The Hindu Business Line : Market realities soften Bolivian nationalisation

It was easy, a few decades ago, for a government to show its seriousness of setting right the wrongs in society — nationalise the assets that are declared critical for the country and claim to hold them on behalf of the poor. If the assets are locally owned, the previous owners were characterised as being parasitical in their acquisition and use of those assets. From Indira Gandhi to Ferdinand Marcos, even the non-communist governments were inspired by Lenin wanting to own the `commanding heights' of the nation. And when assets were owned by foreigners, it was seen as reversing neo-colonialism. Egypt tried that with the Suez Canal and brought on a war.

There is not enough space in this column to list the politicians who have used the nationalisation strategy, but there was a simple problem of management and economics that they did not understand. Powerful speeches can get the votes but good investors look for returns and good managers aim for efficiency. Due to other demands on the state exchequer, nationalised assets often languish for want of sufficient investment to keep them technologically current. The employees see their jobs as sinecure and cause the enterprise to deteriorate through low productivity, bleeding the assets and denying their compatriots the opportunity for more employment or better return.

Promise of nationalisation

When Mr Evo Morales became President in January, he pledged to lift his country out of poverty. Bolivia, one of the poorest countries in South America, has suffered from colonial (Spanish) exploitation and then from rapacious multinationals. Mr Morales, a former coca grower and a member of the country's indigenous Aymara community, promised nationalisation of mines. Apart from gas, the country's rich mineral reserves include tin, zinc, lead, silver, gold and wolfram. On the dusty roads of a campaign trail, the well-dressed executives of energy companies earning high salaries and declaring lavish dividends can look like blood-suckers of national assets who are denying prosperity to the poor. How simple would it be once in power — take back these assets and let the poor benefit! Unfortunately, the reality is more nuanced.

So Mr Morales announced a nationalisation of the country's gas industry on May 1, and gave foreign companies 180 days to sign new deals giving the government majority control or leave the country. Soldiers were dispatched to take control. The markets were upset and papers predicted the end of foreign investment in Bolivia. Unlike the old style nationalisations when the government took over full control, Bolivia wanted the companies to stay and continue to operate under more stringent conditions. An earlier law had raised the state's share to almost 50 per cent of production through higher taxes and royalties.

Soft nationalisation

Unlike post-colonial nationalisations, where the owners were foreigners in a far away country, Bolivia's moves angered its neighbours such as Brazil and Argentina, which are also led by Left-leaning leaders; they were worried about interruptions to their gas supplies. Brazil's government-owned company, Petrobras, was a major investor in Bolivia and one of those affected. A meeting of the leaders of Argentina, Bolivia, Brazil and Venezuela in May tried to sort out the issues of the needs of the producers and consumers. The countries and their companies are producers, but they are also consumers when they maintain subsidies for their domestic users. This meeting must have brought some of the Bolivian idealism down to the reality of how these businesses are run.

The suspense ended on October 31 when the government confessed that it lacked the funds to nationalise the mining sector. Instead, it opted for a `soft' nationalisation. Contracts with the companies Petrobras of Brazil, Repsol, a Spanish-Argentine company, and Total SA of France raised the state's share of revenues from 50 per cent to 82 per cent in the two giant fields and 60 per cent in the minor fields. Mr Morales can now declare political victory without having killed the golden goose. New contracts have also expanded exports of gas to Argentina. Negotiations with these and other companies involved are continuing over compensation and planned future investments to develop the industries.

Better regulation and shrewd negotiation can ensure the benefits of employment for the people and revenues for the state, while keeping growth of the industry through regular investment much better than nationalisation ever can. Bolivia's neighbour, Venezuela, also managed to force major oil companies to take a minority stake in the oil fields they previously owned and pay higher taxes and royalties. Soaring oil prices in the current energy environment meant that the oil companies could swallow these tough terms and still make money. Governments are only slowly learning the ropes of how to use smart negotiation techniques and market forces to get what they want at far less cost. Other Latin American governments, such as Peru and Ecuador are also in the same boat. Ecuador has passed a law that gives the government 50 per cent of oil company profits when oil prices exceed stipulated benchmarks.

Lesson from India

There is still one more lesson Bolivia needs to learn, and India can provide it. The Bolivian government, in deciding against nationalisation, has said that it has not given up the idea but only postponed the decision till 2007. The effect of such an announcement can be disastrous. Remember the Industrial Policy Resolution of 1948 in India? The government identified certain industries that it said would be reviewed and a decision taken on them after 10 years on whether they would be nationalised! With such a prospect, owners of enterprises in these industries will have no incentive to invest and grow the business; they may actually be tempted to bleed it. The realisation came to the Indian government with the Policy Resolution of 1956 when the Damocles' sword was removed but considerable damage had been done by then.

If the Evo Morales government does not immediately make it clear that it has no intentions of taking over assets, but only wishes to regulate how it is used, it will have shot itself in its foot and left a legacy of poverty for its successors.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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