As the threat of war clouded the horizon on the Indian subcontinent, India’s government clinched two important privatization sales. Maruti, India’s biggest car-maker, was sold to Suzuki – the first foreign company to win a major privatization deal – and Indian Petrochemical Corporation (IPCL) went to Indian conglomerate Reliance Industries.
Two small hotels were sold too, one to an investor from Muscat. Together, the sales will fetch the government around $825 million, one-third of its target for sales this year.
The Maruti sale was tricky, because the shareholders’ agreement ruled out sale of the government’s stake in the unlisted company to anyone unless Suzuki, an equal partner in the company, approved it. A negotiated deal was the only way out, and that seemed elusive for a while. In the end, a three-part deal was worked out. First, the government will renounce its share of a rights issue, taking its stake down to 45%. Suzuki will pay Rs10 billion ($204 million) to gain control of the company. An IPO will follow by March that will reduce the government’s stake to 25%, and the remaining shares will be sold once again to investors by March 2004.
Suzuki will underwrite the sale of government shares at a fixed price that is higher than Maruti’s current book value. That commitment should encourage investors to pick up Maruti shares, says Sughosh Moharikar, vice-president at Kotak Mahindra Capital, which advised the government on the deal. The rights issue price values the company at $1 billion, and if the government can sell the rest of its shares at that price, it will get around $667 million for its 50% stake.
Reliance paid Rs231 a share for IPCL, India’s second biggest petrochemicals company, 76% higher than the reserve price of Rs131. At 23 times past earnings, that appears expensive when compared with the 10 times earnings its own petroleum company trades at, says Vidyadhar Ginde, an analyst at HSBC Securities. But Reliance gets a monopoly over the polymers market, he adds, and will keep out IOC, a public-sector oil company and one of the two other bidders for IPCL. The incumbent monopoly tends to pay a higher price to keep competition out as IOC’s price for IBP in February proved, Ginde adds. India’s new competition law will not be a barrier as it does not bar a monopoly, only the abuse of power by a monopoly. Pradip Baijal, secretary in the disinvestment ministry, says the government does not see a monopoly of the local market as distressing in the case of a company whose products can be imported freely.
The political process of privatization is being managed well; a timely transfer out of play of a fractious minister paved the way for the Maruti deal. Suzuki has been a partner in Maruti for over a decade, so the takeover is unlikely to ruffle feathers. The success of the deal should encourage foreign companies to bid for other sales slated this year. These include Hindustan Petroleum and Bharat Petroleum, National Aluminium and Shipping Corporation.
Kala Rao
Ecuador is far behind the rest of Latin America in modernization and president Gustavo Noboa’s government is the latest to fail in its attempts to privatize the electricity sector, a goal he identified when he took office. The process got unplugged when the government cancelled the sale of seven electricity distribution companies following the withdrawal of the qualified bidders.
The electricity sector is in poor shape. Since 1995, a lack of rain has resulted in power shortages that at times have been as high as 30% of total demand, and the distribution companies have run up ballooning losses, totalling $175 million in 2001. The government agreed to pay off $525 million in debts accumulated by the companies in the hope of attracting investment. Noboa’s team is now talking of opening up the administration of the distributors to bids from private companies, as a last-ditch effort at taking them at least partly out of state hands. A date for this has not yet been set.
“Privatization in Ecuador will continue to fail as long as politics intervenes and the Ecuadorian people are not interested,” says Ramiro Crespo, president of Analytica Securities in Quito. “Putting the administration of the distribution companies into private hands should encourage the process of privatization. But if that doesn’t occur, privatization will only happen when we have enforced energy rationing once again.”
The electricity sale was supposed to open the floodgates to privatization of electricity generation and transmission companies and then telecommunications and ports. As things stand, this government will have to content itself with the administration project, while the next will have to decide whether its desire to privatize overrides its fear of losing political capital.
An energy project going ahead on schedule is the country’s first electricity generator driven by natural gas from the Gulf of Guayaquil. National company EDC will extract gas from the gulf and transport it to the province of El Oro, and another national company, Machala Power, is building a plant that will generate electricity from the gas.
EDC will invest $110 million in the project, and Machala $150 million. The system is due to begin operating by October.
Another project the government hopes will help alleviate the constant threat of energy shortages is the Mazar hydroelectric plant.The Mazar plant will be situated near the state-owned HidroPaute hydroelectric plant. HidroPaute was conceived as a three-stage generation system but only two stages have so far been completed, the construction of the Mazar plant being the third. The 183-metre-high dam will take four years to build.
The HidroPaute is Ecuador’s largest power plant, generating over half of the country’s electricity, but output is often severely cut by dry weather from October to March, creating threats of energy rationing. The Mazar plant, expected to cost $400 million, will help the HidroPaute dam downstream, by increasing water storage capacity. With energy demand growing at 7% a year, energy authorities see the Mazar project as essential.
