Argentina & Brazil Study Tour Report: discussion

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
8 May 2002
ARGENTINA AND BRAZIL STUDY TOUR REPORT: DISCUSSION

Chairperson: Mr B A D Martins

Documents Handed Out:
Study Tour To Argentina and Brazil 14 April -21 April 2002

SUMMARY
The government confirmed its vision for the restructuring of state-owned enterprises (SOEs) in November 1999. A tour to Brazil and Argentina was initiated to gain insight into privatization. Before privatisation Argentina was experiencing a serious economic crisis. The current situation in Argentina created an unfavourable environment of bilateral trade between South Africa and Argentina. Brazil undertook the largest privatization process in the world in the shortest period. The result of privatization in Brazil was that the poor became poorer while the rich became richer.

The delegation came to the conclusion that South Africa differed from the two visited countries as it did not need to privatize or restructure to pay off excessive state debts or to recapitalize the country's infrastructure but could restructure to enhance black economic empowerment.

MINUTES
Mr Chris Thisani, the Committee Secretary, presented the draft document to the Committee.

Please refer to the attached document.

Background
The government confirmed its vision for the restructuring of state-owned enterprises (SOEs) in November 1999. This vision sets out the role of the state in restructuring of the SOEs, in light of the developmental needs of South Africa and of international trends in SOEs restructuring. The President of South Africa, reminded government and stakeholders about the need for accelerated agenda for restructuring of SOEs. Therefore, it was imperative for those in the mainstream restructuring of SOEs to follow international trends and perhaps adopt and adapt administrative and economic devices used in other countries.

Purpose
The two countries, which were classified as developing countries like South Africa, were relatively wealthy countries. Their restructuring models served these countries well, but have not been problem free. The tour to the two countries would assist the Committee, in grasping the reasons for failures in order not to repeat them. This tour was initiated to help this Committee to familiarize itself with complexities that other countries have faced and dealt with.

Argentina leg of the tour
The delegation attended a courtesy meeting at the Embassy, where Mr T Nyawose (Charge d'Affaires) and Mr P Pieterse (trade attache) briefed them, on the contributing factors to the present crisis. The decision by the government of Argentina to peg the peso to United States' dollar on one to one basis meant in practice that when Brazil devalued in 1999, foreign investors and buyers found their dollars could in fact buy more in Brazil. Thus, drying up direct foreign investment and buyers of Argentine exports.

Moreover, the extensive borrowing by the Government resulted in the upward spiraling of domestic interest rates. The more Government was borrowing, the more expensive credit became for Argentine business, which forced many companies to close their doors.

The Government failed to balance spending with tax revenue. It is estimated that 70 % of the 23 provinces' revenue is spent on salaries for civil servants, causing deficits in financing of basic services.

The extensive programme of privatisation undertaken in the 1990's resulted in economic recession, which contributed to a significant number of job losses. Employment in the railway sector decreased from 90 000 to less than 20 000 in 1994. However, according to the World Bank, productivity in this sector increased by a factor of seven or eight.

Implications for South Africa
The current situation in Argentina created an unfavourable environment of bilateral trade between South Africa and Argentina. A number of South African exporters found it difficult to export to Argentine companies due to the new currency.

Mr P Pieterse stated that the quality of services had been proven after privatisation. Furthermore, he suggested that it would be a few years before other countries would export to Argentina. He noted that South Africa had a good export foundation in Argentina but that most companies would not be in a position to pay South African exporters.

Meeting with Mrs M Alexander, representative from the World Bank
The World Bank has been involved in the process of privatization since 1990. The prevailing situation in Argentina offered a dramatic setting for privatization to take place and some contributing factors were the suffocation of the fiscal burden by the state and that there was less or no money for basic services.

In Argentina privatization laid the foundation for an increase to the access of water and dramatically reduced the connection to illegal electricity. Furthermore, the railway locomotives were refurbished and a change of management in ports which, yielded better results.

There were still a number of issues that still impeded development. Argentina was in need to create a sound regulatory framework to monitor performance and there was a need to reduce the many regulatory bodies, as they only caused duplication.

The World Bank is working with government and companies to establish tariff impacts and setting up timetables for tariff adjustments. Mrs Alexander debated that privatization should not be considered as the only means to solve the current problem in Argentina. Solutions should be long-termed and policies should be constant.

The dilemma was that the World Bank only loaned money to government and not companies. Privatization improved a lot of things but other factors such a legal systems, tax related problems, lack of trust on the government and other factors contributed to the current crisis.

Meeting with S Kiernan-Managing Editor: Pagina 12 Newspaper
Mr Kiernan informed the delegation that the stage was set in the 1940's when the Peronist party started nationalizing companies. It resulted in poor service provision and by the 1980's public utilities were cheap but not easily accessible.

The government started with its privatization campaign in the 1990's and everything from the railways, water and airlines were privatized. The result was fewer power blackouts and new telephones were erected and almost everyone had access to telephones. This Argentine economy was doubled in seven years time.
The downside of privatization is that people are losing jobs, for companies to be more productive. In Argentina unemployment increased from 12 % to 24 %, with the inception of privatization. More disconcerting is the fact that the state is still left to cater for the social development of Argentina.

Meeting with Mr C Cirigliano-President of 'Trenes de Buenos Aires' TBA (privatized railroad company)
TBA was formed in 1995 after they won a national and international bid. Before TBA took over, service provision was in a bad state and their aim was to meet minimum safety and comfort standards. The organization employed about 3 000 workers and after privatization the number of commuters rose to 1 million but due to recession the number has decreased to 650 000.

Meeting with TELECOM (privatized telecommunication company)
Telecom controls the northern part of Argentina and they enjoyed a monopoly for seven years, which was extendable to 10 years. The Director of Telecom, Mr Sierrra, informed the delegation that before privatization the company was inefficient and that facilities was obsolete and quality of services was unacceptable.

After 1995 the company succeeded by increasing their levels of efficiency and strong profitability. Argentina experienced an era of increased capital investment, which subsequently led to improved customer service.

Meeting with Mr Montana: National Commission of Transport
Mr Montana, an expert in rail transport with 20 years experience in public rail, noted that rail in Argentina is divided into four units, namely, metro rail, goods transport, real estate and long haul (which was cancelled in the beginning years). After privatization, there was a significant increase in the number of commuters due to the low accident rate. Further contributions were the improved customer service and a comprehensive use of the infrastructure.

Meeting with Parliamentary Committee on Public Enterprises
Innargas, a $2.5 billion a year gas production company controls over 100 km of gas network. The company agreed to privatization in 1992 so as to improve efficiency. The enabling law was passed in 1996 and at the same time parliament of Argentina appointed a regulatory agency.

The policy objectives of the agency were to protect the interest of the public and to promote an environment suitable for competitiveness. Furthermore, to promote and encourage investment and to ensure fair tariffs. Most importantly, the agency should ensure free access to gas transportation and encourage growth and diversity in the industry.

A framework for water regulation was started in the 1990's. Among other things, the agency tasked to regulate tariffs, curb widespread inefficiency and corruption in the industry and devise means to counter hyperinflation that started in the 90's. After privatization most of the problems was reduced but still a lot of problems need to be addressed.

Brazil leg of the tour
Meeting with the Chairperson of the Committee on Economy-Deputy C Sobrinho
The Deputy explained to the delegation that the general structure of the Brazilian government and some aspects of their tax collection. He admitted that privatization in Brazil was not handled in a right manner and that it should have been slow and gradual.

Meeting with Deputy A Rebelo-President: National Defence and Foreign Relations.
The president noted that Brazil undertook the largest privatization process in the world in the shortest period. More than $120 billion worth of companies were sold but the desired objectives of privatization were never realized. The result of privatization was that the poor became poorer while the rich became richer.

Meeting at the DEST
The delegation was briefed on the whole process of privatization since it started to the present. Privatization in Brazil has completed its eleventh consecutive year and 139 Brazilian state-owned enterprises and concessions had been transferred to the private sector, with results amounting to US$ 103.4 billion.

Conclusion
The impressive performance of Brazilian privatization in 1997 and 1998 was mainly due to the sale of TELEBRAS-the Brazilian telecommunications system monopoly, the electricity generation assets of GERASUL and several state-owned electricity distribution utilities.

On why other companies were not privatized, the delegation was informed that only those companies with the capacity to stand on their own were privatized. Even the privatized companies were not allowed to sell without the permission of the state.

The delegation came to the conclusion that, South Africa did not need to privatize or restructure in order to pay off excessive state debts or to recapitalize the country's infrastructure. South Africa could restructure to enhance black economic empowerment, provide development capital for future development and bring in working capital, managerial skills, expertise and experiences from the private sector.

Discussion
Mr B A D Martins, chairperson of the Portfolio Committee on Public Enterprises, and members of the Committee agreed that there were no factual changes to be made to the draft report and that only stylistic and grammatical changes would be made.

Mr M Nonkonyana (ANC) expressed his concern about the use of political terminology and thought it best to include footnotes in the text to explain concepts.

Mr M Masala (ANC) said that the report gave the impression that the delegation visited Mrs Alexander and the World Bank. He said that the Committee should consider rephrasing that section to indicate more clearly that it is not the views of Mrs Alexander but that of the World Bank.

Mr R Mohlala (ANC) requested that the citation of the names of delegation members should be corrected.

Mr Martins (ANC) suggested that acronyms and abbreviations such as DST should be explained throughout the text, furthermore, stated that the font and style used in the document must be consistent.

Mr Martins (ANC) confirmed that the final report would be adopted at the next meeting, where a revised report, would be circulated.

The meeting was adjourned.