[A-List] Ecuador: privatisation woes

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Problems disrupt Ecuador's privatisation programme
Financial Times; Mar 22, 2002
By NICHOLAS MOSS

The graffiti read: "For sale: beautiful country, sea views. Inquire at
the presidential palace." It was one of the more lyrical protests
against the sale of state assets ahead of the planned auction of
Ecuador's 17 electricity distribution companies next month.

Inside the Carondelet palace, President Gustavo Noboa was adamant. He
would go ahead with the sell-off to raise at least Dollars 383m (Euros
435m, Pounds 270m) from the sale of the 51 per cent stakes in two groups
of companies - one on the coast and the other in the highlands. It would
provide valuable revenue for Ecuador's dollarised economy, with Dollars
1bn of further investment expected during the next decade from the
winning bidders, he asserted.

This first significant privatisation in Ecuador was also to be a model
for other sales, including telecommunications, ports, banks and
electricity generation. Three foreign companies are eligible to bid:
Spain's Union Fenosa, AES of the US and Argentina's Perez Companc.

But this week the process has hit problems.

The highlands sale has been called off amid opposition from Quito's
municipal government, which holds what amounts to a controlling interest
in the capital's electricity distributor - Empresa Electrica Quito - the
biggest in the group. Meanwhile, the auction of a share in the smaller
coastal group of companies, valued at Dollars 92m, and a concession to
distribute electricity in Guayaquil, Ecuador's largest city, have been
postponed.

If Mr Noboa's government can be blamed for the hitches it is not due to
failing to get across its message on the benefits of privatisation, say
analysts. Even so, privatisation is unpopular with the public, as well
as with legislators preoccupied by the run-up to Congressional and
presidential elections scheduled for October.

Now the privatisation problems have observers looking at Ecuador 's
broader economic model and wondering if its two-year old dollarisation
will survive. They ask when the political establishment will be mature
enough to back the reforms needed to consolidate the success of the
dollarisation.

"Ecuador 's leftwing and rightwing parties are ideological dinosaurs,
unenthusiastic about privatisation. Moreover there is a feeling that
Ecuador dodged a bullet by dollarising, and that now it can go back to
business as usual," said one foreign analyst.

That would be a big step backwards. Improving competitiveness, for
example, was something Ecuador only began to talk about recently, as
exporters struggled to find markets without the help of currency
devaluations.

The government has continued to strengthen the financial sector since
1999, when two-thirds of banking assets were taken into state hands and
the country defaulted on its external debt.

"Ecuador chose for itself an extremely rigid and unforgiving monetary
regime, and now it has to live by demanding economic rules," said
Jeffrey Franks, the International Monetary Fund's representative in
Quito.

The arguments for electricity privatisation are compelling. Improved
efficiency - grid losses amount to as much as 35 per cent, compared with
an international standard of 6-8 per cent - should lower prices,
benefiting the entire economy.

It should guarantee payment to the electricity generators, whose bills
have been mostly ignored by the distributors leaving the government to
subsidise them. Ecuador's 2,000MWh demand for electricity is forecast to
grow 5 per cent a year as the economy recovers, needing new generation
facilities.

President Noboa may still prevail in the battle between economic
advantages and political conservatism, and success when the coastal sale
goes ahead may even persuade the highlands to follow. Failure would bode
ill for future privatisations - and for the sustainability of
dollarisation.

Full article at:
http://globalarchive.ft.com/globalarchive/article.html?id=020322001489&query=Ecuador

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx