A Global Fire Sale

It’s the steal of the century! A one-time-only offer! Get a great deal on a Mexican phone company! Pick up a Philippine airline — cheap! Buy a Pakistani ghee factory for a song! Hurry, hurry, hurry for unbeatable bargains!

Like shopkeepers clearing out superfluous inventory, governments around the world are dumping a vast array of state-owned assets onto the open market. This may be the biggest fire sale in history, with properties up for grabs everywhere: in Western Europe, Asia and, most dramatically, Eastern Europe and Latin America. For finance ministers from Brasilia to Budapest, the disposal of publicly owned enterprises has become the great hope for debt-burdened economies.

Governments have announced plans to sell stakes in a dozen national airlines, including AeroPeru, Lot Polish Airlines and Viasa in Venezuela. An estimated 30 telephone companies, including stakes in those of Uruguay and Venezuela, are up for sale or will become available in the next few years. Some $50 billion worth of properties are on the block in just Latin America and Eastern Europe, and businesses worth hundreds of billions of dollars will be sold worldwide over the next several years. The offerings include huge ! industrial conglomerates and small retail chains, banks and restaurants, oil fields, utilities and hotels.

Former Prime Minister Margaret Thatcher’s transformation of the ailing British economy through divestiture was the key development that pushed privatization into the mainstream. It showed, unsurprisingly, that private owners with their money on the line run companies more profitably than governments do. That, plus the more recent worldwide turn to capitalism, has made privatization an alluring prospect for sluggish state-controlled economies.

Not that selling the properties is easy. The glut of industries on the block, coupled with a global credit crunch that limits the resources of prospective buyers, guarantees depressed prices for even some choice enterprises. “There are just too many projects chasing too little money,” says Paul Sacks, president of Multinational Strategies, a New York consulting firm. When finally sold off, many companies are destined to fail in the highly competitive marketplace of the ’90s.

For the politicians, large-scale privatization entails enormous risk. It virtually ensures at least temporary higher unemployment in societies where millions may already be out of work: state-owned companies tend to be bloated, so private owners impose layoffs right away. Even workers who keep their jobs must often make do with reduced wages and benefits. If the pain becomes too great, a backlash is a potent threat.

Which countries have the best chance of making privatization pay off? Germany probably heads the list; transforming the eastern economy will be expensive, but the nation will have sufficient capital. In the Third World, countries like Mexico appear to be good bets. The Mexican government directs at least some of the proceeds from asset sales into improving education, health care and a crumbling infrastructure — investments intended to pay off in future economic development. Using the money to pay off foreign debt, as Argentina has done, seems a riskier course. Unloading national assets without attracting new capital is somewhat akin to an individual’s selling his house to pay for a new automobile. When the car finally breaks down, there is no nest egg to finance a new one.

Despite the difficulties of making privatization pay off, many governments are moving ahead. Herewith a guide to what’s available at the global sale:

EUROPE Germany’s Treuhandanstalt, or trust institution, is orchestrating the most massive denationalization program, since it controls an estimated $300 billion of assets formerly owned by the German Democratic Republic. When the agency received its mandate to sell or close down the 8,000 state-owned companies that did business in the eastern part of the country, government officials thought the job would take at most five years. But the disintegration of East Germany revealed that its industry was a rolling wreck, running on dirty brown coal and potholed roads.

As a result, not many prospective buyers have come by to kick the tires. Just 1,200 of the 8,000 firms have been privatized. The agency’s troubles intensified three weeks ago when unidentified German terrorists assassinated the agency’s director, Detlev Rohwedder, increasing anxieties throughout Germany about the social and financial costs of integration. Mass layoffs have also complicated the Treuhand’s work. Although a great number of eastern businesses seem headed for dissolution as hopelessly uneconomic or dangerously polluting, the trust will try to rescue as many firms as it can to minimize unemployment.

Most other former East bloc countries have barely started their sales. Eager to help them — and especially eager to earn handsome fees for making the deals — are scores of investment bankers who have descended upon Eastern Europe. “It’s Klondike on the Danube,” says George Lorinczi, a partner at Stroock & Stroock & Lavan, an American law firm that opened an office in Budapest last September.

Hungary is well ahead of the East European pack. The government aims to sell about 2,400 enterprises roughly estimated to be worth $37 billion. These include 20 large companies in businesses ranging from pharmaceuticals to tourism. Lajos Csepi, who runs the privatization program, predicts that the state’s stake in the economy will come down from 86% early last year to 15% in the next two or three years.

In Poland, privatization was a key ingredient of the shock plan that took effect last year when then Prime Minister Tadeusz Mazowiecki’s government lifted price controls, cut off state subsidies and began to reform the banking and monetary systems. The government late last year began selling shares in five of the most successful companies: Exbud, a construction firm with 1989 sales of nearly $15 million, and four smaller profitable enterprises, including a cable manufacturer and a glass mill. Foreign investors will be prohibited from purchasing more than 10% of the shares, though they could ! petition the authorities for more. An additional 10% to 20% of the stock will be reserved for employees of the enterprises. But the public has attacked the reforms, blaming them for wiping out more than 1 million jobs.

The Havel government in Czechoslovakia has begun auctioning off thousands of small businesses and retail shops. The initial round of bidding was limited to Czechoslovak citizens, who must pay only a $1.75 entrance fee to qualify for the auction. A later round of bidding will be open to foreigners.

LATIN AMERICA Chile has been successfully selling off public companies since 1985 and stands a solid chance of making privatization pay off. But its experience is a cautionary tale: the former military regime of General Augusto Pinochet Ugarte did not have to worry about public opinion or the press, which opposed the asset sales. Between 1985 and 1989, the government sold 24 state enterprises, raising $1.7 billion.

Next to Chile, Mexico enjoys the best odds of making privatization work. Former President Miguel de la Madrid sold the Aeromexico national airline for $193.8 million to a group of Mexican investors in 1988. Sales took off after Carlos Salinas de Gortari became President later that year. Mexicana, the other state-owned airline, was sold for $140 million to a consortium including Mexico’s Group Xabre conglomerate and the Chase Manhattan Bank. Next to hit the auction block was Cananea, one of the largest copper mines in the western hemisphere, sold last summer for $475 million to Mexican copper baron Jorge Larrea.

Four months ago, the government completed the first and most important phase of the sale of Telefonos de Mexico, the national phone company, whose market value is about $8 billion and whose profits last year totaled $1 billion. The state has sold 20.4% of Telmex stock, which represents the majority of voting power, for $1.76 billion. The buyers: a consortium led by Grupo Carso, a Mexico City-based conglomerate headed by entrepreneur Carlos Slim and including Southwestern Bell and France Telecom. But the Federal Communications Commission in Washington is considering regulatory changes that could limit one of Telmex’s most lucrative businesses, handling phone calls from the U.S. Salinas is also selling the country’s two largest steel mills and a 66% interest in 18 commercial banks, the other shares of which are already in private hands.

Among Latin American countries, Mexico has been able to drive the toughest bargains. Salinas in many cases restricts foreign ownership to 49% and has not been forced to tie asset sales to repayment of the nation’s $80 billion foreign debt. Argentina, in contrast, allows foreign control of state-owned companies and has also accepted so-called debt-equity swaps, in which banks exchange some debt for stock in newly privatized companies.

President Carlos Saul Menem began propitiously by finding buyers for Empresa Nacional de Telecomunicaciones (ENTel), the notoriously inefficient telephone company. In November, Menem sold a 60% interest in ENTel to two consortiums, one headed by Italy’s Societa Finanziaria Telefonica and the other by Spain’s Telefonica. The firms will pay only $214 million in cash but have agreed to buy back $5 billion of the national debt. The deal looks like a good one for the buyers: the debt will be bought on the open market, so they will pay something like 20 cents on the dollar for it. Menem has also sold the national airline, Aerolineas Argentinas, to a consortium led by Spain’s Iberia. The buyers agreed to pay $2 billion in foreign-debt certificates and $26 million a year for the next decade.

In Brazil, President Fernando Collor de Mello unveiled ambitious plans for privatization as soon as he took office in March 1990. He said he wanted to sell off 40 major companies, including the state-owned steel industry, for an estimated $17 billion. But so far there have been no sales, and Collor’s entire program of economic reform is on decidedly shaky ground. His austerity plan brought inflation down from more than 80% a month to less than 10%. But inflation began rebounding in January; Brazil is mired in a serious recession — GNP fell 4.6% last year; and confidence in Collor has plummeted.

The Colombian government of Cesar Gaviria Trujillo is trying to sell some of its state-owned banks and is sponsoring legislation to overturn a 15-year-old law that restricts foreign ownership to 49% of any bank. “If we are going to open our economy, we need foreign investment,” Finance Minister Rudolf Hommes has said.

ASIA In Pakistan, the government of Prime Minister Nawaz Sharif announced that it plans in coming months to sell 50 of its 150 state-owned industrial operations, including the Ghee Corp., which makes a blend of cooking oils. But the plan faces resistance from the bureaucracy, which long ago grew accustomed to the power and patronage of running an industrial empire, as well as from ; labor unionists, who fear massive layoffs. The government has nonetheless managed to sell off the Muslim Commercial Bank, one of the country’s largest.

Sales elsewhere in Asia are decidedly slow. Last summer the Cambodian government dumped 12 state enterprises on the market, including a rubber plantation and a former battery factory. Vietnam is hawking a beach resort 50 miles south of Saigon. Sri Lanka is peddling its stakes in three luxury hotels in Colombo. The Manila government of Corazon Aquino is trying to sell off a stake in Philippine Airlines.

Since privatization is often painful and precarious, Western public financial institutions — such as the World Bank, the International Monetary Fund and the new European Bank for Reconstruction and Development — must sometimes lend a hand. That may not always be enough. A nation’s people could demand a return to nationalization because they see immediate costs a lot more clearly than future benefits, or because government bungles the job. In addition, says Kenneth Maxwell, a senior fellow at the Council on Foreign Relations in New York, “where privatization hurts special interests and there is a tradition of populism, then nationalism becomes a retreat.” Governments that launched free-market reforms but have nothing yet to show for them could be thrown out of office, a possibility as plausible in Budapest as in Buenos Aires.

The global sell-off will take time. The income it brings will disappoint many sellers. Buyers may be discouraged by the difficulty of transforming ailing enterprises into viable operations. But the fire sale has only just begun, and there is reason to be hopeful. After years of suffering the inefficiencies and inequities of state-owned economies, people ache for a change. Privatization may be imperfect, but it certainly beats the alternative.