Privatization in Argentina LaVerne Cerfolio Lesley Edwards Michael Henderson Shannon Logan Dana Masterpolo March 12, 2001

Overview  Methods of privatization: –Issuing stock to the public –Auction for concession of public services –Deregulation  Two models: –Foreign direct investment –Portfolio investment

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?

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

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

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

History

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

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

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

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

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

Disadvantages of Privatization  Increased unemployment rate – % total jobs lost –Middle aged men out of work –Lower and Middle SES women enter WF  Disrupted family life – 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

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

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

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