State-Owned Enterprises in Latin America and the Caribbean: Challenges and Opportunities

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1 State-Owned Enterprises in Latin America and the Caribbean: Challenges and Opportunities Gustavo García Principal Technical Lead Fiscal Economist Fiscal and Municipal Management Division (FMM) Institutions for Development Department (IFD)

2 The lights are gone bring the candles because the party is not over (Juanes, La Luz)

3 SOEs in Latin American and the Caribbean Overview Which economic sector are there? How do they perform by economic sector? How do they compare with their peers in the private sector? What could explain their performance? What can be done to improve their performance?

4 State-Owned Enterprises (SOEs) in Latin America and the Caribbean (LAC) 85% of the LAC s GDP Country Total SOEs Of which: Fully State- Owned Listed Argentina n.a. n.a. Brazil % 0.7% Chile % 0.7% Colombia % (*) 0.1% Ecuador % 1.0% Mexico 110 n.a % (**) n.a. Peru 31 n.a % 0.2% Total (*) SOEs' assets as a share of national GDP (**) PEMEX Revenues (% national GDP) Employment in SOEs (% total employment) Source: OECD (2012). Information not available for Venezuela, whose largest SOE is PDVSA

5 State-Owned Enterprises (SOEs) in Latin America and the Caribbean (LAC) Largest SOEs in LAC*, distribution by sector (% of total sales, 2011) 11% 6% 4% 2% 5 companies gathered more than 70% of the total revenues from sales in 2011, all of them in the oil/ gas industry (PDVSA, PEMEX, ECOPETROL, PETROBRAS) 77% Oil/Gas Mining Transport/Logistics/Multisector Electricty Services SOEs have an important role in the LAC region, especially in strategic sectors such as oil, gas, mining, electricity, water and sanitation, transportation and infrastructure. (*) Of a sample of the top 40 SOEs in LAC by sales in Source: América Economía

6 SOEs in Latin American and the Caribbean Overview Which economic sector are there? How do they perform by economic sector? How do they compare with their peers in the private sector? What could explain their performance? What can be done to improve their performance?

7 Revenues (USD bn.) SOEs in LAC: How do they perform? 3% Petrobras (Bra) -19% Pemex (Mex) 2% PDVSA (Ven) 15% 10% Petrobras Dist. (Bra) Ecopetrol (Col) -2% -4% CFE (Mex) Electrobras (Bra) 12% 62% 5% Source: América Economía. Largest SOEs in LAC: Revenues (USD bn.) and Return on Assets (%), 2012 Codelco (Chi) Petroecuador (Ecu) YPF (Arg) -5% ENAP (Chi) 5% Grupo EPM (Col) 16% Correios e Tel. (Bra) 3% 7% 1% Kaluz (Mex) Sabesp (Bra) Petroperu (Per) -4% Furnas (Bra) 3% 3% Copel (Bra) ROA (%, right) Revenues (USD bn., left) Average = 4% Itaipu Bin. (Bra/Par) -1% Ancap (Uru) 8% Codelco Div. ET (Chi) -5% Codelco Div. Chuq. (Chi) -25% Chesf (Bra) 3% 0% Aerop. y SSAA (Mex) Recope (CR) 15% Essalud (Per) -3% Eletronorte (Bra) 1% ISA (Col) 15% Aut. Can. de Pan. (Pan) 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% ROA (%)

8 Revenues (USD bn.) SOEs in LAC: How do they perform? 6% Petrobras (Bra) 139% Pemex (Mex) 18% 23% 6% PDVSA (Ven) Petrobras Dist. (Bra) Ecopetrol (Col) -18% -10% CFE (Mex) Largest SOEs in LAC: Revenues (USD bn.) and Return on Equity (%), 2012 Electrobras (Bra) 32% Codelco (Chi) 141% Petroecuador (Ecu) 12%12% YPF (Arg) Grupo EPM (Col) 25% Correios e Tel. (Bra) 9% 16% 2% Kaluz (Mex) Sabesp (Bra) Petroperu (Per) Source: América Economía. Extreme values ommitted -12% Furnas (Bra) 6% Copel (Bra) ROE (%, right) Revenues (USD bn., left) Average=16% -1% Ancap (Uru) -46% Chesf (Bra) 6% 0% 17% Aerop. y SSAA (Mex) Recope (CR) Essalud (Per) -7% Eletronorte (Bra) 4% ISA (Col) 19% Aut. Can. de Pan. (Pan) 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% ROE (%)

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13 State-Owned Enterprises (SOEs) in Latin America and the Caribbean (LAC) 100% 80% 1% 1% 11% Financing Structure of Largest SOEs in LAC, 2012 (% of total assets) 24% % of total assets 60% 40% 20% 113% 99% 99% 89% 76% 35% 35% 36% 37% 38% 39% 39% 40% 41% 44% 44% 44% 46% 51% 52% 54% 57% 58% 65% 65% 64% 63% 62% 61% 61% 60% 59% 56% 56% 56% 54% 65% 66% 49% 48% 46% 43% 42% 35% 34% 80% 84% 20% 16% 0% -13% -20% Pemex (Mex) Itaipu Bin. (Bra/Par) ENAP (Chi) CFE (Mex) ISA (Col) PDVSA (Ven) Furnas (Bra) Kaluz (Mex) Grupo EPM (Col) Source: América Economía Codelco (Chi) Electrobras (Bra) YPF (Arg) Correios e Tel. (Bra) Liabilities Ancap (Uru) Sabesp (Bra) Petroecuador (Ecu) Equity Petroperu (Per) Eletronorte (Bra) Petrobras (Bra) Aerop. y SSAA (Mex) Chesf (Bra) Petrobras Dist. (Bra) Copel (Bra) Institutions for People Ecopetrol (Col) Recope (CR) Aut. Can. de Pan. (Pan) Essalud (Per)

14 SOEs in Latin American and the Caribbean Overview Which economic sector are there? How do they perform by economic sector? How do they compare with their peers in the private sector? What could explain their performance? What can be done to improve their performance?

15 SOEs in LAC: How do they perform and compare to private peers? SOEs Private companies LAC Oil/Gas Companies: Performance Ratios, Ratios ROE (%) ROA (%) Profit/revenue (%) Rev./employee (mill. USD)* Profit/employee (USD 000s)* Emp./Assets* Source: America Economia. Top 500 companies in Latin America Based on a sample of 11 SOEs and 11 private companies. (*) based on a sample of 7 SOEs and 7 private companies.

16 SOEs in LAC: How do they perform and compare to private peers? LAC Electricity Companies: Performance Ratios, SOEs Private companies Ratios ROE (%) ROA (%) Profit/revenue (%) Rev./employee (mill. USD)* Profit/employee (USD 000s)* Source: America Economia. Top 500 companies in Latin America Based on a sample of 9 SOEs and 12 private companies. (*) based on a sample of 5 SOEs and 12 private companies Emp./Assets*

17 SOEs in Latin American and the Caribbean Overview Which economic sector are there? How do they perform by economic sector? How do they compare with their peers in the private sector? What could explain their performance? What can be done to improve their performance?

18 What could explain their performance? Rent seeking in the case of non-renewable resources. Hidden subsidies and price and tariff controls for social or equity reasons in SOEs providers of basic services. Inadequate legal and regulatory framework. Political interference over professional management. High indebtedness over more capitalization. Operational deficiencies due to lack of investment. Lack of performance based monitoring and evaluation. Redundant personnel and powerful labor unions. Vulnerability to external and natural shocks, without fiscal or financial buffers.

19 SOEs in Latin American and the Caribbean Overview Which economic sector are there? How do they perform by economic sector? How do they compare with their peers in the private sector? What could explain their performance? What can be done to improve their performance?

20 What can be done to improve their performance? Strengthen the legal, regulatory and monitoring framework. Make hidden subsidies better targeted, transparent and explicit in the budget. Increase transparency and accountability to several instances. Reduce political interference and adopt performance based monitoring and evaluation, with clear expected performance targets set on an annual and medium term basis. Set medium term capital planning for investment, quality of services and financial buffers. Increase professional management and independent board composition. Consider the possibility of allowing private sector participation as shareholder, even in a minority proportion through the open stock market. The subnational dimension.

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22 Overview SOEs play a fundamental role in production and export of nonrenewable natural resources (oil, gas and minerals) and in the provision of public services (electricity, gas, water and sanitation). SOEs are still a significant source of fiscal resources and potential contingent liabilities for the public sector in various LAC countries. The causes of this absorption of fiscal resources have been: political interferences in the management of these enterprises, implicit subsidies for the consumption of fuels and other public services (price and tariff control), borrowing to cover the investment needs and other financial charges. Institutions for People

23 Overview The debt crisis of the 80 s in LAC forced a substantial process of privatization during the decade of 90 s. Of a total of USD 250 billion of revenue generated by the process of privatization in the developing countries, about 55% was generated in the LAC countries according to World Bank estimates. SOEs are also important to the sub-national governments (SNGs) in the region, above all, in the provision of public services: electricity, gas, water and sanitation, transportation companies in large cities, especially those of metros (subways). Most SNGs enterprises subsidize these public services, which is why they also absorb a huge amount of fiscal resources. Institutions for People

24 Transparency and Fiscal Risks in the SOEs in LAC Not all countries in the region publish fiscal data of SOEs as most of the countries publish only figures at the General Government level (Central and Decentralized Public Administration and SNGs). However, most of the large and medium countries do aggregate fiscal figures of the SOEs as a part of Consolidated Public Sector and Publicly Guaranteed Debt. Economic and financial returns as well as fiscal outcomes of the enterprises are strongly influenced by the outcomes of the companies exporting raw materials (oil, gas and minerals). Companies providing public services have very low returns on assets (ROA) and equity (ROE). Institutions for People

25 Fiscal Risks of the SOEs in LAC However, ROA and ROE of most SOEs are still low and biased upwards by the SOEs exporting non-renewable raw materials (oil, gas and minerals). By contrast, the enterprises providing public services yield much lower profits, produce public service products subsidized for tariff and price and fail to maintain the required investments. Many SOEs of the region fail to maintain the required investments without receiving transfers from the central governments. Institutions for People

26 Fiscal Risks of the SOEs in LAC Many SOEs are exposed to significant fiscal risks due to: External shocks in commodity prices. Implicit subsidies and/or price and tariff control in the provision of public services. Bloated payrolls for political reasons or social and union pressures. Operational deficiencies due to the lack of fixed investment. Other contingent liabilities: pensions, medical services, etc. Deficiencies in the governance and supervision. Institutions for People