "For one thing, there's a distinct advantage in being in the same time zone. Bolivia came on the scene about the time we were beginning our efforts."

Next week, those efforts will pay off when Perry's company expects to close on its first foreign investment ever -- a $34 million chunk of ENDE, the recently privatized Bolivian power entity. Once the deals are final, Constellation and three other U.S. companies -- Energy Initiatives, Dominion Energy and Liberty Power -- will control 90% of the country's total electricity generating capacity. But that's not enough for Perry.

"We don't plan on stopping in Bolivia," he says. "My job is to keep growing the energy business."

Perry was one of several executives who gathered Thursday in this Washington suburb for a conference on how to profit from Latin America's privatization fever. The meeting, entitled "Privatization and Infrastructure Development in Latin America," was organized by Baltimore's World Trade Center Institute and attracted 45 executives from pharmaceutical companies to freight forwarders.

Their interest in the subject reflects the immense strides Latin America has made toward privatizing state-owned companies. In 1993 alone, according to the Chilean magazine AméricaEconomía, Latin America collected more than $24 billion from privatizations, or about 35% of the world total for that year. In 1994, Argentina, Mexico and Peru all announced major divestments; even Cuba -- whose Marxist leadership has resisted free-market policies -- jumped on the bandwagon when Mexican conglomerate Grupo Domos bought 49% of EmtelCuba, the national long-distance company.

"Many of these companies were nationalized in the 1960s and 1970s, but now capitalism has blossomed," said international trade attorney Judd Kessler. "These governments have realized there is no other way to go but to reform their economies and open their investments to private capital."

Bidding for state-owned companies isn't as easy as it sounds, however. Perry says that preparing his company's winning bid -- which was opened on Bolivian national TV -- took almost a year and cost about $500,000.

"In the beginning, 31 companies expressed interest in being pre-qualified," he said. "Constellation began the due-diligence process in August 1994 and continued through June 1995. We did a country risk analysis, mainly for our board of directors." Of the Bolivians, Perry said, "they were determined to do it right and not be subjected to criticism."

Luis de Lucio, manager of international financial services at Ernst & Young, offers some specific tips for companies about to bid on state-owned firms in Latin America:

* Evaluation. Take a careful look at how much the government is asking for what it's selling, and how much you're willing to pay.

* Terms. What is the government requiring in addition to your purchase of the facility, what levels of service does the government expect, and how many employees are they asking you to keep?

* Sources of financing. Your company can finance the transaction with its own equity, or turn to domestic markets (for smaller firms) international markets (for larger firms) or multilateral investment agencies such as the World Bank's International Finance Corp. or the IDB's Inter-American Investment Corp.

* Legal and tax requirements. Carefully study rules on setting up the company, possible limitations on foreign participation and reciprocity with the United States on tax issues.

Once the winning bid is in hand, De Lucio advises, don't fire top personnel who may be indispensable to the smooth running of the enterprise. "Most of these companies are burdened with too many workers, especially railroads," he says. "But there are some employees you don't want to do without."

Aileen Pisciotta, chief of planning and negotiations at the Federal Communications Commission's International Bureau, says executives should also give some thought as to what's behind a given selloff -- particularly in the field of telecommunications.

"Argentina's privatization of Entel was motivated by the need to retire public debt," she said. "It was very different in Venezuela, where the sale of CANTV was motivated by a desperate need to improve service. In Nicaragua, it was a pure political problem."

She added that the sale of government phone companies generally requires a law, and sometimes a constitutional amendment. Bolivia, Honduras, Nicaragua and Panama all expect to sell their state-owned phone companies within the year; Brazil, she said, will be able to do likewise if a law authorizing the sale of Telebras is passed this fall.

"The position of unions is also a major problem. In Uruguay, a public referendum rejected the whole notion of privatization, and in Colombia, workers sabotaged the network." Part of the reason, said the FCC expert, was that although "telecom itself is an engine of economic development, a lot of people think privatization is synonymous with competition, but that's often not the case."

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