Argentina's privatization program

= DEVELOPMENT IN PRACTICE:: -Argentina s ~~~~-7 L -7 Privatiz-ation Program Experience, Issues and Lessons A ~ BN '- S. > - 1 '-L 7 -' A L_ . J 1..,:.,".,-.. .** . . -~ :. ;-;WORLD '-i:mo::-BANK ,:F-,P, LUBLICAT1 0N.  DEVELOPMENT I N P R A C T I C E Argentina's Privatization Program Experience, Issues, and Lessons  Argentina's Privatization Program Experience, Issues, and Lessons THE W OR L D B AN K WASHINGTON, D.C.  O 1993 The International Bank for Reconstruction and Development ITHE WORLD BANK All rights- reserved Manufactured in the United States of America First printing September 1993 The Development in Practice series publishes reviews of the World Bank's activities in different regions and sectors. It lays particular emphasis on the progress that is being made and on the policies and practices that hold the most promise of success in the effort to reduce poverty in the developing world. The findings, interpretations, and conclusions expressed in this study are entirely those of the authors and should not be attributed in any manner to the World Bank. to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent The denominations, classifications, boundaries, and colors used in the map do not imply on the part of the World Bank any judgment on the legal or other status of any territory or any endorsement or acceptance of any boundary. Much of this booklet has been adapted from "Argentina's Privatization Programt" by Myrna Alexander and Carlos Corti, World Bank staff. Library of Congress Cataloging-in-Publication Data Argentina's privatization program: Experience, Issues, and Lessons I The World Bank. P. cm. - (Development in practice) Includes bibliographical references. ISBN 0-8213-2586-8 1. Privatization-Argentina. 2. Structural adjustment (Economic policy)-Argentina. 3. Government business enterprises-Argentina. 1. International Bank for Reconstruction and Development. ]1. Series: Development in practice (Washington, D.C.) HD4084.A74 1993 338.982-dc2O 93-31978 CIP  Abstract ARGENTINA'S privadzation program was characterized by its scope, speed, and breadth, as well as by the intensity of World Bank support. Between 1990 and the end of 1992, the government closed or sold virtually all of its public enterprises. Its main tactic was to establish new corporations as separate business units spun off from the state-owned companies; the latter were either to own the public enterprises' assets or to have the right to operate them under long-term concession agreements. Regulating legisla- tion prior to privatization, congressional oversight, and central coordination contributed to keeping the process on track, and support from World Bank staff, as well as funding from the Bank and other organizations, accelerated to match the pace set by President Menem. The total market value of assets sold is estimated to be well over $22 billion; the proceeds have gone a long way toward reducing both the extemal and the domestic public debt.  Contents FOREWORD Ix A BB R EVIATI ON S AN D AC RO N YMS xl 1 The Program 1 2 Impact 13 3 The World Bank's Support 16 4 Lessons Learned 20 N O T E S 25 A P P E N D I X E S27 A Argentina's Privatization Program: Sample of Major Participants and Technical Operators B World Bank Loans to Argentine Public Enterprises C World Bank Loans and Japanese Grants Used for Privatizing Argentine Public Enterprises vii  Foreword ARGENTINA'S privatization program, which peaked during 1992, is one of the broadest and most rapid in the Western Hemisphere. Nevertheless, this program-ambitious as it is-is only a component of the even more ambitious Argentine adjustment process. The World Bank has been a strong supporter of both the larger adjustment process and the privatization that forms such an important part of it. Although this process began in 1990, the foundation for it and the Bank's support was laid much earlier. For some time, Argentina had attempted to design viable strategies for adjustment. These had, at best, limited success. A few years ago it became evident to all that the key to Argentine adjustment was improved public finances. But the improvement could not ccime from simple wage repression, since this tactic had repeatedly proven to be unsustainable. It was clear Argentina could only control its public finanAces by ridding itself of some corrupt and inefficient expenditure programs, enterprises, and sub- sidies; by ensuring the collection of taxes; and by reversing the government's continuing deterioration which prevented it from providing basic, vital services-either directly or through public enterprises. Only ti;;n, all agreed, could any adjustment program succeed. Argentina's overall adjustment process, therefore, has been multifac- eted- The government has both cut back and reformed its public administra- tion: central government staff were reduced by 120,000; even more were 'ransferred to the provinces, along with responsibility for many social pro- grams. Impartial panels have chosen higher-level professional civil servants and paid them salaries commensurate with their skills. In addition, Argen- tina has greatly improved the tax structure and collection effort-computer- izing collections, prosecuting evaders, and professionalizing tax staff. As a ix  0 xF O RO FOREWORD result, revenue from national taxes rose from 12.7 percent of gross domestic product (GDP) in 1989 to 22.3 percent in 1992. The government has also drastically revamped its rronetary system; the pr-esent bimonetary system is close to a monetary board. Moreover, the country has revised the Central Bank's charter; the bank is now much more autonomous and focused on monetary, not development, issues. Finally, Argentina has ended the chronic deficit of its public enterprises by closing or selling virtually all of them. This monograph, originally developed at the request of the World Bank Board of Executive Directors, describes the privatization of Argentina's public enterprises. There have been other privatization programs in the Latin America and the Caribbean region; the Chilean and Mexican pro- grams are both well known and impressive. What makes the Argentine process different is not only its speed and scope, but the strong and detailed support of the World Bank. In the case of Chile, the World Bank was hardly involved at all; in Mexico, World Bank staff helped analyze some of the major issues and develop the framework for the privatization that followed. But in Argentina, when the Alfonsin administration was initially unsuccess- ful and misfortune dogged the first economic teams of the Menem adminis- tration, the World Bank became not only a proponent of privatization but a close adviser to government officials. The Bank not only supported the process with four new (since 1990) privatization loans, it used a series of already-existing loans to assist the authorities charged with restructuring, closure, sale, or concession of public enterprises. With hindsight, this strong support effort has a natural justification. Privatization, after all, is some- thing a government does very infrequently, and Bank staff-applying les- sons gained throughout the world-were able to help the authorities learn from this experience. We are publishing this report so that others may learn from and use our now-expanded experience. Nevertheless, I would like to emphasize that World Bank assistance was far from the crucial element in this successful program. The progress achieved by the government of Argentina in privatization is attributable almost to- tally to the participation of three series of actors, all of them Argentine. First, there was the strong support given to the program by the Argentine people, including many affected workers and consumers. Next, there was the constant and decisive leadership of President Menem. And finally, there was an extraordinary effort by a group of government officials working sometimes day and night to bring this difficult program to its conclusion. S. Shahid Husain Regional Vice President Latin America and the Caribbean Regional Office August 1993  Abbreviations and Acronyms AyE Agua y Energia Eldctrica BANADE Banco Nacional de Desarrollo EFF Extended Fund Facility ELMA Empresa Lfneas Marftimas, S.A. ENcOTel Empresa Nacional de Correos & Tel6grafos ENTel Empresa Nacional de Telecomunicaciones OSN Obras Sanitarias de la Naci6n SEGBA Servicios Eldctricos del Gran Buenos Aires SIGEP Sindicatura General de Empresas Pdblicas SOMISA Sociedad Mixta Sidernirgica Argentina YPF The new legal name for the Argentine petroleum company that was a major public enterprise since the 1 920s xi  C H A P T E R O N E The Program IJNTIL the 1940s public enterprises had little significance in Ar- gentina. The major exception was YPF, the petroleum company that had domi- nated that sector since the early 1920s. However, the government used the wealth accumulated during the Second World War to create new public enter- prises and establish others by purchasing (mostly foreign-owned) private utili- ies. In 1946 the government nationalized the telephone company (formerly international Telephone and Telegraph) and, in that same period, acquired six railroads originally owned by British, French, and Argentine interests. Later, it also nationalized the electric power company, as well as several bankrupt private industries, and formed major companies in the power and gas sectors and the steel and defense industries, Public enterprise policy has since varied with the many changes of politi- cal rule in Argentina; the present program is not the first attempt to reduce the size of the state. Several privatizations took place in the late 1950s and early 1960s under President Arturo Frondizi. In the late 1970s, the military govern- nient privatized or liquidated a further 120 enterprises. By 1982, total employ- ment in the public enterprises had fallen by 42 percent from the early 1970s; the number of railway employees had dropped from 156,000 to 95,000. Over the years, many governments tried to control and instill accountable behavior in these firns; however, none succeeded in curbing the enterprises' ineffi- ciencies and losses. Financial results for the thirteen largest public enterprises (excluding defense industries) showed an operating deficit of $3.8 billion' on revenues of $8.7 billion in 1989. For the first half of 1990, this operating deficit had increased by 35 percent, with four enterprises-YPF, the railways, t  2 A R G EN TI NA'S PRIVAT IZATIO N PR O G RA M the telephone company (Empresa Nacional de Telecomunicaciones, ENTel), and Gas del Estado, the gas company-accounting for half of the total losses. At the end of 1988, federally owned public enterprises had acquired over $1 1 billion in external debt. The civilian government that replaced the military regimes in the mid- 1980s placed public enterprise reform on its agenda. By the end of its mandate in mid-1989, the Alfonsfn government had embarked on a program of involv- ing the private sector in petroleum development; had formulated plans for defense industries and steel; and had discussed the sale of ENTel and Aerolineas Argentinas, the national airline. Nevertheless, partly because of congressional opposition, partly because of executive wavering, little was privatized by the end of Raul Alfonsfn's administration. The Purpose and Scope of the Privatization Program Upon assuming responsibility in July 1989, the government of President Carlos Menem also concluded that privatization had to be one of the main features of its economic platform. The prime intent was to bring an end to the state-corporate hegemony that had governed Argentina for so long. (Powerful unions had combined with strong industrial interests to maximize salaries and benefits for themselves at the cost of service to the public and economic efficiency.) Another goal was to have privatizations become an important avenue for providing a financial cushion while fiscal reforms took hold; this would facilitate the implementation of Argentina's stabilization program and resolve its external debt problem. With the adoption of the Convertibility Plan2 in early 1991, privatizations took on even greater importance in increas- ing Argentina's internationaI competitiveness. The program did not begin in a favorable climate. Not only was there a burst of hyperinflation during 1989-which contributed to the premature assumption of power by the Menem administration-but the economy was in recession and the physical and administrative capacity of the government was at a record low. Repeated stabilization failures and policy swings had greatly reduced the credibility of Argentine govemments, both abroad and among their own citizens. As a result, privatization was only one of the major reforms the Menem govemment undertook. Equally important were a reform of gov- ernment administration-including major changes in budgeting, staffing, salary schedules, and procurement-and reforms in the financial sector, particularly in the Central Bank. The privatization program operated concurrently with these reforms and, like them, began early in the Menem administration. The Emergency Law passed by the Argentine congress in August 1989 gave the government executive authority to privatize two television stations, ENTel, Aerolineas Argentinas, YPF's production areas, the merchant fleet, Gas  THE PRO G RAM 3 del Estado, and the Buenos Aires watcrworks (Obras Sanitarinas do la Naci6n, OSN) and electricity enterprise (Servicios Eldctricos del Gran Buenos Aircs, SEGBA). Ncw laws and decrees followed for privatizing almost all federally owned enterprises as well as other services that might be attractive to private investors. The final list of privatizations included national highways; electric power facilities; hydrocarbon production, refining, and distribution; rail cargo transport; urban rail and subway transport; ports; grain handling; water supply; mail services; money printing; shipping; a savings and insurance company; a hotel; a race track; petrochemical plants; steel manufacturing; assembly of airplanes and other military hardware; and various defense-related industrics. In addition, surplus public facilities-land and buildings-are up for sale. Finally, the government closed some bankrupt or uneconomic public enter- prises, particularly an iron mining plant in the south and the national develop- ment bank. The total market value of assets sold (netting out liabilities in most cases) is estimated to be well over $22 billion, excluding most concessions, surplus office buildings and land, and banks and insurance companies. Managing the Process The program is the result of President Menem's strong commitment to trans- form the Argentine state. Its implementation required political will combined with technical competence and managerial drive. To gain quick credibility, the authorities decided to quickly privatize the national airline and teleplhone company as well as the maintenance for one-fourth of the nation's highways. Although the latter two went rclatively well, the sale of Aerolineas Argentinas in mid-1990 has proven to be far less successful. Building on its initial expe- rience, the government refined its approach and instituted a structured process for the execution and coordination of the sales. This process was divided into the following steps: * Parliamentary approval * Establishment of a privatization commissiout * Preparation and approval of regulatory legislation or decrees * Contracting technical, legal, and financial consultants * Definition of separate business units * Labor-restructuring and voluntary retirement schemes * Organization of regulatory structure * Preparation of bidding documents and transfer contracts3 * Prequalification of potential bidders * Issuance of calls to tender * Evaluation of bids * Preliminary and final awards  4 ARGENTINA'S P RIVArIZATION PROGRAM * Company and asset transfer * Disposal of minority sharcholdings * Organization of employee stock ownership programs. A distinctive feature of Argentina's privatization process has been the balance between central coordination and individual privatizations. A special unit was formed within the Ministry of Economy headed by the undersecretary for privatizations. This unit provided consistency and transparency to the sales; the planning and execution of the actual transactions proceeded under the respective functional secietaries, mainly within the Ministries of Economy and Defense.4 The key functional secretariats in the Economy Ministry were those for energy, transport, public works, and combustibles; however, their names changed and there was some consolidation during the program. Al- though the central unit monitored the process and participated in the decision making, each area was left to carry out its own sales. Most privatizations were carried out by specially designated commissions including representatives of the central unit, staff of the sectoral secretariats, audit and control bodies, company management, and or:asionally other lev- els of government (provincial and municipal). The participation of the audit- ing bodies was particularly useful in ensuring that the process conformed to Argentine administrative procedures. Each privatization commission had a full-time manager who reported to the enterprise's chief executive or to the functional secretariat Each commission had access to lawyers, financial ad- visers, and sector specialists whose main tasks were to define business units and to prepare bidding documents and transfer contracts. Particularly in the case of infrastructure services-water, power, and gas-the documents had to specify clearly the nature and level of service to be provided and the regula- tions that would be imposed on their operations. Leading consultants and investment bankers were engaged to advise the authorities on the preparation and sale of enterprises. Another important aspect of the process was legislative oversight. The Argentine congress approved all major privatizations, either as part of the initial Emergency and Reforn of the State Laws, which gave the executive the right to sell selected companies, or through. individual laws for each privatization. Only a few companies, organized as joint stock companies, did not require such approval. A bicameral commission, consisting of members from both houses of congress and representing diverse political parties, had the right to approve the divestiture process, bidding documents, and contract terms and conditions. In the first privatizations, this commission was fully involved and mandated changes, for example, in the bidding documents for ENTel.5 For the larger, second round of privatizations, however, the bicameral  TH E PRO GR AM5 commission's power was curtailed; if the commission were unable to reach a consensus within thirty days, the executive branch could proceed. The government recognized early the need for regulating privatized utili- ties. In some cases (such as electricity and gas), this was established by law; in others, by decree. In most cases, privatizations have attempted to create con- tested markets, not only by breaking companies into component parts but also by setting up systems to regulate company behavior. Both the electricity and natural gas laws limnit vertical integration and interlocking ownership. At the same time, the new firms are required to follow competitive procurement practices in order to restrict intrafirm purchases and tranisfer pricing. In the case of telecommunications, the domestic monopoly ends after at most ten years, at which point competition is allowed. Privatization Methods The government employed several privatization methods. The main avenue was to establish new corpomations as separate business units spun off from the state-owned companies. These new companies were either to own the public enterprise assets-telephone networks, gas transmission and distribution sys- tems, and electricity generation plants-or to have the right to operate those assets under long-termn concession agreements, as in the case of electricity distribution. Thus the actual transactions were the sale of shares in these new companies. What had been state enterprises retained most liabilities and all contingent claims, which were extinguished by the procccds of' the sale. In other cases-highways, ports, railroads, and water supply-the government sold concession rights only for operating assets, which remained under state owner-ship. Concession terms were as long as ninety-nine years. The Argentine process economized on the use of government officials by substituting consulting finns extensively. In most cases this external expertise supported each privatizing commaission: m Technical specialists defined and structured the assets as independent and viable business units. * Legal advisers created the charters for new corporations spun off from the privatized entity and prepared bidding documents, contract terms, and condi- tions consistent with the government's approach to the sector and with sale. objectives. * Financial advisers assessed the fiscal feasibility of each business unit, the required investment plan, and the most likely tariff level that each corporation  6 ARGENTINA'S PRIVArIZATION PROG RAM would need to be sustainable. In most cases, the financial advisers coordi- nated the work of the legal and technical advisers, but in others they handled the legal work themselves. In some cases (for example, Sociedad Mixta Siderdrgica Argentina [sOMISA], and the hydrocarbon sector), the- technical work was vital and began well before financial advisers were named. The standard approach for securing these services was competitive bid- ding, restricted to a short list of prequalified firms invited to participate according to World Bank procedures, whether or not World Bank financing was involved. Sole-source contracts were usually avoided. In most cases, the firms hired were entitled to collect an agreed retainer and expenses; most financial advisers (usually merchant banks) were paid a "success fee" linked to the price obtained in the sale by the government. Although the performance of these consultants varied in tenns of their ability to understand the process and its players, deliver a robust product, and communicate with both the seller and the prospective purchasers, most of the consulting firms fulfilled the govemment's expectations. Those cascs rcquiring on-the-job adjustment un- derscored the importance for each consulting firm to have an experienced team manager in permanent residence for the duration of the contract. Viltually all privatizations, whether through the sale of shares or conces- sion nghts, were achieved through a competitive, two-envelope bidding pro- cess. In many cases, this was preceded by a prequalification process aimed at limiting the number of participants to only a few, well-qualified firms or consortia. Offers were generally from consortia composed of financial inves- tors, local businesses, and international operators. The first envelope usually contained the technical offer, which was evaluated to assess its conformity with the requirements set out in the bidding documents. A final selection among the qualified bidders followed, based on the financial offer contained in the second envelope: awards were made to the highest price for shares or concession rights, to the lowest subsidy (in the case of urban rail and subway transport), or to the lowest price charged to deliver a defined level of service (such as water supply). Winners had to make new investments and meet service or product standards as defined in the bidding documents. The sale of shares was usually partial; the government retained minority interests in the new companies. Typically, the government kept about 39 percent of the shares, the private owners held 51 percent, and the employees the remaining 10 percent. The government's intention was to sell its shares to the general public once the new companies were successfully operating. This has already been the case for telecommunications: its two offerings have a vast oversubscription.6 The government plans to sell its minority shares in  THE PROGRAM 7 about thirty-five privatized companies over the next few years. Employee shares are allocated separately through a Programa de Propiedad Participada under which some 120,000 former and present employees can exercise their right to own shares in about sixty-four different privatized companies. Other privatization methods were also used. The Ministry of Defense sold its minority holdings in several chemical companies directly to majority share- holders who exercised their rights option. Public assets have also been auc- tioned to the highest bidder; this has been the case for surplus buildings and land and the rights to explore and develop petroleum resources. YPF is the only company that has been sold as a going concern without the introduction of new technical operators or the break-up of the company into separate units. YPF shares have been sold in major international financial centers. In the case of Empresa Nacional de Correos & Teldgrafos (ENcoTel), the mail service, it will first be converted to a public corporation and then its capital opened to members of the World Postal Union; the government will retain majority control. Ports were also handled differently: small ports were transferred to the provinces, while the four largest ports are being privatized via concessions. Privatizations Realized Except for the merchant fleet, a few hydroelectric plants, and the mail service, the government has now substantially completed its privatization program. Between 1990 and 1993, Argentina sold thirty-four companies and let conces- sions for nineteen services plus eighty-six areas for petroleum development (Appendix A lists these privatizations). A brief description of selected privatizations follows. Railways Ferrocarriles Argentinos (FA) was responsible for providing passenger and cargo service, operating six railway lines (Belgrano, Urquiza, Mitre, Roca, San Martin, and Sarmniento) as well as intraurban rail service for greater Buenos Aires. Peaking at $1 billion in 1987. FA's operating deficit has aver- aged at least $500 million annually, mainly to cover subway, urban, and interurban passenger services. In September 1989, the government issued a decree reorganizing the company and setting out a privatization strategy that enltailed: * Leasing long-term concessions for all profitable services, including cargo networks comprising over 33,000 kilometers of lines, one passenger service  8 A R GARGENTINA'S PRIVATIZATION PROGRAM between Buenos Aires and Mar del Plata, and railway workshops and rolling stock * Reorganizing Buenos Aires' metropolitan passenger services and the sub- way system into a new company under a separate regional authority, with city and provincial participation, to coordinate and oversee suburban rail and subway and bus operations, and subsequently granting a concession to operate these services * Closing and/or transferring to the provinces unprofitable, noncritical inter- urban passenger services * Selling FA'S considerable real estate holdiegs. FA's privatization is near completion. Concession agreements have been awarded fourcargo lines, and two more are close to completion, including one that is probably to be conceded to employees. The capital's urban railway and subway systems have also been awarded on the basis of the least subsidy required to operate the system over the concession period. Based on the winning bids, the arnount required will reach about $915 million-less than $100 million per year-over the next ten years for the railway and twenty years for the subway, including government contributions for capital im- provements. This can be compared with a yearly subsidy of more than $500 million in the 1980s. A key part in PA.'s restructuring has been the reduction of redundant staff: at the end of the privatization program, FA'S staffing will have been reduced to fewer than 5,000 employees from the starting figure of almost 95,000. In addition, closure of most interurban passenger services or their transfer to provincial governments has relieved another fiscal burden on the federal govemment. Ports Privatizing port and grain handling facilities has also progressed. A new federal port law, approved by the congress in June 1992, provides for deregu- lation, demonopolization, and decentralization of port facilities. The rights for smaller ports have passed to the provinces while concession rights to operate major grain ports, Bahia Blanca and Quequen, have been let to a consortium of operators and rural associations. The concession for the Buenos Aires port will be awarded once the port has been divided into three separate  THE PROG RA M 9 business units. Simultaneously, the government is in the process of conressioning the management, signaling, and dredging of the Parana/Delta river basin for a 460-kilometer channel from Santa Fe to the river mouth. Petroleum YPp holds a major stake in the oil industry, from exploration, development, and processing of oil and natural gas through refining, transportation, sale, and distribution of final products. It still controls some 50 percent ofArgentinna's petroleum market even after opening the sector to private activity? As the first step in its privatization, YPF was converted into a public, limited liability corporation in 1991. Approval of the law to privatize YPF came in September 1992, allowing wPF to divest its nonstrategic assets. By mid-1993, over $200 million worth of refining facilities and pipelines, shipping fleet and port facilities, a storage center, retail outlets, in-house drilling and exploration services, and research laboratories had been sold. Since 1990 YPF has reduced the number of its workers from more than 50,000 to about 10,000 and has made major moves to improve its efficiency. The company was split in two for managementpurposes: an upstream unithandles all petroleum production, while the downstream unit refines and sells petroleum products. Both units may buy and sell to other companies and hence are treated as profit centers. By September 1, 1993,58 percent of YPF shares will have been placed with the private sector, thus reversing seventy years of public ownership. Concurrently, Argentina has deregulated and liberalized the hydrocarbon sector. Private operators can explore areas of acknowledged potential, de- velop discoveries on a concession basis, and freely dispose of their production at international prices, Implementation of the program started in January 1991 when all restrictions on oil prices and exports ended. As the next step, four central areas with reserves estimated at 255 million barrels opened to private participation. The "Plan Argentina" was then launched later in 1991, letting a further 1.4 million square kilometers to private exploration-850,000 square kilometers on land and the remainder offshore. Electricity Annual losses in the electricity sector during each of the past two years amounted to almost $1 billion. The reform includes the divestiture of the national power utilities, incorporation of private investors in new undertak- ings, and the adoption of a new regulatory framework. The latter establishes a  10 ARGENTINA'S PRIVATIZATION PROGRAM transparent system for the pricing and selling of bulk electricity in an openly contested market between generators and major users and distribution compa- nies. It also establishes regulation of retail services. In line with this reformn, the government will limit itself to power planning, granting concessions, coordinating a national power dispatch center, and setting overall electric policies. Privatization started in 1990 with the decision to sell SEGBA, which pro- vides electricity service for greater Buenos Aires. The company split into a series of generation and distribution companies. Thermal plants (more than 85 percent of the company's installed capacity) were sold and 95-year conces- sions let for power distribution, dividing greater Buenos Aires between two new companies, with a third for the La Plata area. The process was then extended to include the twoother federally owned electricity companies-Agua y Energia responsible for transmission and distribution in much of the rest of the country (the balance of distribution is in the hands of provincial govern- ments), and Hidronor, which operates several hydro-generation stations and some transmission lines in Patagonia. Upon the divestiture of hydro- generation facilities and the transfer of the remaining distribution activities to provinces, these two companies will be merged to create a new gri.._ company that will also be privatized. Natural Gas Gas del Estado (GdE) had a national monopoly for natural gas transmission and distribution, buying gas from YPF as well as Bolivia for subsequent resale to industry, power stations, and households. In June 1992 the congress passed a law that provided the framework for a new industry structure and the terms under which GdE was to be sold. This new law established a regulatory entity responsible for (1) licensing activities; (2) price regulation at the retail con- sumer level, including aperiodic five-year review of overall tariff structures; (3) safety and environment protection; (4) approval of significant mergers between units; and (5) the prevention of monopolistic or anticompetitive practices. The law also defined a new structure that promoted competition in natural gas supply with open access to the system: it set limits on cross- ownership among producers, transporters, and distributors and prohibited dis- tributors from acquiring more than two areas each. With the breakup and privatization of GdE's operations, the new structure is now in place. The trunk pipeline system of 12,600 kilometers was divided into two independent business units. The existing 9,400 kilometers of second- ary pipelines and 48,100 kilometers of distribution network-including gas  THE PROGRAM 11 treatment, separation, and compression plants; storage; and harbor installations-are now organized in eight independent corporations. In late 1992 the sale of shares and award of operating licenses were completed for all ten of the new business units. The units were sold to consortia that included experienced foreign gas companies; in the case of transmission units, the foreign finns were North American, the distribution consortia were European- led (see Appendix A). In order to maximize competition, the bidding rules had prohibited the same bidding groups from being awarded a combination of companies. As indeed the bidding resulted in bidding groups offering the highest bids for a prohibited combination of companies, the bidding went to three phases: the highest bidders exercised their preferences first, and unsuc- cessful bidders competed in succeeding rounds until all concessions were awarded. Water Supply and Sanitation Obras Sanitarias de la Naci6n (OSN) was responsible for providing potable water supply and sewerage services to a total population of about 11 million inhabitants in the greater Buenos Aires metropolitan area, which includes the federal capital and thirteen municipalities in Buenos Aires province. Al- though coverage of both water and sewerage in the capital isI 00 percent. only about 50 percent and 30 percent of the provincial population are estimated to be connected to public water supply and sewerage, respectively. Thus 4 mil- lion to 6 million people are without adequate water or sewerage facilities or both. In addition, the wastewater collected from the city is discharged into the neighboring La Plata River with little or no treatment, which creates a serious public health and environmental hazard. The problem is exacerbated by the proximity of the water intake to the sewage discharge outlets and by the unfavorable river flow pattern. The biggest challenge in privatizing OSN was how to provide an adequate incentive to satisfy the demand for water and sewerage services and at the same time improve the environmental conditions of the area. Investments of as much as $4 billion will be required to expand service and upgrade it to an acceptable level. Because OSN was owned by national, provincial, and municipal govern- ments, a tripartite government conmnission was established for the privatization. This conniission agreed to forgo any sales price or royalty, which would have been passed on to the consumer. Instead, a thirty-year concession was awarded on the basis of the greatest reduction in overall tariff levels. The winner, a consortium led by a major French water operator associated with an Argentine financial company and by a Spanish water operator, is to reduce tariffs by  12 ARGENTINA'S PRIVATIZATION PROGRAM almost 27 percent and has been given twelve years to meet its investment and service-level commitments. Operation of the privatized service began in May 1993. Privatization also provided for the establishment of an intergovernmental body to regulate the new operator's performance, and responsibility for moni- toring water quality shifted to the Secretary of Environment. The New Owners The process of privatization has generated substantial interest from foreign and domestic investors (see Appendix A.). More than 200 firms have partici- pated so far, averaging about $50 million per transaction (excluding conces- sion agreements and the sale of excess buildings and land). Sales have been dominated by eighteen firms-seven Argentine and eleven of other nationalities-which account for 60 percent of the total value. Major foreign investors have been technical operators from Spain, the United States, France, Italy, and Chile; some of these firms are public enterprises themselves. Smaller investnents are held by firms from Australia, the Tnited Kingdom, Canada, Switzerland, Belgium, Holland, the Republic of Korea, Panama, Saudi Arabia, Brazil, Uruguay, and Ecuador. Financial institutions-Citicorp is the leading case-have also participated, expecting capital gains on the initial debt-to-equity conversion and subsequent public offerings.8 Argentine firms account for 40 percent of the total, although they are almost always members of consortia that include foreign operations and debt holders. These new Argentine owners are mainly the few large conglomerates with sufficient financial backing and technical capacity to meetprequalification criteria. Among the seven Argentine firms that have acquired significant participation, Perez Companc and its affiliate Rio Group account for the single largest stake, about 14 percent of the total. This holding company in- creased its presence in the petroleum sector and diversified into natural gas distribution and telecommunications. Techint another large conglomerate with a base in the steel industry, has 7 percent of the total; it has diversified into telecommunications, rail, electricity, and hydrocarbons in addition to acquiring the public steel company. The next-largest holding is by Astra, also in the hydrocarbon sector; it has about 5 percent of the total. Three other large Argentine firms share about 6 percent of the total value. Wider share holding, especially by Argentine investors, will come about as a result of the planned public offerings of the govemment's minority interests.  CHAPTER TWO Impact AN evaluation of the results of Argentina's program would be premature-researchers are only beginning to analyze the program. However, the following observations on the attainment of fiscal and econornic objec- tives can be made. Fiscal Impact The proceeds from privaizations have gone a long way toward reducing both the external and the domestic public debt. As of December 1992, the nominal face value of foreign and domestic debt was reduced by $12 billion. Debt reduction was particularly important in the first two major sales; the bidding documents required an up-front cash payment as minimum price, turning the bidding into a contest of external debt instruments offered.9 As the price of Argentina's extemal debt rose and the possibility of a Brady debt agreement increased, this avenue had less appeal. The recent approach has been to allow both foreign and domestic debt to be included, stated in cash equivalent. In a few cases, new owners have assumed public enterprise debts, totaling about $1.5 billion. However, the government has assumed most of the debts and liabilities of the former public enterprises. These liabilities are not yet fully ascertained but are reported to be substantial and are now included in the government's debt consolidation and reduction programs. The government has so far received roughly $8.5 billion in cash, which has enabled it to forgo Central Bank financing and borrowing from domestic markets. The funds have also provided the treasury with the resources for implementing the Brady deal. Further receipts are destined for the repurchase 13  14 ARGENTINA'S PRIVATIZATION PROGRAM of the consolidation bonds the government is issuing to pensioners and suppli- ers in recognition of previous underpayments. The cash receipts include pay- ments for shares in the privatized companies as well as concession rights plus the government's shares in the privatized telephone companies. These first two public offerings and the sale of YPF shares yielded about $5 billion in cash. A sample of the sale proceeds appears in Table 1. Furthermore, privatization is expected to generate at least $1.5 billion in annual savings through the reduction of federal government budgetary sup- port to public enterprises, equivalent to almost half of the public sector's primary surplus in the macroeconomic program supported by an Extended Fund Facility (EFM) Arrangement with the International Monetary Fund (IMP).'0 In addition, there should be a long-term impact on tax collections as the private corporations pay value-added taxes (VAT) and profit taxes; the former public enterprises rarely met their fiscal obligations. In the case of telecom- munications, the two privatized companies paid a total of $74 million in profit taxes in their first year of operation. Economic Impact Starting in 1990 from a base of about 222,000 employees in thirteen major public enterprises, the accompanying process of restructuring-prior to or as TABLE 1. SAMPLE SALES PROCEEDS FOR PRIVATIZED ENTERPRISES (in $ mOrion) Enterprise Cash Debt YPF 3,040 855 ENTe] 2,271' 5,000 Aerolineas Argentinas 260 1,61 0b Petrochemicals 53 0 Oil fields 1,560 0 Power (sEosBA, AyE) 308 955 Real estate 107 0 Steel companics 143 40 Natural gas 300 2,651 Ports 14 0 a. Plus S380 million in promissory notes. b. Face value (cash equivalent estimated at about 15 percent).  part of privatization-will reduce employment to no more. than 42,000 by the end of 1993. Of this reduction, some 66,000 employees will be transferred to the new private firms, about 19,000 will be retired, and 95,000 will separate voluntarily with severance payments. The total cost of the severance program is estimated to be about $690 million or an average of about $7,200 per affected employee. Including all enterprises, the total reduction is projected to be almost 250,000, leaving no more than about 60,000 public enterprise employees by the end of 1993. It is noteworthy that labor opposition to these reductions has been isolated and offset by widespread public support for the privatization program. F-actors such as low wages in the public sector, the number of employees holding more than one job, generous severance ben- efits, and the advanced ages of the affected workers help to explain labor support. Another important factor has been that thie reductions coincided with reactivation of the Argentine economy and expanding labor markets in the private sec tor. T'he privatization program is likely to increas Argentina's investment levels, since the new owners are committed to undertake major investments to restore and expanid service levels. Partial estimate of this commitment put annual investments by the privatized firms at about 3 to 4 percent of gross domesfic product (GDP). In the telecommunications sector alone, the new owners plan to invest about $7 billion in upgrading services and providing new access over the next five years. These investments should have a strong multiplier effect on the demand for local capital goods, construction materi- als, and employment. The investmnents, combined with new management and technology, should improve service, especially in transport, telecombmunicatons, water, and power. More reliable service would eliminate the need for inefficient alternatives. Moreover, productivity improvements, enhanced by competitive pressures and deregulation, ought to lower operating CoStS.'2 As an example, the cost of installing new lines in the telecommunications sector has already been re- duced by two-thirds. These operating savings are, in part, to be passed to consumers through lower tariffs. Tariffs arc expected to fall by about 5 per- cent in electricity as changes in supply and demand arc reflected in the wholesale price, telephone charges by 2 percent per year in real terms, and water tariffs by almost 27 percent However, in other cases, real prices have increased. especially in natural gas, as market-determined prices took hold. In addition, tariff structures, particularly in telecommunictions, gas, and elec- tricity, will have to be realigned to reduce the cross-subsidizaLon that existed in favor of urban-residential consumers to the disadvantage of rurl and large industrial consumers.  C H A P TE R T H R E E ; The World Bank's Support T HE World Bank has long been involved with Argentine public enterprises. The Bank's first electricity loan to SEOBA was in 1962. It has made six loans to public power enterprises, four loans to the state develop- ment bank, and two loans to the railways, as well as loans for enterprises in water supply, petroleum, ports, and storage. Appendix B is a list of World Bank loans to the public enterprises. Although many of these loans were intended to help the public enterprises become more efficient, attaining these goals was often illusive. In many cases, the physical works financed were completed relatively well, but the capacities of the public enterprises remained weak. During the 1980s, their capacity deteriorated even faster as Argentina's external debt problems and bursts of hyperinflation led to sporadic austerity and adjustment programs that drastically reduced wage levels, investment programs, and even recurrent obligations such as maintenance. Employees became demoralized; the state's capacity to counter pressures from unions, some parasitical private firms, and populist proposals was virtually eliminated; and the quality of services pro- vided by the public enterprises was greatly dimninished. As a result, World Bank lending to public enterprises ended after 1988; the Bank had become convinced that only radical change could address the inefficiencies, overstaff- ing, and general poor performance of the public enterprises. The Alfonsfn government was the first to request World Bank, including International Finance Corporation (IFC), assistance in privatization. While the IFc examined Aerolineas Argentinas, the World Bank concentrated its efforts 16  THE WO RLDD BANK'S SUPPORT 17 on railways, ENTel, and hydrocarbons. Prior sector studies and continual dia- -logue with both Alfonsfn and Menem administration officials gradually led to the development of firm strategies forprivatization. This was neither easy nor without Cost Constant and rapid turnover of government officials often frus- trated the effect of reports, dialogues, and seminars. The chaos that ended the Alfonsfn administration and the unfortunate changes in the early Menem cabinet, combined with the deterioration of Argentina's civil service, meant that World Bank staff became the "memory" of the government as well as the technical adviser to new officials. lThe World Bank's support for privatization intensif . with a $300 mil- lion Public Enterprise Reform Adjustment Loan (PERAL 1) in February 1991. (Appendix C details the World Bank loans and Japanese grants used to sup- port the privatization effort.) This loan was a costly one to prepare: not only did it require a series of seminars, missions, and analyses, it also required a series of projectpreparation facilities (miniloans used to prepare majorloans); the use of old, restructured loans; bilateral aid; and some "good will" by consulting firms to finance the preparation work. PERAL I emphasized the privatization of three sectors: telecommunications, railways, and hydrocar- bons. (In thecaseof AerolineasArgentinas, thegovernmentdecided to follow a strategy and procedures the World Bank could not support.) In the three sectors covered by PERAL I, World Bank staff had also been instrumental in assisting the development of regulatory frameworks. Accompanying the PERAL was a technical assistance loan, called the Pub- lic Enterprise Reform Execution Loan (PEREL), for $23 million. The PEREL assisted in financing a wide variety of activities required for the success of the program-from the contrncting of technical and banking consultants to the development of regulatory agencies and from the financing of quick, special studies to the contracting of advisory consultants to work directly with the government officials. World Bank staff also began to use existing loans, restructured or not, to provide technical assistance for the privatization ef- forts. For example, a prior power loan to SEGRA financed the consultants required to privatize SEGBA, a water supply loan funded OSN'S concession, and a gas utilization loan assisted the privatization of both Gas del Estado and YPF. When Argentina changed the Economy Minister in February 1991, the new Minister of Defense-the former Minister of Economy who had negoti- ated PERAL 1-immediately requested World Bank assistance for privatizing the many public enterprises owned or managed by the Defense Ministry. Fortunately, the World Bank had done extensive work on some of these enterprises in the past (particularly in steel and petrochemicals), and none of them required regulatory frameworks. Starting with an analysis of the steel sector because of its oligopolistic nature, the Defense Ministry set up a coun-  18 AR G E N TINA'S PR IVATIZATION PR OG RAM terpart organization to handle the proposed privatizations, and a series of missions led to quick agreement on the way to proceed. Some uneconomic enterprises were closed, some minority shares were quickly sold, and sale strategies were defined for the rest. A $300 million loan, called PERAL II, was approved by the World Bank's Executive Board in early January 1993. It supported the privatization of these defense complex enterprises; two Japa- nese grants and monies from PEREL had assisted in financing the consultancy analyses and other tasks required for the program. Finally, the authorities decided to set deadline- for the closure and privatization of some financial institutions long studied and discussed with the Bank. In response, the World Bank quickly prepared a Financial Sector Adjustment Loan of $400 million, approved by the Bank's Board in February 1993. This last loan built on prior work in the financial sector that had begun five years before. In essence, the national development bank closed and its residual portfolio merged with the Banco de la Naci6n, the Savings and Insurance Bank was offered for sale, and the National Mortgage Bank was greatly downsized and restricted to wholesaling activities. As part of the program, Argentina's bank supervision is being strengthened, the Banco de la Naci6n refocused, and transparency in banking data increased. Again, a Japa- nese grant was most useful in preparing some of the key studies and restructurings required for the privatizations, as were prior World Bank loans. As the privatization process accelerated, the UN'S DevelopmentProgramme (uNDP), the IFC, and the Inter-American Development Bank (IDB) also moved to assist. As PERAL I had shown, the Bank's privatization effort had bccome quite costly-so costly the Bank's regional office for Latin America and the Caribbean found itself unable to justify such heavy budgetary outlays on one country. For example, although staff supervise normal projects via missions about every six months, in the case of Argentina, about every other month the World Bank was sending supervisory missions for loans assisting the privatization of enterprises. Moreover, the lack of experier,ce of some staff in privatization meant they depended on consultants for assistance. Finally, it became apparent that the sale of the public enterprises would require exten- sive traveling, aud the marketing efforts could be strengthened if World Bank staff accompanied the responsible government officer. Recognizing these extraordinary costs, the government requested a UNDP grant to help finance its marketing effort, in particular, as well as support its overall privatization effort. When the UNDP was only able to allocate $250,000 for this purpose, the authorities matched that amount from their own budget. The UNDP grant has permitted the World Bank to accompany government officials on four international marketing trips, as well as finance twenty-four extra staff missions to Argentina to assist in privatization. Finally, the World  *THE WORLD BSAN K'S S UPPORT 19 Bank was able to second an experienced staff member in December 19X91 to act as coordinator of the UNDP project and work with the Undersecretariat of Privatizations in accelerating the process. The lFC's assistance to Argentina's privatization program has been in the form of advisory services to the government and financial assistance to the nearby privatized companies. Its ability to assist has been partly affected by the inability of the World Bank-or reasons of possible conflict of interest-to directly finance the irc's fees. This has particularly been a factor in large transactions involving substantial fixed fees, which the government can af- ford to pay only when financing is available from institutions such as the World Bank. Nevertheless, using an already completed technical study of Altos Hornos Zapla, a steel mill in the province of Jujuy owned by the Defense Ministry, the lFc contracted to sell the plant based only on a success fee. The IFC did this efficiently and well, leading to a tripling of the original offer of the purchasing consortium. Altos Hornos Zapla was the first major successful privatization for the Defense Ministry. The ministry then requested the IFC's help in selling a cable and metal working plant, which it also did successfully. On the investment side, the IFc provided financial assistance to the first two privatized railway companies, those with the concessions for the pLior Rosario-Bahia Blanca and Mitre Railway lines. Together these companies represent the main railway network for Argentina's agricultural exports. Argentina's oil privatization program also received support from the IFc when it helped finance the development of three privatized oil fields. The IFc may well become one of the major sources of financing to assist the required investment programs at the newly privatized companies. Its investment pipe- line for Argentine privatized companies currently stands at more than $700 million and includes aid to the two privatized telephone companies; the elec- tricity distribution company for northern Buenos Aires; the gas distribution company for Buenos Aires; the water and sewerage company; and the electric- ity transmission line for Yacyreta, a hydroelectric plant financed by the Bank. As the process continued, the IDB also offered assistance. Once the privatization of SEGBA was under way, the IDB assisted in the privatization of the two other major national electricity companies, Agua y Energia and Hidronor. However, even with this support, the World Bank's staffing limita- tions as well as lack of experience in some sectors meant that the Bank had to decline assisting in the reform of some national public enterprises that the authorities requested. In particular, no direct aid was provided, in the port privatization, the sale of the merchantfleet EmpresaLfneas Mariftimas (ELMA), and-mostly from lack of experience and precedent-the reform of the mail enterprise, ENCOTel.  CHAPTER FOUR Lessons Learned THERE have been many lessons learned, both by the government and the World Bank, from the Argentine privatization process. Some pertain to the overall approach, others to technique. Although it is always difficult to generalize from a specific country case-each cnuntry is different-the Ar- gentine experience seems to underline the earlier, general lessons the Bank has learned from its global experience.'3 General Approaches Taken and Their Implications A major factor affecting the process was the very important decision made by President Menem to proceed rapidly, completing mostofithe privatizations by ihe end of 1992. This had significant implications. Because the privatizations of Gas del Estado, YPF, the defense complex, the Savings and Insurance Bank, and other organizations required legislation, the Executive Branch had less leverage with congress. The time constraint also put great pressure on the government officials involved in the process, their consultancy firms, and World Bank staff. In retrospect, some decisions made in haste might have been made differently given more time for analysis and reflection. Finally, the speed of the process probably restricted the number of possible purchasers for the public enterprises-with more time, more foreign purchasers might have been attracted. Nevertheless, even with hindsight, it is difficult to fault the president's decision. Many of the privatized enterprises will require massive investments to ensure that service quality is improved; the faster the transfer to private ownership, the faster these improvements can begin. The Brady 20  LESSONS LEARNEEDD deal for Argentina was consummated in April 1993. Without a rapid privatization effort, this deal could not have been closed so early. Moreover, the financial situation of many public enterprises deterior.ated even more once a decision was made to sell. It wa; difficult to maintain financial discipline and staff morale when such a major change of ownership was known to be pending. Rapid sale was the only way to stem these growing losses. Combined with the speed of the Argentine program was the decision to begin with the largest, most difficult enterprises: the airline, telephone com- pany, and railways. In both Mexico and Chile, smaller enterprises were privatized in the initial steps; this gave the governments time to learn from the process, develop a broader consensus in support of the program, and attract greater interest among purchasers. Nevertheless, the Argentine authorities remain convinced that the need for quick credibilitry and the already-present consensus that radical steps had to be taken justified their approach. The privatizationefforts of othercountries in similardifficultcircumstances would seem to support this decision. As in many other countries, the government confronted the need to reduce redundant labor in many enterprises. Most of the enterprises reduced their labor forces through voluntary departures, accompanied by severance pay- ments paid by the government or, in a few cases, with company resources and commercial bank loans. This permitted the new owners to receive the enter- prises already rid of much excess employment. In fact, this labor reduction program went more smoothly than initially expected. Argentine law provides generous sevemnce payments for public employees, often more than a year's salary. Because their public enterprise salares were so low, many employees had two or more jobs; severance from their public position gave them more time to dedicate to other work. In some cases, the average age of the workers was extremely advanced-in the railways it was over fifty-five-so that sev- erance pay was close to a generous preretirement bonus. Finally, the corrup- tion and poor service of many public utilities had so alienated the Argentine consumer that protest strikes undertaken by some public enterprise unions generated little sympathy or support In fact, privatization was to nullify existing collective bargaining agree- ments. This scenario would allow the new management to negotiate fresh labor agreements albeit still conforming to Argentina's generous labor laws and not eliminating all of the benefits enjoyed previously. In retrospect, it is possible that, if the government had not taken both of these labor actions before privatization, it could not have sold some of the enterprises, particu- larly the railways and major steel plant. Given the need to ensure the provision and quality of the new companies' services, the government required iznernationally recognized technical op-  22 ARGENTINA'S PRIVATIZATION PROGRAM erators in the prequalification of many bidding consortia, particularly those in public utilities, railways, and major industrial plants. Mforeover, the govem- ment required the continual presence of these operators for a certain number of years, during which time technology transfer to the new companies was to take place. Another requirement of the privatization process was the establishment of regulatory structures. One clear lesson from this proviso was that regulatory capacities will probably take many years to develop. As of March 1993, only one new regulatory agency was working in Argentina (in telecommunica- tions), and that one was dependent on a consultant firm and consumer group to do much of its work. Autonomous regulatory agencies administering funda- mental legislation are so alien to Argentina's recent history that it will prob- ably take years to develop a "demand" for good regulation. For example, the autonomy granted the National Telecommunications Commission was origi- nally abused; the members of the commission essentially did little work and its executive-at the suggestion of the World Bank-finally had to intervene. The Bank and the govermment are now preparing a regulatory project to assist the development of these newly created regulatory agencies. Finally, there is the concentration of asset ownership resulting from the privatization program. In retrospect, this was probably to be expected, since it stemmed from the speed of the privatization effort (discussed above), the initial low credibility of the govemment abroad, and the desire to prequalijfy bidders on theirfinancial soundness. It would have been difficult to have privatized at all were it not for a group of entrepreneurial firns already existing in the country. In the hydrocarbon sector, for example, Argentine firms purchased the overwhelming majority of assets. To ameliorate the effect of this concentration, the government is depending on its future stock sales and a proposed antitrust law. Technical Lessons One key lesson learned was the need to resolve as many issues in the bidding documents as possible, even to require that bidders include a signed copy of the contract with their respective bids. This measure was to avoid protracted negotiations once the award was made but before the sale could be put into effect. Such negotiations, as in the case of Aerolineas Argentinas, Ewrel, and the first railway concessions, could open up the process to changes that could fundamentally alter the conditions of the sale and the basis on which the award was originally made. Another lesson was the need to reduce the latitude of choice in the award process. If potential buyers have broad or ill-defined powers of selection, it  L ESSO NS LEAR NED 23 complicates further an already complex process. For example, at the outset there was considerable controversy over one option proposed by the govern- ment, the "private initiative," by which the private sector could propose an activity for privatization without the government having previously defined the terms. This option was subsequently discarded, and it was decided that privatizations would be via competitive bidding. Furthermore, the bidding process has been refined. The early privatizations in the rail sector called for selection based on a combination of investment, price, and employment criteria-this subjected awards to criticism as to the relative weights for each factor. Recent privatizations synthesize the selection process into one number-higher price or lowest subsidy or tariff-and make the awards more transparent. The government also learned that privatizazion had to be k-ept separate from company management Most of the state-owned enterprises entering the privatization program had 'intervenors"-appointed trustees who had full executive powers to operate the companies until the privatizations were com- pleted. Enterprise boards were abolished. However, knowing that the compa- nies would soon be under different management, these new management teams had little incentive to take decisions or embark on initiatives. Except in the case of YF, management was essentially passive: there was no effort to restructure operations, except to lay off redundant staff, and no strategy to enhance the value of the enterprises prior to their sale. After an early effort to curb enterprise expenses and to adjust tariffs as part of the government's fiscal constraint package, operating losses actually increased, particularly in elec- trcity and steel sectors, prior to sale. The government and the World Bank have found, as well, an innovative way to both confirm and use World Bank adjustment loans tofinance sever- ance pay for departing workers. The PERAL understandings required the authorities to certify, as a condition for disbursement, the names, other identi- fication, and voluntary arrangements made for the departure of a certain number of workers. This arrangement was then audited priorto disbursement, and the corresponding amount from the World Bank's disbursement was used to finance the liabilities thus accrued by the state. Other loans are now follow- ing this approach. The final lesson is that not all transactions will be successfuL It may be necessary to go through the process more than once but, even then, an attempt at privatization may be futile. This fact underlines the need to be initially very realistic and to close down uneconomic public enterprises rther than try to sell them, as the authorities did with a steel mill and some chemical plants. In the case of YPF's oil fields, at least one bid was abandoned for lack of re- sponse; ir. another tender, the government refused to accept a single offer. In  24 ARGENTINA'S PRIVATIZATION PROGRAM these instances, rebidding resulted in increased competition and higher bids. This same issue appeared in the case of the railway privatdzation: one cargo line did not attract any bidder, and the employees have now come forward to take over operations. The second attempt to sell the shipping line also was not successful. Similar scenarios exist for other companies, for example, the coal mine, which may ultimately have to be closed. These lessons, of course, can only be preliminary, since at the time of this writing (mid-1993) the Argentine privatization process had just ended. Al- though the sale of the public enterprises was relatively successful, the govem- ment will have to watch the enterprises closely in the future to determine whether their operating efficiency continues to improve after privadzation and the government achieves its ultimate goal-improving basic services to the people of Argentina.  Notes I. All dollar amounts are U.S. dollars. A billion is i,ao mnillion. 2. One of the miain features of the economic progra implemented by Economy Minister Domingo Cavallo was a fixed parity between the U.S. dollar and Argentina's peso, with a guaratee of the peso's convertibility. 3. Argentina's legal systemn required that a public agency evaluate each company, fixing a minimum sale price. In most cases either the public enterprise auditing agency, Sindicatura General de Empresas P(iblicas. or the development bank, Banco Nacional de Desarollo (BANADE), performed the evaluations. 4. Originally, many public enterprises were largely the domain of the Ministry of Public Works. and Services; the first major privatizations were under the dual author- ity of that ministry and the Ministry of Economy. However, the Public Works Minis- try was abolished at the end of 1990 and its functions taken over by the Economy Ministry. Thus, the Ministry of Economy had control over the bulk of public enter- prises, the major exceptions being those in the area of defense. 5. The commission required that the clause governing future tariffs be changed fromn graning the new owners a minimum rate of return to maintaining actual tariff levels declining in real termns over time. 6. The two telephone offerings coincided with, and may even have helped to fuel, a temporary stock market boom in the early part of 1992. 7. Although private companies have long been able to r-efine and distribute petroleum products, YnF had an effective monopoly on exploration and production. YPF: still has about 50 percent of the retail market plus 30 to 40 percent of oil and 80 pe-rcent of natural gas production, and is operating in association with the new private firms, 8.MTe return in telecommunications has been substantial despite the later down- turn in share prices. As of November 1992. the market value of the investment made by the original shareholders was five times the price paid in November 1990. 25  26 ARGENTINA'S PRlVATIZATION PROGRAM 9. External debt then traded at less than 20 percent of its face value. 10. In the 1992 federal budget, enterprise transfers were 3.5 times the federal budget for health, 4.7 times what was to be spent on the fedeml judiciary. and 13.2 times the federal budget for social assistance. I1. Most layoffs took place in 1991 and 1992, when the unemployment rate had been dropping and the economy recovering from the dramatic 1989-90 Tecession provoked by bouts of hyperinflation. Moreover, the reductions mainly affected the grcater Buenos Aires area, which has better employment opportunities than other parts of the country. 12. Public enterprises had to follow a "Buy Argentina" policy that often entailed higher prices for inputs and capital equipment than if international competitive pro- curement were permitted. More generally, labor reductions, lower interest rates, tax reforms, and deregulation, particularly in transport and port handling, have created many opportunities for lowering operating costs in Lhc privatized companies. 13. See "Privatization: The Lessons of Expcrience:' S. Kikeri, J. Ncllis. and M. Shirley, World Bank, 1992.  Appendixes  28 Appendix A. Argentina's Privatization Program: Sample of Major Participants and Technical Operators Private Major Courny Public enretpr#1e company shareholder of origin ENTel TELECOM Stet Italy Cable& Radio France J.P. Morgan U.S.A. PerezCompanc Argentina TELEFONICA Citicorp U.S.A. RioBank Argentina Tclefdnica Spain Techint Argentina Banco Ccntral Spain Soc Com. dcl Plata Argentina Arrolineas Argentinas Iberia Spain Banco Hispano Spain Pctrochemicmls POLISUR lpako Argentina PETROPOL Indupa Argentita INMUCLOR Indupa Argendna MONOMEROS Viniclor Argendna RIO TERCERO Egenon Fee. Argendna YWFSA.-Oil fields (sample Tozdillo Teqxptrol Argentina of several fields) Sta. Fe Energy U.S.A. El Hucnmul Total France Pueno Heman PerexCompane Argentina OXY U.SA. Vizeachems Asm Argentina Repsol Spain SataCnzz I CCC Argentina Quintana U.S.A. M. Rich U.S.A. Saua Cruzil PerezCotnpane Argentina Astra Argentina llerra drl Fuego Bridas Argentina Cbauvco Canada Aguarague Teepetrol Argentina Affipoex Austmalia almmar Largo Pluspetrol Argentina Norccn Caada Donwon Korea Campo Dumn PerezCompanc Argentina Pluspetrol Argentina SEGBA-Powir (sampl ofseveral Central Puerto Chilgener Chile companies) Chilectra Chile Costanera Endesa Spain Enemsis Chile Imv. Patagonica Argentina EDENOR Astra Argentina EDF France Endesa Spn:in EDESUR PerezComipanc Argentina Chilectra Chile PSI Encrgy U.S.A. P. Mendoza Acindar Argentina Massuh Argentina EDELAP Houston Ughting U.S.A. Techint Argentina  A P P E N D I X ES 29 Prhiate Major Country Puic enterprise company suorehotder of origin Railway Pflviccs (a) C.'go Fcrropampcano Tcehint Argendna Soc. Com. del Plaza Argendna Mesopotunin IMPSA Argentina Conruil U.S.A. Central IMPSA Argentdna Bclgrano Employees Argendna Femrosur Roca Lonu Negra Argendna (b) Interurban passengr Mar ddl Pla Roggio Argendna Burlington Nordhern U.S.A. (c) Intraurban rail and subway Mitc Roggio Argentina Burlington Northern U.S.A. Saradento Roggio Argendna Burlington Northern U.S.A. Urqu