Aspects of privatization : the case of Argentina 1976-81

THE WORLD BANK Internal Discussion Paper LATIN AMERICA AND THE CARIBBEAN REGION SERIES Report No. IDP16 Aspects of Pvatization: The Case of Argentine 1976-81 R. Luders (consultant) April 1988 trade, Finance and Industry Operations Country Department I Discussion Papers are not formal publications of the World Bank They present preliminary and unpolished results of country analyss or research that is circulated to encourage discussion and comment citation and the use of such a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bankd, to its affiliated orgnizations, or to members of its Board of Executive Directors or the countries they represent. Executive Summary Aspects of Privatizations The Case of Argentina, 1976-81 This report addresses important issues of the Argentinian privatization. For example, which methods were used by the Argentine Government to privatize state enterprises from 1976-81? What was the impact on fiscal revenues, employment, business asset concentration, and other economic variablos? What did the Government do to achieve some objectives of state enterprists divestiture if complete privatization was not possible? What were the components of the opposition to a deeper privatisation in Argentina? Was this opposition the same as, or different from that against, a more pronounced trade liberalization? The analysis in this report is based on information and studies, most of them descriptive, of the privatization process, its impact, and difficulties. Unfortunately, the number of privatizations is too small to allow for statistically valid comparative tests between actions of privatized enterprises and of those which remained in the public sector or which were always in the private sector. Attention in this study therefore centers on an analysis of alternative methods used by the Government to achieve divestiture outright, and on the reasons for the opposition to privatization. ASPECTS OF PRIVATIZATION: THE CASE OF ARGENTINA, 1976-81 CONTENTS INTRODUCTION ECONOMIC BACKGROUND STATE ENTERPRISES IN ARGENTINA 1. Growth of the Sector up to 1975 Effects of the Recession and World War II The Nationalist Government of Peron A *Liberal" Interregnun State Enterprises Expand Again 2. Some State Enterprise Indicators Value Added Investment ZEployment Results Subsidies and Indebtedness THE PRIVATIZATION OF 1976-81 1. Different Privatizations for Different State Enterprises Intervened Enterprises Commercial and Industrial Firms Created by the State Equity Held by State Financial Institutions Banks, Insurance Companies, Radio and TV Stations Public Service Companies New Purchases 2. 7he State Enterprise Sector after the Privatisation of 1976-81 Some Aggregated Indicators Specific Cases ISSUES RAISED BY THE ARGENTINE PRIVATIZATION 1. Economic System, Ideology and Putlic Pressure 2. Price-Valuation Relationship 3. Divestiture and Proporty Concentration 4. Peripheral Privatizations BIBLIOGRAPHY APPENDIX Appendix 1 State Enterprises by Legal Status Appendix 2 Divested State Enterprises: 1976-81 Appendix 3 State Enterprises: 1982 Appendix 4 Balance Sheet Data on State Enterprises Appendix 5 Some Exanples of State Enterprise Divestitures TABLES Table I Macroeconomic Results: 1975-82 Table 2 Public Sector Expenditures as Percentage of GDP Table 3 Number of Public Enterprises in 1975 Table 4 Some State Enterprise Indicators Table 5 Size of Some Contracts and Concessions of Peripheral Privatization Table 6 Number of Public Enterprises in 1982 Table 7 Privatization of Sugar Plants Table 8 State Enterprises to be Privatized According to the National Budget. INTRODUCTION During the last several decades public sector expenditures as a percen- tage of GDP (Gross Domestic Product) have increased rapidly in most market econo- mies. In fact, in many countries these expenditures rose to a level at which a majority of the population saw a reduction as beneficial. In particular, in recent years an increasing number of countries has either engaged in, or has considered, the privatization of state-owned enterprises. Prominent among such privatization drives are those taking place Ln Great Britain and France, among the developed countries, and in Bangladesh and Chile, among the developing countries. These privatizations have tended to occur as part of a more general drive toward liberalization and economic decentralization. Within this context, for example, the military government that assumed control of Argentina in 1976 an- nounced the adoption of a state enterprise privatization program. During the next five years, several actions were taken to divest state enterprises, but the scope of the drive never reached the levels observed in Chile and Bangladesh, for ina- tance. Nevertheless; a study of the Argentinian privatization experience is of particular interest because of the lessons that can be derived for other countries considering such a program. First of all, knowledge of the methods used in Argen- tina, as well as the problems encountered in their application, might be useful for countries considering privatization. More importantly, knowing the reasons which forced the Government of Argentina to privatize very cautiously, especially 2 when compared to countries such as Chile and Bangladesh, might allow governments of other countries to avoid the same problems. Finally, the Argentinian expe- rience, which is characterized by cautious privatization and weak trade liberalization in contrast to the a fore mentioned, might shed some light on the relationship between privatization and opposition to, or support of, liberaliza- tion programs, especially trade liberalization. Therefore, the objective of this report is to answer such questions as: Which methods Vere used by the Argentine government to privatize state enter- prises from 1976-817 What was the impact on fiscal revenues, employment, business asset concentration, and other economic variables? What did the Government do to achieve some objectives of state enterprise divestiture if complete privatization was not possible? What were the components of the opposition to a deeper privati- zation in Argentina? Was this opposition the same as, or different from that against, a more pronounced trade liberalization? The analysis in this report is based on information and studies, most of them descriptive, of the privatization process, its impact, and difficulties. Unfortunately, the number of privatisations is too small to allow for statisti- cally valid comparative testj between actions of privatized enterprises and of those which remained in the public sector or which were always in the private sec- tor. Attention in this study therefore centers on an analysis of alternative methods used by the Government to achieve divestiture outright, and on the reasons for the opposition to privatization. The main conclusions of the report in summary are: 3 First, priority of the government, despite its deep ideological commit- ment to privatization since assuning power, was to concentrate on creating the conditions for future outright privatizations. This meant that the government had to increase the efficiency and profitability of state enterprises, in order to ge- nerate interest among private sector investors in acquiring shares of these large state enterprises. Second, this drive toward efficiency and higher profitability in the public services and other large state enterprises induced the government to: raise tariffs to market levelsi push for self-financing to decentralize ownership and control as much as possible (i.e., from the national level to the state level to the municipal level); and, in particular, use peripheral privatizations. Third, peripheral privatization, that is, contracting-out to private enterprises the production of some of the goods and services used as inputs by the large state enterprises, was used extensively.during this period. In this report, the view is taken that these "peripheral" privatizations might contribute to effi- ciency and are in that case desirable. 2hey are not, however, equivalent to regu- lar privatizations, since the state enterprise which engages in such peripheral privatizations does not reduce the volue of its sales and maintains, as long as it continues to be a monopoly, total control over contractual arrangements with its suppliers. Furthermore, nothing guarantees the attainment of an optimum level of contracting-out. Fourth, during the period from 1976-81 outright divestitures were limi- ted to about 120 small and medium-sized enterprises which had previously fallen 4 into the public sector as a result of financial difficulties, and to minority sha- res of several hundred enterprises previously acquired by two state financial ins- titutions. In terms of revenues, these sales (estimated at the equivalent of about 400 million US dollars) amounted to less than the assets of an electricity generating company taken-over by the government during this same period. Thus, the impact on employment, revenues, and investment, was negligible. Fifth, the main opposition to the privatization came, in general, from the management of the state enteriises themselves, which was very often composed of members of the armed forces. Nor were the public or private sector managers enthusiastic either. However, the experience with peripheral privatization and some other measures associated with the privatization program changed the climate slightly toward eventual outright privatizations. Perhaps this can be considered the main achievement of the 1976-81 government in this field. Sixth, the strongest and most effective opposition to trade liberaliza- tion did not come from the private sector, but came instead from the management of several important state enterprises, especially those controlled by the military. In that sense, a deeper privatization, if somehow made possible, also might have allowed a deeper trade liberalization. The first part of this report (ECONOMIC BACKGROUND) describes the gene- ral economic conditions in Argentina from 1976-81, stressing the economic libera- lizations which took place and their results. In this context, the privatization effort is viewed as another element of a policy to sharply reduce state interfe- rence in the economy. The second part (STARE ENTERPRISES IN ARGENTINA) also pro- 5 vides background information, in this case on the history and scope of the state enterprise sector. The next parts THE PRIVATIZATION OF 1976-81, provides a complete des- cription of the privatization process in Argentina, including the methods used in different cases, the results achieved, and the steps taken (as with the peripheral privatizations) to set the stage for a deeper outright privatization process in the furture. Finally, In ISSUES RAISED BY THE ARGENTINE PIIVATIZATION, the report draws some lessons from the experience studied. 6 ECONOMIC BACKGROUND Argentina is one of the richest countries of Latin America in human and natural resources, so much so that at the beginning of this century it was consi- dered a developed country. Up to the time of the depression of the 1930s, its economic velfare was based mainly on the export of agricultural products. The de- pression, which left a deep impact on those exports and on the nation's GNP, indu- ced governments of the time, as was the case witi many of Argentina's neighbors, to drastically modify their export-based development strategy. Between the early 1930s and 1975, Argentina, with few interruptions, increased the rate of protec- tion given its import-substituting activities, and expanded the role of government in the management and operation of the economy* The growth of the state enterprise sector was part of this process. Although the degree of openness of the economy, and of government inter- vention in its management and operation, never reached that of its Chilean coun- terpart, for example, the results were similarly unsatisfactory. During 1975, the last full year of the second Per6n administration, the inflation rate reached al- most 200 per cent, the fiscal deficit exceeded 14 per cent. of GDP, given govern- ment expenditures of more than 39 per cent of GDP (almost 1/3 of it generated by state enterprises); the country lost more than one billion US dollars in reserves; and GDP (at constant market prices) fell by 0.4 per cent. Conditions did not im- prove at all during early 1976, and the military took over the government on March 24, 1976. At that time Argentina was about to default on its foreign debt pay- 7 ments, since it was two billion dollars in arrears on those payments with only 25 million dollars in reserves. Economic Minister Jos Martines de Hot, who stayed on for the full term (1976-81) of the military government, was charged with implementating an economic reform program designed to reactivate economic growth under conditions of price stability and full employmentl. Its general aim was to liberalize the economy anci to reduce the role of the state to its "proper" functions, such as providing gene- ral guidelines to the private sector through monetary, fiscal, exchange rate and commercial policies. In line with this, foreign trade reform was to produce a rea- 1location of resources toward more efficient uses* State enterprises had to be privatized, since managemen of them was not included among the "proper" functions of the state. Martinez de Hot was not able to institute all of the desired reforms, 4 although, the liberalization drive was impressive'in certain respects. For ins- tance, the degree of financial liberalization was significant: interest rates and foreign capital movements were completely freed relatively early during the term, and regulations on entry into business, among others, were considerably eased. Prices of goods and services, which were fixed to a very considerable extent du- ring previous governments, were also completely freed. Nevertheless, trade libera- lization was relatively weak. While duties were reduced in 1976, it was mainly to eliminate "water"o A pre-announced schedule of quarterly tariff reductions to be 1See LUders (1986). 8 applied between early 1979 and early 1984 was suspended in 1981, when nominal pro- tection rates for manufact,ring were still around 50 per cent. A moderately, suc- cessful effort, although temporary, was made to reduce the fiscal deficitj during 1978-79 monetary financing of the deficit was avoided. A consistent monetary and exchange rate policy allowed a significant reduction in the inflation rate, which neve=theless remained in the 3 digit range, and accelerated again after 1981. As will be discussed in the next section of this report, progress in the privatiza- tion process was very limited, and tended to be concentrated on the transfer of some activities of state enterprises to the private sector, rather than on the di- vestiture of any important companies. The results of the Argentinian attempt at economic liberalization from 1976-81 are summarized in Table 1. The inflation rate was reduced, from about 500 per cent in 1976 to approximately 100 per cent in 1981, while at the same time the already low unemployment rate was further reduced. Given that the fiscal deficit was only slightly decreased, it is cleir that these results were achieved at the cost of a reduction in real wages (at one time very significant), and a very high foreign indebtedness. It is also not surprising that the rate of inflation increa- sed again as soon as reducing wages and increasing foreign indebtedness could not be used further to moderate price increases. During the 1976-81 period public sector expenditures increased rapidly, despite the public policy to the contrary. These expenditures as a percentage of GDP rose from 39.1 per cent in 1975 (32.2 per cent for 1961-74) to 48.2 per cent in 1981 (see Table 2 ). In absolute terms, the growth was most important in cen- tral government expenditures, and only of minor import at the level of the state .9 TMLE 1: MMEDMC ME=n 1975-1982 Perc~nvst G n Military Go 2!nruc nuberalization eriodt Miltary Gov. E n P price Cbntwrolt~ Tm' :p 1975 1976 1977 1978 1979 1980 1981 1982 GDP -0.38 -0.46 6.37 -3.37 6.71 0.74 -6.24 -6.26 Perconag cangs unenplopent 3.8 4.4 2.7 2.3 2.4 2.5 5.3 4.6 rate (percenags Grass Investnt ate (percetae of GP) 20.1 21.2 23.9 21.4 21.9 23.8 20.5 17.4 Grcss Domstic Saving rto (Percentage of GD) 17.7 22.5 26.0 22.9 19.7 17.4 12.0 12.6 - Esort (uL11fe~a of U$> 2.961 3.918 5.651 6.401 7.810 8.021 9.143 7.599 Inports (milliWB of U$) 3.510 2.765 3.799 3.488 6.029 9.394 8.431 4.873 Current Acoxt Balano. (mlli~ U$) -1.284 651 1.126 1.856 -513 -4.774 -4.712 -2.477 Capital Acount (mIl.~ U$) 177 270 702 441 4.894 2.025 1.275 1.719 ibserves (millea U$) 618 1.772 3.863 5.829 10.138 7.288 3.719 3.013 Foreigi Dabt (MilliCn U$) 7.875 8.279 9.678 10.796 19.034 27.162 35.671 38.736 mhal Eang irte Indwc (1979-100) 168 168 185 148 100 78 87 115 Trnm of 'rade (1970=100) 104.2 90.0 87.0 78.3, 82.9 93.8 106.7 92.4 ~eal Wat me Indx (1970=1000) 1.237 0.792 0.756 0.772 0.861 1.000 0.912 0.793 Public Sectar Espendires (percetage of GDP) 39.1 39.4 37.7 43.9 41.7 43.8 48.2 46.9 Fiscel Dficit (percentaga of GDP) 14.1 12.9 11.9 10.1 9.0 11.3 16.4 17.2 monetazy Isss to Fina= the Fiscl Deficit (percetas of GDP) 7.7 10.4 12.2 7.0 4.5 3.2 2.9 4.1 9a T l* 1: OR : 1975-1982 ernist y MiNlitary v brmic Liberalz*tr riutdi nilitury PH. eannna·P Prios <ntro2l TMiHémi* uraariep. 1975 1976 1977 1978 .1979 1980 1981 1982 >Mony plus Qiasi Monelt (peretachn) 129 331 243 186 200 87 99 140 18.8 17.4 20.9 24.4 27.9 30.7 25.8 15.9. Jiil Real I*nding Lmterest Rae -68.57 -65.04 -.675 11.92 2.58 25.91 2.63 -15.4 ns~sr Prim Indec (peranta chang) 170.6 443.0 176.2 175.0 159.5 100.8 104.5 164.7 Mhälaala Pric Indec (prea Cha 192.5 499.0 149.4 146.0 149.3 75.4 109.6 256.2 W~s IIder (1986). * Ihe *tablitaM as the popuar nam for a fi~ed exchang rate syste Lå whi the ex~hnge rate was devalied at a prrenuminer and dea1ning rat ovwr a r ~i^arah1e nunber of nmth. 10 enterprises. In fact, the latter expenditures decreased significantly as a pro- portion of total public sector expenditures up to 1980, inclusive. Given the in- significance of the state enterprise divestitures, this decline is, in part, a . reflection of policies designed to reduce the role of state entrepeneurial activi- ties, and to contract-out new activities to the private sector wherever possible. TABLE 2: PUBLIC SECTOR EXPENDITURES AS PERCENTAGE OF GDP (Percentages) Total State Enterprises Central Other Government 1961-64 33.0 14.1 1218 6.1 1965-69 30.5 10.4 13.6 6.5 1970-74 33.2 11.2 14.6 7.4 1975 39.1 11.9 17.4 9.8 1976 39.4 14.6 16.5 8.3 1977 37.7 13.0 15.7. 9.0 1978 43.9 14.5 18.7 10.7 1979 41.7 12.8 18.8 10.1 1980 43.8 12.4 19.8 11.6 1981 48.2 15.0 21.1 12.1 1982 46.9 15.6 21.9 9.4 Sources IBRD (1985). The volume of trade did increase rapidly between 1975 and 1981, but occu- rred mainly as a result first, of the impact on imports of the impressive increa- se in expenditure levels made possible by foreign indebtedness; and, second, of the effect on exports of a reduction in export taxes and the implementation of a set of standard export promotion measures. Moreover, trade values were not affec- 11 ted, as in many other Latin American countries, by adverse movement in the terms of trade. In any event, the policies implemented on trade, finance, state enterpri- se divestiture, and wages and prices only mildly affected the structure of the Ar- gentinian economy. In addition, investment rates remained at their historic high levels, although foreign savings substituted for a large part of what had been a domestic savings effort. The rate of growth in GDP continued to be rather modest. 12 STATE ENTERPRISES IN ARGENTINA Toward the end of 1975 the state had accumulated a total of about 150 enterprises in which it had either equity participation, some management control, or both (see Table 3 and Appendix 1). 1.- Growth of the Sector up to 1975 The entrepreneurial activity of the state began in Argentina in 1826, only a decade after its independence, when the Banco de la Provincia de Buenos Ai- res was created as a joint venture between the public and private sectors. If was fully nationalized in 1863; today it is the second largest commercial bank in the country. In 1891 the state-owned official Banco de la Naci6n was created, today it is the largest bank in the country. The state also was instrumental in the crea- tion of the Banco Hipotecario Nacional (mortgage) in 1885, and the Caja Nacional de Ahorro y Seguro (savings)* Prior to the 1930s the state created the post offi- ce, Obras Sanitarias de la Naci6n (sanitary works), wholesale food markets, and the Yacimientos Petroliferos del Estado (petroleum) which today is the largest en- terprise in Argentina. Finally, during the same time, the state initiated the creation of a railroad network, but allowed the private sector to expand it. 13 TABLE 3: NUMBER OF PUBLIC ENTERPRISES IN 1975 CATEGORY NUMBER 1. Enterprises totally or majority controlled by the State. 248 2. Enterprises in which the state is a minority equity holder, but manages alone or with some participation of others* 13 3. Enterprises totally managed by the state, in which it has no equity* 31 4. Subsidiaries of state, or state managed, enterprises* 39 5. Enterprises in which the state owns all or some equity, but which are managed by others with some state participation. 16 SUB-TOTAL 347 6. State-owned hotels, given in concession to others. 57 7. Enterprises over which the Banco Nacional de Desarrollo exercises some control. 7 8. Enterprises which have delayed their tax and social security payments, and over which the state exercises certain controls (Law # 17.507). 76 9. Enterprises in which the Banco Nacional de Desarrollo and the Caja Nacional de Ahorro y Seguro have equity, but do not control or participate in their mana- gement. 260 TOTAL 747 Notes: (1) This table does not include enterprises belonging to seven provinces, and all Municipalities, due to lack of data. (2) The 23 radio stations of the Red Nacional de Radiofonla (Radio Nacional) are not included. SOURCE: FIEL (1976). 14 Effects of the Recession and World War II In the decade between the early 1930s and the early 1940s, mainly as a direct consequence of the effects of the recession and the beginning of World War II, the succesive governments of Argentina began to intervene heavily in the eco- nomy. The state, through the Junta Nacional de Granos (grains) and the J,.nta Na- cional de Carnes (beef), began to participate directly as entrepreneur in the international marketing of Argentina's most important food exports. It was then that the General Directory of Military Industries (Direcci6n General de Fabrica- ciones ilitares) was createdl today it controls 14 military goods factories, and has participated in 17 others, mainly in the metalurgical and petro-chemical sec- tors, becoming, in the process, the principal development force in those sectors. Later, using vessels expropiated from Axis countries during World War II, the state formed anpresas Lineas Maritimas Argentinas (ELMA), today a huge in- terest. The Nationalist Government of Perin The government of President Peron during (1946-55) favored a leading role for the public sector in the provision of public services and basic goods, as well as in the promotion of industrial activities. During this period the government took a series of steps toward this end. It: created a state railway network (Ferrocarriles del Estado Argentino); (2) bought the existing telephone companies, most of which were foreign-owned and for- med the National Telecommunication Company (Empresa Nacional de Telecomanicaciones-ENTEL) (3) bought a private shipping company, sold part of its 15 equipment to ELMA and# with the remaining vessels, formed the Argentine River Na- vigation Company (Flota Argentina de Navegrci6n Fluvial); (4) created the National Directory of State Industries (Direcci6r, Nacional de Industrias del Estado-DINIE) to manage 34 industries appropriated from citizen of Axis countries (enterprises which were divested, returned to their owners an4/or liquidated between 1953 and 1980, but mainly between 1958 and 1961); (5) created several companies in the energy field, including Agua y Energia El6ctrica de la Naci6n (electricity), Yaci- mientos Carboniferos Fiscales (coal), and Gas del Estado (gas); (6) created, in the industrial sector, SOMISA (today the main steel industry in Argentina), Indus- trias Aeronguticas y Mecinicas del Estado-IAME (airplanes and cars), Astilleros y Fbricas Navales del Estado (shipbuilding) and Atanor (a joint venture to produce chemical products); (7) created the Banco Industrial de la Repfiblica Argentina (industrial bank) to support private sector industrialization; (8) merged four joint venture airlines into the official Aerolineas Argentinas, and two others in- to Lineas A6reas del Estado (LADE); and (9) among similar actions nationalized the ports, which were thereafter managed by the Direcci6n Nacional de Puertos, and re- insurance, which was thereafter provided by the Instituto Nacional de Reaseguros (INDER). A "liberal" Interregnum Beginning with the overthrow of Per6n in 1955, and up until 1966, Argen- tinian governments were generally inclined to reduce or at least contain the scope of the state enterprise sector. This was the time when DINIE increased the speed of its enterprise divestitures, when several enterprises (IAPI, ENT, ENDE, etc.) 16 were liquidated, when the government privatized urban passenger transportation, when state enterprise employment was drastically reduced in many companies (railroads, for example), and when private contractors were used to expand public sector-financed activities in others (petroleun, for example). At the same time, however, the state increased its own entrepreneurial scope in other activities, buying the Servicios E16ctricos del Gran Bue.os Aires (SEGBA), the second largest electricity company in the country; expropiating news- papers and radio and TV stations; creating the Editorial Universitaria de Buenos Aires (press); and establishing the Yacimientos Mineros de Aqua de Dionisio (YMAD-manganesian) enterprises. The provinces in particular were very active, creating new firms, including 8 comercial banks, 4 electricity companies, and 13 insurance companies. State Enterprises Epand Again Beginning in 1967-68, the governments again increased the entrepreneurial activities of the state. In particular, they began several large projects in the energy field (two in nuclear energy -Atucha I and anbalse; two national hydroelec- tric plants- Choc6n and Cerros Colorados, and two international plants --Salto Grande and Yacyretl, joint ventures with Uruguay and Paraguay). In the petrochemi- cal field several large projects were also undertaken by the government: Petroqui- mica General Mosconi; Petroqulmica Bahia Blanca and four joint ventures using its products; Carboquimica Argentina Sociedad Mixta (a joint venture); and Petroquimi- ca Rio Tercero. In the steel industry, SOMISA was expanded, and HIPASAM was crea- ted. In addition, several consulting and research firms were created, several TV 17 channels nationalized, and a news network expropiated. Moreover, during this period a policy aimed at avoiding the liquidation or closing of enterprises affected by economic or financial problems was adopted. As a result, approximately 15 large enterprises were transferred to the state, in- cluding Siam Di Tella, Llave, La Bernalesa, Gilera, La Emilia, and Frigorificos Swift. 2. Some State Faterprise Indicators The relative importance of the state enterprise sector in Argentina and its performance durign this time can be evaluated using a series of indicators such as value added, investment, employment, results, and subsidies and indebted- ness. Value Added Table 2 has already suggested the relative size of the state enterprise sector in Argentina. As a matter of fact, in 1961-64 the state enterprise sector used more than 10 percent more resources than did the central government, and al- ready amounted to more than 14 per cent of GDP. In 1976 the resources the central government used were greater than those of the state enterprises, but the latter's expenditures still had grown somewhat relative to GDP. In terms of value added, state enterprises as a whole during 1975 sup- plied more than 8.5 per cent of GDP, a percentage which a decade earlier had stood at only 7.7 (see Table 4). Based on the universe of enterprises studied by FIEL* (1976) as reported in Table 4, state enterprises in Argentina in 1975 produced a 18 TABLE 4: SOME STATE ENTERPRISE INDICATORS 1965 1970 1975 Value Added at Factor Costs (percentage of GDP) 7.70 7.35 8.57 Weight in Sectoral Output (percentage of sectoral GDP at factor cost) - Agriculture - - - - Mining 51.2 36.1 48.2 - Manufacturing 2.1 2.1 4.1 - Elect., Gas* Water 75.1 76.9 53.0 - Construction 11.5 6.9 13.1 - Trade .8 .7 .9 - Transp*# Communic. 43.1 33.6 40.0 - Finance, 26.0 36.1 35.8 - Other Services - - - Wages paid 1/ 2.1 2.1 3.7 (billions of 1976 US dollars) Subsidies received 1/ 1.0 0.7 1.7 (billions of 1976 US dollars) Profit (losses) 1/ (.1) .3 (2.3) (billions of 1976 US dollars) e State enterprise investments as a percentage of total gross fixed investments 19.3 21.5 27.8 State enterprise credits in local currency as a percentage of total credits in local currency 12.8 8.4 23.8 State enterprise foreign indebtedness as a percentage of total foreign indebtedness 31.9 21.6 33.7 state enterprise employment 488 479 627 (thousands) State enterprise employment as a percentage of total employment 8.3 7.1 8.2 state enterprise employment as a percentage of public sector emp oyment 35.2 34.5 35.3 1/ 1960 pesos converted into US dollars for presentation purposes, using the wholesale price index of Table 9.2-A and the exchange rate for 1976 of Table 3.4 in IBRD (1985). SOURCE: Fiel (1976). 19 substantial proportion of output in several sectors, especially in mining (about 50 percent); electricity, gas and water (more than 50 percent); transportation communications (about 40 percent)l and finance and insurance (more than 35 per cent). In absolute teras, the state enterprise wage bill in 1965 amounted to slightly more than US 2 billion dollars of 1976 purchasing power. During 1975 that bill had risen to US 3.7 nillion of the same dollars. Investment In Argentina, as is also the case in Chile and most countries with a sig- nificant state enterprise sector, this sector's share in investment exceeds by se- veral times its percentage of total value added. The FIEL data indicate that state enterprises undertook 19.3 percent of national investment during 1965, and 27.8 percent during 1975. According to Ugalde (1984), state enterprises conducted about half of the total public sector investments up to 1975, with about 80 per cent of that made by public service companies and the remainder by enterprises providing goods and services for defense (15 percent), and by other public enterprises. Ugalde also shows that the investment share of public enterprises in Argentina du- ring 1975 exceeds that of Belgium (15 percent), The Netherlands (19 percent), Uni- ted Kingdom (20 percent), Germany (22 percent), and France (23 percent) at approximately the same time. It should be noted through that the Italian state enterprise sector supplied 35 percent of the country's gross domestic investment. 20 Baployment According to the information provided by the FIEL atudy of about 350 sta- to enterprises, employment in these companies exceeded 600,000 in 1975, while * earlier, in 1965 and 1970, state enterprises employed about 480,000 people. Ugalde reports that -in 1974 alone the public service enterprises employed about 400,000 people, with approximately 200,000 employed in military goods and services- producing companies, and in other non-service public sector firms. From 1965-1975, state enterprises provided about 35 per-cent of the public sector employment and approximately 8 percent of total employment nationwide. PASU" ts In Argentina, during most of the time before 1975, a set of conflicting objectives (profit maximization, employment maximization, production of public services at low prices, and political patronage) existed among a large proportion of the state enterprises. It is therefore not surprising that the performance of these companies, as measured by profits, was rather poor. As shown in Table 4, state enterprises in Argentina made a profit of US 300 million dollars (1976 prices) in 1970, but lost 100 million in 1965, and then lost 2.3 billion of do- llars more in 1975. The latter losses constitute abovat 30 percent of the value of sales of these enterprises. Although very important, they were relatively moderate compared with those of their Chilean counterparts during 19732. 2See Hachette and Liders (1987). 21 Subsidies and indebtedness As a result of the losses just mentioned and because of the investment programs conducted by many of the state enterprises, Argentine governments had to subsidize these state enterprise operations, even as these firms sank increasingly into debt. The subsidies, as can be seen in Table 4, reached US one billion 1976 do- llars in 1965, fell to 700 million dollars in 1970, when the state enterprises did not show any losses, and rose again to 1.7 billion dollars in 1975, when the los- ses exceeded even those subsidies. In addition to sales and subsidies, state enterprises borrowed from local and foreign sources. Local loans increased from about 13 percent of total domestic credit in 1965 to almost 24 percent in 1975, while foreign loans for the same pe- riod remained below one-third of the total for the country. In both cases, state enterprise credit as a percentage of total credits fell during 1970, the yeaT pu- blic enterprises reported modest profits. 22 THE PRIVATIZATION OF 1976-81 The economic team of the military government of 1976-81 defined certain functions which the state could "properly" perform, which did not include the con- trol and management of state enterprises. In fact, the government said it would follow the general guidelines of any modern social market economy3. Accordingly it would create, purchase, expand, manage or control any enterprise essential for the common goo, and would act where the private sector was not willing or able to do so. In general Martinez de Hoz believed that the private sector was able and better prepared than the public sector to carry out entrepreneurial activities. Since the government in 1976 was controlling and managing several hundred enterprises, the need to privatize these seemed a logical conclusion. The state could concentrate its scarce material and human resources on areas it could not delegate (public administration, justice, law And order, internal security, and international relations), and on other programs which could not be financed by the private sector (public health and education). In turn, the private sector could own and/or manage enterprises for which it was judged more efficient than the pu- blic sector. As a result of this specialization, a host of benefits would follow, including a faster rate of growth in GNP (better allocation of resources) and lo- wer rates of inflation (lower subsidies and less credit expansion). 3See Martinez de Ho: (1985). In this context, Martinez de Ros probably refered to the expression "social" in terms of the use made by Dr. Ludwig Erhard. 23 Given the scope and diversity of the state enterprise sector in Argentina in 1976 and the likely pressure from public opinion, the government recognized that it could not inmediately divest all state enterprises. The size alone of the state-owned firms worked against such a plan. For example, profits from Gas del Estado (gas) were larger than the sales of all except the 25 largest enterprises, and the official state railroad employed more people than the 20 largest private industrial enterprises combined. The government therefore devised a strategy of different types of privatization for different categories of enterprises, a stra- tegy which it implemented over time as conditions allowed. 1. Different Privatization for Different State Enterprises Intervened Enterprises Beginning in 1967, but especially after 1970, the government took over the management of many enterprises which were facing bankruptcy as a result of fi- nancial and economic problems. From 1976-81, the government divested or liquida- ted 120 of t)ese enterprises. Most of these were divested to the private sector, although some were liquidated when there was no private sector interest to acquire them. To ease this intervention, two laws (#21606 and #22177, the so-called "enterprise privatization law") were approved, which still did not eliminate all of the bureaucratic problems. Divestitures were executed through bidding at auc- tion, direct sales and concessions. Appendix 2 lists divested enterprises in this category, including only a few medium-sized companies (La Bernalesa, Frigorifico Swift, FIALP, La Emilia, CompaRia Azucarera Tucunana, and La Cantibrica), with the 24 rest being rather small (provincial hotels, and radio stations). While the go- vernment was able to divest most enterprises in this category, few, some rather large, remained under state control after 1981. Apparently some remained state enterprises because they were under the jurisdiction of ministries less inclined to privatize than the Ministry of Economics, while others remained because oi le- gal and political obstacles which could not be removed. Commercial and Industrial Enterprises Created by the State. Commercial and industrial firms, often joint ventures with the private sector, Involved the state because of the private sectors unwillingness to invest by itself in pioneering sub-sectors such as steel, petro chemicals, chemicals, and certain mining activities. In general, it was not possible, for reasons to be dis- cussed below, to divest these enterprises (or the states equity in them) at once. Therefore, the government tried to transfer equity gradually to the private sec- tor, and to induce the private sector alone to offer new shares. If this was not possible, and new investments considered to be of natio- nal interest required state financing, the government suscribed part of the new share issues, under an agreement with the private sector partners that they would purchase those shares later. Within this category fall the large enterprises controlled and managed by the Argentinian armed forces: the army (arms, military vehicles, explosives, rela- ted chemical products and also finished steel products used in agriculture, for example), the navy (shipyards), and the air-force (airplanes, missiles, vehicles). These industries were viewed by the armed forces as strategic, and thus had to re- 25 main in the state's hands, although often a high proportion of their products com- peted directly with products produced by the private sector. As a result, progress in the privatisation of enterprises falling within this category was very limited. A few medium-sized en.erprises were divested (Aceros Ohler, Establecimiento Azufrero Salta, and Aceros Especiales which belon- ged to the army), and others were either liquidated (Flota Fluvial) or closed down (IME, belonging to the air force). Equity Held by State Financial Institutions Over time the Banco Nacional de Desarrollo and the Caja Nacional de Aho- rro y Seguro acquired minority (but sometimes important) equity shares in about 400 industrial and commercial enterprises (see Appendix 1). They acquired these shares either as a result of loan guarantees or because of equity subscriptions complementary a loan for an important new investment project, or, in the case of Banco Nacional de Desarrollo, because of the implementation of a special savings plan. The government at that time wanted to encourage the channeling of savings into shares, but most savers were either unfamiliar with the stock market# or found equity investments too risky. An unusual mutual fund plan was then devised. The Banco Nacional de Desarrollo opened savings accounts subject to a guaranteed interest rate, higher than the prevailing market rate, and used the proceeds to purchase shares on the stock market. It was argued that, in the long run, the ra- te of return on equity investments would be sufficiently high to allow payment of higher than market interest. The system worked well while the stock market was on the rise, but the Banco Nacional de Desarrollo had to subsidize the special sa- 26 vings accounts once share prices fell. At some point the management of the Bank was not willing to continue its subsidiesi then the special savings accounts were transformed into regular savings accounts, and the Bank held the shares in more than 200 enterprises as part of its investment portfolio. The Bank and the Caja w6re not, with few exceptions, represented on boards of directors or among the ma- nagement of these firms. During 1976-81 these official banking institutions were instructed to di- vest the acquired shares. This move was made with great caution in order to avoid any significant negative impact from these sales on share prices. The method used was either the periodic sale of small holdings directly on the stock exchange, or bids for packages, usually managed in such a way that the majority holders could purchase them. As a result, both financial institutions divested their holdings in approximately 200 companies and reduced their share in many others (see Appendix 3). Banks, Insurance Companies, Radio and TV Stations over time the state had acquired a large number of banks (Banco de la Na- cin Argentina, Banco Nacional de Desarrollo, Banco Hipotecario Nacional, and many provincial banks, very often in joint ventures with the private sector, insurance companies (Caja Nacional de Ahorro y Seguro, Instituto Nacional de Reaseguros, and many provincial insurance companies), and radio and TV stations. These banks con- trolled about 40 percent of all deposits, while the state-owned radio and TV sta- tions formed about 85 percent of the national network. Although the state policy was to divest these companies, and the economic 27 team tried especially hard to increase the private participation in provincial banks and to divest the radio and TV stations, very little progress was made. Public Service Companies The last category of state enterprises includes those in the public ser- vice sector. This group, the most important in sales, employment and subsidies, included such services as the railroads, the underground transportation system, the generation of electricity (thermal, nuclear,and hydroelectric), plus telecom- munications, sanitation, the merchant marine fleet and airlines. The economic team also included YPF (the petroleun monopoly) in this category, since in this case, as in most other public service companies, the government was the sole pro- ducer of the good. The economic team considered a straight divestiture of these enterprises impossible, given conditions in Argentina. This judgement was based in part on both political considerations and capital requirements, but it was also based on the fact that these services were very inefficiently managed around 1976, and that divestiture prices would be very low. It was therefore decided to take two steps: first, to increase the administrative efficiency of the public service enterpri- sea and eliminate their deficits (losses), and second, to engage in a program of peripheral privatization, consisting of contracting-out works and services produ- ced within the enterprises themselves until that time. To improve efficiency and lessen losses (in some cases seen as the first necessary step toward divestment) many steps were undertaken, including: (1) the 28 transformation of these public service state enterprises into sociedades de capi- tal (in many respects like private corporations) to increase their management flexibilityl (2) the elimination of all tax exemptions; (3) the fixing of tariffs based on optimal rather than actual costs; and (4) the creation of a hdlding com- pany (Sindicatura. General de Empresas Pdblicas-SIGEP) to direct and control the firms. These measures seem to have been successful, as these firms reduced em- ployment levels relative to activity by about 30 percent. Furthermore, between 1976 and 1981, the nunber of enterprises requiring a subsidy was cut from 14 to 2 (railways and telecommunications). Finally, the largest companies financed about 50 percent of their investment from current revenues during 1979-80. The most important effort to privatize in Argentina from 1976-81 came with the peripheral privatizations mode of privatization. This system, while by its very nature less visible than enterprise divestitures, also contributes by re- ducing the scope of public activities, and*may even increase the operational effi- ciency of many activities. Examples of peripheral privatization which occurred during this period illustrate their importance. Existing railroad repair shops either had to be closed or were transferred to the private sector, with repair services or improve- ments contracted from the latter. Moreover, those companies which transported large amounts of goods could have their own railcars, and rent the use of the of- ficial railroads. Even the operation of the system itself, for some parts of the network, was contracted-out to the private sector. In another example of peripheral privatization, the government adopted 29 legislation to allow the private sector to build or equip ports, and encouraged agricultural producers to build the infrastructure. One result, perhaps the most important, was the San Lorenzo port at the Paran river. As was the case with the ports, the government allowed the private sector to build and operate other public works facilities, charging appropriate user fees. The most significant such pro- ject was the Centro-Oeste "gasoduct". A third example of peripheral privatization took place in the petroleum industry. The private sector was invited to participate in the exploration and ex- ploitation of oil wells, using a wide variety of contracts. The modernization and expansion of refining by the private sector was also made possible in this manner. Finally, the central government decided to play a subsidiary role (since the state should only implement those activities required to for the common good when the private sector is unwilling to perform them) in the management of its own aftairs. Thus, it transferred to the provincial level many entrepreneurial activi- ties (management of schools, hospitals, energy systems, irrigation works, water plants and distribution systems, communication firms, ports, and sanitation), just as the provincial level transferred its activities, wherever possible, to the mu- nicipal level. Table 5 lists same of the contracts used to implement these peripheral privatizations, and estimates the investment required from the contractors, as well as the annual sales to the state enterprises. 30 New Purchases Despite its philosophy to the contrary, the government in 1976-81, usually under pressure from the military, created some small enterprises (CONUAR, ENACE and Nuclear Mendoza S.E. in the nuclear field; OPTAR and BAC as service sub-sidiaries for Aerol5neas Argentinasi SATZECNA and Astillero M.D. Garcia to pro- duce submariness and CBAMSE a sanitation firm). Furthermore, the government took over two large companies (Compalia Italo-Argentina de Electricidad and Austral LI- neas A6reas) because of their financial problems and, in 1980, intervened in seve- ral financial conglomerates and their related industrial and commercial firms (the banks of Los Andes, Oddone and Sidesa, and in firms such as Grecco, National Lead, Flor de Lis, Productos Solmar, and Parques Interama). The takeover costs alone to the government of the compafiia Italo-Argenti- na are.estimated at US 93 million dollars (in cash); it also assumed the corporate debt of US 300 million dollars, and thus paid a total saum which by itseld exceeds the estimate of all assets divested from 1976-81. Furthermore, the government's bank intervention cost during 1980 3 per cent of GNP and more in the following years, while total assets of the financial conglomerates taken over exceeded US$ 5 billion. Of course, the government intended to liquidate or divest the intervened or acquired enterprises, but was only able to do so with a few small firms. Even the divestiture of Austral, a medium-sized airline, while approved by one adminis- tration, was blocked by its successor. 31 TABLE 5: SIZE OF SOME CONTRACTS AND CONCESSIONS OF PERIPHERAL PRIVATIZATION Contracts Annual Payment 6f Estimated Contracting State Investment of Enterprise contractors (mill.of US dollars) (mill.of US dollars) (a) Petroleum exploration and exploitation 1000/1500 1.200 during 1977-1980 (b) Centro-Oaste gaseoduct ? 1.000 during 1980-1981 (c) Telephone maintenance 40 - (4) Road maintenance 30 - (e) Garbage collection 60 - (f) Street lighting maintenance 20 - Concessions Location Estimated Toll Estimated Duration of Collections Investments Concessions (Millions of US dollars) (1) Estacioam (C6rdoba) 7 3.6 28 Urbano EUSA (GRupo Huarte) (2) Estacionam (Sarmiento) 8 3.2 30 Urbano EUSA (Grupo HEarte) (3) Estacionam (Catalina 7 3.2 38 Urbano EUSA Norte) (Grupo Huarte (4) Estacionam (Congreso) 7 3.2 33 Urbano EUSA (Grupo Huarte (5) E. S&nchez (Clinicas) Granel 15 3*7 30 (6) Parkital (Salas (Corrientes) y Billoch) 4 1.6 24 (7) Parkital (Salas (Catalinas) 8 6.4 25 y Billoch) (8) Plavinco, Com- (San MartIn) 7 3.7 39 lisa y otros (9) Pluvinco, Com- (Vte. L6pez) 7 3.8 39 lisa y otros Total 70 32.0 Source: Schvarzer. 32 2. The State Enterprise Sector after the Privatization of 1976-81 Unfortunately, only a few of the indicators used to describe the state enterprise sector in 1975 are available for 1981. In some cases, such as with fi- gures on value added by the sector, the information has not been made public. In other cases, the 1975 data was obtained from studies (such as the FIEL research) which have not been repeated. In any event, some information is available to make some meaningful comparisons. Some Aggregated Indicators During 1975 FIEL reported the existence of 747 public enterprises. This total included about 340 firms in which the state either played the role of passi- ve minority shareholder (Banco Nacional de Desarrollo and Caja Nacional de Ahorro y Seguro) or only exercised control over its activities because the firzqs owed some taxes or social security payments* Thus, the state was involved in the board of directors, control or management of about 400 enterprises. Using slightly different, more restrictive criteria to define a state en- terprise, the Central Bank of Argentina prepared a list of state enterprises for financial policy purposes. Since the listings for April 1981 and late 1982 do not differ by more than a handful of enterprises, the latter date is used in Table 6. 33 TABLE 6: NUMBER OF PUBLIC ENTEPRISES IN 1982 1* Non-Financial Enterprises 260 1.1 National 143 1.2 Provincial 83 1.3 Municipal 6 1.4 Intergovernmental 3 1.5 Mixed 24 2. Financial Enterprises 37 2.1 National 5 2.2 Provincial 26 2.3 Municipal S 3. Total Public aterprises 297 Source: Central Bank of Argentina, published in Ugalde (1984). According to this list, in 1982 there were 300 state enterprises, about 100 less than in 1.975 (see coMplete list in Appendix 3). This reduction in public enterprises is explained by the 120 commercial and industrial enterprises divested during 1976-81, and by the net change in the number of firms created and taken over by the government during the latter period. It should be noted, that the 120 firms divested were medium-sized or small, while two of the companies taken over from 1976-1981 were large. In addition, during this period the minority equity in more than 200 firms belonging to the two state-owned financial institutions was sold. However, this effect was, at least in the short and medium-term, more than compensated by the intervention and take-over of the financial conglomerates and their related companies. That is, in net terms and in terms of the number of enterprises as 34 weighted by equity size, the state enterprise sector in Argentina varied very little during the 1976-1981 period. In terms of employment, however, there seems to have been significant progress, mainly as : result of the peripheral privatizations. Although compara- ble data is not available for the state enterprise sector as a whole, SIGBP does report on state public service enterprises. As a group, they employed about 400,000 people during 1974 (approximately two-thirds of the total), and reduced that number to about 300,000 people by 1981, which puts total employment in these state public service fims significantly below the 1950 level. Information on the investment performance of the state enterprise sector is only available to 1979. Until that time, the investment ratio had remained-at roughly historic levels (35 percent of GDP). However, during that period total public sector investment as a percent of GDP had risen, reflecting to some axtent the government policy of de-emphasising the development of public enterprises. Based on data included in Ugalde (1984) for 1976-81 (reproduced in Appen- dix 4), it is clear that public enterprises increased their efficiency in terms of output per worker, and generated a relatively larger surplus to contribute to the financing of their investment. Nevertheless, their new indebtedness increased sig- nificantly, especially in 1981. Their assets were used to guarantee foreign finan- cing, in order to increase financial investments, and help solve Argentina's balance of payments problem. 35 Specific Cases Since there is no information available on the state enterprise sector in various sub-sectors of the economy during 1981 (as measured by value added, for axanple), it may well be of interest to provide specific data on certain indus- tries. State-controlled foundries in 1981 produced the country's entire steel supply, while state firm's productive capacity, depending on the product, ranged from 39 to 71 percent. The petroleum monopoly* YPF, obtained 63.2 percent of the petroleum itself and contracted-out another 35.4 percent. It also processed 70 percent 4f the petroleum itself, while the private sector processed the remainder. During 1978-80 the state sold or liquidated several industrial firms it had acquired in the sugar, meat processing and textile industries. It retained its vinyards, and indirectly increased its holdings when it intervened in a large, regionally -based congloerate, the Grecco financial group, one of the largest wine producers in the country. By late 1981 the state was still a minority partner (24 percent) in the only newsprint producer in Argentina, and controlled a firm which produced 20 percent of Kraft paper. In the chemical products sub-sector, state enterprises were also the leading producers, as already described. Although the private sector had always been the leading producer of metalic products, the state contributed most of the output (arms, transformers, large tubes, railroad equipment, and ships) for some products; and this did not change during the period under study. The state was, and remained in 1981, the main supplier for some major 36 services, although it did decentralize control and management of many firms in the field. In fact, state enterprises: generated 90.1 percent of the electricity con- sumed in Argentinal directly produced more than 80 percent of the natural gas and, through contracts with the private sector, another 18.4 percentl supplied about 90 percent of the telephones (1979), handled approximately 40 percent of the deposits* in financial institutions and granted about 50 percent of the loans (1982)1 and directly controlled approximately 50 percent of the radio and TV stations. The state played a relatively minor role in the transportation sector, participating with about 13 percent in passenger services (mainly through air transportation, railroads and ships), and about 33 percent in the cargo business. The states in- tervention in the trade sector was, in general, indirect, through the Juntas (grain, meat) and through some local wholesale markets (fruits, vegetables, and meat). The description of these specific cases confirms the general conclusion reached before: that the Argentine privatization effort directly affected only a handful of medium-sized enterprises and roughly 100 rather small firms, most in the tourism (hotels) and communications (radios) business. The main impact of the privatization policy of the period was made through peripheral privatizations, which did, in all likelihood, contribute to the public enterprise efficiency dri- ve. 37 ISSUES RAISED BY THE ARGENTINE PRIVATIZATION In this last part of the report a few issues derived from the Argentinian privatization experience of 1976-81 will be discussed. The magnitude of the di- vestitures was such that the creation of a few relatively small state enterprises, the take-over of some commercial, industrial and service activities (some large), and the "forced" intervention of some banks and their related enterprises cer- tainly more than offset, at least in the short-run, any aggregate effect of the privatisations on the economyo Very little can therefore be said about the impact of the privatization drive on total employment or investment. A comparative study of balance sheet data for privatized versus continuously private enterprises was also impossible, given the relatively small number of privatized firms of any mag- nitude, and the difficulties of obtaining information on some of them. The dis- cussion here will therefore center on the sources of the difficulties encounteres by the economic team led by Martinez de Boz in privatizing a larger number of more significant state enterprises. 1* Economic System, Ideology and Public Pressure A large-scale privatization drive was unlikely in Argentine in the mid- seventies. At the beginning of the 1976-81 regime there existed strong opinion in favor of a public service-producing state enterprise sector, and the armed forces believed the state had to control a number of strategic sectors, which included the production of arms, but also that of energy, and certain transportation and 38 communication media. Furthermore, Martinez de Hos believed and many other Argentine economists agreed, that the private sector was not willing to bid on firms which for decades had sold their output at politically low, fixed prices. The problem was aggrava- ted because many of these same enterprises were running huge deficits and required enormous investment to be updated technologically. In general, it would have beern difficult to raise the necessary funds to do so, given the state of the stock mar- ket and the capital market. Many firms in the private sector were satisfied with the contracts they were receiving from the state firms, and felt these might not be available at the same profit rates under private management. Other interests also favored the .tatus quo. Among these, not surprisingly, were the management and workers of the state enterprises. The former very often were political ap- pointees, and the privatization of their enterprises almost certainly would have iMlied a loss of jobs. Also, workers probably were aware that most state enter- prises were overstaffed, and that a certain proportion of them stood a good chance of losing their jobs. Martinez de Noz and other privatization advocates therefore felt that the privatization drive required a "change of minds". This task, however, turned out to be harder than expected. As the head of the economic team wrote in February, 1981: "...Each case of privatization and each case of reorganization was a field battle, which had to be won trench by trenchn4. 4As reported in the Boletin Semanal of March 2, 1981. 39 Perhaps Martinez do Hoz had not anticipated the full force of the exis- ting anti-privatization interests and ideology, but he was aware that some of it * had existed since the beginning of the regime, and therefore devised his policies accordingly. Martinez de Hoz hoped that the success of the case by case policy descri- bed here would contribute to a change in favor of more privatizations which were more direct. He has, in fact, publicly declared his belief that this objective was achieved. Nevertheless, successive governments have only paid lip-service to the issue, by creating what have turned out to be, in reality, non-operational en- tities to design privatization plans. There are some indications that public opi- nion today is more favorably disposed toward privatization, but pressure groups opposing it have proven effective thus far. 40 TABLE 71 PRIVATIZATION OF SUGAR PLANTS Plant Base Price for Bidding and Actual Result date Santa Rosa 11.002 N$ Apr. 78 Sold at 4.400 N$ (June (CONASA) 1978) to Ing. NuWorco. The bankruptcy of Nuflorco in Nov. 1980 put the plant again on sale, 17.435 N$ Jun. 80 Sold (Dec.80) at 18.188 M$ to "Pueblo Independencia"S.A. La Trinidad 13.092 M$ Apr. 78 Sold at 4.400 M$ (Sept.78) (CONASA) to "Azucarera Tucumana". La Florida 12.844 MS Apr. 78 Sold to Soler (Mar. 79) (CONASA) Bella Vista 57.811 MS Aug. 79 Sold at 25.000 10 (Nov. 79) (CONASA) to Minetti (Alcogas). San Juan 24.956 M$ May. 79 Sold to Soler. (CIFEN) Arno 12.962 M$ Mar. 79 Sold at 13.100 1$ (Nov. 79) (CIFEN) to Wellbers. La Esperanza(2) Intervention related to the (SWIFT) Swift-Deltec bankruptcy continues. (Sale authorized in October 1980). (1) 0ONASA was ranked 39th among industrial enterprises in 1977. Ing.La Esperanza was ranked 86th among industrial enterprises in 1977. Source: Schvarzer. 41 2. Price-Valuation Relationship In Argentina, the divestiture of state enterprises vas often criticized because of the "low" price obtained for the equity* Schvarzer (....) lists for a number of enterprises (or assets of enterprises) the relationsaip between the va- luations prepared for the divestiture process and the actual price received (see Table 7, and Appendix 5)e It is true that in the overwhelming majority of cases for which information is available, the final divestiture price was below the va- luation. This does not mean, however, that private investors were paying less than market value for those assets. In general the assets were divested through an open bidding process, so that the presumption is they were sold at the "right" price. There are several reasons, other than valuation errors which on average are unli- kely, for this discrepancy between valuation and effective divestiture' prices. Most are related to the deterioration process which takes place among enterprises which are announced as divestiture candidatest managers of these enterprises tend to abandon any medium and long-term efforts to increase productive efficiency. This deterioration is compounded, moreover, by the fact that the most effective executives will leave the firms, since the new top management will, in all likeli- hood, bring in its own team. Finally, other state enterprises tend to reduce pur- chases from these firms and increase them from others, so as to limit any new credits to the enterprises to be divested. Taken together, these factors usually produce lower tales, higher financial costs (if not outright financial difficulties), and rapid personnel turnover, coupled with lessened efficiency. 42 Siam, a firm which appeared year after year on the official list of en- terprises to be divested (see Table 8), is a good example. Although Siam lost mo- ney during the 1975-76 accounting year due to the general economic conditions of that period, it recovered and showed profits during the following two periods. Ho- wever, once it was included in the list of enterprises to be divested, its finan- cial costs increased and its sales dropped, the latter mainly because the government shifted a significant part of its purchases to other suppliers* Siam therefore suffered losses during the periods ending during 1979 and 1980. Schvarzer argues that another reason for the low prices is the limited interest shown by the private sector in bidding for these assets. This lack of in- terest, measured by the number of bidders and by the relatively high number of ca- ses in which no one was interested in acquiring the state assets offered for sale, is probably partially related to the too-high base prices. If so, the main reason for the price-valuation relationshib can be found in the previously described de- terioration in the performance of enterprises which become divestiture candidates. TABLE 8: STATE ENTERPRISES TO BE PRIVATIZED, ACCORDING TO THE NATIONAL BUDGET 1979 1980 1981 SIAM Yes Yes Yes Burlingham Yes tes Yes Cla. Asucarera Las Palmas Yes Yes Yes Textil Escalada Yes Yes Yes Indastrias Llave Yes Yes Yes Ingenio Bella Vista Yes Ingenio San Juan Yes Sources Schvarzer. 43 This deterioration was, of course, a function of the length of firm a firm was a confirmed divestiture candidate. In the case of Argentina, where sig- nificant opposition existed to the concept of privatizations in general, pressure to delay a definitive divestiture decision tended to increas6 with the size of the firms. As a matter of fact, the economic team charged with divestiture did not even attempt to sell the state's equity in the huge public service companies. The- re arose the general sense that eaall firms were divested rapidly, with a low de- terioration cost, while the medium-sized companies, by contrast, incurred high losses because of the time element which exposed them to greater deterioration. In addition to Siam, another firm slated for divestiture was CAP, a meat proces- sing holding company, ranked 31st amon Argentina's industrial companies. After divestiture of this firm as a whole failed, it was sold plant by plant between 1979 and 1981 (see Appendix 5), a time when the state paid more in severance to the employees than it received in payment for the plants. Furthermore, because of lack of private sector interest given the base prices, the Municipality of Buenos Aires, and the official railways bought part of the assets. 3. Divestiture and Property Concentration There is no indication that the Argentine privatizations produced any significant change in the degree of property concentration. Of course the main reason for this was that the total amount of assets divested was relatively small compared to existing assets in the private sector. Although there are no official 44 accounts of the assets divested, in part because there was no centralized institu- tion in charge of the process, the total was estimated at less than US$ 400 mi- lion. * Another factor which should at least be considered, is that in Argentina no financial institutions were privatized. Had they been, such privatizations could have led to the formation of a relatively small group of financial conglome- rates, which might eventually have controlled a significant proportion of all pro- ductive assets. This did not happen in Argentina although there were, and are, financial groups, but none expanded because of privatization; in fact, they hardly participated in the bidding for divested enterprises, which took place mainly among regional entrepreneurs. 4. Peripheral Privatizations The concept of contracting-out part of the production of goods and servi- ces, in Argentina called peripheral privatizations if undertaken by state enterprises, should be considered as an alternative for any rationally-managed firm. Private companies in Argentina, and elsewhere, are continuoslly engaged in this pro-zess, both as a way to reduce costs and to take advantage of the economies of scale which exist in any process. State enterprises, in Argentina and elsewhe- re, probably have fewer incentives to initiate this contracting-out since it redu- ces the size of the workforce and therefore the power of the maiager. One achievement of the economic team led by Martinez de Roz was to have engaged the state enterprises in a massive effort to rationalize productive processes, at least considering outside production of parts and services. 45 A different question arises as to whether this "privatization" reduces the state's control of productive processes. No doubt it does reduce state employ- ment, and it also generates within the private soctor, new opportunities for eco- nomic activity. Nevertheless, it can also be argued that the sales volume of the state enterprises remains constant and that the sphere of control of these enter- prises does not change significantly, since they can decide exactly what the con- tractors will produce. Of course, unless, first governments do not subsidize state enterprises; second prices of their products or services are set at market lev.Asl and third* managers are rated on the basis of profit rates, there is not- hing to guarantee that state enterprises will contract-out optimum amounts of goods and services. Moreover, the most significant Argentinian peripheral privatisations, which took place frox 1976-1981, represent new activities, and not the replacement of state-for-private sector productions. That is, state enterprises, instead of making new investments in new facilities, invited the private sector to provide them as contract work. To attract the private sector, the state very often had to guarantee minimum levels of use (vehicles on toll roads or gas transported in the case of gasoducts) and also to guarantee the foreign loans required by the private sector to make the investments. These guarantees have been criticized for elimina- ting private sector risk-taking, and therefore made meaningless any differences between direct state enterprise production and contract work. 46 BIBLIOGRAPHY GENERAL Berg, E*s "Divestiture of State-owned Enterprises in LDC's" Consultants Report a prepared at the request of the World Bank, mimeo, 1985. Bernell, P.S., Earnings differentials between public and private sectors in Africas the cases of Ghana, Xenya and Nigeria, Labour and Society, Vol. 6, No3, July-September 1981. Butler, SM., "Privatizacran de los Servicios de Gobierno", on Perspectivas Econ6- micas, N*55, 1986. Business Week, "Italian Renaissance", February 16, 1987. Hanke, S.H., "La Opcibn de la PrivatizaciGn: Anilisis", en Perspectivas Boon6- micas, NO55, 1986o Hanke, S.H., editor, "Privatization: A Prospectus for Economic Growth with Development", to be published by the Institute for Conteporary Studies, San Francisco, California. Articles by E. Berg, R. Poole, S. 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