Privatization in Argentina

1
Privatization in Argentina

• LaVerne Cerfolio
• Lesley Edwards
• Michael Henderson
• Shannon Logan
• Dana Masterpolo
• March 12, 2001

2
Overview

• Methods of privatization
• Issuing stock to the public
• Auction for concession of public services
• Deregulation
• Two models
• Foreign direct investment
• Portfolio investment

3
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?

4
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

5
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

6
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

7
History
8
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

9
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

10
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

11
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

12
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

13
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

14
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

15
Implications

• Business Sector
• Competitive hiring based on education and
  credentials
• Need for office regulations
• Sex Harassment
• Child Labor Laws
• Minimum Wage
• Create Social Welfare Organizations
• Food Stamp Program, SSI, Health Care

16
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