Managing State Assets in Brazil: The Case of the National Development Bank

1. Managing State Assets in Brazil: The Case of the National Development Bank Armando Castelar Pinheiro BNDES - UFRJ Budapeste, September 19, 2000

2. The Creation of SOEs in Brazil • Industrialization drive • National security • Nationalization of foreign assets (utilities) • Verticalization and diversification of SOEs • Bankrupt private companies

3. Controlling SOEs in Brazil • 1960s: Creation of holding companies (steel, telecom, electricity, etc.) • 1967-78: Administrative reform reduced controls over SOEs while keeping privileges • 1979-89: Creating centralized expenditure controls and legal restrictions on SOE creation (census) + sale of small formely private SOEs + performance contracts • 1990-98: Privatization of large traditional SOEs • 1999-: Change in corporate governance

4. US$ million Number of Companies Debts Transferred Sector Proceeds Total Steel Petrochemicals Railroads Mining Telecom Power Others Minority shareholdings Federal-level State-level Total 8 27 7 2 26 3 18 - 91 34 125 5,562 2,699 1,697 3,305 26,978 3,909 1,472 1,102 46,724 26,172 72,896 2,626 1,003 - 3,559 2,125 1,670 343 - 11,326 6,592 17,918 8,188 3,702 1,697 6,864 29,103 5,579 1,815 1,102 58,050 32,764 90,814 Total Results (1991-2000) On February 18, 2000

5. Decision President of the Republic Privatization Council Management BNDES Evaluation External consultants PND institutional structure Inspection, control and follow-up Support • Ministers responsible for the companies • Monetary Council • Brazilian Central Bank • Federal Audit Court • House of Representatives Privatization Sub-committee • External auditors

6. Inclusion in PND Tenders for consulting Consultant A Consultant B Financial and economic valuation Financial and economic valuation, special auditing, assets and legal appraisal Sale model & financial adjustments Minimum price Privatization Council - CND Call for tenders Auction / Offers PND privatization process

7. Remaining State Assets in Brazil • Power generation (being privatized) • Real estate (being privatized) • Roads (to be partly privatized) • Water and sanitation (to be partly privatized) • Banks (to be partly privatized) • Oil company (not to be privatized, but end of monopoly and sale of shares)

8. Banks: ongoing discussion on what to do • Federal • 2 commercial banks (agriculture and housing) largest commercial banks in Brazil • 2 regional development banks (also commercial) • 1 investment bank (BNDES) • Local states • Several commercial banks being privatized • Investment banks turned into development agencies

9. BNDES The Brazilian Development Bank • Founded in 1952 • 100% owned by the Federal Government • The main source of medium and long-term financing in the Brazilian economy • Main Brazilian partner of multilateral credit organizations • 1,600 employees

10. 50 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 60 70 80 90 BNDES along the years 2

11. BNDEStotal disbursements US$ billion 16,5 16,5 11,8 11,1 9,6 1997 1998 1999 1995 1996 2.000 forecast : US$ 13.3 billion

12. 96% 73% 74% 90% 78% 59% 1997 1998 1997 1998 1999 1999 Private sector share (%) Loan Portfolio Disbursements

13. BNDES Finances long-term investment BNDESPAR FINAME Equity participation Finances capital goods purchases and foreign trade BNDES group structure

14. 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 BNDESPAR

15. Operations cycle BNDESPAR recycling Investment Monitoring Divestment funding interest and dividends BNDES pay debt

16. Alwaysminoritystakes oftemporary nature Valuation is based on each firm’s prospective performance Investment may also be made indirectly, through one of itsclosed-end funds BNDESPAR offersspecial programsfor small and medium-sized technology-based businesses and emerging companies Investment highlights

17. Primarily through public offers in the domestic or international capital markets BNDESPAR often creates new financial products, coupled with derivatives, to promote liquidity and develop the capital market Divestment

18. Key BNDESPAR Figures US$ billion Dec-98 Dec-99 Jun-00 Total Assets Net Worth Market Value Stocks, funds & bonuses Convertibles Investment Divestment Number of Companies Net Profit (US$ million) 12.8 7.7 6.9 4.6 2.3 3.7 3.9 214 510 11.6 5.4 11.2 9.1 2.1 3.2 .6 197 366 11.6 5.6 10.4 8.3 2.0 .3 2.2 191 246

19. BNDES access to credit • 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 )

20. BNDES credit policy & procedures Exposure limits: sectors and clients Rating 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

21. Changes in SOE Corporate Governance Failure of performance contracts • More active board members (outsiders) • Minister as president of board • More transparent accounting practices • BNDES on board of directors of privatized companies with left overs in state hands

22. BNDES - The Brazilian Development Bank www.bndes.gov.br e-mail:financia@bndes.gov.br