Nationalization in Latin America may not be expropriation


By Frank Bajak
Associated Press
Saturday, January 13, 2007

Hugo Chavez loves incendiary rhetoric and risk-averse investors understandably rushed to sell shares in Venezuela's biggest telecommunications and power companies after he announced this week that he would nationalize them.

But it later emerged that the Venezuelan president -- whose "21st-century socialism" has managed to co-exist with a vibrant private sector -- is disposed to pay fair market prices for the two utilities.

That would make these "nationalizations" much less radical than initially feared and not all that unusual for Latin America.

"Nationalization," White House press secretary Tony Snow said after Chavez's latest move, "has a long and inglorious history of failure around the world."

The directors of the Chilean copper-mining company Codelco might take issue. Theirs is a proud and extremely profitable ward of a state so committed to free markets that even its toll roads are privately run.

A decade after the region rushed to privatize state-run industries, even countries outside Chavez's populist camp have realized that private companies haven't always served the public's best interests, particularly when it comes utilities like water distribution that require major investment but don't reap much profit.

Several key privatizations have recently been reversed, and even in countries that bought into the "Washington consensus," some strategic industries were never sold off.

"Some nationalizations in Latin America are long-standing and exist for mainly national security and even symbolic reasons. They are also a measure of national pride," said Michael Shifter of the Inter-American Dialogue think tank.

Mexico's 1938 nationalization of its petroleum industry set the standard. Its state-run oil company Pemex has long served as both the government's cash cow and a model of inefficiency and patronage.

State-run oil is the norm in countries including Brazil, Colombia and Chile, despite the latter two being near orthodox free-marketeers. (Colombia is, however, poised to sell 20 percent of state-run Ecopetrol this year to help fund exploration).

State-owned enterprises continue to account for more than 10 percent of the region's gross domestic product and about 5 percent of formal employment, according to the World Bank.

Of course, the success of any nationalization depends on details specific to the industry and country.

Many analysts consider Chavez's planned takeover of CA Nacional Telefonos de Venezuela -- known as CANTV and partially owned by U.S.-based Verizon Communications Inc. -- to be destined for failure.

The world's most wired nation -- South Korea -- happens to have a very sophisticated state-run telecom. But turning a telecom over to civil servants in a developing country like Venezuela in the Internet age worries Venezuelans who remember CANTV in the 1990s, before it was sold off. It was so hard to obtain a dial tone at times that many companies had to hire multiple operators just to work the phones.

Residents of Venezuela's capital also worry about Electricidad de Caracas, the power company currently controlled by Arlington, Virginia-based AES Corp. in a sector that Chavez says he'll nationalize. While this company has always been private, other regions of Venezuela now served by government-run companies suffer frequent blackouts.

Chavez's nationalizations, announced as he began another six-year term, are "all about taking advantage of favorable conditions to tighten and consolidate political control," opined Shifter.

Gary Hufbauer of the non-partisan Institute for International Economics in Washington, D.C, cited three reasons to nationalize:

-- The ruling party wants the revenues, and this pertains mostly to oil and mineral enterprises.

-- They're a way to deliver patronage through bloated work forces.

-- The populace wants cheap or free services.

None provide a recipe for efficiency.

A 2004 World Bank study that looked at 181 state-run utilities in 15 Latin American and Caribbean countries that were privatized in the 1990s -- in fixed telecommunications, electricity and water distribution and sewers -- found that on the whole, labor productivity, efficiency and quality of service improved, especially in telecoms. Water and sewers tended to be problematic, however.

One of Latin America's most bullish privatizers, Carlos Menem of Argentina, sold off scores of state industries during his 1989-99 presidency. The selloffs helped modernize the country, yet critics complained the fortunes reaped were later squandered or illegally pocketed and that many buyers failed to make needed investments. Similar complaints tagged sweeping privatizations in Peru and Bolivia.

Today, Argentines often carp about creaky privatized rail lines, and in the capital of Buenos Aires last year, the government rescinded the 30-year contract of French water utility Suez S.A.'s local subsidiary, accusing it of failing to make promised improvements and neglecting outlying poor areas.

Similar complaints, expressed in violent street protests, helped bring down another big privatizer -- Bolivian president Gonzalo Sanchez de Lozada. He sold off a swath of Bolivian industry during his mid-1990s tenure and was driven from office in 2003 in a later term.

President Evo Morales gained power in Bolivia pledging to roll back those privatizations. He's had some success with natural gas and, last week, finished buying back water distribution from Suez in the capital of La Paz. Electricity and telephones could be next, he's suggested.

Among dirt-poor Indians in the chilly Andes, higher electrical bills can mean having to choose between food and heat.

That helps explain the 2002 riots by Peruvians objecting to then-President Alejandro Toledo's eventually scrapped bid to sell off two state-owned electrical utilities. Toledo was trying to raise money to cover budget needs, something alien to Chavez with his oil riches.

For that reason, Hufbauer says he'd be surprised if Latin America's nationalization wave extends much beyond Bolivia and Venezuela -- where Chavez allies say such strategic sectors as the steel industry could also become state-run.

"Only Venezuela has the cash to support the padded payrolls and financial losses that sweeping nationalization portends," Hufbauer said. "So my guess is that even Bolivia will slow down after the obvious oil and gas takeovers, and perhaps water and power."

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