Clever Protesters, Cleverer Privatizers

By Lanchner, David | Global Finance, June 1997 | Go to article overview

Clever Protesters, Cleverer Privatizers

Lanchner, David, Global Finance


A manual on how to halt the privatization of a state-owned company would explain that styles vary from country to country. The preferred strategy in many lands is backroom political machinations. In some countries, a huge civil service stymies sales by simply not functioning. Or workers call a nationwide strike (as in France) until the government capitulates. Brazil, as usual, has developed a style all its own.

The Brazilian technique is twopronged: Labor unions and others stage street protests while left-wing lawyers stimulate a blizzard of injunctions, which are most effective when they are filed in remote areas-making it hard for government lawyers to get to the courthouse to argue the state's case.

In the past, this approach has blocked sales for months, or even years, as arguments and appeals drone on. The country first started trying to privatize steel companies in 1991. Its most recent high-profile sale-of Light, the company that distributes Rio de Janeiro's electricity-took two years and was finally completed last December. In six years the government managed to sell off only $13.4 billion, about a sixth of its privatization program.

The logjam appears to have been broken, however, by the counterstrategy that the government devised last month to privatize Companhia Vale do Rio Doce (CVRD), Brazil's largest company and the world's largest iron ore miner. In a raucous, nationally televised auction on the floor of the Rio stock exchange-during which workers stormed the exchange floor and broke up the bidding with a new injunction-representatives of two competing consortiums bid up the price of a big chunk (41.735%) of CVRD's voting shares. The sale brought $3.1 billion, giving CVRD a total value of $11.5 billion. (About a third of its equity was already trading in the form of nonvoting shares.) Scheduled for April 29, the transaction took place May 6-a delay of only a week.

The government is so delighted with its success that it now predicts it will complete sales of some $60 billion worth of other assets by the end of 1998. That may be unrealistically ambitious. But if the opposition doesn't fashion some clever new monkey wrenches to throw into the process, a great deal of it will get done.

"We learned from past experience," says Paulo Libergott, who heads privatization at Brazil's National Development Bank (BNDES) in Rio. "First, we made the evaluation of assets and pricing of CVRD highly transparent. Second, we marshaled more than 200 lawyers for anticipated legal battles." By choosing CVRD, the most valuable company on Brazil's privatization list (it earned $500 million last year), the government also hoped to undermine charges of selling out Brazilian citizens.

Legal challenges to privatizations typically boil down to one of three claims: that the government does not have the right to sell a company without a new specific law; that the industry is too important to national security; or that the price is too low. Notes Luciana Portolano, head of research at HSBC James Capel in Sao Paulo: "In Brazil, if you win the fight to privatize the state's most profitable company, it becomes much easier to justify selling less profitable companies-not to mention the many that produce losses or are not deemed to be as 'strategic' to national interests."

The BNDES plan had all the earmarks of a military campaign. Under the guidance of BNDES vice president Jose Pio Borges, 15 mining and financial consulting firms were hired last year to evaluate the worth of CVRD assets over six months. The data were made available to bidders and the financial press in November. In February all of the BNDES' lawyers, plus other lawyers from the attorney general's office and from two private law firms, were put on standby, ready to skitter all over the country when the injunctions hit. …

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