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Privatization Fever Sweeps Latin America
Area Development / November 1995

By Larry Luxner

WASHINGTON -- 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."

Those efforts paid off in September, when Perry's company closed 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."

Like hundreds of other U.S. companies, Constellation's interest in Latin America reflects the tremendous strides this region 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. In Mexico, state-owned entities from petrochemical plants to prisons are being sold to U.S. and other interests.

"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."

In Brazil, four petrochemical firms were recently put up for sale, while the country's main electric utility, Electrobras, and its telephone monopoly, Telebras, are expected to be privatized within the next year. Neighboring Paraguay is in the midst of selling off three state-owned firms: rum distiller Cañas Paraguayas, national merchant marine fleet Flota Mercante Paraguaya and a steel factory, Aceros del Paraguay. And in Venezuela, a number of state entities have been put on the auction block from a horseracing track to a shipyard operated by the Venezuelan Navy.

Throughout Central America, privatization fever is alive and well. With the return of the Panama Canal looming only four years away, Panamanian President Ernesto Pérez Balladares is hoping 100,000 acres of "reverted areas" will pump badly needed cash into his country's coffers. Part of the former Canal Zone has already been given back to Panama, although the bulk of the estimated 4,850 buildings and military bases won't revert back until the latter half of the 1990s. Late last year, the Washington consulting firm National-Intercarib Associates was selected to carry out a $4.5 million feasibility study on developing the reverted areas.

Meanwhile, the governments of Panama and Taiwan are studying the creation of a joint-venture industrial park in just-returned Fort Davis, in which Panamanians would provide 100 hectares of land and the Taiwanese the capital. Tax and financial incentives are already offered to foreign and local investors to encourage them to invest in manufacturing, export-oriented ventures and tourist facilities.

In Cuba, the Castro government has passed a law allowing foreign investors to own 100% of businesses and property in all industrial sectors except the "strategic" areas of education, health and defense. The law, passed Sept. 5, also permits the establishment of duty-free zones and maquiladora factories where foreign companies can produce and warehouse goods for export, and guarantees that foreign properties cannot be expropriated without compensation.

At the moment, however, Latin America's hottest spot for privatizations appears to be Peru. Later this year, the Fujimori government will begin selling off Peru's $100 million port system, with help from Boston-based Mercer Management Consulting. One option calls for liquidating Enapu, the national ports monopoly, and replacing it with a superintendency of ports which would be authorized to regulate port charges and promote conditions favorable to the development of foreign trade. Concessions to the nine ports -- Paita, Salaverry, Chimbote, Huacho, Callao, San Martín, Matarani, Ilo and Iquitos -- will be awarded one at a time. According to the U.S. Commerce Department, Callao, which serves Lima and is by far the largest of Peru's seaports, will be saved for last.

In addition to ports, Peru is also selling off several dozen state-owned hotels, as well as the state-owned Pescaperú fish processing factory and a cigarette factory run by the soon-to-be-privatized Empresa Nacional de Tabaco. Finally, the auction for 100% of the shares of Siderperú, the state-owned steel entity, should take place by year's end.

To date, nine consortia have acquired the bidding package for this auction, according to Peru's privatization committee: Armco do Brasil, CSN and White Martin (all of Brazil); Ispat (Mexico); Samsung (South Korea) and Aceros Arequipa (Peru). In early August, the government assumed responsibility for Siderperú's unpaid debts to foreign creditors, as well as to the government's tax and customs authorities. Located in Chimbote, Siderperú has a production capacity of 500,000 metric tons and supplies 50% of the Peruvian steel market. Last year, it sold 240,000 tons and had revenues of $96 million.

Companies also eagerly await the privatization of Petroperú, the state petroleum entity, with many of the world's major oil conglomerates expected to submit bids once Petroperú is put on the auction block -- a decision expected within the next six months.

Bidding for state-owned companies isn't as easy as it sounds, however. Perry of Constellation Energy 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 by December.

"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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