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BOLIVIA: Will Nationalisation Scare Off Foreign Investment?

Franz Chávez

LA PAZ, May 16 2007 (IPS) - Foreign investment in Bolivia fell to 237 million dollars in 2006 as part of a continued tendency that is jeopardising economic growth, warn some analysts, who blame the phenomenon on the government’s strategy of placing firms that were privatised in the 1990s back in state hands.

Studies by the United Nations and Inter-American Development Bank (IDB), cited by a Central Bank report seen by IPS, warn that in order for the economy to grow at a steady rate of seven percent a year, Bolivia would need some two billion dollars in foreign direct investment (FDI).

In the last 10 years, the Bolivian economy has grown at an average annual rate of four percent, despite the political turbulence that led to the fall of two presidents since 2003.

The governments were toppled by social uprisings by demonstrators protesting the way the country’s abundant natural gas reserves – the second largest in South America after Venezuela’s – were being handled, and demanding that the state charge the foreign oil corporations operating in Bolivia higher taxes.

Bolivia, where roughly 70 percent of the population of 9.2 million live in poverty and gross domestic product (GDP) amounts to just 9.6 billion dollars, has moved over the past decade from an aggressive investment attraction policy, which included the privatisation of five public enterprises, to the current wave of nationalisations.

The leftist government of Evo Morales is attempting to recover a controlling stake in the telecoms company Empresa Nacional de Telecomunicaciones (Entel), the Lloyd Aéreo Boliviano airlines, the Empresa Nacional de Electricidad power company, the Empresa Nacional de Ferrocarriles railway company and two rich gas fields that formerly belonged to the Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) state-run oil company.

The former state companies were privatised between 1995 and 1997 by the government of rightwing president Gonzalo Sánchez de Lozada (1993-1997 and 2002-2003).

As part of their investment commitment, the foreign firms poured around 400 million dollars into the newly privatised companies in 1996 and 800 million in 1997, according to Central Bank figures. In 1998 and 1999, foreign investment set a new record of one billion dollars.

But FDI shrank to less than 200 million dollars in 2005, in the midst of political turmoil that prompted the resignation of Carlos Mesa, who was appointed president in 2003 to complete the term of the ousted Sánchez de Lozada. Mesa was replaced by caretaker president Eduardo Rodríguez, who served until Morales took office in January 2006.

“All poor countries need private investment, in order to develop,” Professor Armando Méndez Morales, a former Central Bank president, told IPS. “Bolivia does not have internal savings and the only way to obtain investment is through the capital brought in from abroad.”

A year after Morales launched his offensive to restore state control over the country’s natural gas reserves, foreign investors are still hanging back, in response, according to some analysts, to the not so investment-friendly signals sent out by the government.

The Economic Commission for Latin America and the Caribbean (ECLAC) reported this month that FDI in Latin America and the Caribbean continued to rally in 2006, although at a slower pace than in 2005.

With respect to South America, the report, Foreign Investment in Latin America and the Caribbean 2006, ranked Bolivia in second-to-last place in terms of foreign investment, with 237 million dollars, only ahead of Venezuela, and a far cry from the 18.78 billion dollars drawn in by Brazil, the top regional recipient of FDI.

The doubts about how much new investment would be flowing in were heightened by Morales’ proposal to nationalise Entel, the former state-run telephone company, by purchasing it back from Italy’s Telecom Italia.

In another case, the government and Brazil reached an agreement last week for the nationalisation of two oil refineries owned by the state oil company Petrobras.

But Javier Gómez Aguilar, at the Research Centre for Agrarian and Labour Development (CEDLA), took an upbeat attitude. He told IPS that the new scenario for private investment that is taking shape will be characterised by greater transparency and higher expectations on the part of the state and business.

Morales announced the nationalisation of Bolivia’s energy reserves, but without the confiscation of installations or other assets, on May 1, 2006, and gave the foreign companies six months to renegotiate their contracts. Under the terms of the new contracts, taxes and royalties should rise from 248 million dollars a year to 1.2 billion dollars.

The new contracts signed with the 12 foreign oil companies operating in Bolivia, which were the result of a lengthy, painstaking process, and the care taken by the government in negotiating the purchase of shares from Petrobras and Entel show that the administration is following a development strategy based on maintaining a strong private sector presence, said Gómez Aguilar.

The state’s annual public sector expenses range from 500 to 700 million dollars a year, and the tax revenues from the oil industry “finance the national budget, current expenditure and infrastructure, but they don’t go towards investment in factories, industry, or exploration for energy resources,” added Méndez Morales.

He said that is why the state’s share of investment is still insufficient to drive growth that could satisfy the demand for new jobs.

But in Gómez Aguilar’s view, the private sector will become more active from 2008, as a consequence of the new oil industry investment announced in the contracts, which will be in effect for 20 years on average.

In terms of foreign investment, the worst thing that could happen, he warned, is for the business community to make a mistaken interpretation, based on media coverage and Morales’ political discourse, when the government ministries are actually carrying out effective negotiations favourable to investment.

With respect to the role of the state, he was optimistic regarding the announcement that one billion dollars would be spent by the central government and the country’s nine provinces and 327 municipalities in the areas of health, education and infrastructure, as well as 60 million dollars to be made available in bank loans to small producers.