Bolivia’s long distance and international telephone carrier, Entel, has come a long way since 1995, when Italy’s state-owned telephone company won the tender to partially privatize the company with a commitment offer of $610 million.
Under the guidance of Italy’s Telecom, Entel has been transformed from a highly inefficient, poorly run state-owned entity into an efficiently operating company. Not only have earnings, traffic and clientele more than doubled in four years, but the company has also greatly diversified its services and has expanded its network. Industry insiders say Entel’s numbers speak for themselves.
The company’s net earnings in 1998 almost doubled to $70 million, up from $46 million in 1997, while its operating profits increased 38% from $74 million in 1997 to $102 million in 1998. Additionally, Entel last year transported 581 million minutes of traffic, an increase of 57% over 1997, when the company carried 350 million minutes, and more than double 1995’s total.
Observers attribute much of Entel’s success to Bolivia’s capitalization law, passed in 1994 as a legal means to capitalize the country’s six major public companies: Entel (telecommunications), YPFB (hydrocarbons), Ende (electricity), Enfe (railways), LAB (national airline) and Enaf (smelters).
Entel was one of the state’s first and largest enterprises to be capitalized under Bolvia’s unique privatization program, where buyers make investment commitments in exchange for a 50% interest in the company and management control. The other 50% of the company’s shares are transferred to the Bolivian people through a private pension fund handled by international trustees.
Unexpected Developments
Some consider Entel the crown jewel of Bolivia’s capitalization program. After all, of the capitalized companies since 1995, Entel has experienced the highest growth rate. “It makes us happy that a company in which we are 50% owners has such an interesting performance,” said Jose Luis Lupo, Bolivia’s minister of economic development.
But recent news that Italian company Olivetti had assumed a majority control of Telecom, and thus Entel, has raised concern about the Bolivian phone company’s future. It also is one of the unexpected predicaments that some of the capitalized companies have encountered since the government’s program was launched in 1995.
“There have been successes and mistakes,” admits Lupo.
Though Entel is far from being considered a mistake, the recent announcement by Olivetti that it might consider shedding some of its international businesses, such as Entel, which is administered by its subsidiary Stet, has left many worried.
“We have not yet received any signal from Olivetti regarding its decision on Entel,” Lupo said. “We just hope that their long-term strategic vision includes Bolivia.” He was quick to add that he had no doubt that the original investment figure of $610 million would be completed. According to government statistics, Entel has to date invested 64.6%, or $394 million, of the total commitment.
Entel, meanwhile, has said that there is no reason to believe that the change in ownership will change Entel’s plans, given the fact that Telecom owns 50% of the company’s shares.
Peering Inside
In general, Bolivia’s capitalization program has been considered successful by bankers, analysts, and government officials- even though it’s been marked by ups and downs.
According to government sources, the state has received a total of $1.6 billion in investment commitments from the capitalized companies across several sectors, including transportation, energy and communications.
The hydrocarbon and electricity sectors, in particular, have demonstrated impressive growth since the program was initiated. The latter has shown the highest growth rate from capital investments, due to the fact that two new companies, Valle Hermoso and Guaracachi, have started operations. In fact, Valle Hermoso’s 1998 investment figure surpassed its commitment by some $42 million.
A Flying Misfortune
But the ride hasn’t been as smooth for national airline, Lloyd Aereo Boliviano (LAB), which was taken over three years ago by Brazilian company VASP for an investment commitment of $48 million.
“The capitalization of LAB has been close to a disaster,” said one source in Bolivia, who chose not to be identified.
Though there have been rumors that VASP would suspend investments, Lupo said it has fulfilled its investments under its capitalization contract. “What happened is that Lloyd needed to make more investments in order to maintain its competitiveness,” he explained. “It’s a corporate problem.”
The emergence of additional routes by American Airlines and AeroSur, which has increased competition, won’t help the struggling airline. LAB officials have stated their fears that the airline will continue to lose money with the opening of skies to international and domestic competition.
Workforce issues, however, have been the root of LAB’s troubles. “In this case, as in many cases, (privatization) has been a difficult change, a traumatic change, for the trade unions,” said Jaime Aliaga, transportation superintendent of the regulatory system.
Earlier this year, former LAB employees went on strike over a bond that was never paid to them. Then in May, the airline’s current employees declared a national state of emergency and threatened to overtake airports to protest the expansion of flights by American Airlines. Close to 80% of LAB’s income comes from the Miami-Bolivia flight, and American is now adding a second daily flight on that same route. AeroSur, a domestic airline, meanwhile, is also fighting for the right to provide international service, but it’s still under government negotiation.
In addition to its workforce problems-which were transferred to VASP-the new administrators have had to deal with halts in operations due to strikes and thus monetary losses. Perhaps more important is the apprehension from clients, said Aliaga. “But (management has) been overcoming these issues,” he added. “The owner-worker relationship has improved a bit.”
Back on land, the completion and operation of the billion-dollar Bolivia-to-Brazil natural gas pipeline has also called positive attention to the hydrocarbon sector.
Transredes-the consortium made up of Shell and Enron, which in 1996 capitalized the exploration, production and transport units of state-owned YPFB for $263 million-is among the seven companies with a stake in the pipeline, which is to deliver an initial eight million cubic meters of gas a day through more than 3,000 kilometers of pipe. Operation began in July.
“The sale of gas to Brazil means an increase of 1% to 1.5% of GDP annually and an increase of exports of $115 million per year up to $430 million until the year 2018, which are important statistics for Bolivia,” said Lupo.
So far, investments in the hydrocarbon sector have more than doubled the country’s probable reserves of 5 trillion cubic meters of gas in 1995 to 10 trillion. Later this summer, YPFB plans to sell two state-owned refineries, Santa Cruz and Cochabamba, in a single package for about $100 million as part of its continuing downstream privatization. YPFB’s oil storage and gas distribution systems are also expected to be put on the auction block once investment bankers have assigned them an appropriate value.
While the hydrocarbon, electricity, and telecom companies have been the most successful from a sale perspective, railroad companies Ferrocarril del Oriente and Corani last year demonstrated the highest return on investment with 13% and 8%, respectively. The rest of the capitalized companies have shown a return of about 5%-6%, say the government.
“These companies bought the railroads at a very low price and have turned them around,” said Gonzalo Berthin, manager at Bolivia-based Berthin Amengual&Asociados, an auditing and consulting company.
A Needed Bill
Yet, the capitalization of state-owned mining assets has been a slow process, again characterizing the downsize of the program. In the most recent example, the planned sale of the Vinto tin smelter has encountered protests, environmental problems, and, perhaps more important, a lack of interested bidders.
The government is hopeful that a recently passed bill by Congress, which allows the full rather than partial privatization of Vinto, expected to raise $35 million, will help attract bidders now that the government is free to negotiate a deal with the interested companies.
“We now have the green light to move forward with the process,” said Alvaro Rejas, president of state-owned Comibol, the entity that oversees the government’s mining assets. “This (bill) was necessary.”
Approximately eight companies have expressed interest in Vinto since the bill was passed in June. The bid date is scheduled for September 28.
In other mining news, negotiations with Pan American Silver of Canada for the shuttered San Vicente silver-zinc mine just concluded, following three unsuccessful public bidding rounds, while the shuttered San Jose mine attracted only one bidder. Comibol’s Rejas says many of these problems had to do with external factors, such as the global financial crisis which has made mineral prices plummet. “We have felt the effects of this,” he said. “Many junior exploration companies have had to close down their offices.” He is confident that Comibol will be able to pull off the sales scheduled to occur this year.
Looking Ahead
Despite all the difficulties, the structural reforms and the ongoing investments in Bolivia’s largest public enterprises, have significantly increased foreign direct investment. According to an International Monetary Fund report, FDI in Bolivia rose from $120 million in 1993 to almost $600 million in 1997.
The oil and gas sectors, as well as mining and telecommunications, are expected to continue to be the main destination of FDI. The capitalization of YPFB, for example, has attracted well-capitalized upstream companies such as Amoco and YPF.
Meanwhile, the international financial community has recognized Bolivia’s establishment of democratic initiatives as well as its effort to beat inflation and refinance external debt. Standard&Poor’s rated Bolivia’s long-term local currency BB+ and assigned a BB- rating to its long-term foreign currency. The rating company in June affirmed its B short-term local and foreign currency ratings on Bolivia, with a “stable” outlook.
Thomson Financial BankWatch in May upgraded its sovereign risk rating outlook for Bolivia from stable to positive, rating it single B.
Much of this rating is based on Bolivia’s economic performance during the global financial turmoil, says Theresa A. Paiz, vice president and sovereign risk analyst at Thomson.
“The country is doing fairly well,” she said. “They have a steady growth rate and continue to attract FDI.”
This positive economic performance is largely based on the fact that Bolivia is not dependent on international capital markets-due to its small size and access to multilateral and bilateral financing-and therefore has not been affected with the drying up of international liquidity, notes Paiz.
Another factor contributing to growth is that Bolivia comes from a low base and hasn’t been on the investment map in Latin America, Paiz added.
“They don’t have problems as in larger economies where there is speculation against the currency,” she said. “Bolivia is not as involved in the flows of international capital.”
But corruption-and poverty-is still rampant. “This could have a strain on the political situation and on policy,” said Paiz.
Another obstacle, says Berthin, is the ambiguity of the rules of the game, such as lack of government guarantees, judicial security and transparency, which could turn companies off.
Still, Bolivia’s judicial and structural reforms are taking hold, and the government continues to implement investor-friendly policies. “It will take time for these reforms to pay off,” said Paiz.