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Market Focus : Latin Countries Rushing to Privatize : Mired in debt, governments are fast finding that the business of government isn't business.


BUENOS AIRES — While the former East Bloc pushes forward with its free-market reforms, several Latin American countries are quietly going through a similar ideological somersault, redefining the role of the state and trying to ease their debt burden in the process.

Governments, according to the emerging regional consensus, have no business running businesses. The "in" word now is "privatization," and some Latin American countries have made major strides.

Chile became a pacesetter for the region during the regime of Gen. Augusto Pinochet. But Argentina is being viewed as a test case for returning state-run businesses to private hands under a democratic government--a case whose success or failure is likely to influence similar programs in Brazil, Peru and perhaps other parts of the Third World.

Privatization fever has become so contagious here that the issue is no longer whether to sell off state-owned companies, but when and how--and at what price. Discarding a 50-year-old policy entrenched by the late Gen. Juan D. Peron, the Peronist government elected last year is racing to sell the phone company, the national airline and more than two dozen smaller businesses.

The opposition Radical Civic Union, the party that ruled from 1983 to 1989, is complaining bitterly about President Carlos Saul Menem's policies. But most objections focus on the nature of the planned privatizations--not the concept itself.

The critics, including some Peronists, worry that Argentina is in such a hurry--and is such a poor investment risk--that the sales will be giveaway bargains, to be rued later as imprudent auctions of valuable national assets.

The phone company, for example, looks likely to bring about $1 billion in real terms, although its value has been estimated at $4 billion.

Yet Menem, who took office last July, is determined to make the privatizations the cornerstone of his free-market economic program--and in the process reduce both the inflation-feeding government budget deficit and the huge foreign debt.

The trade unions, the heart of the Peronist party, fear the privatizations will mean widespread layoffs. They have managed to slow plans to sell the state-owned oil and railroad companies, but they have otherwise failed to turn back an idea that has found deep support among ordinary Argentines fed up with poor service and inefficiency in their nationalized firms.

Entel, the state telephone company, offers a case study of the promise and problems of privatization. It is the most advanced and among the largest of the selloffs, making it a lightning rod for all sides of the argument.

The sale is being managed by Maria Julia Alsogaray, a former legislator and daughter of one of Argentina's foremost conservative politicians, Alvaro Alsogaray. He is the scion of the right-wing Union of the Democratic Center, Menem's unlikely partner in the reform program.

The phone company is symbolic of everything that is wrong with Argentina, a country rich in resources and with a well-educated population--but also nearly bankrupt and scandalously inefficient. Inflation reached nearly 5,000% last year.

People wait years for a phone to be installed, then wait months for it to be repaired when it stops working. A rainstorm causes havoc. One recent downpour put 140,000 lines out of service.

"The system is in collapse," Alsogaray said recently. The company has 47,000 employees and is $1.5 billion in debt, with recent losses running at $50 million per month. She notes regularly that she was not appointed to run Entel but to sell it. "I wouldn't have accepted the job if it was to run Entel. That is an impossible task."

Her Margaret Thatcher style has helped raise the pitch of the Entel debate. She told a magazine that the president had smilingly called her a stubborn mule, to which she answered, "You need mules to get over the mountain range."

The Entel deal has attracted seven potential bidders, including Bell Atlantic Corp. of Philadelphia, Nynex Corp. of New York and GTE Corp. of Stamford, Conn., as well as companies from Spain, Italy, France and Britain.

Bidders for Entel are paired with foreign banks that hold part of Argentina's $60-billion-plus foreign debt; at a minimum, they will have to put up $214 million in cash, cover $380 million of outstanding Entel debts and, most important, pay off at least $3.5 billion of Argentina's foreign debt. Since that debt paper is worth just 15% or so of its face value in the free market because of Argentina's bad credit rating, the $3.5 billion in debt would cost somewhat more than $400 million.

The foreign buyer will own 60% of Entel. The rest will be sold to suppliers, employees and the public in the form of shares. Bids are to be submitted by the end of June and the whole process completed by October.

The profit-making national airline, Aerolineas Argentinas, is being sold under roughly similar terms, including a debt buyout of a nominal $1.5 billion.

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