Managing State Assets: The Case of Brazil

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

• Industrialization drive
• National security
• Nationalization of foreign assets (utilities)
• Verticalization and diversification of SOEs
• Bankrupt private companies

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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

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Total Results (1991-2000)
On February 18, 2000
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PND institutional structure
Inspection, control and follow-up
Support

• Federal Audit Court
• House of Representatives Privatization
  Sub-committee
• External auditors

• Ministers responsible for the companies
• Monetary Council
• Brazilian Central Bank

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PND privatization process
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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)

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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

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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

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BNDES along the years
2
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BNDES total 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
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Private sector share ()
Loan Portfolio
Disbursements
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BNDES group structure
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BNDESPAR

• 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

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

• Always minority stakes of temporary nature
• Valuation is based on each firms 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

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Divestment

• 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

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Key BNDESPAR Figures
US billion
Dec-98
Dec-99
Jun-00
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
Total Assets Net Worth Market Value Stocks,
funds bonuses Convertibles Investment Divestme
nt Number of Companies Net Profit (US million)
11.6 5.4 11.2 9.1 2.1 3.2 .6 197 366
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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 )

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credit policy procedures
BNDES

• 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

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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

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BNDES - The Brazilian Development Bank
www.bndes.gov.br e-mail financia_at_bndes.gov.br