PRIVATIZATION NEW PHASE

Brazil has radically altered its view of the proper role of a modern State. No longer is the government seen as a prime producer of goods and services, but rather as a regulatory agent that should focus its resources on the country's social needs. Privatizing the State's extensive productive network is an effective way to enhance the government's social role, to balance the budget, to reduce the public debt and to improve the competitive position of the nation's industry.

The steel sector is a good example of Brazil's changing economic structures. Throughout the last forty years, the Brazilian government invested $26.1 billion in the steel sector, receiving in return dividend payments of only $600 million. From 1992 until 1993 eight companies were privatized. The speed at which these companies turned their losses into profits was remarkable. Already in 1993, they were able to distribute dividends worth $150 million. But the benefits to Brazilian society far exceed that number. In financial terms, the total sale of the steel sector approximated $10.6 billion if one considers the $5.5 billion from the sale of shares, the $2.6 billion in debt assumed by the new owners, and the expected $2.5 billion of new investment. In addition, efficiency improved substantially, about 2,500 new jobs were created, ownership was expanded and extended to the workers, and exports rose. The successful privatization of the steel sector indicates the privatization program's massive benefits to Brazil.

In summary, the privatization program contributes significantly to the restructuring of the State by pursuing the following objectives:

Privatization has been part of the national agenda for many years. The first phase of the program (1981-89) was characterized by the privatization of companies that had been absorbed by the State due to their financial difficulties. At the time, the government had no intention of implementing a large-scale privatization program. Because this phase covered mostly small companies, it had little economic impact. The government received only $723 million in privatizing thirty eight enterprises.

In 1990, the Collor government made privatization a fundamental part of its plan for structural reform. The government initiated this second phase by creating the National Privatization Program (PND). In the process, the privatization effort was enlarged significantly — thirty-four state companies and thirty two minority stakes were included in the PND. The sale of Usiminas alone, in October 1991, generated twice the revenues of all prior privatizations. During 1991-93, the PND focused on selling state companies that had been considered strategic in the development model of the 1970s. That fact explains why the steel, petrochemical and fertilizer sectors had such a prominent role. During this period, the privatization currencies — debt for equity swap — were used almost exclusively. The Collor government, in privatizing fifteencompanies, received assets of $3.5 billion, but only $16 million in cash.

The Itamar Franco government initiated the third phase of the PND by giving more emphasis to such factors as cash payments, fiscal considerations, and a broader distribution of share ownership. In order to expand and democratize the PND, the law was changed to permit: a) the wider use of Federal Treasury debts as privatization currency, b) the sale of the State's minority company ownerships, and c) foreign purchase of up to 100% of a privatized company.

In 1994, the privatization program generated receipts of $2 billion — 72% in cash — that were used to retire short-term public debt. It is worth noting that 89% of all the cash receipts from the privatization program were received in 1994.

The privatization of ESCELSA, the electricity distribution company in the State of Espírito Santo, in july, was a milestone of the resumption of the privatization program by the Cardoso Government. The sale of 50% of the company’s shares capital yielded receipts of Us$ 387 million, 67% of which being cash payments. This first experience of privatizing a public service, involving a concession regime, will be followed by the privatization of LIGHT, another state electricity distribution company, scheduled to take place until the end of 1995. The fact that the PND has been modified to include the enterprises of the ELETROBRAS system (FURNAS, CHESF, ELETROSUL and ELETRONORTE) is a clear indication of the Government’s interest in expanding the program.

Presidential Administration	Number of Companies Privatized	Amount Received in Cash Payment ($ millions)	Sales Proceeds ($ millions)
Collor 1990/92	15	16	3,494
Itamar 1992/94	18	1,581	5,113
Cardoso 1995	2	284	642
TOTAL	35	1,881	9,249

The government received na amount of $9.2 billion through the sale of public companies and stakes plus $400 million through the sale of miscelaneous minority shares. Moreover, some $3.6 billion of debt was transferred to the private sector. Nor can one forget the benefits from investments to be made by the new owners — in the steel sector alone, new investments through 1997 should total $2.5 billion. Finally, one should note the privatizations' indirect benefits of increased tax receipts, improvements in the environment, creation of jobs and higher productivity.

The Brazilian Privatization Program (PND) is one of the Cardoso government's main reform instruments. Its priority status requires that it be highly agile and that its decisions be made at the highest levels of government. Thus, the National Council for Privatization (CND) was created. It is comprised of cabinet-level officers, is chaired by the Minister of Planning and Budget and is directly accountable to the President.

This new structure enlarges the scope of, and gives more flexibility to, the PND without damaging its technical operations nor diminishing its transparency. The CND has been able of streamline decision implementation because the members of the Council are officials responsible for the process within their own ministries.

The importance that the Cardoso government places on privatization can be seen in the decisions made by the CND in its first meetings . They comprise:

The sale of the large electricity distribution companies — Light and Escelsa — and of the concession of cargo transportation services marks a new phase in the privatization program. This phase establishes the regulatory framework essential for the proper development of these activities. Ending its role as a producer, the government will not be neglecting its basic obligations, but rather will be focusing on its role as a regulator.

The PND has been making an important contribution to the country since its creation in the early 1990s. In some cases, its actions have eased the pressures of the public debt, attenuating the upward tendencies of interest rates. In others, it has promoted greater efficiency and competitiveness among private companies, having a direct effect on sectoral costs and on regional economies.

The privatization of public financing institutions constitutes one of the program's new frontiers. It should begin with the sale of the Meridional, a bank which operates principally in the south. Following the federal government's example, some states, such as Minas Gerais and Ceará, are working to privatize their financial sectors. Thus, the PND is creating an important precedent which other states could follow.

Having privatized the steel and fertilizer sectors, the PND will finish privatizing the petrochemical sector and proceed to overcome important infrastructure deficiencies, most notably in electrical energy, transportation and telecommunications. Brazil can no longer permit large shortfalls in infrastructure investments; it must look for partners in the private sector.

An inadequate infrastructure raises the costs of production, distribution and storage, placing national industries at a competitive disadvantage internationally. No private sector can be competitive without efficient public sector. Thus, reducing Brazilian production costs requires improving infrastructure efficiency.

By transferring the operation of public services to the private sector, the State will be able to dedicate itself more adequately to the regulation and monitoring of these activities. This is essential for the country's economic and social development because only a solid regulatory mechanism guarantees the quality and continuity of public services. The privatization process is a basic instrument for moving Brazil toward a more prosperous and just society.

Brazil's development model during recent decades required the State to undertake major infrastructure investments. However, the budgetary crisis of the 1980's underlined the indispensable role of private capital in financing national development. The new Concessions Law enables private sector investment to substitute for public sector investment.

Traditional privatizations signified the sale of a public asset. With concessions, the private sector will offer public services on behalf of the State, using assets that will revert to the public sector. This law will benefit directly the sectors of electricity, transportation, highway construction, ports and airports, basic sanitation, and water supply. Appropriate laws will be implemented to give investors stability and confidence. The State will by no means abandon its regulatory functions, functions that will require a reorganization and a re-equipping of responsible government agencies.