2. Managing State Assets in Brazil: The Case of the National Development Bank Armando Castelar Pinheiro BNDES - UFRJ Budapeste, September 19, 2000

3. The Creation of SOEs in Brazil ëIndustrialization drive ëNational security ëNationalization of foreign assets (utilities) ëVerticalization and diversification of SOEs ëBankrupt private companies ëIndustrialization drive ëNational security ëNationalization of foreign assets (utilities) ëVerticalization and diversification of SOEs ëBankrupt private companies

4. Controlling SOEs in Brazil 41960s: Creation of holding companies (steel, telecom, electricity, etc.) 41967-78: Administrative reform reduced controls over SOEs while keeping privileges 41979-89: Creating centralized expenditure controls and legal restrictions on SOE creation (census) + sale of small formely private SOEs + performance contracts 41990-98: Privatization of large traditional SOEs 41999-: Change in corporate governance 41960s: Creation of holding companies (steel, telecom, electricity, etc.) 41967-78: Administrative reform reduced controls over SOEs while keeping privileges 41979-89: Creating centralized expenditure controls and legal restrictions on SOE creation (census) + sale of small formely private SOEs + performance contracts 41990-98: Privatization of large traditional SOEs 41999-: Change in corporate governance

5. Total Results (1991-2000) On February 18, 2000 US$ million SteelPetrochemicalsRailroadsMiningTelecomPowerOthers Minority shareholdings Federal-levelState-levelTotalSteelPetrochemicalsRailroadsMiningTelecomPowerOthers Federal-levelState-levelTotal TotalTotalProceedsProceeds Number of Companies Debts Transferred SectorSector 8277226318-91341258277226318-91341255,5622,6991,6973,30526,9783,9091,4721,10246,72426,17272,8965,5622,6991,6973,30526,9783,9091,4721,10246,72426,17272,8968,1883,7021,6976,864 29,103 29,1035,5791,8151,10258,05032,76490,8148,1883,7021,6976,864 5,5791,8151,10258,05032,76490,8142,6261,003-3,5592,1251,670343-11,3266,59217,9182,6261,003-3,5592,1251,670343-11,3266,59217,918

6. PND institutional structure F Federal Audit Court F House of Representatives Privatization Sub- committee F External auditors F Federal Audit Court F House of Representatives Privatization Sub- committee F External auditors Inspection, control and follow-up F Ministers responsible for the companies F Monetary Council F Brazilian Central Bank F Ministers responsible for the companies F Monetary Council F Brazilian Central Bank SupportSupport ManagementBNDESEvaluation External consultants ManagementBNDESEvaluation Privatization Council DecisionDecision President of the Republic

7. Sale model & financial adjustments Inclusion in PND Auction / Offers Call for tenders Call for tenders Tenders for consulting Consultant A Consultant B Financial and economic valuation Financial and economic valuation Minimum price Financial and economic valuation, special auditing, assets and legal appraisal Financial and economic valuation, special auditing, assets and legal appraisal Privatization Council - CND Privatization Council - CND PND privatization process

8. Remaining State Assets in Brazil ëPower generation (being privatized) ëReal estate (being privatized) ëRoads (to be partly privatized) ëWater and sanitation (to be partly privatized) ëBanks (to be partly privatized) ëOil company (not to be privatized, but end of monopoly and sale of shares) ëPower generation (being privatized) ëReal estate (being privatized) ëRoads (to be partly privatized) ëWater and sanitation (to be partly privatized) ëBanks (to be partly privatized) ëOil company (not to be privatized, but end of monopoly and sale of shares)

9. Banks: ongoing discussion on what to do ëFederal Q 2 commercial banks (agriculture and housing) largest commercial banks in Brazil Q 2 regional development banks (also commercial) Q 1 investment bank (BNDES) ëLocal states Q Several commercial banks being privatized Q Investment banks turned into development agencies ëFederal Q 2 commercial banks (agriculture and housing) largest commercial banks in Brazil Q 2 regional development banks (also commercial) Q 1 investment bank (BNDES) ëLocal states Q Several commercial banks being privatized Q Investment banks turned into development agencies

10. BNDES The Brazilian Development Bank 4Founded in 1952 4100% owned by the Federal Government 4The main source of medium and long-term financing in the Brazilian economy 3Main Brazilian partner of multilateral credit organizations 31,600 employees 4Founded in 1952 4100% owned by the Federal Government 4The main source of medium and long-term financing in the Brazilian economy 3Main Brazilian partner of multilateral credit organizations 31,600 employees

11. 2 BNDES along the years 90 50 60 70 80 Infrastructure - Steel Energy - Intermediate inputs - Consumer goods Import substitution of intermediate and capital goods Private industry and agribusiness Private infrastructure and exports Management of privatization process Infrastructure - Steel Energy - Intermediate inputs - Consumer goods Import substitution of intermediate and capital goods Private industry and agribusiness Private infrastructure and exports Management of privatization process

12. BNDES total disbursements US$ billion 9,6 19951996 199719981999 11,8 16,516,5 11,1 2.000 forecast : US$ 13.3 billion

13. Loan Portfolio Disbursements 59% 73%74% 19971998 1999 199719981999 78% 90%96% Private sector share (%)

14. BNDES group structure Finances long-term investment investment BNDES BNDESPARFINAME Equity participation Finances capital goods purchases and foreign trade

15. BNDESPAR The investment corporation of BNDES Created in 1982 Fully-owned by BNDES A public company since January 1998 The most important venture capital agency in Brazil The investment corporation of BNDES Created in 1982 Fully-owned by BNDES A public company since January 1998 The most important venture capital agency in Brazil

16. Operations cycle Monitoring Divestment Investment funding BNDESPAR interest and dividends recycling pay debt

17. Investment highlights Always minority stakes of temporary nature Valuation is based on each firm’s prospective performance Investment may also be made indirectly, through one of its closed-end funds BNDESPAR offers special programs for small and medium-sized technology-based businesses and emerging companies

18. Divestment Primarily through public offers in the domestic or international capital marketsPrimarily through public offers in the domestic or international capital markets BNDESPAR often creates new financial products, coupled with derivatives, to promote liquidity and develop the capital marketBNDESPAR often creates new financial products, coupled with derivatives, to promote liquidity and develop the capital market

19. 12.8 7.7 6.9 4.6 2.3 3.7 3.9 214 510 12.8 7.7 6.9 4.6 2.3 3.7 3.9 214 510 11.6 5.6 10.4 8.3 2.0.3 2.2 191 246 11.6 5.6 10.4 8.3 2.0.3 2.2 191 246 Total Assets Net Worth Market Value Stocks, funds & bonuses Convertibles Investment Divestment Number of Companies Net Profit (US$ million) Total Assets Net Worth Market Value Stocks, funds & bonuses Convertibles Investment Divestment Number of Companies Net Profit (US$ million) Dec-98 Dec-99 US$ billion 11.6 5.4 11.2 9.1 2.1 3.2.6 197 366 11.6 5.4 11.2 9.1 2.1 3.2.6 197 366 Jun-00 Key BNDESPAR Figures

20. 3 3Up to R$ 7 million ( around US$ 4 million ) BNDES Automatic - financing through a network of accredited financial institutions (pass-through lending ) 3 3In excess of R$ 7 million FINEM - Direct financing 3 3Unlimited FINAME - Machinery and equipment (pass-through lending ) BNDES access to credit

21. credit policy & procedures Exposure limits: sectors and clients Rating policy and Credit Committee No foreign capital discrimination All loans require collateral and repayment capacity Onlending through financial intermediaries, which assume the final credit risk BNDES

22. Changes in SOE Corporate Governance Failure of performance contracts ëMore active board members (outsiders) ëMinister as president of board ëMore transparent accounting practices ëBNDES on board of directors of privatized companies with left overs in state hands Failure of performance contracts ëMore active board members (outsiders) ëMinister as president of board ëMore transparent accounting practices ëBNDES on board of directors of privatized companies with left overs in state hands

23. www.bndes.gov.br e-mail: financia@bndes.gov.br www.bndes.gov.br e-mail: financia@bndes.gov.br BNDES - The Brazilian Development Bank BNDES BNDES - The Brazilian Development Bank