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"Privatization is so important because downsizing the government is the only way we can reduce our debt and improve the fiscal situation," says Jose Roberto Mendonca de Barros, the secretary of national economic policy and one of the most senior members of president Fernando Henrique Cardoso's economic team. "We continue to have constraints imposed on us constitutionally, and congress continues to make it difficult for us to get through constitutional reforms."
The privatization law came into force in 1990, but only industrial sectors the "easy" privatizations have been sold off. Brazil has yet to sell any utilities.
So far 45 companies have been sold, for total values of anything between R8 million ($8.1 million) and in the case of Light Sesa, the Rio de Janeiro-based electricity distribution company auctioned in May R2 billion. About 66% of the amount paid for Light Sesa was in cash, the biggest cash amount of any Brazilian privatization so far. So far, privatization proceeds total R12.3 billion, but only a small proportion has been paid in cash. The figure rises to R16.8 billion if the transfer of debt from the public to the private sector is included.
Privatization proceeds have soared this year in particular (R2.73 billion in the first five months, compared with a record R2.6 billion in all of 1993). But this is small compared with the tens of billions of dollars that could be raised if the utilities owned by the states and the federal government were sold off. For instance, mining conglomerate Companhia Vale do Rio Doce (CVRD), is alone worth about R10 billion.
Moreover, for a debt-laden country the fiscal effects of selling parts of the public sector is significant. A small example is the leasing of the federal government's five railway network concessions. Already two have been leased to private companies to manage and operate. The concession to operate the south-eastern section of the network, whose minimum price has been set at R888.9 million, will be auctioned on September 20. The sale of the entire concession will be completed by March next year. At the end of 1994 the federal railway system employed 45,000 people and recorded an annual loss of R350 million, with accumulated debt of R3.3 billion. "By March 1997, when we expect the entire railway privatization process to be completed, we will have only 400 public servants working in the federal railway system, just in an administrative capacity to receive the rents from the new operators leasing the networks," says Mendonca de Barros. The rents will be about R1.5 billion a year. "The new operators will invest another R1 billion, at present value, in track and equipment."
About 20 thermal and hydroelectric generating plants owned by Eletrobras are scheduled for privatization in late 1996 and 1997. Also in 1997 the government will tender for consultants to advise on how best to sell Eletrobras's four regional subsidiaries: Furnas, Eletrosul, Chesf and Eletronorte. Moves to sell Furnas will begin in late 1997, with a view to selling it in 1988. By the end of the privatization process the government is expected to have sold off all its 48% stake in Eletrobras. Based on market estimates, that could raise about R8 billion to R9 billion.
The government has also included 31 port concessions on the privatization list, which are due for sale in 1997 and 1998.
Cellular consultation
Before the end of 1996 national development bank Banco Nacional de Desenvolvimento Economico e Social (BNDES) will have issued the terms and conditions of the bidding process for consultant tenders on the first of about 10 B-band cellular telephone leases due for sale in 1997. The privatization process to sell Telebras-controlled A-band cellular licences will also begin late next year with a view to beginning their sale in 1988. As far as the restructuring and privatization of Telebras is concerned, the corporate restructuring should also gain momentum in 1997. The privatization of Telebras might take more time because the government doesn't want to be aggressive in privatizing other basic services, and so it will initially focus more on the cellular side.
By far the biggest upcoming privatization is CVRD, the federally owned mining conglomerate. In February 1997, 45% of its voting shares held by the government will be sold to a controlling consortium, and 10% will be sold to employees immediately afterwards. In June the government's remaining 20% stake will be sold as part of a global offering. This is expected to be the biggest privatization deal in Latin America since Argentine oil and gas company Yacimientos Petroliferos Fiscales' (YPF) $3 billion initial public offering in 1993.
The accelerated privatization plans follow a genuine change in the minds of the public and politicians. "In the past people criticized the very fact that we were privatizing," says Irima da Silveira, assistant chief of privatization at BNDES. "A lot of political parties and unions are against privatization. The criticism now is that we are not going fast enough. People accept it and want it to be done quicker."
Optimism that things are definitely picking up speed on the privatization front has been raised not just by the announcement of the CVRD and Eletrobras sales, but also by the fact that after years of preparation and passage through various committees the government has legal frameworks in place for concessions which it can transfer far more quickly to other sectors.
The government is also moving to develop regulatory blueprints, as well as regulatory bodies, to govern utilities and sectors such as telecoms and electricity. BNDES has hired consultants Coopers & Lybrand to help the central government decide on further regulatory and operational changes in the electricity industry. It's likely that Brazil will define market rules based on UK experience, since this is the best model for electricity privatization, rate reduction and improved services and competitiveness.
A law known as the minimum regulation for telecommunications has already been passed by congress, but it touches only on satellite and cellular services. The creation of a regulatory body for the telecoms industry as a whole is under consideration. Only two years ago the federal government could not even mention Telebras and privatization in the same breath. Now the possibility of privatizing the telecoms networks, including Telebras subsidiaries such Telerj and Telesp, is at least being discussed.
A proposal on how the telecoms regulatory body will be structured has already been drafted, and this is currently being considered by congressional commissions. Regulatory bodies for both electricity and telecoms are expected to be set up by mid-1997. These will be essential to the reduction of sector risk and will make it easier for would-be buyers of state-owned entities to predict future earnings flows.
"The process is gaining momentum and will continue to gain pace because we have seen developments on the regulatory side as well as the general framework for concessions law being put in place," says Marcelo Audi, head of equity research at Patrimonio, a Sao Paulo brokerage affiliated with Salomon Brothers. "These things can take many years it took more than two years for the federal railway concession sales to get going, for instance but now it is in place. We have the blueprint for other sectors."
Also, for the first time in many years politicians are, as a matter of self-interest, politically motivated to speed up the process. They realize now that growth lies in boosting the private sector. The public sector's flabbiness is hindering private-sector growth, and waving the privatization flag is politically advantageous. "This is the first time in more than a decade that publicly run infrastructure is becoming a bottleneck for sustainable growth in the country," says Audi, "so it's in the political interest to attract growth in the next few years." It's estimated that the electricity sector and the telecoms sector will require respective investments totalling R30 billion and R40 billion between now and 2000.
Quite apart from the need for growth, state governments and federal politicians are realizing that they won't be able to afford to pay for their past excesses without privatization. The state governments saw concrete evidence of the benefits of selling assets in May when BNDES sold Light Sesa. "In the wake of the Light auction, state governments in Brazil seem increasingly interested in selling their utility assets," says Paul Parshley, equity analyst at Lehman Brothers. "During our meetings in Brazil with utility companies and state government officials, we found intense interest in learning more about international utilities and IPPs [independent power producers] that might want to invest funds in Brazilian utilities."
Energy sales
Sao Paulo and Rio de Janeiro have gone farthest down this road. Sao Paulo is selling four energy companies: CESP, Eletropaulo CPFL and Fepasa. Those four will be split into 18 subsidiaries by activity: generation, transmission and distribution. CPFL is expected to be sold first, followed by some of CESP's unfinished installations. The proceeds will be used to pay off the companies' debt. The advisory mandates for CPFL and Eletropaulo were due to be opened for bidding and the state government is keen for the first sales to occur in the second quarter of 1997.
Rio is privatizing its state bank under the new federal government bank privatization incentive programme, as well as six other state-owned companies: CERJ, CEG, Conerg, Flumitrens, Metro and Cedae. Gas company CEG is one of the biggest to be sold off. It will be evaluated by December this year and ready for privatization in March. Capitaltec Consultoria Economica, a Rio-based firm, and investment bank Deutsche Morgan Grenfell have the advisory mandate.
Others up for concessions sales, or partial or full privatization for 1997 and 1998 include CRT (in Rio Grande do Sul), Coelba (Bahia); Cosern (Rio Grande do Norte) Celguge Cachoeira Dourada (Goias); Energipe (Sergipe); Cemar (Maranhao) Cemat (Mato Grosso); Enersul (Mato Grosso do Sul); Celpa (Para) and Ceron (Rondonia).
BNDES is also pushing certain states to speed up privatization programmes, by advancing funds to state governments and state utilities for investment and debt reduction. In return it expects the states to move forward with plans to sell utility assets or shares of state-controlled utilities. "A condition of these loans enables the BNDES to take control of the privatization process if the state drags its feet, which is a contingency the states would try to avoid," says Parshley.
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