Real Challenges

When Ecuador’s new government took the reins of control in August, one of the first things President Jamil Mahuad did was name Alvaro Guerrero-Ferber, president of Banco La Previsora, as head of the National Council of Modernization, known by its Spanish acronym Conam. Launched in 1994 as a result of the 1993 modernization law, Conam’s role within the government is three-tiered: to lead the sale of state companies, to administer government concessions, and to improve the efficiency of government operations.

Its self-pronounced mission is to modernize the state with the efficiency and transparency needed to improve the quality of life and welfare for all Ecuadorans. Its vision is to create an efficient and decentralized public sector, with agile regulation that prevents corruption and incites investment, and that provides basic services of high quality and maximum coverage.

Guerrero, who has worked as La Previsora’s president for 13 years, is well respected within the business and financial communities of the country and many view his appointment as a signal of the government’s serious intention to ensure economic growth into the 21st century. As current president of the Ecuadoran Bankers Club, Guerrero’s past experience includes working as manager of finance and planning at Banco del Pacifico during the early 1980s and, prior to that, receiving an MBA from the Wharton Graduate School and a bachelor’s degree in administration and finance from the Universidad Catolica de Santiago de Chile. He served as president of the Ecuadoran Banking Association through 1997 and has taught graduate-level international economics and finance.

But his challenges going forward are very real, especially following the failed privatization last year of Emetel, the state-owned telecommunications company. Rodrigo Paz, the previous president of Conam resigned as a result of the way in which the previous government handled the attempted sale, which it had tried to execute three times. Some say the Emetel example is a case study of how and when not to privatize a company. Apparently, the asking price was too high for splitting the company into two parts and selling them off separately.

With deficits skyrocketing, inflation high and reserves dwindling fast, Ecuador desperately needs to privatize state companies quickly. If the current administration can learn from previous mistakes and pull off efficient sales of state-owned assets, it just might stave off some very hard times.

LF: Conam has operated for five years so far. How is Conam’s role any different in today’s government?

AG: The national government, this president, has made a commitment: to begin a very profound process of modernization. For that we’re going to launch an aggressive plan of government disinvestment in order to, one, attract foreign investment and develop the markets and, two, recuperate the investments the state has made. Under this administration, Conam’s priority is establishing the necessary framework to privatize the oil, telecommunications and utilities sectors and to supervise the process.

LF: Wall Street is no doubt interested in the privatization process. Have you approached any investment banks yet?

AG: We have chosen the International Finance Corp. (IFC) as our global adviser for the entire process and will ultimately be choosing three investment banks, one for each sector, to lead the privatization. We are working on developing a short list of six to eight investment banks in each of those sectors from which to choose. In turn, those banks will contract the auditors, industry consultants, and lawyers to bring into the process. I expect the banks will be chosen either in the first or second trimester of 1999.

LF: In what stage of development is the process?

AG: At this point, we are just now holding talks with the IFC about the entire process.

The focus we’ve chosen is to have just one global adviser for everything. We are working very closely with Congress. Privatizations, especially in the areas of electricity, telecommunications and petroleum, always require legislative reforms.

LF: Many of your neighbors have already gone through privatization. Is Ecuador using another country’s process as a model?

AG: We are not directly applying one country’s methodology. We are taking the best of each experience in Latin America, something from Chile, something from Argentina, Mexico, Peru and Bolivia. It is really a mixture.

We’ve been looking at what has worked well and what hasn’t worked with respect to the privatization processes in neighboring countries.

LF: Is there a danger of monopolies?

We have seen countries so interested in getting the highest price possible that they end up creating monopolies or oligarchies. We don’t want to create a monopoly or oligarchy in those sectors simply to get a high price in the process. We want to develop the country and those sectors for fair competition in order to lower prices and create more efficient practices.

LF: So far, the privatization process has been very sensitive politically. How have the labor unions and other Ecuadorans responded to the plans to privatize these industries?

AG: In general, most people are demanding structural reforms as a necessary condition for the country to move forward. More specifically, in reference to the labor unions, the telecommunications union has been supporting us. Since the employees will become shareholders in the new company, they have an interest in this process. Within the utility unions, there hasn’t been much of a problem, either.

(But) it’s possible that we could have a problem with the petroleum unions. The government is not going to sell the production arm of the state oil company. That means it’s going to compete with the foreign companies and operate under the same conditions that are imposed on them. Perhaps they will sell off the refineries, however.

LF: What statistics do you have that demonstrate the potential growth in these industries?

AG: We are finishing up our growth estimates and sector analyses, but I can’t give you any firm statistics yet. In the oil and gas sector alone, Ecuador has the capacity to at least double its current level of production. For that reason we are very interested in attracting new companies that want to participate in exploration and exploitation.

LF: Ecuador is very small compared to its neighbors. How will you entice foreign companies to invest in your country?

AG: That will be a very important function of the IFC and the investment banks. We expect and hope to have foreign interest of the highest caliber, and for that we want to adopt very clear rules and regulations and foment an atmosphere of transparent competition. We’ve been working very hard in developing clear reforms in order to attract foreign direct investment. We want people to see a new profile of Ecuador. If we can carry out a privatization program that is very clear and very smooth, then we will be able to attract the kinds of investors we would like to see.

LF: How do you foresee Ecuador’s economic activity in 1999?

AG: The previous political crises combined with the fall of oil prices and capital flight from emerging markets impacted the Ecuadoran economy significantly. The GDP in 1998 grew by only 1.8%. Inflation has been high and there has been a problem with the deficits. But we now have a committed government that is implementing needed change. This year will be a year of adjustments, but by 2000 we will be seeing positive results.