privatizations en latinamerica - bid - 1993

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PrivatizationinLatin Am erica

ManuelSanchezandR ossana CoronaEditorsITAM ,M exico

Publishedby the Inter-American Development BankDistributedby TheJohns Hopkins University Press

Washington,D.C.1993


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The view s and opinions expressed in this publication are those of the authorsand do notnecessarily reflecttheofficial positionof theInter-AmericanDevelopment Bank.

Privatization inLatin Am erica

Copyright 1993 by theInter-AmericanDevelopment B ank1300 N ew York Avenue, N.W.Washington, D.C. 20577Distributed byThe Johns H opkins University Press2715 North Charles StreetBaltimore, Maryland21218-4319Library of Congress Catalog Card N um ber:93-080794ISBN:0-940602-67-9


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FOREWORD

Privatization inLatin Am erica is the fifth book of a series published under theCenters for Research in Applied Economics Project sponsored by theInter-Ameri-can Development Bank. In keeping with the centers' objective of addressing themajoreconomicandsocial problems affec ting Latin America and the Caribbean,this volume examines the effects of privatization on efficiency, distribution ofownership,and overall performance of Latin American economies.

This book examines thediverse privatization experiences ofChile, M exico,Colombia, and Argentina. Each case study carries with it specific lessons ontransfer ofownership issues and the various costs and benefits of privatization.Evid ent from all four studies is the need to comb ine priva tization w ith other reformmeasures such as price liberalization, openness to foreign investment, andsimplified regulatory procedures. Without a stable climate fo r business and asound f inanc ial system, the ben efits from privatizations cann ot be achieved fully.These studiesaremost timely. Never before in thehistoryof theregion hasprivatization been embraced sow holeheartedlyorpursued with such vigor. Eveninsu ch sectorsaspetroleum andm ining, which traditionally have been protectedas strategic and v ital interests, the role of the state has come un der serious scru-tinyover the last few years. As a ma jority of state-ow ned enterprises co ntinu e tomount enormous losses, it is becoming increasingly obvious that the drain theyexert on public finances is no longer allowable.

Yet p rivat izat iongoesbeyond mere fiscal considerations, asthis book seeksto show. In fact, although short-term budgetary relief can be expected from thesale of pub lic enterprises, pol icy mak ers w ould do w ell to resist the temptation ofreaping quick govern me nt revenues, focusing instead on the broader implica-tions for the economy as a whole. When executed properly, p rivatization facili-tates m oreefficient mark ets, better regulatory practices, greater p rodu ctivity, andhealthier financial systems.Whatever a country 's motives for privat izing might be, certain conditions

simplify th eprocess andspread th ebenefits more equ ally among th eentire pop u-lation.F orexam ple, experience hasshow n thatthegearsofdivestiture turn m oreefficientlywhen responsibility is consolidated within a single agency capable ofseeking potential buyersand making sales. Also, because labor's cooperation isvitalto the eventu al success of the restructured enterprises, i nclu ding workers indivestitureprofitsis importantforensuringasuccessful privatizationprocess.


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mak ers are signaling their serious co mm itment to reform. Indeed , the message isgetting through not only to their own populations, but also to the entire globalcommuni ty .B yplacing suchanemphasisonprivate ownershipand competition,governments are acknowledging openly that the key to economic progress lieswithin entrepreneurship and the sound business principles employed by the pri-vatesector. The corollary to this policy approach is that increased pro du ctivityandefficient managementare theon ly realistic strategies for survivalinincreas-ingly competitive global markets.And w hile privatization alone cannot g uaran-tee a successful reform p rogram, it is certainly an appropriate step towa rd com -prehensive structural adjustm ent.

Nohra Rey de Marulanda, ManagerEconomic andSocialDevelopmentDepartment

By divesting unprecedented amounts of publiccapital LatinAmerican policy


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CONTENTS

Chapter OneACom parisonofPrivatization Experiences:Chile,M exico, Colombia,and Argentina 1Manuel SanchezRossana CoronaLuis Fernando HerreraOtoniel OchoaChapter TwoFiveCases ofPrivatizationinChile 41Dominique HachetteRolfLudersGuillermo TagleChapter ThreeThe Privatization Process inM exico: Five Case S tudies 101Manuel SanchezRossana CoronaOtoniel OchoaLuis Fernando HerreraArturoOlveraErnesto SepulvedaChapter FourPrivatization inColombia: ExperiencesandProspects 201LuisAlbertoZuletaJ.LinoJaram illo G.Carlos Eduardo BallenAna Maria GomezChapter FivePrivatization inArgentina 251Pablo GerchunoffGerman ColomaIndex 301


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CHAPTER ONE

ACOM PARISONOFPRIVATIZATION EXPERIENCES:

CHILE MEXICO COLOMBIAANDA RGENTINAManue l Sanchez, Rossana Corona,

Luis Fernando Herrera, andOtonielOchoa*

IntroductionOne of thestru ctura l reforms associated w iththesuccessful performance ofsev-eralL atin American cou ntriesispriv atization, w hich seekstobroaden individu alcountries' efforts toward market liberalization. As part of a new developmentstrategy, this process stems from the redefinitio n of the state's role in the econom y,substitutingdirect government participationin thep roduc tive processes withactionprimari ly related to export promotion and regulation. Privatization can be ac-complished in various way s, the most common being the total or partial sale ofth estock inpubl icenterprises, follow edby thegrantingofpu blic service conces-sions toprivate companies and the private financingof government infrastruc-ture works.1The a ckn ow ledg me nt that pu bl ic enterprises have not been able to guaran-tee the mult iple object ives for which they were created (i.e., changes in statepolicy,job protection, better income d istribu tion, and macroeconomic stab ility)has been the common thread. In the past, fulfilling these goals proved costly tosociety bec ause reso urces w ere allocated inefficiently. Theretreat fromthecrite-rion of profitability led to a deterioration in the financial health ofpu blic enter-

The au thorsaregrateful for thesuggest ionsfrom th eparticipatingevaluatorsand researcherso fth e I D E ' sCentersf orResearch inApplied Economics.' In a broader sense, liquidating public enterprises may also be included when such companiesinterfere wi th th enor mal operationof themark et under private agents.

*


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2 PRIVATIZATION

prises. Moreover, governm ent interventionin themarkets occasionally supplantedpr ivate inves tment and jeopardized the countries' growth potential . Withprivatization, the governments have sought to eliminate the primary causes offiscal disequilibriumandinefficiency associated withtheoutdated intervention-ist approach.

Although privatization continues to spread in many countries, knowledgeof the form thattheprocess can take and itsimp licationsislimitedby the smallnum ber and abstract nature of theoretical predictions, as w ell as by the dissimilarand relative ly recent natu re of the variou s privatization experiences. Indeed, per-haps because the goal is unattainable, theory does not provide an idealprivatization model that conforms to specific conditions, such as the good orservice produced, the market s t ruc tu re , complementary pol i c ies , or themacroeconomic context of the countries. The pu rpose of this stud y, whose ma infindings areoutlinedinth is chapter, is to contribute to an understandingof theformsthatprivatization cantakeand itsimpact. Tw entycasesare examined 10industrialand 10service enterprises selected fromthecontrasting experienceso fChile, Mexico, Colombia, and Argentinato enable us to draw some conclu-sions and make concrete recommendations about future privatization processesinth e region.2

The study is organized in the follow ing manner. The second section review sth etheoretical fram ew ork that formsth ebasisfor theresearch andhypotheseso fthe investigation . Th e third describes the economic polic y context that substan-tiallydetermines the individu al national experiences and sketches the back groundofthe companies a nalyzed . The fo urth presents the general findingsand the indi-vidualresultsforeach cou ntryineight analy tical areasasthey relateto thework-inghypotheses.Thefifth highlights economic p olicy lessonsto bedrawnandsetsforth recommendations,and the sixth section contains some final comments.

TheoreticalFrameworkAssuming that the government seeks to maximize the welfare of society, Jones,Tandon,andVog elsang(1990)determine that privatizationisju stifiedif the sumof thesocial valueof theenterprise inprivate hands plusthesocial benefitof themonetary transferfrom th eprivate to the public sector associated withth e saleprice outweighthesocial valueof the enterprise ingovernm ent hands.The bestbuyer from thesocietalstandpoint is the onethat, giventhestructureof themar-ket,canbringthegreatest benefitintermsofboththepriceand thecapacityof the

The design, methods,an dscopeof thecase study approachas aninvestigativestrategyare foundin Yin, 1984.2


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buyertogenerate p rofits withtheenterprisecomparedto theopportunitycostofthe source of financing.

These same authors show that the indifference price is equal to the differ-ence in the social value between th e enterprise when privatized and when notprivatized, divided by the difference in the social v alu e (or shadow price )of themoney in the hands of the government as opposed to the private sector. Thisfigure represents am inimu m price if thedifference referred to as the denomina-tor ispositiveand amaxim um price if it isnegative. Presumably ,theopp ortunitycostof themoney obtained isdifferent, dependingonwhether itimplies sacrific-ing public or private expenditures or whether it is consumption or investment.The cost isexpected to be low if it derives from nonnational external sources,assuming that nationalsdo notinclude nonnationalsintheir welfare fun ctionandtheenterpriseto beprivatizeddoesnothave monop oly characteristics, since thereis no sacrifice of resources or the transfer of monopoly rents to the exterior.Analogously, the increment in social welfare derived from the use of the re-sources from the privatizationdepends on the value that society assigns to thisuse.

Now, it is naturalto conclude that th e ability of the buyer toenhance thesocial valueof theenterpriseisassociated withthepossibility thattheprivatizationleads to moreef fcient production and allocation. The literature identifies threebasic channels through which privatized enterprises can generate gains in pro-ductiveefficiency (the minimizationo fcosts for any production level):(1) less(o r zero) interferenceby government officialsin the enterprise's decision-mak-ing process, permitting a more efficient allocation of productive resources andth e maximizat ionofprofits, with administrations abandoning political or non-commercial objectives; (2) achange inproperty rights that reducesth e informa-tiongap between owner and administrator, enabling the former to supervise thelattera ndprovidehimwith appropriate incentives;3and (3)financial discipline,if theprivat ization imp liesthe wi thdrawalofgovernmentas the guarantorof theenterprise insituationsofbankruptcyor takeover.How ever, theory suggests that priv atizatio ncanimp rove allocative efficiency(the allocation of resources toward socially desirable levels of output) only inenterprises that have not been sub ject to comp etition and through comp lem entarymeasures. V ickers and Yarrow (1988) emphasize that promoting competition inth e markets and effectively regulating enterprises with monopoly power maygenerate efficiency more significantly thanthep rivatizatio n itself. This hyp oth-esis can be broken down into two parts. First, it is necessary to remove entrybarriers tocomp etition tooffsetthemonopoly powerof theprivatized enterprise

This second channel is based on the theoriesof property rights ( agent-principal ) an d publ icelection.Se eAlchian, 1965,an dN iskanen, 1971, respect ively.

A COM PARISON OF PRIVATIZATION EXPERIENCES 3

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4 PRIVATIZATION

or eliminate subsidies that have enabled the enterprise tocompete.T his finding,however, does not require the presence of real competition; the mere threat ofcompetition would suffice.4Second, therearecases of market failure (suchasnatural monopolies andexternalities), w here it is impossible or undesirable to stimu late greater comp eti-tion.Insuch situations, adequate regulationis the tool forachievingan increasein efficient allocation by the enterprisefor example, by establishing tariffs,investm ent goals, and quality control for the produ ct or service. These cond itionspoint to a single conclusion: that the priva tization of an enterprise w ith monop olypower will tend to raise the level of productive efficiency at the expense ofallocative efficiency (which impliesa less-than-socially-desirable level of out-put) ,except where profit ma ximizationispursu ed throug h competition andregu-lation. The hypothesis suggested by several authors thus postulates a tradeoffbetween efficient production and allocation when privatized enterprises possessmonopoly power. A specific example of this is the monopolist's exploitation ofeconomies of scale and synergies that lower his average costs but increase hissize in the market, distancing him from th e situation that would prevail undercompetitive conditions.5N ow ,th e majorityo fauthors maintain tha t some sub sequ ent increase in theefficiency of anenterprise is indispensable ifprivatizationis to bring a perma-nentfiscal gain. The theory is that the sale of pub lic stock constitutes a one timeonly influx of capital that reduces th e government deficit for a single period inequal measure. If the price of the stock reflects thepresent valueof the flow ofbenefits of the privatized enterprise, th e loss in future revenues stemming fromthe sale w ill resultinlargerfuture deficits, keepingthe netcapitalof the govern-ment intact. Under these circumstances, privatizationoffers but atemporary re -liefforpublic finances, simply alteringthetime profileof therevenues; thus,th egovern men t shou ld direct its new revenu es tow ard some other type of investm ent(e.g., financial) w ithout modifyingit s current spending. However, this equationisalteredif theprivatizationor thepolicies that complement itimplyan increaseinthe future benefitsof the enterprise throughananticipated gainin efficiency.In that case, the resources from the sale would exceed the present value of thebenefits that th e enterprise would obtain if itwere notp rivatized, signifying anincrease in government capitalthatis, a perman ent fiscal gain that the govern-ment could apply to current expenditures without passing larger deficits on tofuture generations.

In the theory of contestable markets in Baumol , Panzar, an d Wil l ig , 1982, th e monopolistbehavesmuchlikeacomp etitive enterprisei fother enterprises facea lowentry cost invying fo rpart of them onopoly rents, should therebeany.The most common transactions that generate synergies are mergers or acqu isit ions. See M uelle r,1980.

4

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ACOMPARISON OFPRIVATIZATION EXPERIENCES 5

Fina lly, since societies p laceanegative valueon theconcen trationofwealth,privatization could diversify theownershipofpublic enterprises throughthe saleof stock to w orkers, to investmentfunds,and,finally,to multiple investors throughthe stock exchange. The literature thus postulates that some genuine benefitsfrom privatizationin developing countries could be thepromotion ofsavings,acertain redistributiono fincome,andexpansionof thecapital market.At thesametime, privatizationcan contribute tocreating a stable macroeconomic environ-ment through permanent fiscal gain. This can reduce the public deficit if thereform is perceived as an attractive op portun ity for foreign inve stme nt, thu s im-provingthebalance-of-payments situationfor a time.Thisreviewof theliteraturesuggestsusingthecasestudym ethodtodelveingreater depth into eight topics related to privatization and its effects in LatinAmerica:(1)preparatory measures, (2)valuation,(3) thesale mec hanismand theprice, (4)buyersand financing,(5)com petition, (6)regulation and supervision,(7)productive and allocative efficiency, and (8) the fiscal and macroeconomicimpact. To achieve this objective and facilitate a comparison of thecases,thisinvestigationadopts the 11 working hypotheses listed inTable 1.6

Countries and Selected CasesProbably no factor determines the cou ntries ' ind ividu al experiences w ithprivatization more than their economic policy framework, which includesgov-ernment prioritiesand theorderandeffectivenessof the measures. This elementis so crucial that the methods and the effect of privatization of enterprises de-voted to the same activity but indifferent countries are radically different (e.g.,the telephone companies in Chile, M exico, and Argen tina; the airlines in M exicoand Argentina; and the banks in Chile and Colombia).Chile's privatization program has the longest trajectory of the experiencesanalyz ed since it formed p art of the measu res promised by the entering militarygovernment inlate1973.Theprivatization process consistedof tworounds,cor-responding to the periods 1974-78 and 1985-89, separated by a lapse ofrenationalization(theresult of the financia l crisis associated in part with thecon-ditions of priva tization in thefirstro und ). The objective of the first phase was toachieve fiscal gain. This phase affected a large number of enterprises, usuallyemployed competitive bidding (auction) as the transfer me chanism (withthe en-terprise going to the highest bidder), allowed for the sale of enterprises on credit,and was complemented with deregulation. The objective of the second round,

6 Thesehypotheses w ere establishedaprioriand do notpretendto beunive rsal; theya reused onlyas a point of departure for the comparative analysis.


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PRIVATIZATION

Table1.1 Results of the Testing of the Hypo theses Pe rce n ta g e o f re jec t ion )Hypothesis Chile M exico Colombia ArgentinaMonopoly Po wer-Worker 's Share Hypo thes is: Onlyin enterprises with monopoly power doestheprivatiza-tion include thedistributionof shares to wo rkers. 17 40 25 0Profitmaking-MinimumR eference Pr iceHypothes is:The value of the sale ex ceeds theminimum reference pricefor all profitmakingenterprises. 17 40 50 20ClosedBiddingOwnershipC oncentrationHypothes is: If theprivatization is accomplishedthrough closedb idding (e.g., requiring certaincharacteristics of the investors) without theparticipationof the stock exchang e, then ow nershipbecomes concentrated. 17 20 0 0B u y e rSelect ion Hyp othes is:Selecting buyersis afunction of theinvestment programsand theoffer ofthe new technologies to be incorporated, rather thanthe buyers'experiencein thefield. 33 20 0 0Profi tabi l i ty Promotion Hypothesis: Theprivatization has soug ht to promote the profitab ility ofthe privatized enterprises, sacrificing regulationandeffectivecompetition. 100 80 100 0Input Deregulat ion Hypothesis:Deregulation ofinput prices complements privatization of enterprises . 17 0 0 20Increased Investment H ypothes is: Theprivatizations have resulted inmore investment in thecompany rather than reductions insub sidies andincreasesinfiscal resources. 33 20 75 20Fisca l Gains-Current Expend i tures Hypo thes is: T hegovernmentdoesnotconsider privatizationstemporaryfiscal gains; thustheresources ob tainedfromthem are not used to increase currentexpenditures. 17 0 0 100Interest Ra t eand Debt Service Hyp othes is:Privatization generatesamajor influx ofcapital thatmakespossibleareduction ininterest ratesand thedebt service. 50 80 75 40Higher Profit-PriceAdjustment Hyp othes is: Thehigher profits derived from the privatizations are duemoreto price adjustments than to cost reductions. 83 60 100 0Union-Eff iciency Deteriorat ion H ypo thesis: Th egovernment is better able to resist union pressures(i.e.,strikes, interruptions inservices, wag e demands)than the private sector; thus efficiency deterioratesafterprivatization. 100 40 100 100S o u r c e :CentradeAnalisiseInvestigacionesE conomicas(CAIE).

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ACOM PARISON OFPRIVATIZATION EX PERIENCES 7

which included reprivatizing the enterprises temporarily taken over by the stateand selling public service entities, was todisperse ownership through a mix ofseveral types ofcapitalism topermit participation by small investors. Three in-dustrial and two service enterprises (incl ud ing the privatizing and reprivatizingof one ofthem)areanalyzed:

Compania deAcerode lPacifico (CA P).Afterafailed stock issue , this steelcompany, exposed to external competition years before, was privatized intw ostages d urin gthesecond round .Theprivatization combined labor capi-talism with a new stock issue, a buyback of stock by the company, andofferings on the stock ex chang e. This enterprise is not sub ject to a specificregulatory regime, sinceitfaces external competition. Celulosa Arauco yConstitution, S.A. (CAYC). Aconsortium ofthree en-terprisesfromthe timb er sector, this company was privatized during thefirstroundthrough comp etitive bidding.It is notsubjectto aspecific regulatoryregime, since it faces internation al comp etition.

Empresa NacionaldeElectricidad (ENDESA).Afterarevisiono f the lawgoverning the electricity sector, this national electricity enterprise wasprivatized during th e second round. A variety of approaches was em-ployed, including stock packages to public employees andinstitutional,labor, and popu lar capitalism, as well asofferingson the stock exchange. Banco de Chile (BCH ). Privatized in the first round and later taken overby the state, with the reprivatization ownership of BCH was diversifiedsignificantly. Strengtheningof the regulations thatgovernedthefinancialsystem accompanied this action.

Compania deT elefonos deChile (CTC). The specific regulatory frame-work of the telephone com pany hav ing been mod ified at an earlier date,CTC wasprivatized duringthesecondround because of thestate'sinabil-ityto assume resp onsibility for the investm ent necessary to meet the grow -ing dem and for service. The process inclu ded sel lin g a controllin g shareof company stock through international bidding, plus institutionalandlabor capitalism , offerings on the stock exchange, and a new stock issue.

M exico 's p rivatiz ation program had the second longest duratio n in LatinAmerica, surpassed onlyby thatofChile. As inChile, privatization was one ofthe structural reforms that accompanied the stabilization measures necessary todeal w ith the balance-of-p aym ents crisis of1982.Two p hases can be distingu ished :th efirst(1983-87),w hich included selling a large nu mb er of med ium -sized andsmall businesses typically subject to acompetitiveenvironm ent, required rela-tively simple transfer processes based onmarket parameters; the second (1988and thereafter) included selling major enterprises accompanied by regulatoryadjustments and coincided w ith a new m acroeconomic stabilization program.


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8 PRIVATIZATION

The Mexican study explores five cases pertaining to the second phase (threeindustrialand two service enterprises): Ingenios Azucareros. Belongingto on e of themost regulated indu striesin

the country, these sugar processing plants were privatized through foursuccessive auctions that offered increasingly flexible conditionsof sale. Comp ania M ineradeCananea,S.A.(CM C). With serious labor problemsarisingfrom th eexisting labor law s,theprivatizationofthis miningcom-

pany included two calls for bids, the declaration of bankruptcy, and twopublic almonedas.1 Tereftalatos M exicanos (TEMEX).Subject toexternal competitionan dhighlyprofitable, this chemical com panydid notrequireanyspecial prepa-rationbeforeitsprivatization, w hichw asaccomplished through competi-tivebidding aw arded to its largest domestic comp etitor. Telefonos deM exico,S.A.deC.V.(TELMEX). The national telephonecompany was privatized after a modification in the regulatory regime topromote inve stme nt and foster expansion of the sector. T he privatiza tioncombined apublic auctionfor acontrolling interestin thecompany thatgranteda30-yearconcessionon theenterpriseand a6-yearmonopolyonlong distance service, with stock offerings on the domestic and interna-tionalcapital markets. Compania M exicana de Aviacion,S.A.deC.V.(M EXICAN A). W ithanew regulatory regime inplace,thefirstphase of the priva tization of thisnational airline includ ed capitalization of the enterprise by the investm entgroup awarded the right to buy the government-owned stock; the secondphase con sisted of selling that stock.

Before the privatizations, Colomb ia did notsuffer a period of m acroeconomicinstabilitycom parable to that of the other coun tries exam ined. The p ub lic sectorwas considered small in the 1980s. Thus, there was no comprehensive programofprivatization, butinsteadtheisolated saleofpublicenterprisestoresolvespe-cific problems. The study on Colombia includes two industrial and two serviceenterprises duringthe1988-91interval:

Rena ult de Colombia (SOFASA). Government stock inSOFASA,pa rt ofahig hly regulated sector,wassold direc tlyto theFrench state autom otiveenterprise, which previously had held 50 percent of its equity capital.Thus, withdrawal of state participation from this company was not aprivatization but a sale from state to state. The transfer of property im-

7 Ajudic ia l proceeding appliedtoenterprisesthathave declared bank rup tcy.


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ACOMPARISONOFPRIVATIZATION EX PERIENCES 9

pliednochange in theregu latory regime,and just three years afterward,thebarriers to external com petition began to be lifted. Compania Colombiana Automotriz (CCA). Subject to the same regula-tions as SOFASA, this automotive company w as privatized tw o years

afterSOFASAthroughthedirect saleof thestock ownedby thenational-izedbanks to aforeign investorin the enterprise.

Banco de losTrabajadores (BT).N ationalized alon g w ith other banks inresponse to the crisis of the early 1980s, this institutionw as privatizedonce it had been financially rehabilitated. The privatization involvedadouble bidding procedure. Recoleccion de Basuras en Bogota (RECO L). The refuse collectioncon-cession was grantedfor a5-yearperiod in two geographical areasin or-der to broaden the coverage of the curren tly inadeq uate service providedby EDIS(E mp resa D istrital de Servicios), the state enterprise.

Arge ntina's privatization program was thefastestandmost intenseofthosestudied. Launched by the entering administration in 1989, it was an essentialcomponent in coming to grips with th e coun try 's tremendous macroeconomicinstability.The process thusw asoriented toward providing liqu idityto serviceth egovernmentdebtand torehab ilitatethep roductive capacityof theenterprises;it thus made extensive use of external debt-for-capital swaps. Because of theurgentneedforresources, thesaleofstate enterprises began w iththe largestandmostprofitablenot to mention economically essential comp anies. This madeit impossible to rehabilitate the enterprises financially or introduce regulatorymodifications to boost efficiency before th e privatization.T he national studyincludes twoindustr ialandthree service enterprises:

Oil.To boost the pro ductiveefficiency of the state oil enterprise (YPF),oilreserves were privatizedbyauctioningoffareas that yieldedlowprof-its; signing contracts with private enterprises to exploit low-risk, high-profit areas; andreconverting contracts withprivate companies totrans-fe r the propertyof thereserves that they were w orking. Petrochemical enterprises. Theminoritystate share offourp etrochemicalenterprises was sold to the private comp anies that held the ma jority share.Thesepackages included external debt papers as part of the payment. Acertain opening to the exterior occurred, and some subsidies were elimi-nated. EN TEL . The phone comp any was sold as two enterprises throug h an of-feringof 60percentof thestock,withthewinnersof thebidding aw ardeda7-yearmonopolyonbasic services. Extern al debt papers w ere includ edas part of the payment, and the rest of the stock was divided betweenworkersan dofferingson the stock exchange.


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10 PRIVATIZATION

Aerolmeas Argentinas (AA ). The national airline w as sold throughanoffer of 85percentof theequityto theonly interested inve stment group,which includedth e company's principal domestic competitor. The con-trollingshare passedto theSp anish state airline com pany , which , throughits business associations, exceeded the shareholdings permitted to for-eign investors(30percent). N ew tariff norms were established once theprivatizationhad takenplace. Servicios V iales (SV ). Through com petitive bidding, concessions on ap-proximately30percentof then ational networkofpaved roads w ere grantedforoperation under tollorfixed -rate systems established before thecallfor bids, althoughth e rates later were reduced.

A Comparative Analysisof theCasesPreparatory MeasuresComparing the 20 case studies makes it clear that the less urgent the need fo rresources from privatization,the more extensive the measures adopted in ad-vance of theprivatization.In themajorityof thecases, thepurposeofsuch stepswas toimprovetheefficiencyof theenterprisesandavert bankruptciesinordertoobtainahigher pricefor thebusinesses transferred.InChile particularly, theCorporationde Fomento de laProduction(CORFO)the agency responsible for privatizationsassumed thedebts of one of theCAY C companieswiththedomestic b anks duringthefirstroundofp rivatizationssince thecompany had suffered revenue losses andneeded toattract buyers.Inth e second round of privatizations,the Chilean government, having created acompetitive institutional framew ork, placed greater emphasis onrehabilitatingeach ind ivid ua l enterprise. InCAP, ad ministrativeandfinancial rationalizationwereundertaken;theresultwasrestructuringof theenterprisetomakeit functionas aholding company , w ith commercial op erations among subsidiaries regulatedby the market , a goal-oriented administration,and personnel cutbacks. InENDESA, distributionunitsw ere converted toregional enterprises,andperson-nelcutbacks were applied.Theinsolvencyof BC Hrequiredaplantorecoverandnormalize uncollectible loans, reschedule the debts of viable clients, diversifyand administerthe bank's portfolio, transfer goods received aspayment, liqui-date nonb ankin g stocks and investm ents, increase revenu es, and reduce expend i-tures. In CTC, steps were taken to improvethedebt p osition; they includedre-structuringliabilitiesandrec onv erting debt contractedinforeign currencytodebtin local currency.InMexico, an agent bankresponsibleforeachprocessw as designated. Sev-eral cases included the financial rehabilitationof the company bycapitalizing


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A COMPARISON OF PRIVATIZATION EXPERIENCES 1 1

liabilities contracted with the government and modifying labor contracts. In thesugar processing plants, no preparatory measures were adopted, but the processcoincided with restructuring of the debt of plants whose portfolios had exp ired.In particular, theexcesspersonnel mandatedby thelaborcontractw as not elimi-nated since the most important determinant of sales w as considered the nearbysugarcane fields.InCMC, thefirstagent bank began credit rationingof theenter-prise and capitalized the bulk of its existing liabilities, creating a fiduciary ac-cou nt to cover obligations w ith sup pliers and creditors; th is obliged the comp anyto adjust its current expenditures. After the first offering was annulled and thesecond had notakers, them ining company w as declared bankruptand a secondagent bank w as named. To start up company operations again, the agent bankrestructured the administration and operations of the mine, as well as the wagesand benefits it provided to workers. The labor contract also was modified, themost important agreements being thecontinui tyof thework shiftsand a decreasein the num ber of categories from 40 0 to ju st six. This led to a sub stantial reduc-tion in operating costs, enabling the authorities to arrive at the sale date with aprofitmaking enterprise.

Inthe case of TELM EX , profits equ ivalent to 1.5times the equ ity capital of theenterprise were capitalized, substantially increasingthevalueof thecompany . More-over, the capital structure was modified, making it possible to gain control of theenterprisew ith the pu rchase of ju st 20.4 percent of the com pany 's cap ital stock. Thefederal government, furthermore, assumed the external liabilities of TELMEX inorder torenegotiate them withthe company's creditors.Theseliabilities later wereexchanged for external public debt papers acquired in the secondary market. Thisdebt swap, the sale ofTELMEX 's uncollected accounts on the international ex-changes, and bond issues led to a reduction in liabilities and a substantial financialgain. In addition, a collective labor contract was signed to take the place of 57assorted contracts, creating moreefficient labor regulations and decreasing the numberof labor categories from 1,000 to 140. InM EXICANA, the effort concentrated onreducingtheweightof thedebt vis-a-vis assetsandeliminatingunjustifiable conces-sions in the collective labor contract (the grace period fo r tardiness,fo r example,was reduced from 30minutesto 5m inutes,and leave for adeath in the family orillness, from 300days to 180days).

In Colombia, the financial reorganization of the enterprises included debt-for-equityconversion, personnel cutbacks, administrative reorganization, stricterfinancialcontrol me chan ism s, and def initio n of corporate strategies to guaranteethe companies a presence in the markets. Furthermore, in the case of BT, theacquisition of unp rodu ctive assets to recover u ncollectible loans and personnelcutbacks was sign ificant, w hile the strategy to face up to the competition con-sisted of specializing in short-term consu mer loans. The pla n forEDISbefore theprivatization of the refu se collection service inclu ded city sectors d ivi sio ns , anoperations basef oreach zone that reducedthedistance traveledperrouteperday,


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A COMPARISON OF PRIVATIZATION EXPERIENCES 13

thedepreciationof thestock 15years dow n the lineincalculat ingthepresent ne tvalue of the future flows. In the case of TELMEX, the agent bank performedseveral valuations usingthe net cash flow method: afinanc ial valuation that in-corporated futurebusiness in which TELMEX migh t participate; a technical valu -ation; and a val ua tion of each of the com pan y's sub sidiaries and the assets of theenterprise itself. Here it was necessary to consider the company's contingencylabor l iab ilitie s at a value of close to 10 percent of its total revenu es. In the caseof M E X I C AN A , the discounted net flow of profits, adjusted by the sum of thedepreciation andworking capital, w as estimated.

In Colombia, th evaluat ionof theenterprises to be privatized took intoac -count the fact that they were ongoing businesses; thus, th e methodology em-plo yed was to take the present net value of the cash flo w , projected tofive yearsanddiscounted by dep reciation and provisions. TheSOFASA valu ation w as b asedon past investment ,theequity value of investment, th eanticipated profits,andtheprofits of the supplier of the material to be assembled.

InArgentina, the method used to determine the sale price of the enterprisesand the fee to bechargedforconcessionsw asestimatedon thebasisof the presentvalueof the cash flowof the activities to be privatized.Sale Mechanism and PriceAlthoughthe cases studied va ry, the chief mecha nism in the sale of the enterprisew as competitive bidding. Nevertheless, Chile's experience w as unique, for itincluded thewidest range of methods, especially th e financed sale of companystock to workers and public employees. The sale price obtained through the bid-dingw as typi call y higher than the min im um reference price. The experiences ofthe four countries tend not to reject the Monopoly Power-Worker 's Share andClosed Bid ding Ow nership Concentration Hyp otheses, and with the exception ofColombia,thesamecan besaidfor theProfitmaking-Minimu m Reference PriceHypothesis (see Table 1.1).InChi le ,them ain method employed duringth efirst round ofp rivat izat ionswas the au ction of stock packag es that granted a contr ollin g interest in the com-pany. When thebids did not satisfy th e requirements,the government declaredth e process void and negotiated directly with the highest bidder; this is whathappened with CAYC. The twocases examined involved enterprises with nomarket power, and they did not include the sale of stock to workers; thus, theM onopoly Pow er-Worker's Share H ypo thesis is not rejected. The same holdstrue for theProf itmaking-MinimumReference Pricea ndClosed B idd ing Ow ner-ship Concentration Hypotheses. In the CAYC enterprises, part of the paymentwasmade incash;th erestw asfinancedininstallments overa neight-yearperiodatafixed rate ofinterest. Inprivatizing B CH, the government attempted to pre-ventthe conc entratio n of ow nership by establish ing a ceiling on the sale of stock


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toindividualsan dcorporateentities; however, inpractice,thisw asimpossibletocontrol. Tw o calls fo r bids were issued; a cash deposit w as required, with thebalanceto bepaid inquarterly paym ents pegged to theprice indexand accompa-niedb y afixed interest rate.

The second round of privatizations combined several methods: the sale ofstock to workers, private individuals, and corporate entities; sales on the stockexchange; and competitive bidding. Salesto workers were effected by substitut-ing company stock compensation for years of service, and sales to the publicwere facilitatedwithsoft loansfrom th egovernment. W iththeexceptionofCAP,the MonopolyPow er-Worker's Shareand Profitmaking-Minimum Reference PriceHypothesesare notrejected. This isbecause thesale included worke rs, evenif itdid not depend on thedegree of competition in the industry, and the prices ob-tained were at least equal to the minimum reference price. Similarly, with theexception of BCH , the Closed B idding Ow nership Concentration H ypothesis isnot rejected, because the stock exchange was used and ownership was not con-centrated.

Threeunsuccessfulattempts to sell the company precededCAP'sprivatization,the last of which included granting loans toemployees to enable them to acquirestock in the enterprise. N evertheless, only a small portion of the stock was sold. Thelack of interest in CAP was due to its small profits and the fact thatthe financialsector was offering securities under conditions that were hard to match. At thispoint,CORFOdecided to sell part of the stock to the enterpriseitself,thusreducingthe government's shareandcapturingtheprivatesector'sinterest.ENDESAstockwas sold on the domestic market in various stages through competitive bidding,offerings on the stock exchange, and direct sale to comp any em ployees, pub lic em-ployees, and personnel in theArmed Forces and publicsafety agencies, who ac-quired stock throughapartial advance on their future compensation for yearsofservice. In CTC, several methods were employed for the sale; chief among themwas theauctionof acon trolling shareof thestock, coupledwiththeobligationby thesuccessful bidder to guarantee a capital increase that would give itcontrol of 45percent of the com pany . International enterprises withthe capacity to make a tech-nological contribution to the country also w ere contacted. The strategy provided forthe use of five complementary methods: selling to pension fund administrators(AFPs), selling to workers through advances on their compensation for years ofservice, selling on the stock exchange, b idding com petitively, and increasing capital.The sale mech anism em ploy ed for most Mex ican enterprises was pu blicauction under diverse modes of payment and coupled with the sale of assets orstock, dependingon theparticula r situationof theenterprise.Of thethree entitieswith monopoly power that were analyzed, only in TELMEX and CMC is theMonopoly Power-Worker 's Share Hypothesis not rejected, for it included thesaleof stock tocompany w orkers; neitheris itrejected forTEMEX , because thecompany faces competition. The Profitm aking-M inimum Price H ypothesis is not


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ACOMPARISON OFPRIVATIZATION EXPERIENCES 15

rejected fo r ei ther TEMEX, TELMEX, or MEX ICANA, whi lethe Closed Bid-ding Ow nership Concentration Hy pothesis is rejected only in the sugarprocess-ing plants, because ownership was not concentrated, despite the fact that thestock market was not used.The su gar processing p lants were sold throu gh four pu blic offerings by form-ing packages of good and bad enterprises that gradu ally permitted averticalintegration that reached 100percent duringthelast biddingprocessand increas-ingly required investment programs. Partial payment was to be made in cash,withthe balance to be paid in annu al installm ents at an interest rate linked to theaverage bank rate. In the final bidding, moreover, the government allowed forthe issue of sugar obligations indexed to the price of sugar, by means of w hichthe federal government assumed part of the risk connected with the purchaseof these plants. Despite this support in financ ing the purchase, uncertainty aboutthepermanenceof theprocessand theamountofsubsidies toagroindustry and toth einefficientp aym ent systemfor thesugarcane resulted inlower sale prices forthe plants in thefinal stage. The first auction for CM C was annulledbecauseth ewinninginvestm ent group failedtofulfill th etermsofpaymentasituation thatcould have been avoided had potential buyers been screened beforehand; th esecond auct ion and the first almoneda were declared null and void whenth em in im u m reference price w as not attained.

The sale of TELM EX was carried out by selling stock for a contr ollin g inter-est; bidding was open to foreign participation through afiduciary that kept themajorityshare in the hands of Mexican investors. The criteria for selecting buy-erswerethepriceand theamountofinv estment pledged.At thesame time, stockwithoutvoting pri vile ges was offered on the domestic and international m arkets,givingthe inves tm ent group s that had pu t the stock up for sale the righ t to acquireshares at the starting price of the biddin g. After two attempts to sell M EX ICA N Athrough the Mexican stock exchange fell through because the buyers failed tofulfill th e requirements stipulated,th ecompany w asprivatized through th e cre-ationof acontrolling interest withthe old company stockand anoffering of newcapital through com peti t ive bidd ing, thu s reducing the size of the governmentshare. To ensure the comm itme nt of the successful bidders and grant them con-trolof theenterprise,th egovernment 's stockw asplaced in twotrusts,andthatofthewinnersinanother.In thesecondof itsfiduciary funds, thegovernment cededitsvoting rights to thew inninginvestm ent group, allow ing the group to buy thestock at the sale price when the trust expired. The second stage of privatizationhas begun with the sale to the controlling group of the government stock corre-sponding to thefirsttrust .

Ow ing tolegal constraints,thesale mecha nisminColombia includedan offerof the government's share to the former owners or current partners in the enter-prises. Iftheir response w as deemed inadequate, apublic tender was made. Theexceptions were BT, RECOL, and SOFASA, which were offered directly to the


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public. In BT, the former owners were considered morally bankrupt fo rhavingparticipated in the poor manage ment of the bank ; in RECOL , there were no formerowners; and in SOFASA, the norms governing foreign investment prohibited amajoritysharetopartnersw howerenotColombian nationals.TheMonopoly Power-Worker's ShareHypothesis is not rejected inthree of the companieswhere therewas competition and workers did not play a part in the sale. The Profitmaking-MinimumReference Price H ypothesis is rejected in the cases of BT and SOFASA,since the price obtained was higher than the m inim um reference price, even thoughthecompanies registered losses.Byselling throug halimited pu blic tender, capitalwasconcentrated;theClosedBidding Ownership Concentration Hypothesis isthere-fore not rejectedin any of thecases studied .

Similarly, Colombia did not seek to democratize ownership of the enter-prises or bolster the capital market by offering shares on the stock exchange. Inthe sale of BT, two bid ding competitions w ere held, since there were nooffers inthe first. The privatization w as carried out in stages: registration (through thepaymentof anon refundab le fee);anevaluat ionof the financial andadm inistra-tive soundness of each interested party; an invitation to the qualified buyers topresent a bid; and the selection of the w inni ngoffer, based on a mi nim um refer-ence price an nou nced at the time of the award . BT w as not sold throug h the stockmarket for fear that control of the enterprise wouldfall into questionable hands.

Individuals and corporate entities withsufficient resources and experienceandtheappropriate technology were invitedto bid on RECOL. Proposals weretocover the p ertinent technical, administrative, legal, economic, and finan cial as-pects that w ould enableth egovernmenttojudgeth eproponents' nature, compe-tence, andabilitytoexecute the project. Bidders wouldbecomm itted to render-ing services in the sector of thecityassigned to them byEDIS.Participants wereto present their price per ton of refuse collected, taking into account the timeallowedanddum ping site specified. Paymentfor theservices w ouldbebi-monthlyper ton of refuse collected, transported, and unloaded at the chosen site. Thecriterion for selection was the lowest bid per toncollected.InArg entina , the method employed was a two -envelope com petitive bid. Inthe first envelope, interested companies were to include proof of their technicaland financial ability to manage the enterprise. They then were screened on thebasis of this information. Qualified investor groups could go on to present a sec-ond envelope indicating the price and inv estm ent plan offered. In large and highlyspecialized enterprises like ENT EL, AA, and the petrochemical comp anies, thebidding terms required the sale price to include afixed amount incash and an-other variable portion in debt papers. The highest bid (sale price or concessionfee) was accepted. In the case of the two monopolies, ENTEL and AA, the bid-ders had to form part of an international enterprise with expertise in the field,foreign-held shares could not exceed 50 percent and 30 percent, respectively,and, in contrast to enterprises that operated inmore competitive markets, the


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stock was to be sold to company employees. The Monopoly Power-Worker 'sShare Hypothesis is therefore generally not rejected. The Profitmaking-Mini-mum Reference Price Hypothesis is rejected only in the caseof oil. In the othercompanies, thesale price w ashigher thanthereferenceprice becauseof the con-ditions granted by the governm ent w hen it su bst anti ally raised the rates for theservices, thus sustainingthemarket powerof the enterprises. Underth etermsofth esale, EN TELw as divided into tw o companies, witha stock package offeredfo reach.In all the cases analyzed, whenaclosed au ctionw asused, ownershipofth eenterprisesbecome concentrated; thus,the Closed Bidding Ownership Con-centration Hypothesis is not rejected, even in the case of EN TEL, where thebidding w as complemented with recurrence to the Argentine and internationalstock exchanges.Inthe au ctioning of AA, the investment groupmadeup of Iberia (the Span-ish state enterprise) and aseries of Argentine companies headed byA ustral, pre-sented theonly valid offer when the envelopes were opened.T he offer includeda cash pa ym ent, a credit paym ent, and transfer of external debt papers. Privatizationin the oil market included granting concessions on some reserves that yieldedlowprofits, jo int ventures between the government and private capital, and thesale of some refineries, w ith the governm ent retaining over half of the refin eries'productivecapacity. Since th eprivatesectorhelda 70 percent sharein the petro-chemical companies, only investment groups thatpo ssessed a controlling shareinthe enterprise w ere allow ed to participa te in the bid ding . The initialstockhold-ers' meetingof SV began withapu blic screening processatwhich38consortiapresented themselves; of these, 29 met theg overnment 's qu alif ications. Therewere 147offers, from which judges selected 13consortia comp rised of 46 enter-prises. Several of the qualifying firms participated in designing the sale process.Concessions w ere granted for existin g roads; all segments were auctioned simu l-taneously, fostering collusion among the buyers who distributed the segmentsamong themselves.

Buyers and FinancingIn the bidding for the companies, the main criterion for selecting buyers was thehighest price once certain entry requirements hadbeen metmost importantly,th eprospects for thedevelopment of theprivatized enterprise. Theexception tothis rule was the sale of stock packages to workers, the aim of which was todiversify ownershipwith Chile themost ou tstanding example. The BuyerSe-lection Hypothesis is not rejected in any of the national experiences, given therelatively secondary place occupied by the buyer's experience.Du ring thefirstro und of privati zatio ns in Chile, the enterprises affected w erecompanies that operated in com petitive mark ets; thu s, the best bu ye r w as deemed

A COMPARISON OF PRIVATIZATION EXPERIENCES


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theonetha t offeredthehigh est price. There is ,however ,noevidencetorejecttheBuyer Selection Hypothesis ineitherof the twocases, since pricewas themainconsideration and the amountofexperience in the sectorwas not taken intoac-count. Domestic creditwas theprimary sourceoffinancing.In thesecond roundofprivatizations,theB uy er Selection Hy pothesisisrejectedin CAP andENDESA,since th em ain criteriaforselecting buy erswas thetypeofworker employedbythecompanyor the natureof itsinstitutiona l investors. How ever,as in theotherthreecases,theobjectivew as todiversify ownershipandco nsolidateth esystemof private ownership. The main sources of financing were th egovernment andemployee pension funds. At the beginning, the unions were opposed to theprivatization ofCAP. Stockw astherefore soldtow orkerson an individualbasis,withloans grantedinproportiontotheir base sa laryforeach yearofemploymentwith the company.

Itw asdecided fromth eoutset that EN DESA wo uldbesold throu gh popu larcapitalism.8Thus, thesalew as notpromotedto foreign investors, who,oncethecompany w as privatized, invested in it through th e stock exchange. Companyshares were distributed, in order of importance, among pension funds, publicemployees, members of the armed forces, private citizens, foreign investors,CORFO, and others.CTC's controlling stock w as sold to an Australian groupthat had no experience in the sector but offered th e highest bid. However, th egrou p sold its shares to theComp aniaTelefonica InternacionalHolding B. V. (theInternational Telephone H olding Com pany, Inc.). In this case, the stock w as dis-tributedindescending order among Telefonica,th eBankof NewY ork, workers,pension funds, and others. BCH wasprivatizedb ygranting credit toprivatein-vestors to enable them to acquire stock and pay for it in installments based ontheir taxes for the previous p eriod. The reference price was set to enable a fina n-ciallyviable bank to be established withB C H 'sparticular portfolio.In Mexico, th e selectionof the buyerw as generally determined by thesaleprice thatw asbid. ExceptforTEMEX , however ,th eB uy er Selection Hy pothesisisnotrejectedin any of thecasesstudied,sincetheinvestment comm itmentmadewas considered more important than experience in the sector. In the sale of thesugar processing plants, in addition to the price offered, th e percentage of theprice covered incashand thedegree ofvertical integration requested(in the firstbid) were taken into account, with the investment programs becoming progres-sivelymore relevant than the buy ers' experience. T he w inne r of the com petitionfo r CM C required credit from foreign and domestic banks to financeth epur-chase of them ine partially;itallotted less than4percento f thestockto theunion,

This term refersto thep rivatization method usedby theg overnment thathad as one of itsmaingoals making stock in the privatizedfirms availableto the mass of itscitizens.To achieve thisgoal, sales were carried out with subsidized credit for theb uyers whose only guaranteewas thestock itself.

8


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despite its originaloffer of 5 percent and thegovernm ent 'spledge to tur n over 25percent afterthe bankru ptcy. TELMEX buy ers werescreenedto ensure that theyhadsufficient net capital to carry out the exp ansio n program s, that the finances oftheir companies were sound, and that they had some knowledge of telephonecommunicat ionssystems. The w inning investme nt group consisted of a nationalconsortiumwith experience inindustry , market ing,andfinanceand two foreigninvestors withacknowledged expertise in telephone communications. Althoughth e investors with technology that were awarded the contract had higher effi-ciencyindicators tha n those oftheir comp etitors, theirproposedinves tmen t pro-grams carried more weight. With a loan from the federal government, the unionacquired 4.4percentof the enterprise'sequity capital and wasobliged to makeamortizationpay me nts only if the share price w ent up. The screening process fo rM EX ICA N A was based on the bidder 's reputat ion in the business com mu nity,its financial solve ncy , and the absence of pend ing debts or legal matters withth egovernment. Thewinninginve stment group includ ed a national consortiumwithexperience in tourism, plus foreign investors who would provide access to fi-nancing.

Althoughbu yer s in Colombia we re selected according to the highes t bid, thesaleprocess inclu ded screening bu yers on the basis of their reputation andfinan-cialsolv ency and their experience in the activity of the enterprises to be privatized.However, thereis noevidence toreject theBuyer Selection Hypothesis.In Argentina, except for the petrochemical companies, interested partieswere prescreened, with their technical and financial capacity serving as thecriteria; it can t h usb e inferred that ensuring a higher level of investmentw asconsidered more important than the buyers' experience in the sector. There-fore, even though select ion was a funct ion of the sale price that was bid, theB u y e r Selection H yp othesis cannot be rejected. W hen p aym ent with externaldebt papers was required, some of the buyers that had qualified did not tenderan offer because they could not obtain sufficient debt papers to fulfil l the re-quirement . Out of seven bidders for ENTEL, only three submitted the secondenvelope; this number later shrank totwo, probablybecauseof internal prob-lems and diff icult ies inobtaining debt papers. Selection criterion for AA gavea weigh t of 70percent to the price, 25 percent to the investment plan, and 5percent to other indicato rs. The only v alidoffer presented was accepted. As thepaymentsfelldue, how ever, the financial precariousness of the investm ent groupbecame evident. To obtain the cash for the payment, the group planned to sellpart of A A ' s fleet and then lease it from the new owner. As part of its capitalcontribution,Aeronac p lann ed to tu rn over 90 percent of its shares in Au stral.For debt papers, i t planned to issue stock in the company and exchange it forexternal debt owed to Argentina's foreign creditor banks. The addition of newaircraft to the fleet was notpartof thecontract; the group transferred aircraftfrom Austral to AA in order to meet its commitment.


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Competition

Lifting barriers to competition tended toprecedeoraccompany privatizationincases inwhich the marketapproach served as alaunching pad forstructural re -forms.T he prototype of this situation was Ch ile's experience , and the antithesis,Argentina's. Hence, withtheexception of this latter case, th eProfitab ility Pro-motion Hypothesis is generally rejected.

InChile,th emilitary governm ent fostered free comp etitionfrom th eoutset,eliminatingmark et distortions and ap ply ing a policy of openness to internationaltradeand capital; thus, the Profitability Promotion Hy pothesis is rejected. Evenbefore itsprivatizations, CAY C formed partof anou twardly oriented competi-tive market. For BCH, ceilings on interest rates and entry and exit barriers tofinancial (inclu ding internation al) intermediaries w ere eliminated, and resourcescouldbefreely obtained andinvested accordingto theindiv idu al criteriaofeachbank. By the second round, the markets had already been liberalized; the enter-prises were therefore operating in competitive markets. The laws that governedthe telephone com mu nicatio ns sector, moreover, w ere modified to guarantee freeentry into the telecommunications market. This obliged concession holders toestablish and accept interconnections to give users access to all the public ser-vices installed and to enable providers to setprices and rates fo r these servicesfreely, independentof anyagreements that they m ight enter intowithcustomers.One exception is ENDESA, which, as a natural monopoly in the provision ofelectricity to final users, did not modify th e market structure. Even here, th eProfitability Promotion Hypothesis is not rejected, for there was no attempt toboostthe profitability of the enterprise.Inth em ajori tyof theM exican cases,efforts were made toward elimina tingentry andexitba rriers andfostering competition.In thesuga r processing plants,establishinga variabletariffon imports permitted a certaindegreeof openness. Areferencepriceinconstant dollarsw asset; importswithprices belowthisthresh-old were prohibited,and for those with prices above it, the importer paid zerotariffs. If thespot pricefellbelow thereference price,theimporter paidthe differ-ence between thespot price and thereference price. Inaddition, althoughCM Cwas sold to Mexico's maincopper producer, and thepurchase ofthis companyconsolidated a local monopoly, the constraints imposed by external opennessrendered an ti-monopoly measures unnecessary. H owe ver, a new m ining regula-tion was put inplacethat eliminatedth elegal entry b arrierstomin ing explorationandex ploitationa nd facilitatedtheprocedures for obtaining concessions.Theenterprise that purchasedTEMEXbecame thesole producerof theproductat thenational level;tofoster competition,tariffs were reducedand theenterprisecommittedtosupplying domestic industrial consumers withthisinputat adiscountover the import price if the consum ers are exporters. The new ow ners of T ELM EXwere guaranteed thattheenterprise w ouldbe thesoleprovideroftelephone service,


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Regulation and Supervision

Updating theregulatory framework tended to precede privatization and was moreeffective the longerit was inplace. Once more, C hile represented thep ositiveex-tremeinthis respect,andArgentina,thenegative. Nevertheless,theInput Deregula-tionHypothesis, which associates increases in theprices ofpublic inputswith theprivatization,is not rejected in the four country experiences. Moreover, effectivesupervision depended on the presence of an authority to exercise adequate con trol,thusavoiding conflictswiththeobjectivesofother government agencies.

InChile,themod ificationsin thelegal framew orktofoster com petitivenessincludedeliminating controlson thecredit ma rket (i.e., ceilingsonloan s, interestrates,external b ank debt,andreserverequirements) an dstandardizing theactivi-tiesof the various types of banks. Despite efforts to construct an adequate legalframework tostimulate andmo nitor theoperationoffinancial institutions withina market economy, thefinaloutcome was negative because the free-market schemeexisted side by side with the free regulation of the system. In the late 1970s,itbecame obvious thatfinancial inst itutio ns cou ld not be allowed to operate in afreem arket unless some prudent minim al controls w ere established over them. Inthe twocases considered,theInp ut Deregulation H ypothesisis notrejected, sinceprice controls were lifted.

During the second roundofprivatizations,the Input Deregulation Hypoth-esis is not rejected either, except in the case of ENDESA, because the govern-ment decided to regulate certain privatized enterprises more stringently and in-tensify price liberalization. The legal framework for banking institutionsw asmodified tocorrecttheerrorsof the first round, with limits imposed on transac-tions w ith enterprises connected w ith the owners of the bank. For END ESA , anew Comprehensive Electricity ServicesLaw wasenacted that takesthe market,competition, and marginal costs into account when establishing rates. The lawregulates theprice ofservicestofinal users withlow levels ofconsump tion andincludesthe freedom to negotiate rates withlarge ind ustria l clients.In neitherof theround s werenewinstitutionsresponsibleforsup ervisingtheenterprises created, al thou gh in some cases ex isting agencies were strengthene d.Inthe electricity sector, the Nationa l Energy C omm ission is responsible for plan-ningand coordinating state investments, developing large electricity generationand transmission projects, and carrying out price studies that are used by theMinistryof the Econo my to determine electricity rates. In add ition, the Econ omicOffice fo rElectrical System s optimizestheoperationof thesystemas aw hole.Itestablishes mechanisms tocoordinate activities amongthevariousenterprisesofth esector in generating and distrib utin g electricity and operating interconnectedinstallations inorderto ensure uninterrupted andefficient service. In thesecondroundofp rivatizations, me chanism s were established toenabletheOfficeof theSuperintendent ofBanks todischarge its duties more efficiently, endowing the


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ACOMPARISON OF PRIVATIZAT ION EXPERIENCES 23

office withtheauthorityandfinanc ial resources tomonitor compliance w iththeadditional restrictions imposed on thebanks.

Privatization inMexico w as accompanied by measures to promote open-ness and regulations to prevent an explosion of monopolies. Similarly,all ofthe privatized enterprises had to deal with deregulating prices and public ser-vices rates that formed part of the economic stabilization program; thus theInput Deregulation Hypothesis is not rejected. The most important aspect ofsugar regulation was the elimination of the tax on marketing the commodity,which removed th e disincentive toproducers to integrate verticallyandlinkedthe price of sugarcane to the price of sugar. In thecaseof TELM EX, theTele-communications Regulation w ascreated, and the Title of Concession, whichestablished the investme nt comm itments of TEL M EX , was extended by 30 years.To m ake these c om mitm ents feasible, rate and tax structures were redefined toallow profits to be reinvested, and some distortions in prices and rates werecorrected. Toregulatethemonopoly powerofTELMEX, thegovernm ent optedfo r a rate system that implied keeping basic phone services constant in realterms. It should be mentioned that although the increases in the cost of basictelephone service provide d for in the Title of Concession transfe r a larger shareof resources to the monopoly, they put the quantity of services provided in aposition much closer to comp etition. In M EX ICA N A, domestic airline passen-gerfares and routes were freed in competitive situations, withoutthe need forprior government approval. Moreover, after the privatization, the governmentsuspended the concession to the un ion of exemp ting 50 percent of wages fromtheincome tax; this obliged thecompany to compensate workers, significantlydamaging MEXICANA's f inances .Anumberofe ntities curre ntly supervise sugar productioninM exico, whichoccasionally leads to an overlapping of responsibilities. First, there is Azucar,S.A.de C.V ., wh ich mo nitors the comp anies' level of outp ut in order to channelsale of their stocks and keep domestic prices from being depressed. Anotherinstitution, Financiera Nacional Azucarera (FINASA), periodically analyzesthe situation in the processing plants to ensure the recovery of its loans and thefinancing needs of each of the enterprises. Finally,the Secretariat ofAgricul -ture and Hyd raulic Resources (SA RH ) is responsible for overseeing the sugar-cane fields. TELMEX must submit quarterly progress reports to the govern-ment on the expansion programs. The government has the authority to desig-nateaproperty advisorand adeputy advisorto theAdm inistrative Council ; thisprovision w ill remain ineffectuntil August 1993. Government supervisionhaskept prices from rising as stipulated in the Title of Concession, which coulddelay th e opening to the exterior if the cross-subsidy between services is noteliminated.The go vernm ent has a share e qu iva len t to 14 percent of the votes onMEXI CAN A's board of directors and, in this manner, supervises companydecisions.


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InC olombia, th eau tomo tive sector w asfaced withtax and customs prefer-ences fo rimportso f them aterialto beassembled, and themodels assembled hadtoremainin thecountry for atleastfive years.By1991, entry barriers and pricecontrols had both been lifted and effective protection lowered, although it wasstill higher than that granted to the rest of the manufacturing subsectors. TheInputDeregulation H ypo thesis is not rejected, since privatization was accompa-nied by price liberalization, particularly in the automo tivesector.Furthermore, in1990,thefinancial,exchange,andinvestmen t laws w ere mo dified.The new leg-islationgrants greater freedomand amore activeroletocommercial banksin thenegotiation of foreign exc hange and reduces the share of the Central Bank in thatmarket. Moreover, it permits up to a 100 percent share of foreign investment,eliminates entry and exit barriers (maintaining minimal levels of capital), andpromotes the dissemination of information, such as the publication of interestrates and risk indicators. The Office of the Superintendent of Banks is respon-sible for supervising and monitoring compliance with th e general norms thatgovern the entire sector and complementing the protection provided by depositinsurance.The law requ ires that capital be increased ann ua lly by a percentage atleast equ ivale nt to the level of inflation of the previou s year. The N ational RatesBoard (JNT) sets refuse collection rates forEDISand canmodify them as well.

InArgentina,with the exception of the petrochemical comp anies, the Inp utDeregulation Hypothesis is not rejected, since the input prices of some inputswere liberalized. C alls for bidding partially compensated for the lack of a clearand comprehensive regulatory regime. In the majority of cases, the sales con-tracts established quantitative and qualitative goals for service improvementsthat implied high levels of investment torecap italize th e enterprise. Neverthe-less,virtuallyall thecontractual regulations w ere modifiedafterth eprivatizationto lower the price of the services. For example, in the cases of ENTEL and SV,thegu ideline s of the sale established that rates w oul d be set by the governm ent onth ebasis ofinflation and the exchange rate.How ever, the convertibility law pro-vided for indexation of rates to the U .S. consum erpriceindex. M oreover, in SV,th egovernm ent eliminatedtheroyalty thatitcollected, low ered taxes,andgrantedsubsidies. Together with the privatization of oil reserves and oil refining, theobstacles in impo rting o r exporting crude oil were remo ved. Fuel taxes were alsomodified. In the case of the petrochemical companies, subsidies and the legalbarriers to imports were eliminated.The agencies responsible fo r supervisingand regulating state services werenotm odified with the privatization, and they were weak and lacked autonomy.Financed witharoyaltyfrom telephone revenues,th e National Commission forTelecommunications w ascreated tomonitorcompliance with the quantitativeand qu alitative goals of ENT EL. This comm ission also establishes technical andservice standards, standardizes equ ipmen t installa tion, and resolves conflicts thatmay arisebetweenenterprisesan dusers.


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Productive andAllocative Efficiency

Althoughm ost of the cases an alyzed are recent, profits generally increased afterprivatization, partly because of greater productiveefficiency. Among the deter-mining factors should be noted the emergence of synergies from contestablemonop olies, althou gh the price increases permitted by the regulationsalsohaveplayed a crucial role. Evidence of the effect on allocative efficiency isscanty;however, there are indications that when efficiency did increase, it was exclu-sively because of competition and regulation policies. Only in Argentina is itclear thattheH igher Profit-Price Ad justm ent Hy pothesisis notrejected. Withth eexceptiono fM exico,th eUnion-Efficiency Deterioration Hyp othesis, wh ich pos-tulatesthatth egovernmenti sbetter abletoresist union pressures thanth eprivatesector, tends to be rejected.In Chi le , ind ica tor s for the y ea r s f o l l ow i ng the f irs t round showedprivatizationswithh igher profits. How ever, duringtheeconomic crisiso f 1982,B C H ' s financial position deteriorated so much that the government was com-pelled to take itover; thus,asw ith CAYC , th e Higher Profit-Price Adju stmen tHypothesis is rejected. In all the second round cases studied, improved use ofavailable resources is discernible, which suggests that privatization led to in-creased productiveefficiency. Becauseo fexternal competition,C AP investedinnew technology to cut production costs and improve product quality. Moreover,it institutedadiversification policy thatled to itsbuyingof 20companies inironand steel production, m ining, timber prod uction, and services, and its profitabil-ity indicators have exhibited arising trend. It is important topoint out that th estate does not provide backing for any of ENDESA's transactions. ENDESAsecures finan cing based oneconom icallyefficient projectsand thefinan cial sol-vencyof the enterprise itself.The increase in CTC p rofits is fun dam enta lly due torate hikesfor local and international callsand the introductionof new services.Therefore, onlyinthiscaseis theH igher Profit-Price Adju stment Hypo thesisnotrejected.TheUnion-Efficiency Deterioration Hypothesisisrejectedaswell sincelabor relations tend to improve after privatization because they become moretechnical.

In Mexico, the profitsofTEMEX and CMC have risen because they havetaken advantage of complementary relationships. Thus, the Higher Profit-PriceAdjustment Hypothesis is rejected for these tw o enterprises as well as for thesugarprocessingplants. This isbecause higher profitsare the resultofcost cut-ting, even thoughthepricesoftheir products have falleninline w ithth einterna-tional trend. The U nion -Ef ficien cy Deterioration H ypothesis is not rejected forCMC, TELMEX, and the sugar processing plants because these activities arelabor-intensive and equi l ibr ium between the union and private enterprise isachieved o nly through agreem ents that can cou nt on pub lic sector support, giventh e constraints imposed by the FederalLabor Law. In TEMEX, efficiency has


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improved, reflected in the average output and the ratio of man-hours per tonproduced. The complementary relationships arisingfrom the merger made im-proved efficiency possible. Moreover, costs were cut by 25 percent when thecom pany 's bargaining power withm aterials suppliers was enhanced a nd its geo-graphical location improved. For CMC, although there were no significant in-creases in labor productivity at the mine, the lower costs associated with thereductionin thesizeof thecrew (2 4percent ofprofits in 1991)and thesavingsintransportation and treatment costs when the mine integrated itsprocesseswiththoseof itsbuy ers translated intoamajo r increaseinprofits.InM EXI CAN A,thecompany's inexperienced boards of directors committed strategical errors thatcaused the qua lity of the services provided to deteriorate. M oreover, the lag be-tween the rate adjustment and the cost increase caused profits to fall.In themajorityof the companies, privatization led to increased output. Thesugar processing plants, for exam ple, produced enoug h of the com mod ity to coverdomestic needs. TEMEX obtained a larger share of worldwide production bymergingwith PETROCEL. However, allocativeefficiency in thedomestic mar-ket did not deteriorate, given the external openness of this product. The numberof TELMEX telephone lines rose by 12.5 percent in 1991, and the number ofcommunities served rose by 25.9 percenthigher growth than stipulated in thecontract.

In Colombia, the impact on productive efficiency was more the result ofpreparatory measures and corresponding complementary policies than of theprivatization itself. Moreover, profits rose before th eprivatization, mainlybe-cause of cost reductions; thus, the Highe r Profit-Price A dju stm ent Hy pothesis isrejected. In the case of BT in particu lar,financialrehabilitation of the bank led tosignificant growthin theprodu ctivityandefficiency indicators. Becau seofpres-suresfrom its new Japan ese ow ner and a deteriorating m arket share brou ght aboutbytheinefficient management style imposed by its French owner, SOFASA im-posed p olicies to boost prod uctiveefficiency and cut assembly costs. Economicopen ness and the more aggressive b usin ess stance of other auto mo tive plants hasforced thecompany to cutspendingbyreducing thenumberofmanagem ent staffand broadening the range of products w ithou t hiring new assembly workers. Thepolicies of economic openness appliedto the automotive sector fostered greatercompetition and, consequently, reduced the prices of the vehicles. Furthermore,the Union-Efficiency Deterioration Hypothesis is rejected in all the cases ana-lyzed.

In Arg entin a, w ith the exception o f the oil and petrochemical companieswhere the impact onefficiency was not estimated, the enterprises show higherprofits associated withth eprice a dju stme nts made before their privatization;theH igher Profit-Price Ad ju stm ent H ypo thesis is therefore not rejected. The U nion-Efficiency DeteriorationH ypothesis isrejected, however, since theunions havelost some of their clout because of privatization. Once AA was privatized, it


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closed its foreign offices, taking advantage, instead, ofIberia's offices and de-creasing the frequency offlights on less profitable routes. In SV, roadw ays wereimproved. Finally, privatizationhad anegativeeffect on allocativeefficiency inexchange fo rshort-term resourcesbecausethe enterprises retained,and insomecases enhanced, their monopoly power.Fiscal andM acroeconomic ImpactThe case studies indicate a favorable impact on public finances, although noconclusion can be drawn about possible growth in government net wealth. Re-sults ofhypothetical fiscaleffectsof theprivatizationsare notuniform. W hiletheIncreased Investment Hypothesis tendsto berejected fo rColombia and theFis-calGains-Cu rrent Exp enditures Hy pothesis fo rArgentina; theInterest RateandDebt Service H ypothesis tends to be rejected in all cases but Argen tina. Privatizinglarge companies when participation by foreign capital ispermitted or resourceshave been used toreducethe external publicdebthasresulted insignificantbal-ance-of-payments relief.During the first roundofprivatizationsinChile,th egovernment made sig-nificant outlaystorestore BCH tofinancia l soundness afteritsprivatization; theIncreased Investment Hypothesis w as rejected only in this case. Nevertheless,th e Fiscal Gains-Current Expenditures Hypothesis is not rejected for this bankbecause the net effect was again in fiscal assets and only the Interest Rate andDebt Service Hy pothesisisrejected.As arule,in thesecond roundofprivatizations,th egovernmentdid notseek toimprovethefiscal situation, although threeof thecases showed a short-term fiscal improvement that will probably become long-term ifefficiency continues to rise. In the case of CAP, stock prices were lessthanthepresent valueof theexpectedfuture f lowsofdividends, wh ich impliedasub sidy; it can therefore be said that the statesuffered a long-term capital loss. Inthe short term, the fiscal impact w as positive, since the taxes and divid end s pro-duced by CAP before it s privatization were less than th e subsequent revenuesfrom taxesand the sale of stock. ForCTC, the fiscal impact was positivein theshort term sincetheeffective sale price exceeded thevalue thattheprivate sectorassigned to the stocks traded, based onprojectionsat thetimeof thesale. Thus,theIncreased Investment H ypothesis isrejected onlyin thecaseofENDESA;theFiscal G ains-Current Exp enditure s Hy pothesis, in none of the cases; and the In-terest Rate and Debt Service Hyp othesis, in two .

In Mexico, the fiscal impact on government net wealth was generally posi-tive. The sugar processing plants enjoyed a permanent gain since the revenuelosses stemming from the sale of the enterprises as a package deal were morethan com pensated for by the subsidies thatno longerhad to bepaid. For CMC,the fiscaleffect was neg ative because the price paid did not offset the present netvalueof unrecovered liabilitiesof thedevelopment bank.InTEMEX , reduction

ACOMPARISON OF PRIVATIZATION EXPERIENCES


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insubsidies and increase in taxes paid had a favo rable fiscaleffect.In thecaseofTELMEX, while the sale went better than anticipated, the net fiscal impact isestimated to have been neg ative if the bene fitfrom reduction in interest rates (towhichthe sale of stock o n the international markets c ontributed ) is not included.Resourcesfromprivatizing TELM EX were allocated reducing the pub licsector'sdomestic debt by 10.5 percent inrealterms. In vie w of this, the Increased Invest-ment Hypothesis can be rejected only in the case of the sugar processing plantsbecause thecutbackinsubsidieswasconsiderably greater thantheriseininvest-ment after the sale. The Fiscal Gains-Current Expenditures Hypothesis is notrejected in any of the cases, since resource use has generated p ermanent savingsthrough the contingencyfund and recovery of part of the capital of the develop-ment banks. Nevertheless, theresources w erenotusedtoboost current expendi-tures. Finally the Interest Rate and Debt Service H yp othe sis is not rejected exceptin the case of TELMEX since capital flowing into the country as a result ofprivatizing therestof thecompanieswas notsufficient togenerate interestratemovements.Althoughthe Colombia study does not involve quan titative measurements,th equ alitative argumen ts indicate tha t higherprofitsam ong the privatize d enter-prises may generate higher tax revenues in the future. When added to the cut-back s in subsidies, these m ay lead to consolidation of a perm anen tfiscal saving,although the am ount is perhaps less than the investment required in thecaseo fBT alone. Thus, only for this enterprise is the Increased Investment Hypothesisnot rejected. The resources from privatization of the auto assembly plants wereallocated to settling part of the external liabilities contracted with the Frenchban ks to support industrial project developm ent. The resourcesfromprivatizationof BT were returned to the Insurance Fund for Financial Institutions(FGIF) toenable it to deal withfuture crises; the Fiscal Gains-Current Expenditures H y-pothesis istherefore not rejected sincethe use of theresources obtained throughprivatizationgenerated a permanent fiscal savinga ndimproved theinvestmentcapacity of FGIF. In view of the relatively small amount involved in theprivatizations, the Interest Rate and Debt Service H yp othesis is not rejected, ex-cept in the case of BT.The fiscal effect of privatizations in Argentina is ambiguous. They ful-filled the short-term objective of attracting resources and reducing the externaldebt, but the long-term effect is not clear. In every case investment has in-creased, self-finance d by rates and fares. The impact on investm ent and fiscalrevenues depends on the regulatory regime and any modifications in the rela-tive prices; thus, the Increased Investment Hypothesis can be rejected only inSV. The Fiscal Gains-Current Expenditures Hypothesis isrejected because theobjective was to finan ce the fiscal deficit. Deregulation of the oil indu stry couldhave a negativefiscal effect in the long term because of reduced tax pressureson the sector, the absence of a stable regulatory regime at the time of the


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privat izat ions (w hich tended to lower the price), and the allocation of part ofthe resources obtained to the financing of public sector expenditures. In thecase ofENTEL, pu t t ingth ecomp any unde r private manag ement ini t ial lyhad astrongfiscal impact.This situation reversed itself after severalyears sincetaxrevenues no longerfully compensatedfor thefunds lostnowthatthe state doesnot own theenterprise. M odify ingSVimpliedacostly sacrificefor thegovern-men t thro ug ho ut the period of the concession du e to elimination of royaltiesand to low er taxes and subsidies. Finally, the privatization of the p etrochemicalcompanies, of ENTEL, and of AA affected the balance of payments becauseintereston the ex ternal debtfell; the Interest Rate and Debt Service Hyp othesisis therefore not rejected for these three companies.

Lessonsand RecommendationsPreparatory MeasuresThecontrast betweentheprivatization experiencesin thefirst andsecond round sinCh ile highlightstheneedfor arelatively long timehorizontocarryou tboththenecessary prepa ratory m easures and the entire process of priv atiz ing pu blic en-terprises.Colombia 'sexperience reveals thatfinanciallyrehab ilitating enterprisesbefore privatizationisparticularly relevant w hen th e survivalof credit institu-tions is at stake, as in the case of the CCA, whose reorganization enabled thebanks torecover th eir loansan dm aintainedthestabilityof thefinancial system.Perhaps the most important lesson of the Colombian experience is the need tolimit th e time allotted for financial rehabilitation; otherwise, th eprivatizationmay nottake placein theend. Thisisw hat happened in thecase ofEDIS,whichcontinues to operate with tremendous inefficiency whileno decision has beenmade about itspriva tization . From the Mexican experience, the bankruptcyofCMC issignificant, for itenabledtheauthoritiestofound a newenterprise witha labor contract that reduced the sources of labor inefficiency and allowed thejudiciary to interveneinco nflicts betweenthegovernmentand theunion.Inthiscase, bankruptcywas the k ey towi thdrawingth egovernment guaranteeandsub-jectingthe enterprise to the sameregimeas theprivate sector.ValuationThe valu ation of enterprises shou ld be adapted to the ob jectives of the privatization.If the goal is to sell the com pan y, the main criterion shou ld be a sale price basedon thefirm 's potentialfo rgene rating profitsin thefuture. This would includethepost-privatizationregulatory regimeand thegeographical and labor situation.Alackof realism that led to an overestimate of BT 's profits and the establishme nt


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of a reference price that was high er than the com mitm ents that could be m ade inC M C ' ssituation thwa rted initial attemp tsa tselling both enterprises. Inaddition,if thepotential buy erscanbecome future supplierso rintegrate their productiveprocess with that of the enterprise to be privatized, the profits that these addi-tional benefits represent to the buyers should be incorporated into the valua-tionan aspect that was ignored in the assessment ofColombia's automotiveenterprises. In Chile, the sale prices were not lower than the reference pricessince the reference prices were determined by the market price of the stock (ifsoldon the stock exchange ) or by the cashflowmethod, discounted to those whodo notpossessa contro lling interest in the enterprise. Incasesin wh ich control ofth e enterprise is transferred, however, both alternatives are inappropriate, fortheydo nottake priv ate controlof theenterprise into acco unt.Sale Mechanism andPriceInsome cases, speed has meantsacrificingp rice, as in the Argentinegovernmen t 'sfailure to set even minimum requirements in the adjudication. Moreover, th eurgent need for liquidity paradoxically may impede attainment of amaximumlevel ofresources an d even unnecessarily prolong theperiod ofsale,as it did inthe case of AA. The experiences of Chile and Mexico show that concentratingdecision-making capacityin thehandso f asingle entity thathad theau thoritytoact wascrucialfo re nsu ring thattheprivatizationprocessw asconsistent w iththerest of economic policy . In Colombia, the lack of an agency responsible for theprivatizationscaused some of the sales to proceed withoutclear objectives (andin some cases, with conflicting objectives),as in the first attempt atp rivatizingBT. Here, two incompatible objectives were pursued: to recover the costs ofrestoring th e bank tofinancial soundness and to sellit to theprivate sector at areasonable price. Thefourexp eriences underscore the need to avoi

privatizations en latinamerica - bid - 1993

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