From LatinFinance, Number 105
by Jennifer L. Rich
Last year's scandal surrounding Brazil's
National Development Bank is making some wonder whether it can
still successfully lead Brazil's privatization process.
Scandals can soon dull the shine
on even the most glorious of achievements. Just ask officials
at Brazil's National Development Bank (BNDES), the institution
in charge of a privatization process that brought in a whopping
$37.3 billion last year.
The bank's glory lies not only in
the size of privatization proceeds raised in 1998-a figure
which is not much less than the $48 billion garnered through
state sales between 1990 and 1997-but also in the fact that 60% of that amount came
from outside the country during a year in which foreigners were
fleeing emerging markets in droves.
Indeed, 1998 saw the largest
participation of foreign capital ever in the nine years that
Brazil has been selling state assets-a process that reached a
crescendo last year with July's $18.9 billion sale of telephone
company Telebras. In that sale, 13 new telecommunications
operators, dominated by Spain's Telefonica, Telecom Italia and
US-based MCI, promised to lead the country's phone system-and
Brazil itself-into the 21st Century.
Yet despite the fanfare
surrounding Telebras and the enormous feather it put in BNDES's
cap, the telco's sale also ironically forced an abrupt shift in
leadership that some observers see as a considerable body blow
to the once confident BNDES.
Last November, Brazilian weekly
news magazine Veja released taped conversations
between then-BNDES President Andre Lara Resende and
Communications Minister Luiz Carlos Mendonca de Barros that put
in doubt their objectivity in choosing buyers during the
Telebras sale. And although Lara Resende and Mendonca de Barros
considered themselves exonerated by the failed bid of the
consortium that they were accused of favoring, the two men were
eventually forced to resign as political pressures heated
The changing of the guard brought
on by Lara Resende's downfall has resulted in both old and new
faces holding the reins of power at the BNDES. The bank's vice
president, Jose Pio Borges, who had in fact also offered his
resignation in the wake of the scandal, was finally persuaded
to assume the presidency in January. Meanwhile, the president
of Lehman Brothers in Brazil, Jose Luiz Osorio de Almeida
Filho, was appointed as the new director of privatization for
BNDES veteran Pio Borges' ability
to lead may not be in doubt, but the shake-up has raised
serious doubts as to whether the BNDES can now successfully
sell the remaining assets on the auction block.
"Although it is not going to
affect the BNDES's reputation or (its) staff, the scandal could
affect the BNDES's role as a major force behind privatization,"
said Francisco Gros, managing director at Morgan Stanley Dean
Witter, an adviser to the government on the Telebras sale.
And if ever there were a time when
the wheels of Brazil's privatization juggernaut needed to run
smoothly, it is now. Investor jitters over a ballooning fiscal
deficit, an ever shrinking reserve base and a recently devalued
currency have only heightened the urgency to complete the
Even under normal circumstances,
Brazilian privatizations are difficult at best. Assets are
generally large and have extensive and normally undefined
contingent liabilities. But some experts are wondering how far
the BNDES will stick out its neck so soon after the Telebras
scandal chopped off its head.
"The BNDES felt quite good about
everything it did, and I think these guys feel fairly hurt by
having had their ears pulled," added Gros. "The message we are
getting from the BNDES is: '…if you are in government,
you can't take any initiative. We are being asked to be
mediocre, so we aren't going to do anything going
Pio Borges and the highly-regarded
BNDES staff plan to auction 13 companies at the federal level
this year, including electric generators Furnas, Chesf and
Eletronorte, as well as São Paulo state bank Banespa.
Fernando Perrone, the interim head of privatization at BNDES,
told LatinFinance in January that conservative
estimates put the government's take at $20 billion.
Yet the unsuccessful auction of
Alagoas electric company Ceal in December only fueled talk that
the privatization program was facing trouble in 1999. Although
companies involved in the sale cited unresolved liabilities and
an overly-high base price for the failure, one local
businessman at the time referred to the defeat as the "breaking
of the spinal cord" of the BNDES's command over the
privatization process. Others disagree.
"Obviously, it is a pity that we
lost people of the caliber of Andre Lara Resende, but the game
is a political one and that is the name of the game," said
Winston Fritsch, president of Dresdner Kleinwort Benson do
Brasil. "I don't think that the mission of the BNDES will
change in the eyes of the people who have to do the job."
Perrone at the BNDES agreed: "I
can't think of any objective reason why the BNDES would change
its form of conducting the program. Why would you want to alter
a program that is so successful and so well-tested?"
The bank had a minor victory in
mid-January in auctioning off two of the four mirror telecom
companies for a total of R$115 million. Each asset, however,
had only one bidder. The Tele Norte Leste mirror was sold to
the Canbra group, which includes Bell Canada, WLL and Qualcomm
for the base price of R$60 million. The Bonari group, which
includes the UKs National Grid, Sprint and France Telecom,
bought the Embratel mirror for R$55 million, 37.5% above the
base price of R$40 million. Nevertheless, the BNDES's role in
the sale was barely mentioned in the press.
"Since there is no major
privatization going on in the very short term, I think that
they are trying to be very low profile for the time being,"
said Marcelo Serfaty, chief economist at Rio-based Banco
But, he added: "I don't see any
kind of reduction of the presence or the importance of the
BNDES in the privatization program. What they will probably do
is just not go so far in exposing their preference."
How important are privatization
proceeds to the country in 1999? When the Brazilian government
formulated its $28 billion fiscal adjustment package last fall
as a precursor to its loan agreement with the International
Monetary Fund, it estimated privatization revenues of $20
billion for 1999. Economists, however, aren't as concerned with
"The impact is indirect," said
Carlos Kawall, chief economist at Citibank in São Paulo.
"If the privatization program is set back $5 billion in the
first half of the year, the impact on the economy is the
interest that you will have to pay on the $5 billion in debt
that you won't be able to retire. You get an expenditure that
is around $600 million. For a government that has to cut $28
billion next year, $600 million is not much."
The fiscal adjustment measures
that are nearing full passage in Congress should be a long-term
fix to the country's domestic debt problems, eventually
relieving the need for privatization proceeds.
But the real problem is not the
IMF, which has already sent a team to Brazil to rework fiscal
and monetary assumptions after the real was left to float in
January, but international investors. The debate in
privatization circles is one of timing.
Serfaty at Pactual advocates
stepping up the privatizations scheduled for this year. "We
need to show the international market that there is confidence
in Brazil," he said. "I think that privatizing Banespa would be
a great idea, especially considering that Citibank announced
that it would be a buyer at the right price. That would create
a better perception for Brazil."
The Brazilian government, for its
part, announced late in January that Banespa's sale, which was
tentatively scheduled for April, would be moved back to May.
And the exact schedule for 1999 privatizations has yet to be
divulged by the BNDES.
January's devaluation of the real
comes as a mixed blessing for Brazil's privatization efforts. A
cheaper real means that assets should draw more interest from
foreign investors. And direct investors that feared growing
foreign exchange risk now have much less to worry about. But
the government must now cope with companies that may be worth
less because of dollar-denominated debt burdens or high
imports. It is in this type of situation where the BNDES'
expertise is the most needed, say some observers.
"By themselves, the BNDES can't
change the direction of investor sentiment, but they can
certainly help nudge some of these privatizations," said Gros.
"Obviously, the issue is whether foreign direct investors are
going to want to put resources into Brazil right now. But what
the BNDES can do is assure maximum competition and maximum
An Extended Role
The BNDES role also extends past
the federal level. As a case in point, the government of the
state of Paraiba undertook in December to auction state
electric company Saelpa. The state, despite advice from
consultants, chose to add the expected premium on to the base
price of the asset. The auction failed.
It is in these state
privatizations that observers say BNDES expertise could provide
welcome support to the dozen or so companies on the auction
block in 1999.
"The BNDES can have an important
role in advising the state governments that will now-as part of
their own reform and because of the financial pinch they will
be feeling in 1999-start a second wave of privatization in the
states," said Fritsch at Dresdner. LF