ECONOMY-BRAZIL: State Banks Put Privatisations Back on Track

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Oct 18 2000 (IPS) - Brazil’s privatisation process is set to get back on track Friday with the auction of the Parana State Bank (Banestado), after the process was derailed last year by resistance to the sales of banks, power and sewerage companies.

Banestado, the minimum price for which was set at 434 million reals (235 million dollars), is seen as an “appetiser” put on the table prior to the privatisation of the Sao Paulo State Bank (Banespa), the largest financial institution on sale in Latin America.

The call for bids for Banespa, which has already been postponed at least 10 times since 1998, has been scheduled for Nov 20, when one-third of its shares will be put up to tender for a minimum of 1.85 billion reals (one billion dollars).

Five of the nine groups interested in the bank are foreign, including the U.S. Citibank and Spain’s Bilbao Vizcaya and Santander banks.

Obtaining a controlling stake in Banespa could signify a leadership position in Brazil’s private banking sector.

Banestado and Banespa are especially attractive because their business is concentrated in Parana and Sao Paulo, two states with great economic clout in Brazil, the world’s eighth largest economy.

Meanwhile, six other state banks are on the waiting list for privatisation, several of which have been taken over by the central government due to their serious financial troubles.

The privatisations will culminate the process of restructuring of the state banks that got underway in 1996.

In a bid to keep the state banks from folding, the national treasury invested what today would be equivalent to 30 billion dollars in the process of restructuring the institutions, which in the past have been used by state governments to finance their projects, while they eluded fiscal discipline.

The case of Banespa was the most serious, as it involved large sums of money, which led to intervention by the Central Bank in December 1994 and the transfer of the institution to the central government three years later, to prepare it for privatisation.

Once the national currency was stabilised in 1994, it became clear that the banks could not be left in the hands of state governments, because the economic stabilisation plan entailed a restructuring of the financial sector, which previously benefited from bulky profits gained as a result of the high inflation level.

The tight fiscal adjustment made survival impossible for the banks, which were used by state governments to spend outside the limits set by the budget.

So far, 13 state banks have been privatised, and a similar number have been turned into development agencies.

But the privatisation of Banestado and, especially, of Banespa faces heavy resistance from the trade unions. Strikes, complaints of irregularities and a number of lawsuits have blocked all previous attempts to put the banks up to tender.

However, the government finally got the last legal action holding up the auction annulled last Thursday.

Nevertheless, new legal battles will have to be fought before Nov 20 rolls around, as has occurred in the runup to many of the privatisations carried out in Brazil since 1994.

Joao Piza, a lawyer for the Sao Paulo union of bank employees, said a new attempt would be made within the next few days to get the auction suspended, since the Supreme Court found in favour of privatisation without listening to either Banespa employees or the public prosecutor’s office, which reported irregularities in the process.

The four largest national banks are disputing Banestado, and the winning bid is expected to be significantly above the base price set, given the bank’s strategic importance to financial groups intent on maintaining their position or moving up a notch in the banking system.

The interest is even greater in the case of Banespa, due to its size, and because foreign banks are better prepared for expansion.

Spain’s Bilbao Vizcaya and Santander banks and Britain’s HSBC have already absorbed a number of Brazilian institutions in the past three years.

The union of bank employees is opposed to the sale of Banespa for nationalistic motives, and because according to experts, privatisation will mean a downsizing of the bank’s staff to half the current total of 21,000 employees.

Besides selling off the state banks, the government of Fernando Henrique Cardoso aims to give new momentum to efforts to privatise power companies.

The next one to be put on the auction block will be the Sociedad Anónima de Electrificación of the northeastern state of Paraiba.

Brazil has already privatised other power companies run by state governments, several of which have been sold to Spanish, Chilean or U.S. groups.

Several firms in the northeast have yet to be privatised, as well as the large power companies run by the Ministry of Mines and Energy, in connection with which the government has decided to promote broad participation by workers in the acquisition of shares, thus altering the model of privatisation.

Meanwhile, sewerage companies have suffered even greater delays, due to difficulties in working out how the private sector will administer the service.

Conflicts between state and municipal governments have broken out over the privatisation of sewerage companies, which have led to a drastic reduction of the level of public investment in the sector.