Privatization Blues

When Luiz Inacio Lula Da Silva was sworn in as Brazil's president in January, he vowed to uphold all existing contractual agreements that he inherited from his predecessor. That was a big promise: Fernando Henrique Cardoso had sold off scores of state companies to the global private sector, raising $103 billion from the auctions. But some of those firms are now putting Lula's pledge to the test. The U.S. conglomerate AES, for example, missed a deadline last month for paying $329 million on the billion-dollar debt it acquired with the purchase of the state-owned utility Eletropaulo. Officials of a government development bank refused to extend the deadline, suggesting they may be ready to begin foreclosure proceedings against AES, a move that would in effect restore public-sector control over the electric-power company. "Both parties are still talking," said an energy-industry insider close to the negotiations.

Could the Eletropaulo case trigger a rollback of other unprofitable, or controversial, privatization deals? Worried foreign investors hope not. Many Latin Americans will remember the 1990s as the Great Fire Sale Decade: from shipyards to steelworks, hundreds of billions of dollars in assets changed hands, remaking the skylines from Tijuana to Tierra del Fuego. Out went the lumbering, money-losing dinosaurs of the state-led economy with their alphabet soup of acronyms--YPFB, Entel, Telebras. In came Telefonica, Vivendi, BBVA and other standard-bearers of a new, globalized world. The sell-off brought consumers many benefits--a new phone line could be installed within a few days instead of months, for example--but a price also had to be paid. The rates charged by Eletropaulo and all other newly privatized electric-power and phone companies have soared, creating a consumer backlash that has swept across the hemisphere. "We want to get our companies and natural resources back," thundered Bolivian opposition leader Evo Morales last year. "We can't allow them to be concentrated in the hands of a few transnational corporations." That message helped Morales finish a surprising second in the 2002 Bolivian presidential elections.

Other politicians in the region have adopted a similar stance. In Argentina, where long-suffering consumers once welcomed the sale of inefficient state enterprises, Peronist presidential candidate Nestor Kirchner has called for a revision of all government contracts with the private firms that operate the country's passenger railroads. Kirchner is responding to growing public dissatisfaction at the poor service offered by some of the private railroad operators. In Peru, former president Alan Garcia has restored some of his political clout by pointedly attacking the long-distance phone rates charged by the Spanish telecommunications giant Telefonica, which acquired the state phone company in 1994. A 1990 opinion survey by the Belo Horizonte polling firm Vox Populi found that about 75 percent of all Brazilians favored privatization policies; a decade later that figure had fallen to 25 percent.

What happened? When prices rise, especially for basic services, foreign owners make an easy target for angry customers. For example, in the fall of 1999, a consortium led by the California engineering corporation Bechtel won a 40-year concession to provide water to the Bolivian city of Cochabamba. Within weeks of its arrival, the company announced hefty rate increases that, in some cases, doubled or even tripled water bills. The price hikes triggered a general strike and violent clashes between police and irate demonstrators in February 2000 that left one dead and hundreds injured. The unrest was so severe that Bechtel managers fled the country. The water contract was abruptly canceled. A spokesman for Bechtel argues that the government raised the rates, by an average of 35 percent, to pay back debt accumulated by the public utility that had previously operated the system.

Experts say the street protests and campaign rhetoric do not presage a wholesale state takeover of companies that went private in the 1990s. Latin American governments simply don't have the money to buy back and run the companies, let alone invest in their infrastructure. Privatization may be a dirty word at the grass-roots level of many societies, but that view hasn't necessarily taken hold among the majority of government leaders. Analysts note that, in some cases, rate increases are inevitable when utilities switch from public to private ownership. Public utilities often subsidized their rates, and lost money. Private firms want to make money in exchange for their investments. In a recent survey of Brazilian businessmen, judges, military officers and other members of the country's elite, political scientists Amaury de Souza and Bolivar Lamounier found that 70 percent still favor opening up the economy to foreign investors. "For a country that is struggling to pay its debts and keep the public deficit under control, re-nationalizing privatized companies is out of the question," says Roberto Teixeira da Costa, a So Paulo banker who heads the Brazilian Center on Foreign Relations.

Tighter government oversight of privatized companies is a more realistic option. In one of his strongest public pronouncements as president of Brazil, Lula lashed out at the country's autonomous regulatory agencies responsible for the telecommunications and electricity sectors. He accused them of setting steep rate hikes that are fueling inflation. The problem is more complex. Utility --rates are tightly pegged to a wholesale-price index that is rising by more than 22 percent annually. Lula's complaint prompted speculation that his government might try to take a more direct hand in determining future rate increases. But executives fear that such market meddling would set a bad precedent--and besides, experts argue that the real problem is that the privatization of Bra-zil's energy sector hasn't gone far enough. While private companies distribute three quarters of Brazil's power, the government still controls 80 percent of electricity generation. Trying to set prices in such a system is a nightmare. "There's no way to promote competition in a government-controlled market," says Peter Greiner, who served as Brazil's Energy secretary in the late 1990s.

For all the problems in the energy industry, privatization has mostly worked in Brazil and other countries. Brazil's steel, banking and telecommunications industries are now booming under private ownership. In the 12 years since Brazil auctioned off its various state-owned Telebras phone companies, the number of fixed telephone lines in the country has nearly doubled. Cellular phones, once a luxury, are now as common as football jerseys. El Salvador has embraced privatization with such gusto that even road maintenance in that country is handled by outside contractors. "We have to separate reality from the noise sometimes," says Miguel Lacayo, the Economy minister of El Salvador. "The perception can often be that privatization hasn't been very effective, but the truth of the matter is that things have improved."

As Lula ponders what to do about an ailing foreign company, he might do well to consider the approach of another Latin politician who didn't always follow "the model." Outgoing Ecuadoran President Gustavo Noboa defied an International Monetary Fund edict last year when he scaled back cooking-gas prices that had sparked an uprising among some of the country's indigenous communities. Noboa felt compelled to make that move, but he still backs privatization as a sound policy tool for promoting economic growth. "Privatization isn't bad," he told NEWSWEEK. "Our countries don't have the money to manage all the companies, and we need serious foreign investors to extract the [natural] resources that we cannot extract on our own." With improved regulatory oversight, and a fair, long-term focus by corporate owners, there is no reason privatization shouldn't work.

Privatization Blues | News