ManagingManagingState Assets in Brazil: The Case of the State Assets in Brazil: The Case of the

National Development BankNational Development Bank

Armando Castelar PinheiroArmando Castelar Pinheiro

BNDES - UFRJBNDES - UFRJBudapeste, September 19, 2000Budapeste, September 19, 2000

ManagingManagingState Assets in Brazil: The Case of the State Assets in Brazil: The Case of the

National Development BankNational Development Bank

Armando Castelar PinheiroArmando Castelar Pinheiro

BNDES - UFRJBNDES - UFRJBudapeste, September 19, 2000Budapeste, September 19, 2000

The Creation of SOEs in Brazil

Industrialization driveIndustrialization drive

National securityNational security

Nationalization of foreign assets Nationalization of foreign assets (utilities)(utilities)

Verticalization and diversification of Verticalization and diversification of SOEsSOEs

Bankrupt private companies Bankrupt private companies

Industrialization driveIndustrialization drive

National securityNational security

Nationalization of foreign assets Nationalization of foreign assets (utilities)(utilities)

Verticalization and diversification of Verticalization and diversification of SOEsSOEs

Bankrupt private companies Bankrupt private companies

Controlling SOEs in Brazil

1960s: Creation of holding companies 1960s: Creation of holding companies (steel, telecom, electricity, etc.)(steel, telecom, electricity, etc.)

1967-78: Administrative reform reduced 1967-78: Administrative reform reduced controls over SOEs while keeping controls over SOEs while keeping privileges privileges

1979-89: Creating centralized 1979-89: Creating centralized expenditure controls and legal expenditure controls and legal restrictions on SOE creation (census) + restrictions on SOE creation (census) + sale of small formely private SOEs + sale of small formely private SOEs + performance contractsperformance contracts

1990-98: Privatization of large traditional 1990-98: Privatization of large traditional SOEsSOEs

1999-: Change in corporate governance1999-: Change in corporate governance

1960s: Creation of holding companies 1960s: Creation of holding companies (steel, telecom, electricity, etc.)(steel, telecom, electricity, etc.)

1967-78: Administrative reform reduced 1967-78: Administrative reform reduced controls over SOEs while keeping controls over SOEs while keeping privileges privileges

1979-89: Creating centralized 1979-89: Creating centralized expenditure controls and legal expenditure controls and legal restrictions on SOE creation (census) + restrictions on SOE creation (census) + sale of small formely private SOEs + sale of small formely private SOEs + performance contractsperformance contracts

1990-98: Privatization of large traditional 1990-98: Privatization of large traditional SOEsSOEs

1999-: Change in corporate governance1999-: Change in corporate governance

Total Results (1991-2000)

On February 18, 2000On February 18, 2000On February 18, 2000On February 18, 2000

US$ millionUS$ millionUS$ millionUS$ million

SteelSteel

PetrochemicalsPetrochemicals

RailroadsRailroads

MiningMining

Telecom Telecom

PowerPower

OthersOthers

Minority shareholdingsMinority shareholdings

Federal-levelFederal-level

State-levelState-level

TotalTotal

SteelSteel

PetrochemicalsPetrochemicals

RailroadsRailroads

MiningMining

Telecom Telecom

PowerPower

OthersOthers

Minority shareholdingsMinority shareholdings

Federal-levelFederal-level

State-levelState-level

TotalTotal

TotalTotalTotalTotalProceedsProceedsProceedsProceedsNumber of Number of CompaniesCompaniesNumber of Number of CompaniesCompanies

Debts Debts TransferredTransferred

Debts Debts TransferredTransferredSectorSectorSectorSector

88

2727

77

22

2626

33

1818

--

9191

3434

125125

88

2727

77

22

2626

33

1818

--

9191

3434

125125

5,5625,562

2,6992,699

1,6971,697

3,3053,305

26,97826,978

3,9093,909

1,4721,472

1,1021,102

46,72446,724

26,17226,172

72,89672,896

5,5625,562

2,6992,699

1,6971,697

3,3053,305

26,97826,978

3,9093,909

1,4721,472

1,1021,102

46,72446,724

26,17226,172

72,89672,896

8,1888,188

3,7023,702

1,6971,697

6,8646,864

29,10329,103

5,5795,579

1,8151,815

1,1021,102

58,05058,050

32,76432,764

90,81490,814

8,1888,188

3,7023,702

1,6971,697

6,8646,864

29,10329,103

5,5795,579

1,8151,815

1,1021,102

58,05058,050

32,76432,764

90,81490,814

2,6262,626

1,0031,003

--

3,5593,559

2,1252,125

1,6701,670

343343

--

11,32611,326

6,5926,592

17,91817,918

2,6262,626

1,0031,003

--

3,5593,559

2,1252,125

1,6701,670

343343

--

11,32611,326

6,5926,592

17,91817,918

PND institutional structure

Federal Audit CourtFederal Audit Court

House of House of

Representatives Representatives

Privatization Sub-Privatization Sub-

committeecommittee

External auditorsExternal auditors

Federal Audit CourtFederal Audit Court

House of House of

Representatives Representatives

Privatization Sub-Privatization Sub-

committeecommittee

External auditorsExternal auditors

Inspection, control Inspection, control and follow-upand follow-up

Inspection, control Inspection, control and follow-upand follow-up

Ministers responsible Ministers responsible

for the companiesfor the companies

Monetary CouncilMonetary Council

Brazilian Central BankBrazilian Central Bank

Ministers responsible Ministers responsible

for the companiesfor the companies

Monetary CouncilMonetary Council

Brazilian Central BankBrazilian Central Bank

SupportSupportSupportSupport

ManagementManagement

BNDESBNDES

EvaluationEvaluation

External consultantsExternal consultants

ManagementManagement

BNDESBNDES

EvaluationEvaluation

External consultantsExternal consultants

Privatization CouncilPrivatization CouncilPrivatization CouncilPrivatization Council

DecisionDecisionDecisionDecision

President of the RepublicPresident of the RepublicPresident of the RepublicPresident of the Republic

Sale model & financial

adjustments

Sale model & financial

adjustments

Inclusion in PNDInclusion in PND

Auction / OffersAuction / Offers

Call fortendersCall fortenders

Tenders for consultingTenders for consulting

Consultant AConsultant A Consultant BConsultant B

Financial andeconomicvaluation

Financial andeconomicvaluation

Minimum priceMinimum price

Financial and economic valuation, special auditing, assets and legal appraisal

Financial and economic valuation, special auditing, assets and legal appraisal

PrivatizationCouncil - CNDPrivatization

Council - CND

PND privatization process

Remaining State Assets in Brazil

Power generation (being privatized)Power generation (being privatized)

Real estate (being privatized)Real estate (being privatized)

Roads (to be partly privatized)Roads (to be partly privatized)

Water and sanitation (to be partly Water and sanitation (to be partly privatized)privatized)

Banks (to be partly privatized)Banks (to be partly privatized)

Oil company (not to be privatized, but Oil company (not to be privatized, but end of monopoly and sale of shares)end of monopoly and sale of shares)

Power generation (being privatized)Power generation (being privatized)

Real estate (being privatized)Real estate (being privatized)

Roads (to be partly privatized)Roads (to be partly privatized)

Water and sanitation (to be partly Water and sanitation (to be partly privatized)privatized)

Banks (to be partly privatized)Banks (to be partly privatized)

Oil company (not to be privatized, but Oil company (not to be privatized, but end of monopoly and sale of shares)end of monopoly and sale of shares)

Banks: ongoing discussion on what to do

FederalFederal

2 commercial banks (agriculture and2 commercial banks (agriculture and housing) largest commercial housing) largest commercial banksbanks in Brazil in Brazil

2 regional development banks (also2 regional development banks (also commercial) commercial)

1 investment bank (BNDES)1 investment bank (BNDES)

Local statesLocal states

Several commercial banks being Several commercial banks being privatizedprivatized

Investment banks turned into Investment banks turned into developmentdevelopment agencies agencies

FederalFederal

2 commercial banks (agriculture and2 commercial banks (agriculture and housing) largest commercial housing) largest commercial banksbanks in Brazil in Brazil

2 regional development banks (also2 regional development banks (also commercial) commercial)

1 investment bank (BNDES)1 investment bank (BNDES)

Local statesLocal states

Several commercial banks being Several commercial banks being privatizedprivatized

Investment banks turned into Investment banks turned into developmentdevelopment agencies agencies

BNDES The Brazilian Development Bank

Founded in 1952Founded in 1952

100% owned by the Federal 100% owned by the Federal

GovernmentGovernment

The main source of medium and long-The main source of medium and long-

term financing in the Brazilian term financing in the Brazilian

economyeconomy

Main Brazilian partner of multilateral Main Brazilian partner of multilateral credit organizationscredit organizations

1,600 employees1,600 employees

Founded in 1952Founded in 1952

100% owned by the Federal 100% owned by the Federal

GovernmentGovernment

The main source of medium and long-The main source of medium and long-

term financing in the Brazilian term financing in the Brazilian

economyeconomy

Main Brazilian partner of multilateral Main Brazilian partner of multilateral credit organizationscredit organizations

1,600 employees1,600 employees

2

BNDES along the years

9090

5050

6060

7070

8080

Infrastructure - Steel

Energy - Intermediate inputs - Consumer goods

Import substitution of intermediate and capital goods

Private industry and agribusiness

Private infrastructure and exports

Management of privatization process

Infrastructure - Steel

Energy - Intermediate inputs - Consumer goods

Import substitution of intermediate and capital goods

Private industry and agribusiness

Private infrastructure and exports

Management of privatization process

BNDES total disbursements

US$ billion

9,6

1995 1996 1997 1998 1999

11,8

16,5 16,516,5

11,1

2.000 forecast : US$ 13.3 billion 2.000 forecast : US$ 13.3 billion

Loan PortfolioLoan Portfolio DisbursementsDisbursements

59%59%73%73% 74%74%

19971997 19981998 19991999 19971997 19981998 19991999

78%78%90%90% 96%96%

Private sector share (%)Private sector share (%)

BNDES group structure

Finances long-termFinances long-terminvestmentinvestment

Finances long-termFinances long-terminvestmentinvestment

BNDESBNDES

BNDESPARBNDESPAR FINAMEFINAME

Equity participationEquity participation Finances capitalFinances capitalgoods purchases and goods purchases and foreign trade foreign trade

BNDESPARBNDESPAR

• The investment corporation of BNDES

• Created in 1982

• Fully-owned by BNDES

• A public company since January 1998

• The most important venture capital agency in Brazil

• The investment corporation of BNDES

• Created in 1982

• Fully-owned by BNDES

• A public company since January 1998

• The most important venture capital agency in Brazil

Operations cycleOperations cycle

MonitoringMonitoring DivestmentDivestmentInvestmentInvestment

BNDESBNDESBNDESBNDES

fundingfunding

BNDESPARBNDESPAR

interest and dividendsinterest and dividends

recyclingrecycling

pay debtpay debt

Investment highlights

• Always minority stakes of temporary nature

• Valuation is based on each firm’s prospective performance

• Investment may also be made indirectly, through one of its closed-end funds

• BNDESPAR offers special programs for small and medium-sized technology-based businesses and emerging companies

Divestment

• Primarily through public offers in the Primarily through public offers in the domestic or international capital domestic or international capital marketsmarkets

• BNDESPAR often creates new BNDESPAR often creates new financial products, coupled with financial products, coupled with derivatives, to promote liquidity and derivatives, to promote liquidity and develop the capital marketdevelop the capital market

12.8

7.7

6.9

4.6

2.3

3.7

3.9

214

510

12.8

7.7

6.9

4.6

2.3

3.7

3.9

214

510

11.6

5.6

10.4

8.3

2.0

.3

2.2

191

246

11.6

5.6

10.4

8.3

2.0

.3

2.2

191

246

Total Assets

Net Worth

Market Value

Stocks, funds & bonuses

Convertibles

Investment

Divestment

Number of Companies

Net Profit (US$ million)

Total Assets

Net Worth

Market Value

Stocks, funds & bonuses

Convertibles

Investment

Divestment

Number of Companies

Net Profit (US$ million)

Dec-98Dec-98 Dec-99Dec-99

US$ billion

11.6

5.4

11.2

9.1

2.1

3.2

.6

197

366

11.6

5.4

11.2

9.1

2.1

3.2

.6

197

366

Jun-00Jun-00

Key BNDESPAR FiguresKey BNDESPAR Figures

Up to R$ 7 million ( around US$ 4 million )

BNDES Automatic - financing through a network of accredited financial institutions (pass-through lending )

In excess of R$ 7 million

FINEM - Direct financing

Unlimited

FINAME - Machinery and equipment (pass-through lending )

BNDES access to credit

credit policy & procedures

Exposure limits: sectors and clientsRating policy and Credit Committee

No foreign capital discrimination

All loans require collateral and repayment capacity

Onlending through financial intermediaries, which assume the final credit risk

BNDES BNDES

Changes in SOE Corporate Governance

Failure of performance contractsFailure of performance contracts

More active board members More active board members (outsiders)(outsiders)

Minister as president of boardMinister as president of board

More transparent accounting More transparent accounting practicespractices

BNDES on board of directors of BNDES on board of directors of privatized companies with left overs privatized companies with left overs in state handsin state hands

Failure of performance contractsFailure of performance contracts

More active board members More active board members (outsiders)(outsiders)

Minister as president of boardMinister as president of board

More transparent accounting More transparent accounting practicespractices

BNDES on board of directors of BNDES on board of directors of privatized companies with left overs privatized companies with left overs in state handsin state hands

www.bndes.gov.bre-mail: financia@bndes.gov.br

www.bndes.gov.bre-mail: financia@bndes.gov.br

BNDESBNDES - The Brazilian Development - The Brazilian Development

BankBank

BNDESBNDES - The Brazilian Development - The Brazilian Development

BankBank