GOB SEEKS TO GAIN CONTROL OVER PRIVATIZED COMPANIES

UNCLAS LA PAZ 000627

SIPDIS

SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: ECON EINV ENRG EPET BL
SUBJECT: GOB SEEKS TO GAIN CONTROL OVER PRIVATIZED COMPANIES



1. Summary: According to press reports, the GOB intends to
gain control over ten companies, which were partially
privatized in the 1990s, by persuading or compelling private
investors to sell their shares. Four of these companies are
majority owned by U.S. investors, and none has received
official notification from the government about this plan.
Company representatives believe implementation of the GOB's
plan will be difficult, if not impossible, as it will require
amending three laws, revising Bolivia's pension system,
negotiating with the companies and their shareholders, and,
not least, coming up with around USD 1.5 billion. End
summary.

Background on Capitalization
--------------

2. Between 1993 and 1997, the GOB capitalized (partially
privatized) five important state enterprises in the
hydrocarbons, transportation, and telecommunications sectors
to form ten new "private" companies. Private investors
acquired approximately 50% of the new companies' shares, a
collective capitalization fund that administers pension
payments received roughly 45%, and state company workers got
the remaining 5%. U.S. investors purchased the shares of
four of these companies: Corani SA (electricity
generator)/Duke Electric, Ferroviaria Oriental
(railroad)/Genesee and Wyoming Inc., Chaco SA
(hydrocarbons)/Pan-American Energy, and Transredes (pipeline
operator)/Prisma Energy.

Press Announces GOB Plan to Regain Control of the Companies
-------------- --------------

3. The press announced on March 5 that the GOB intends to
seek control of these ten "capitalized" companies by
acquiring 51% of their shares. It will reportedly do this by
persuading shareholders to sell or by compelling them to do
so if they prove unwilling. (Comment: It is unclear how the
government might force shareholders to relinquish their
property, but some believe it will challenge the legality or
legitimacy of the process whereby the shares were originally
acquired. End Comment.) According to press reports,
Development Planning Minister Carlos Villegas announced that
the GOB plans to take over the shares of the collective
capitalization fund and the workers, in addition to
purchasing roughly 1% of the shares from the private
investors in order to gain control over important decisions,
such as investments, salaries, and board member appointments.
This goal will reportedly be included in the GOB's 5-year
development plan to be presented on April 15.

U.S. Companies Say Process Will Be Neither Quick nor Easy
-------------- --------------

4. Representatives of the companies with significant U.S.
investment -- Chaco, Corani, and Transredes -- all said that
they had received no official notification from the GOB about
the plan. Chaco's Vice-President, Jana Drakic, told us that
YPFB (the Bolivian state oil company) held a meeting with the
managers of the collective capitalization fund on March 6 to
discuss transferring shares to the government, but that the
GOB has not contacted the private companies themselves.
Drakic stated that the state would not necessarily gain
control over key decisions were it to acquire majority
ownership of the businesses. This control, she explained,
was determined by regulations and laws. The General Manager
of Corani, Jose LaFuente, concurred, stating that the GOB
would have to modify three laws dealing with capitalization
and pensions and negotiate with the companies, which would
have to seek share-holder buy-in, in order to enact its plan.
He added that 3% of the ex-workers of Corani had sold their
shares on the stock market, so the GOB would have to purchase
4% to 5% of Duke's shares, not 1%, in order to hold 51%.

Nor Possible?
--------------

5. The President of Transredes, Ernesto Blanco, told us the
GOB plan was not, in his view, economically feasible. He
estimated that obtaining 51% ownership of the ten capitalized
companies would cost around USD 1.5 billion, money the GOB
does not have. As for Transredes, he explained, 50% of the
company is owned by Prisma and Shell, while 34% is held by
the pension fund and 16% by private individuals. Blanco
agreed that the GOB might take over the pension fund shares,
but contended that it would be extremely difficult for the
GOB to acquire the additional 17% needed for majority
ownership. He stated that most companies would prefer to
sell their entire ownership interest rather than sell the 1%
that would give away control.

Comment:
--------------

6. This reported plan is another example of the GOB's aim to
revise the "neoliberal economic model." Although it clearly
reflects a vision of increased state control over the
economy, the plan does not go as far as some in the private
sector had feared, i.e., complete nationalization. In this
sense, the GOB seems to realize that it needs private
business and investment to stimulate economic growth.
However, it seems unlikely that the GOB can keep existing
private investors in the capitalized companies happy,
especially should it gain management control of these
companies. End comment.
GREENLEE