阿根廷州银行私营化：原因、方式以及“那又怎样？”

'T7s A1 POLICY RESEARCH WORKING PAPER 2159 Provincial Bank Privatization Argentina's recently privatized provincial banks generate in Argentina much of their income through service contracts The Why, How, and "So What?" with the provinces, and the transition to commercial banking has been George R. IJ. Clarke challenging. Available Robert Cull evidence suggests improvements in post- privatization performance, but it is uncertain whether these are sustainable. At the very least, however, a fiscal burden has been lifted from the provinces. The World Bank fli E QP Development Research Group Regulation and Competition Policy and Finance August 1999 H  | POLICY RESEARCH WORKING PAPER 2159 Summary findings Argentina's provinces offer a unique opportunity to provinces, portfolio guarantees, and the assimption of study bank privatization because so many transactions only "good" assets. In return, provincial politicians were took place there in so short a period in the 1990s (1994- granted restrictions on branch closings and layoffs of 98). As the decade started, every province owned at least bank employees. one bank, performance in publicly owned provincial Both types of accommodation were costl, to the banks was substantially worse than in private banks, and purchasers and the provinces. These transai tions the losses incurred imposed substantial fiscal costs on the probably could not have been completed w thout long- provinces. term loans from the Fondo Fiduciario. Politicians whose provinces were in dire fiscal straits, Were the Fondo Fiduciario loan funds pi. t to good their banks losing money at a fast rate, were most willing use? Did privatization leave provincial banlb ing on a to seize opportunities to privatize, even though sounder footing? overstaffed provincial banks were harder to privatize. Initial indications are that the situation has improved Deposit loss and liquidity problems associated with the in most provinces. And the provinces experiencing post- Tequila crisis made privatization more likely. privatization difficulties tend not to have participated The right political situation is necessary but not fully in the Fondo Fiduciario privatization program. sufficient to ensure good privatizations. First, one must But the privatized banks rely on their ser"ice contracts find a buyer, and Argentina's provincial banks were the with provinces to generate a big share of th ir income least attractive in the banking sector. So the provinces and are having trouble making the transition- to settled for purchasers that were not first-tier banks. commercial banking. It is uncertain whethe - the newly Many of them were small wholesale banks that had to created banks are sustainable. But at least a fiscal burden make the difficult transition to retail banking. has been lifted from the provinces. Three important concessions were made to purchasers: contracts to provide post-privatization services to the This paper - a product of Regulation and Competition Policy and Finance, Development Research Group - is part of a larger effort in the group to investigate the determinants of structural change in developing countries' b. nking sectors. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Paulina Sintim-Aboagye, room MC3-422, telephone 202-473-8526, fax 202-522-1155, Internet address psintimaboagye@worldbank.org. Policy Research WorkingPapers are also posted ontheWeb at http://www.x"orldbank.org/ html/dec/Publications/Workpapers/home.html. The authors may be contacted at gclarke@cworldbanlk.org or rcull (cworldbank.org. August 1999. (30 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center  PROVINCIAL BANK PRIVATIZATION IN ARGENTINA: THE WHY, THE HOW, AND THE SO WHAT. By George RG. Clarke and Robert Cull* Respectively, Economist, Development Research Group - Public Economucs, World Bank, and Economist, Development Research Group - Finance, World Bank. We would like to thank Stefan Alber, Paul Levy and Jo Ann Paulson for helpful comments and suggestions. For providing data and many helpful discussions we are indebted to Javier Bolzico, Andrew Powell, Gabriel Caracciolo, Maria Hernandez, Andrea Molinari, Laura D'Amato, Juan Barale, Horacio Fernandez, and Jorge Lombardi of the Central Bank of Argentina; Rogelio Frigerio, Alejandro Caldarelli, and Enrique Scala of the Fondo Fiduciario; and Raul Benitez and David Rosenblatt of the World Bank.   1. INTRODUCTION Argentina's provinces offer a unique opportunity to study bank privatization because of the large number of transactions that took place in a relatively short period (1994-98). At the beginning of the decade, all Argentine provinces owned at least one bank.' The performance of these publicly owned provincial banks were substantially worse than that of private banks, and the losses they incurred imposed substantial fiscal costs upon the provinces (Clarke and Cull, 1999). Beginning in 1991, when the provincial government of Corrientes passed a law authorizing the privatization of Banco de Corrientes, provincial governments started to consider privatizing the public banks. The trickle of provincial bank privatizations became a flood after the "Tequila Crisis" of December 1994. Of twenty-six provincial banks, over two-thirds (eighteen) had been privatized by the end of 1998. The number of bank privatizations provides as rich a data source for one country as can be found anywhere in the world, one that we have exploited in previous research. The earlier papers focused on the first question in the title of this paper - why the provinces privatized their public banks. Clarke and Cull (1999) look at this question normatively, assessing why a social welfare maximizing policymaker would want to privatize. It quantifies the potential fiscal benefits of privatization and compares them with the short-term losses realized at the time of privatization. In contrast, Clarke and Cull (1998) look at this question positively, trying to explain why policymakers in some provinces privatized and policymakers in others did not. Rather than viewing policymakers as social welfare maximizers, it econometrically analyses how different provincial and bank characteristics affected the political costs and benefits of privatization. The main results from these earlier papers are summarized in Section 2. In that section, we briefly describe the technical process and the roles of the main players, summarize the fiscal effect of privatization, and discuss factors that seem to have influenced privatization decisions. The primary focus of this paper, however, is to address the other two questions: the 'how' and the 'so what'. In Section 3, we describe the terms of the privatization contracts and the division of assets into the privatized banks and the residual entities. This section draws upon both the contracts and interviews that we conducted with some owners to uncover their motivations for buying a provincial bank, their long-range strategies, and the most significant difficulties that they faced during the transition period. We then use characteristics of the provinces and the banks to explain differences in contract provisions. Finally, in Section 4, we describe the gains and losses associated with privatization beyond the effect privatization had on the provincial governments' finances. Enough time has elapsed since privatization that we can begin to analyze post-privatization performance to identify the challenges faced by the new owners of the provincial banks. We complement this with an econometric analysis of the evolution of credit market in provinces that did, and did not, privatize. The section's recurring theme is that, while there have been post-privatization 1 Twenty provinces owned only one bank and three owned two banks. 2  improvements in performance, sustainability remains uncertain. The small, low quality, publicly owned banks were unable to attract large, solvent buyers, and the baggage associated with the actual buyers made the post-privatization transition process more difficult in some cases. Coming on the heels of crisis, provincial bank privatization in Argentina was mainly about making the best of a bad situation. 2. WHY? 2.1 The method of privatization. One of the reasons that provincial bank privatization in Argentina is interesting is the institutional innovation that allowed the provinces to meet the fiscal and political costs of privatization more easily. In all but one case, the purchaser of the privatized entity did not assume ownership of all pre-privatization assets and liabilities. Although the individual cases varied, the basic strategy was to first place attractive assets in the privatized entity and then to match those assets with liabilities, up to the point that the privatized entity's net worth met Argentina's prudential standards. The remaining assets and liabilities were then transferred into a residual entity. Residual asset recovery would have been neither quick enough, nor on such advantageous terms to liquidators, that it would have covered most residual liabilities. Consequently, provinces needed some way to meet a substantial portion of their residual obligations immediately. To address this, the Argentinean Government, the Inter-American Development Bank and the World Bank developed the Fondo Fiduciario, a part of the federal government that extends loans to provinces that have privatized their provincial banks. The provinces could then use the loan proceeds to pay off the obligations of the residual entity. In this way, some short-term obligations are converted to longer terms. From a political perspective, financing obligations in this way was presumably beneficial, as the yearly loan payments due to the Fondo are less eye-catching than short-term obligation payments would have been.2 The Fondo Fiduciario, therefore, enabled provincial governments to design privatization arrangements to mitigate political objections. This is important because governments can, and often do, design the privatization program to buy off important political opponents. Boyko, Shleifer, and Vishny (1993, 1995) argue, for example, that this was central to the design of Russian privatizations. 2.2 Fiscal Benefits of Privatization: Why it makes sense to privatize. 3 One feature shared by the public provincial banks was their penchant for losing money. This provided the underlying fiscal rationale for privatization. Clarke and Cull (1999, Table 1) compare the costs of re-capitalizing a typical provincial bank, based on their average loss rates 2Of course, assuming the terms of the loans are reasonable, the refinancing should make little difference from an economic (0e, resent value) perspective. In this sub-section, we briefly summarize the results of Clarke and Cull (1999) 3  from 1991-96, with the short-term cost of privatization. In practice, the loss rates are likely to be understated. The poor performance of the provincial banks meant that they had good reason to be less than forthcoming when reporting loan quality to the Central Bank of Argentina. Indeed, just before privatization these banks were subjected to external audits that revealed that their portfolios were far weaker than had been previously reported. In any event, even based on the observed loss rate, we find that the present value of the future re-capitalization required by Argentinean law exceeded the maximum short-term costs associated with privatization. As will be described below in more detail, these short-term costs come from realizing and cleaning up the past losses of the provincial banks. As noted in the previous subsection, most purchasers did not to assume all of the assets and liabilities of the provincial banks. Low quality assets and remaining liabilities went into a residual entity for collection by the province. Based upon the experience to date, we derive a predicted residual entity.4 The maximum short-term costs of privatization would be the residual liabilities. These may eventually be covered by recoveries of the residual entities' assets (and by the purchase price for the privatized banks). Clarke and Cull (1999), however, simply compare them with the discounted re-capitalization costs. Under discount rates of ten and fifteen percent, the residual liabilities do not exceed the discounted re-capitalization payments and in the ten- percent case, they are substantially smaller.5 In other words, even if the province receives nothing for the privatized entity and recovers no residual assets, it makes sense from a fiscal perspective to privatize to avoid the large future losses of the provincial bank. Although the fiscal benefit is not likely to be the only, let alone the most important, gain from privatization, these results suggest that the fiscal gain alone justifies privatization. In Section 4, we discuss the post-privatization performance gains and the effect that privatization had on the provincial banking sectors. 2.3 The Political Economy of Privatization: Why privatization occurred.6 Given the fiscal benefit of privatization and the improvements in bank performance summarized in Section 4.1, a natural question is why did some provinces not privatize at all and others take so long to do so? Clarke and Cull (1998) analyze this question, studying factors that affect the costs and benefits of privatization to self-interested provincial policymakers. Politicians might decide to privatize for several reasons. For example, Shleifer and Vishny (1994) suggest that privatization is more likely when conservative governments that benefit from low taxes win out over leftist governments that favor public employees (p. 1022). Opposition from labor might make privatization especially costly when the public enterprise is overstaffed or when policymakers rely upon union support. Another factor that might affect the privatization decision is external crises. By altering the costs and benefits of public ownership, crises might make it more difficult for policymakers to continue to subsidize loss-making state-owned 4Residual liabilities are set equal to .698 of pre-privatization liabilities, the share of liabilities shifted to the residual entities in the privatizations to date (Table 3). SThe losses were 383 million pesos for re-capitalization (10% discount rate) and 132 million for residual liabilities (Clarke and Cull, 1999, Table 1). 6This section briefly summarizes the results of Clarke and Cull (1998). 4  enterprises (World Bank, 1995). Finally, political ideology or affiliation might also affect the decision to privatize. Using a semi-parametric hazard model, Clarke and Cull (1998) investigate what drove the privatization decisions for the banks in this study. The analysis includes variables to proxy for the political affiliation of policymakers, the fiscal performance of the province, the size of the bank, bank performance and the extent of overstaffmg. They find that poorly performing banks were far more likely to be privatized than better performing banks. A 1% decline in net worth (divided by total liabilities) increased the estimated privatization rate by nearly 5% and a 1% increase in the percent of 'normal' (i.e., not overdue) loans decreased the estimated rate of privatization by nearly 7%. Poor performance could affect the probability of privatization in several ways. First, poorly performing banks might put greater fiscal pressure on public finances, forcing policymakers to make tough decisions. Another possibility is that the social cost of not privatizing the public banks, in terms of greater likelihood of failure or a more inefficient allocation of credit, might be higher in those provinces with the worst performing banks. If policymakers are concerned about social welfare, this might encourage them to privatize. After controlling for these measures of bank quality, Clarke and Cull (1998) find that overstaffed banks were far less likely to be privatized. This would be consistent with the hypotheses that opposition from labor was greatest in the most over-staffed banks. Clarke and Cull (1998) also find that provinces that faced higher provincial deficits were more likely to privatize their provincial banks. One plausible explanation for this is that exogenous fiscal crises make it more difficult to finance money-losing banks. However, they note that this result was not highly robust in different model specifications. Finally, Clarke and Cull (1998) find that when the bank was large relative to the provincial banking sector, the province was less likely to privatize the provincial bank. Since the provincial banks often dominated the sector in their province, one plausible explanation is that politicians might be unwilling to turn the sector over to a private bank that might act non- competitively. In Section 4, however, we find that there is no evidence that privatized banks behave more non-competitively than the public provincial banks did. Another explanation, therefore, is that this variable simply represents the preferences of provincial policymakers or voters. Policymakers with a strong preference for public ownership might have been both less willing to privatize, and more willing to encourage the growth of public banks, than other policymakers were. Other variables, including demographic controls, variables indicating political affiliation of provincial policymakers and measures of transfers to the province from the national government were statistically insignificant or were not robust to small variations in model specification. 3. How? 3.1 Contract Terms Because the negotiations were principally over the level of assets and liabilities that the purchaser would assume, the prices fetched in the completed privatizations were relatively low, compared to the face value of the assets transferred (See Table 6). Table 1, therefore, focuses on 5  the non-price features of the privatization agreements. In the Argentine context, two important ways opponents to bank privatization were bought off were through agreements to limit the number of layoffs or compensate laid-off workers and to maintain branches in certain cities.7 Based upon a review of the requirements imposed on the purchasers of the privatized banks, it appears that limits on branch closings and layoffs were the rule rather than the exception (Table 1). Of the sixteen contracts summarized, half had some restriction on the number of employees that could be dismissed and another purchaser agreed to implement a job re-training program. Three of the contracts stipulated that the private purchasers maintain the existing branch network and ten permitted the closure of branches but required that the purchaser maintain service provision in all locations served at the time of privatization. These contract features strongly suggest that the political buyoffs present in other privatizations were also evident in Argentina. As noted above, the public provincial banks were chronic money losers frequently in need of re-capitalization. To pass a substantial share of their low-quality assets onto a private purchaser while, at the same time, imposing branching and labor restrictions on that purchaser would have been difficult, if not impossible, without concessions on other dimensions. The most attractive of these were service contracts to provide banking services to the provinces and guarantees as to the quality of the acquired assets. The service contracts, which, among other things, provide income to the private owners for coordinating the payments activities of the provincial government, varied in duration from five to twenty years. Ten of the sixteen agreements provided service contracts of at least ten years. In interviews, the new private owners confirmed that these contracts are of vital importance, as an abnormally high share of the privatized banks' income is generated from services (described in more detail in Section 4). In many cases, however, the lure of the service contract appears to have been insufficient to entice a private bank to acquire assets of dubious quality. Rather than verify the quality of each individual asset, which proved time-intensive, many provinces took to guaranteeing a substantial share of the assets transferred to the privatized entity. In six cases, the province guaranteed assets up to either a fixed dollar (peso) limit or a certain share of the total assets acquired. In two other cases, private owners were able to substitute assets from the residual entity for privatized assets during some trial period; in another, the buyer could shift low-quality assets to the residual for a period. Finally, in two cases the guarantee was set as a fraction of the residual assets recovered. Presumably, since the owner of the privatized bank was also charged with managing the residual entity, the idea was to increase incentives to recover residual assets. Only four cases did not guarantee the privatized asset portfolio at all. 7The issues discussed in this paragraph are analyzed in detail in Clarke and Cull (1998, 1999). 6  Table 1: Terms of the Provincial Bank Privatizations Province Object of Branching Employees Duration of Portfolio (Bank) Sale Banking Guarantees Service Contracts Chaco 600/e Class A Maintain service Keep at least 715 20 years None (6/94) shares workers Entre Rios (12/94) 60% Class A Maintain Up to 700 (of 7 years Up to S26 shares service, closures 1500) early million require approval voluntary maximum retirement Formosa 60% Class A Maintain service 10 years 35% recovered (9/95) shares residual assets Misiones 100% Class A No dismissals in 5 years Up to $16 (12/95) shares first six months; million <30% of maximum workforce after Rio Negro* Determined 10 years Up to 80% of (2/96) by bidders portfolio or $50 million Salta 75% Class A Maintain similar 10 years None (3/96) shares geog. Coverage Tucuman 75% Class A Maintain service Workforce <= 10 years Up to $32 (3/96) shares 200 at transfer million San Luis 100% Class Maintain service 10 years $16 million (5/96) A,B shares deposit from province, up to 5 years Santiago del Estero 95% Class A, Maintain service Job re-training 10 years None (7/96) B shares program, >= 1 yr. San Juan 75% Class A Maintain similar _ 10 years None (7/96) shares geog. Coverage Mendoza 90% Class A Maintain all Keep at least 600 5 years Can substitute p- (7/96) shares branches workers tized assets for residual assets, up to $20 million Mendoza 90% Class A Maintain all Keep at least 500 5 years Can substitute p- (Prev. Social) shares branches workers tized assets for (7/96) residual assets, up to $10 million Municipal de Tucuman 100% Class Maintain service Keep at least 70 10 years Can shift some (10/97) A,B shares workers assets to the residual Jujuy** 80% of Maintain all Keep at least 170 10 years Fund created w/ (1/98) capital branches workers 35% recovered residual assets Santa Fe 90