The Great Brazilian Bazaar Is Set To Open

After years of stop and go, Brazilian privatization is starting to roll. Constitutional amendments to open up state monopolies in key industries from oil to telecommunications are moving through Congress. Two electric utilities and at least a dozen petrochemical companies are expected to be sold in the next several months for a total of $3 billion. And President Fernando Henrique Cardoso's government is pushing ahead with plans to privatize huge mining conglomerate Companhia Vale do Rio Doce (CVRD).

The sell-offs could pull in up to $40 billion of foreign investments in the next three or four years. The money is badly needed. Without it, Brazil's economic revival could soon run into bottlenecks from transport to electric power. Brazil needs to pour $70 billion into infrastructure over the next four years, warns Amaury Bier, chief economist at Citibank in Sao Paulo. Of that, the public sector can finance only $30 billion.

However, Brazil's fragmented politics won't allow privatizations to move as fast as in Argentina or Peru. The Senate must still approve the monopoly-busting amendments, and the government must draw up new regulatory frameworks. "The market opening in the biggest sectors will come, but it won't be at a Formula One pace," says Bier.

A turning point for privatization was Cardoso's recent showdown victory over entrenched employees of state oil monopoly Petrobrs, who staged a month-long strike for higher wages. The walkout, by workers who earn six times the national average salary, angered Brazilians, who had to do without fuel and cooking gas. On June 7, just five days after the strike ended, the Chamber of Deputies voted overwhelmingly to end Petrobrs' monopoly.

Cardoso's new privatization drive will be launched on July 11 with the auction of a controlling stake in Escelsa, a distribution subsidiary of electric monopoly Eletrobrs in Esprito Santo state. Its minimum sale price is $363 million. In August, the state's remaining 32% share in Copene, a partly privatized petrochemical complex, will go on sale for a minimum $600 million. And Rio de Janeiro electricity distributor Light should bring in $2 billion when it goes on the block in November, officials say.

What's riveting the attention of Wall Street and European investment banks, though, is the planned sale of CVRD, the world's No.1 iron-ore producer, with tentacles in other businesses. It's worth an estimated $15 billion, with 49% of shares publicly traded. To manage an international offering of the state-held 51%, Brazil plans to hire a pair of investment banks. "The commissions will be so big, everyone will want to be in on it," says Luiz Galvo, head of research at Baring Securities do Brasil.

Cardoso hopes to sell CVRD next year, but 1997 may be a likelier target. Although CVRD turns a healthy profit, estimated at $220 million this year, Baring analyst Adriana Lacombe believes that earnings could be boosted to nearly $1 billion by administrative cost savings under private ownership.

For Petrobrs, which still retains some status as a nationalist sacred cow, legislation pending in the Senate would "flexibilize" its monopoly by allowing foreigners to invest in joint ventures, concessions, or "risk contracts" for exploration. What's eroding Petrobrs' monopoly is simple shortage of money. By Petrobrs' own reckoning, lack of investment will drop its production from 750,000 barrels of oil a day currently to just 300,000 barrels a day by 1999. "The only way to keep up with demand is to let in foreign investment," says Galvo.

STEP BY STEP. In telecommunications, too, the plan is to start opening the sector step by step, under legislation headed for a July vote, without formally ending the monopoly of holding company Telebrs. Foreign investment could begin this year in cellular phone services, which can't keep up with surging demand, and data transmission. Over the next two years, Cardoso aims to combine 27 state phone companies, led by Sao Paulo's Telesp and Rio's Telerj, into just seven or eight, as a step toward eventual sale.

Once before, in 1991, Brazil started toward a broad market opening with the successful sell-off of the steel industry. But that round of privatizations was derailed by the corruption scandal that forced former President Fernando Collor de Mello to resign. Now, Cardoso has put the process back on track. Foreign investors may still need patience, but this time, it should be worth the wait.

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