TIME: Almanac 1993/TIME Almanac 1993.iso/time/042291/0422200.000

Text File | 1992-08-28 | 13.5 KB | 289 lines

                                                                                BUSINESS, Page 58

A Global Fire Sale


Governments worldwide are selling off state-owned enterprises.
The results should be salutary -- but the process can be painful.

By BARBARA RUDOLPH -- With reporting by Andrea Dabrowski/Mexico
City, James L. Graff/Vienna and James O. Jackson/Bonn


    It's the steal of the century! A one-time-only offer! Get
a great deal on a Mexican phone company! Pick up a Philippine
airline -- cheap! Buy a Pakistani ghee factory for a song!
Hurry, hurry, hurry for unbeatable bargains!

    Like shopkeepers clearing out superfluous inventory,
governments around the world are dumping a vast array of
state-owned assets onto the open market. This may be the biggest
fire sale in history, with properties up for grabs everywhere:
in Western Europe, Asia and, most dramatically, Eastern Europe
and Latin America. For finance ministers from Brasilia to
Budapest, the disposal of publicly owned enterprises has become
the great hope for debt-burdened economies.

    Governments have announced plans to sell stakes in a dozen
national airlines, including AeroPeru, Lot Polish Airlines and
Viasa in Venezuela. An estimated 30 telephone companies,
including stakes in those of Uruguay and Venezuela, are up for
sale or will become available in the next few years. Some $50
billion worth of properties are on the block in just Latin
America and Eastern Europe, and businesses worth hundreds of
billions of dollars will be sold worldwide over the next several
years. The offerings include huge industrial conglomerates and
small retail chains, banks and restaurants, oil fields,
utilities and hotels.

    Former Prime Minister Margaret Thatcher's transformation
of the ailing British economy through divestiture was the key
development that pushed privatization into the mainstream. It
showed, unsurprisingly, that private owners with their money on
the line run companies more profitably than governments do.
That, plus the more recent worldwide turn to capitalism, has
made privatization an alluring prospect for sluggish
state-controlled economies.

    Not that selling the properties is easy. The glut of
industries on the block, coupled with a global credit crunch
that limits the resources of prospective buyers, guarantees
depressed prices for even some choice enterprises. "There are
just too many projects chasing too little money," says Paul
Sacks, president of Multinational Strategies, a New York
consulting firm. When finally sold off, many companies are
destined to fail in the highly competitive marketplace of the
'90s.

    For the politicians, large-scale privatization entails
enormous risk. It virtually ensures at least temporary higher
unemployment in societies where millions may already be out of
work: state-owned companies tend to be bloated, so private
owners impose layoffs right away. Even workers who keep their
jobs must often make do with reduced wages and benefits. If the
pain becomes too great, a backlash is a potent threat.

    Which countries have the best chance of making
privatization pay off? Germany probably heads the list;
transforming the eastern economy will be expensive, but the
nation will have sufficient capital. In the Third World,
countries like Mexico appear to be good bets. The Mexican
government directs at least some of the proceeds from asset
sales into improving education, health care and a crumbling
infrastructure -- investments intended to pay off in future
economic development. Using the money to pay off foreign debt,
as Argentina has done, seems a riskier course. Unloading
national assets without attracting new capital is somewhat akin
to an individual's selling his house to pay for a new
automobile. When the car finally breaks down, there is no nest
egg to finance a new one.

    Despite the difficulties of making privatization pay off,
many governments are moving ahead. Herewith a guide to what's
available at the global sale:



    EUROPE Germany's Treuhandanstalt, or trust institution, is
orchestrating the most massive denationalization program, since
it controls an estimated $300 billion of assets formerly owned
by the German Democratic Republic. When the agency received its
mandate to sell or close down the 8,000 state-owned companies
that did business in the eastern part of the country, government
officials thought the job would take at most five years. But the
disintegration of East Germany revealed that its industry was
a rolling wreck, running on dirty brown coal and potholed roads.

    As a result, not many prospective buyers have come by to
kick the tires. Just 1,200 of the 8,000 firms have been
privatized. The agency's troubles intensified three weeks ago
when unidentified German terrorists assassinated the agency's
director, Detlev Rohwedder, increasing anxieties throughout
Germany about the social and financial costs of integration.
Mass layoffs have also complicated the Treuhand's work. Although
a great number of eastern businesses seem headed for dissolution
as hopelessly uneconomic or dangerously polluting, the trust
will try to rescue as many firms as it can to minimize
unemployment.

    Most other former East bloc countries have barely started
their sales. Eager to help them -- and especially eager to earn
handsome fees for making the deals -- are scores of investment
bankers who have descended upon Eastern Europe. "It's Klondike
on the Danube," says George Lorinczi, a partner at Stroock &
Stroock & Lavan, an American law firm that opened an office in
Budapest last September.

    Hungary is well ahead of the East European pack. The
government aims to sell about 2,400 enterprises roughly
estimated to be worth $37 billion. These include 20 large
companies in businesses ranging from pharmaceuticals to tourism.
Lajos Csepi, who runs the privatization program, predicts that
the state's stake in the economy will come down from 86% early
last year to 15% in the next two or three years.

    In Poland, privatization was a key ingredient of the shock
plan that took effect last year when then Prime Minister
Tadeusz Mazowiecki's government lifted price controls, cut off
state subsidies and began to reform the banking and monetary
systems. The government late last year began selling shares in
five of the most successful companies: Exbud, a construction
firm with 1989 sales of nearly $15 million, and four smaller
profitable enterprises, including a cable manufacturer and a
glass mill. Foreign investors will be prohibited from purchasing
more than 10% of the shares, though they could petition the
authorities for more. An additional 10% to 20% of the stock will
be reserved for employees of the enterprises. But the public has
attacked the reforms, blaming them for wiping out more than 1
million jobs.

    The Havel government in Czechoslovakia has begun
auctioning off thousands of small businesses and retail shops.
The initial round of bidding was limited to Czechoslovak
citizens, who must pay only a $1.75 entrance fee to qualify for
the auction. A later round of bidding will be open to
foreigners.



    LATIN AMERICA Chile has been successfully selling off
public companies since 1985 and stands a solid chance of making
privatization pay off. But its experience is a cautionary tale:
the former military regime of General Augusto Pinochet Ugarte
did not have to worry about public opinion or the press, which
opposed the asset sales. Between 1985 and 1989, the government
sold 24 state enterprises, raising $1.7 billion.

    Next to Chile, Mexico enjoys the best odds of making
privatization work. Former President Miguel de la Madrid sold
the Aeromexico national airline for $193.8 million to a group
of Mexican investors in 1988. Sales took off after Carlos
Salinas de Gortari became President later that year. Mexicana,
the other state-owned airline, was sold for $140 million to a
consortium including Mexico's Group Xabre conglomerate and the
Chase Manhattan Bank. Next to hit the auction block was Cananea,
one of the largest copper mines in the western hemisphere, sold
last summer for $475 million to Mexican copper baron Jorge
Larrea.

    Four months ago, the government completed the first and
most important phase of the sale of Telefonos de Mexico, the
national phone company, whose market value is about $8 billion
and whose profits last year totaled $1 billion. The state has
sold 20.4% of Telmex stock, which represents the majority of
voting power, for $1.76 billion. The buyers: a consortium led
by Grupo Carso, a Mexico City-based conglomerate headed by
entrepreneur Carlos Slim and including Southwestern Bell and
France Telecom. But the Federal Communications Commission in
Washington is considering regulatory changes that could limit
one of Telmex's most lucrative businesses, handling phone calls
from the U.S. Salinas is also selling the country's two largest
steel mills and a 66% interest in 18 commercial banks, the other
shares of which are already in private hands.

    Among Latin American countries, Mexico has been able to
drive the toughest bargains. Salinas in many cases restricts
foreign ownership to 49% and has not been forced to tie asset
sales to repayment of the nation's $80 billion foreign debt.
Argentina, in contrast, allows foreign control of state-owned
companies and has also accepted so-called debt-equity swaps, in
which banks exchange some debt for stock in newly privatized
companies.

    President Carlos Saul Menem began propitiously by finding
buyers for Empresa Nacional de Telecomunicaciones (ENTel), the
notoriously inefficient telephone company. In November, Menem
sold a 60% interest in ENTel to two consortiums, one headed by
Italy's Societa Finanziaria Telefonica and the other by Spain's
Telefonica. The firms will pay only $214 million in cash but
have agreed to buy back $5 billion of the national debt. The
deal looks like a good one for the buyers: the debt will be
bought on the open market, so they will pay something like 20
cents on the dollar for it. Menem has also sold the national
airline, Aerolineas Argentinas, to a consortium led by Spain's
Iberia. The buyers agreed to pay $2 billion in foreign-debt
certificates and $26 million a year for the next decade.

    In Brazil, President Fernando Collor de Mello unveiled
ambitious plans for privatization as soon as he took office in
March 1990. He said he wanted to sell off 40 major companies,
including the state-owned steel industry, for an estimated $17
billion. But so far there have been no sales, and Collor's
entire program of economic reform is on decidedly shaky ground.
His austerity plan brought inflation down from more than 80% a
month to less than 10%. But inflation began rebounding in
January; Brazil is mired in a serious recession -- GNP fell 4.6%
last year; and confidence in Collor has plummeted.

    The Colombian government of Cesar Gaviria Trujillo is
trying to sell some of its state-owned banks and is sponsoring
legislation to overturn a 15-year-old law that restricts foreign
ownership to 49% of any bank. "If we are going to open our
economy, we need foreign investment," Finance Minister Rudolf
Hommes has said.



    ASIA In Pakistan, the government of Prime Minister Nawaz
Sharif announced that it plans in coming months to sell 50 of
its 150 state-owned industrial operations, including the Ghee
Corp., which makes a blend of cooking oils. But the plan faces
resistance from the bureaucracy, which long ago grew accustomed
to the power and patronage of running an industrial empire, as
well as from labor unionists, who fear massive layoffs. The
government has nonetheless managed to sell off the Muslim
Commercial Bank, one of the country's largest.

    Sales elsewhere in Asia are decidedly slow. Last summer
the Cambodian government dumped 12 state enterprises on the
market, including a rubber plantation and a former battery
factory. Vietnam is hawking a beach resort 50 miles south of
Saigon. Sri Lanka is peddling its stakes in three luxury hotels
in Colombo. The Manila government of Corazon Aquino is trying
to sell off a stake in Philippine Airlines.

    Since privatization is often painful and precarious,
Western public financial institutions -- such as the World Bank,
the International Monetary Fund and the new European Bank for
Reconstruction and Development -- must sometimes lend a hand.
That may not always be enough. A nation's people could demand
a return to nationalization because they see immediate costs a
lot more clearly than future benefits, or because government
bungles the job. In addition, says Kenneth Maxwell, a senior
fellow at the Council on Foreign Relations in New York, "where
privatization hurts special interests and there is a tradition
of populism, then nationalism becomes a retreat." Governments
that launched free-market reforms but have nothing yet to show
for them could be thrown out of office, a possibility as
plausible in Budapest as in Buenos Aires.

    The global sell-off will take time. The income it brings
will disappoint many sellers. Buyers may be discouraged by the
difficulty of transforming ailing enterprises into viable
operations. But the fire sale has only just begun, and there is
reason to be hopeful. After years of suffering the
inefficiencies and inequities of state-owned economies, people
ache for a change. Privatization may be imperfect, but it
certainly beats the alternative.