CHAPTER 18 STATE-OWNED ENTERPRISES (SOES) IN LATIN AMERICA
| Jurisdiction | United States |
(Apr 2015)
STATE-OWNED ENTERPRISES (SOES) IN LATIN AMERICA
Partner
Vitale, Manoff & Feilbogen
Buenos Aires
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SAúL RICARDO FEILBOGEN is the founding partner of Vitale, Manoff & Feilbogen in Buenos Aires, and head of the Corporate and Finance Department. Mr. Feilbogen is actively involved in the oil & gas and mining industry. He usually represents both domestic and foreign companies in Argentina in all aspects of their activity, including domestic and cross-border equity and debt financing, M&A transactions, advising explorers and producers, obtaining title rights, property option agreements, joint ventures and incorporation of subsidiaries. He also helps their clients in relations with the Federal/Provincial Government and compliance with foreign exchange regulations. Mr. Feilbogen is member of the Rocky Mountain Mineral Law Foundation, the Prospectors and Developers Association of Canada, the American Bar Association, the American-Argentine Chamber of Commerce (AMCHAM). He is a professor of finance at the University CEMA in Buenos Aires, Argentina. Some of the conferences and seminars where he lectured include: Love in the Time of Cholera: Any Love in Latin American Mining ? Argentine Chapter. PDAC 2015, Toronto, Canada, March 2015; Below the Surface: Drilling Deep in Law and Regulation to Reach the Americas' New Energy Frontier, Fall Meeting, American Bar Association, Buenos Aires, October 2014; Strategy and Opportunity for Argentina's unconventional oil and gas producers Organized by Terrapin, August 2013, Buenos Aires, Argentina; and The Current State of Oil and Gas Regulations in Argentina, Petroleum Club, Calgary, March 2013. His publications include: Antitrust Regional Report: Essentials of Regulatory Review in SouthAmerica, available at: http://abanet.org/intlaw/committees/businessregultaion/antitrust/reportsmap.html; International Practices on Joint Ventures (Argentine Chapter), prepared by the ABA Committee on Mergers & Acquisitions, to be published; and Joint Ventures in the International Arena, Second Edition. (Argentine Chapter) Section of International Law. American Bar Association, Editors Darrel Prescott and Salli Swartz. 2010.
Chapter 1: Rationale, Organization, Economic Participation and Conclusions
1. Introduction
The activity or participation of the Government1 in different sectors of the economy is well known and registered all over the world. However, it is probably worthy to start defining what we mean when referring to State Owned Enterprises (hereinafter "SOEs")
"Different types of entities where the Government has a controlling interest".
• We say entities with the purpose to comprehend all different kind of activities performed by a State. These include:
(i) Corporations, (either governed by the commercial, the administrative law or both)
(ii) Agencies which belong to a ministerial structure,
(iii) Trusts for specific purposes of development,
(iv) Developments banks with a significant stake as lender in certain projects.
• We refer to a controlling interest to include those Corporations where the Government owns either 100% of its equity, or a controlling interest, or a golden share with a veto authority regarding certain matters
In several OECD countries SOEs still represent a substantial part of their GDP, employment and market capitalization.2
In the case Latin American, SOEs are also key and strategic actors in many country's economy, holding a dominant market position in critical sectors while are representing an important part of consolidated public expenditures.
SOEs are often prevalent in utilities and infrastructure industries, such as energy, transport and telecommunications, whose performance is of a great importance to broad segments of the population. But SOEs are also present in a number of sectors considered of a "strategy interest" to the State.
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This has been the case of the oil sector. In 2012, the IMF reported that "some 80 percent of world petroleum reserves are controlled by state companies and 15 of the 20 largest oil companies are state-owned"3
Regarding the Mining sector, SOE are not a new phenomenon and we have a number of examples all around the world.4 In Latin America the involvement of the Governments has also a large background. We only have to remember the starting activity of CODELCO in Chile (1966-1971), COMIBOL in Bolivia (1952) and YMAD in Argentina (1959) just to mention a few of them.
But following the development of the last decade, the Government participation as a player in the mining industry certainly constitutes an important trend.
In this paper, we will review the following topics:
1. The rationales behind the SOEs (this Chapter)
2. The ownership organization (this Chapter)
3. The economic participation in the industry (this Chapter)
4. Main Conclusions
5. Country Analysis (Chapter 2 to 5)
2. The rationales behind the SOEs
Several explanations have been advanced to account for the emergence of the "state capitalism" represented by the SOE's sector.5 Among those arguments, we can mention:
1. Industrial Policy view: this explanation sees the provision of state capital as an important tool for solving market failures leading to suboptimal productive
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investment. This situation usually occurs in poorly developed financial markets with capital scarcity to finance all different activities and projects.
Coordination problems are also cited in this explanation, when the need to link the production chain requires the presence of the state to foster complementary investments.
2. Social view: the activity of the state is justified by noncommercial objectives that go beyond profitability or even contradict the simple principle of shareholder value maximization. These noncommercial objectives include the promotion of regional development, job creation and income redistribution, or the provision of essential services that the people cannot pay.
Both mentioned theories are criticized because they do not explain why in some cases the state is the majority investor while in others acts more indirectly through non-controlling shares or targeted lending.
3. Political view: according to this explanation, the interference of the Government has the aim to pursue political rather than economic goals. These activities are usually characterized by excessive employment, staff selection based on political connections rather than on merit or background, poor business decisions; and all these leading to an inefficient performance.
4. Path Dependence view: the existence of state capitalism is a result of idiosyncratic, country-level institutional features and historical processes. This theory serves to explain the uneven result of the last wave of privatization - which took place specially the decades of 1980s and 1990s-, and the emergence of "national champions", as are known local private companies which receive the favors of the state.
To all the above reasons, when referring to the mining sector, specific explanations are given to justify the involvement of the Government:
a) The potential benefits of resource dependence are contingent on whether mining and the associated revenues are developed and managed responsibly over time with more attention to sustainability issues.
b) Poor environmental and social management of mining projects can have significant long lasting effects on resources, biodiversity and local communities. Best practices in addressing environmental, health, safety and social (EHS&S) issues can be introduced as a benchmark for the whole industry,
c) Private companies have low incentives to invest in physical and human capital
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All these true, but we are of the opinion that one of the main reason, but probably not politically correct to be mentioned, is
d) To increase the Government's revenue.
It is true that the main sources of revenues have been tax collection and royalty payments. Governments tried different ways to increase those revenues with new tax legislation. Some of these experiences failed if we remember the Resource Super Profits Tax and its replacement the Mineral Resource Rent Tax in Australia, or the Marginal Effective Tax rate in Nigeria or the, so called, real estate tax on reserves in Santa Cruz, Argentina.
However, the involvement of the Government in the mining activity through, already existing or new controlled entities constitutes a new approach that has been successful so far. Private companies are used to enter in different arrangements with the mining interest's owners to partner a Project. There is no difference if the owner is a SOE.
Even more, the activity of the Government through the SOE may provide higher comfort to the private partner. The Government will have an incentive as stakeholder, to
(i) ensure that all permits are granted in due time once the project complied with all legal requirements,
(ii) help improving the relation with the local communities making them understand the benefits of the project,
(iii) aligned the interest of the union with the project
Notwithstanding the above mentioned, a conflicting interest may arise when there is a lack of clear division among the functions of the State as owner of the SOEs, regulator of the markets in which they operate, and public policymaker. This conflicts are even higher when the State is a joint owner with the private sector.
3. The Ownership Organization
We are referring to the form in which the State organizes itself to exercise ownership over the SOE. In some cases, the institution or public entity that exercises ownership rights over the SOE is also the legal owner of said company's assets. The owner of the SOE will exercise the same activity as the shareholder of a corporation. It will appoint the member of the board, vote the annual...
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