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 up.
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 the bank.
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 privatization process.
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 forward.’”
Signs of Trouble?
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 Pactual.
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 numbers.
“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 price.”
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