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The findings, interpretations and conclusions expressed herein are en-

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Private Sector Development Departmen O
Advisory and Implementation Group
ARGENTINA PRIVATIZATION PROGRAM

A REVIEW OF FIVE CASES
Hafeez Shaikh
with
Manuel Angel Abdala
Christina Kappaz
Peter Lauter
Alfredo Visintini
For additional copies, please contact Ms. Burcu (akin at PSD, Tel: (202) 458-5672, Fax: (202) 477-1822
This work is dedicated to the late Mr. Jose "Pepe" Estenssoro, formner President of
Yacimientos Petroliferos Fiscales (YPF). Argentineans like him were responsible
for making the privatization program a reality and a success.
TABLE OF CONTENTS
ACKNOWLEDGMENTS vii
FOREWORD ix
EXECUTIVE SUMMARY: Main Findings and Lessons 1
PART I: SYNTHESIS: A Review of Five Cases 19

I. INTRODUCTION 21
II. NATIONAL PRIVATIZATION STRATEGY 22
1. The Role of Public Enterprises and Previous
Privatization Attempts 22
2. The 1989 Macroeconomic Setting and Privatization
Objectives 23
3. Legal and Institutional Framework 24
4. Elements of Strategy 25
5. Role of International Agencies 27
III. THE PREPARATION FOR PRIVATIZATION 28
1. Restructuring 29
2. Post-privatization Regulatory Systems 35
3. Additional Preparatory Steps 42
TV. TRANSACTION RESULTS 47
V OUTCOMES/IMPACTS 49
1. Fiscal Impact 49
2. Financial Performance 54
3. Operational Performance 55
4. Impact on Stakeholders 57
VI. LESSONS LEARNED 64
Appendix A: Bidding Consortia Membership 67

Appendix B: Privatization Transactions of YPF
Strategic Sale 72
PART II: CASE STUDIES 73

Case Study 1: Empresa Nacional de Telecomunicaciones
de Argentina (ENTel) 75
I. INTRODUCTION 75
1. The Company/Industry 75
2. Role of Government 77
iv Argentina Privatization Program
II. THE PREPARATION FOR PRIVATIZATION 77

1. Strategy and Institutional Arrangements 77
2. Restructuring 79
3. Post-privatization Regulatory System 81
4. Sales Procedures 83
III. TRANSACTION RESULTS 86
1. Bidding Process 86
2. Payment Arrangements 88
IV. OUTCOMES/IMPACTS 88
1. Fiscal Impact 88
2. Profitability 89
3. Productivity/Quality of Service 91
4. Investments 92

Appendix B: Regulatory Service Quality Requirements 98
Appendix C: Service Quality Before and After Privatization 99
Appendix D: Service Coverage Before and After
Privatization 100
Appendix E: Investment Levels Before and After
Privatization 101
Case Study 2: Servicios E1lctricos del Gran Buenos Aires

(SEGBA) 103
I. INTRODUCTION 103
2. Restructuring 108
1. Fiscal Impact 117
2. Profitability 119
4. Investments 122
Table of Contents v

Appendix B: Penalties on Power Outages at the
Distribution Level 129
Appendix C: SEGBA's Past Performance and
the New Regulatory Requirements 130
Appendix D: Comparative Service Coverage Before
and After Privatization 131
Case Study 3: Gas del Estado (GdE) 133

I. INTRODUCTION 133
4. Investments 148
Case Study 4: Obras Sanitarias de la Naci6n (OSN) 155

I. INTRODUCTION 155
vi Argentina PrivatizationProgram

4. Investments 173

Appendix B: Service Coverage Targets 178
Appendix C: Terms of the Concession for OSN 179
Case Study 5: Yacimientos Petroliferos Fiscales (YPF) 181

I. INTRODUCTION 181
1. Central Area Oil Reserves 192
2. Secondary Area Oil Reserves 194
3. Plan Argentina 195
4. The Privatization of Physical Assets and Activities 195
5. Domestic/International Public Offering of YPF Shares 197
3. Productivity/Quality of Output 200
4. Investments 201
BIBLIOGRAPHY 203
vii
ACKNOWLEDGMENTS
This work is a collaborative effort. Hafeez Shaikh was the team leader and
principal author. The case studies are based on background papers prepared by
Manuel Angel Abdala (ENTel, SEGBA), Alfredo Visintini (GdE, YPF), Christina
Kappaz, Margarita Bosch (OSN) and Yvette Leon (YPF). Peter Lauter helped with
the finalization of the cases and contributed to the Synthesis. Christina Kappaz, Tal
Wongse-Sanit and Burcu Cakin provided assistance at various stages of the study
Detailed review was undertaken by Kevin Young, Carlos Corti and Manuel Angel
Abdala. Valuable comments were also provided by Gerver Torres, Shyamadas
Banerji, Richard Mallon, John Speakman, Peter Scherer and Robert Taylor. The
study was undertaken in response to the request by the Argentinean Government
and with support from the Latin American (LAC) Region of the World Bank. We
are also grateful to the Argentinean managers of the privatizations and to the offi-
cials of the privatized enterprises for their help. In particular, we would like to
acknowledge the help of Mr. Juan Carlos Sanchez Arnau, former Undersecretary
for Privatizations inArgentina, for securing institutional support, and to Mr. Carlos
Eduardo Sanchez, Secretary of Commerce and Investments in Argentina, for his
comprehensive review and comments. From the LAC, we are particularly grateful
to Paul Meo, Patricio Millan and Myrna Alexander for their support and comments.
Finally, we thank Emily Evershed, Brenna Hearty, Marcy Rye and Kanitha Saleetid
for their steadfast assistance with the production of this report.
I
ix
FOREWORD
This Study, Argentina Privatization Program: A Review of Five Cases, was de-
veloped as a reference work to provide policy-makers and practitioners with prac-
tical information and guidance in their efforts to design and implement privatization
programs. The main obstacles in implementing national privatization programs
are: (i) lack of government commitment; (ii) lack of a decision making mechanism;
(iii) inadequate technical and institutional capacity for implementation; and (iv)
lack of financial resources. The Argentine experience shows how these problems
can be overcome and a large scale privatization program can be accomplished within
a short period of time.
This Study provides a review of the Argentine privatization program with a

focus on five major privatization transactions. It is designed to address three phases
involved in each privatization: (i) preparations for privatization; (ii) transaction
process and results; and (iii) early post-privatization outcomes. The case studies
presented here include the telephone company, Empresa Nacional de
Telecomunicaciones deArgentina (ENTel); the electricity utility, Servicios Electricos
del Gran Buenos Aires (SEGBA); the gas utility, Gas del Estado (GdE); the water
and sewerage company, Obras Sanitarias de la Naci6n (OSN); and the energy enter-
prise, Yacimientos Petroliferos Fiscales (YPF).
We are pleased to present this review of the Argentine privatization pro-

gram as part of the ongoing efforts of the Private Sector Development (PSD) De-
partment to disseminate best methods and cross-country experience of privatization.
The Study was supported in part by a grant from the Government of Japan.
Magdi Iskander Kevin Young

Director Manager
Private Sector Development Advisory and Implementation
Department Group
I
Executive Summary
Executive Summary:
Main Findings and Lessons
I. INTRODUCTION
Argentina's privatization program, initiated in 1989, was

unique in its scale (covered all major enterprises) and its pace (largely
accomplished in four years). Privatized enterprises included: the na-
tional airline, banks, railways, fuel, natural gas, electricity, telecom-
munications, ports, water and sewerage services, and manufactur-
ing including steel, various assembly operations and defense-related
industries. By 1993 the market value of privatized assets was esti-
mated to be at least US$18 billion.' The privatization program had
significant impacts on the economy: by 1993, it generated over US$8
billion in cash and reduced public external debt by over US$10 bil-
lion at face value and over US$4 billion in cash equivalents. It elimi-
nated the bulk of subsidies and resulted in higher tax revenues,
greater investment in infrastructure and improved quality of public
services.
This paper is a review of the Argentine privatization pro-

gram. It describes the national privatization strategy and analyzes
five major purification transactions. The cases in this study are: the
telephone company, Empresa Nacional de Telecomunicaciones de
Argentina (ENTel); the electricity utility, Servicios Electricos del Gran
Buenos Aires (SEGBA); the gas utility, Gas del Estado (GdE); the
water and sewerage company, Obras Sanitarias de la Naci6n (OSN);
and the energy enterprise, Yacimientos Petroliferos Fiscales (YPF).
The case studies focus on three questions: (1) How were the five
enterprises prepared for privatization? (2) What were the results of
the transactions? (3) What were the early post-privatization outcomes?
The insights gained from this analysis can be of use to policymakers
and practitioners involved in the design and implementation of
privatization programs around the world.
'Myrna Alexander and Carlos Corti, Argentina'sPrivati7ationProgram, Washington D.C.: The World
Bank, August 1993. p. 1.
2 Argentina PrivatizationProgram
II. NATIONAL PRIVATIZATION STRATEGY
1. PoliticalCommitment and Support
A notable feature of the Argentinean privatization program

was that it received strong support and public backing at the high-
est levels of the government, including President Menem. The
privatization program was not camouflaged under the guise of en-
terprise reform or restructuring. It was advocated and adopted
openly. A consensus was generated within the cabinet and the pub-
lic on the difficulty of sustaining loss-making public enterprises.
Privatization was viewed as a pragmatic response to the low invest-
ment, inefficiency and deteriorating quality of the services of the
public enterprises.
2. Macroeconomic Setting
The macroeconomic situation in Argentina was quite bad in

1989, when the government initiated major reforms, including
privatization: the annual rate of inflation was almost 5,000 percent,
the GDP had dropped 6.2 percent and the budget deficit was 11.5
percent of GDP The external debt reached US$62.2 billion (81 per-
cent of GDP) and the debt service to export ratio amounted to 50
percent. The Argentine people were thus more willing than previ-
ously to try drastic solutions. The large-scale privatization itself was
viewed as part of an overall strategy of economic reform. One aim
of privatization was to provide a financial cushion while other fiscal
reforms were consolidated.
3. Administration
Several central agencies were involved in the policy and

monitoring of the privatization process. These included the Bicam-
eral Congressional Commission, the special unit for privatizations
headed by an Undersecretary within the Ministry of Economy and
Public Works, to provide legal monitoring and oversight, and the
Sindicatura General de Empresas Publicas (SIGEP), the public
Executive Summary 3
enterprise auditing agency, to audit activities on a case-by-case

basis. However, the key feature of Argentina's privatization ad-
ministration is that the implementation was largely decentralized.
Large privatization transactions were executed by special commit-
tees and managed by Secretaries of State or interventors who had
considerable autonomy in managing the process with assistance
from consultants.
4. InternationalAgency Support
Argentina's privatization program received considerable as-

sistance from international donor agencies, particularly the World
Bank. Once the government's commitment to the program was es-
tablished, the World Bank utilized several ongoing loans, e.g., a Pub-
lic Enterprise Reform Adjustment Loan (PERAL), a Finance Sector
Adjustment Loan (FSAL) to provide support, in addition to a grant
and new loans. In particular, the Public Enterprise Reform Execu-
tion Loan (PEREL) of US$23 million was devoted to technical assis-
tance for implementing the transactions of various enterprises.
III. THE PREPARATION FOR PRIVATIZATION
Some of the main findings on the preparation of the five

enterprises for privatization are outlined below.
1. Restructuring
Restructuring of enterprises prior to privatization was clearly

linked to preparing the enterprise for sale. No effort was made to
"prop up" the companies by investing more money into making
them perform better prior to privatization.
1.1 Organizational Restructuring

One of the striking features of Argentina's privatization is
the degree of de-monopolization carried out prior to privatization.
Four enterprises -ENTel, SEGBA, GdE and YPF- underwent ex-
tensive organizational restructuring and breakup to promote post

privatization competition and, as in the case of YPF, to make the
transactions easier. The water utility, OSN, was transferred as is to
maintain the system's integrity The difficulty in its breakup was
due to the involvement of several levels of government, to the de-
sire for speed and to technical reasons.
1.2 Employee Restructuring

The numbers of employees affected by restructuring varied
across enterprises. In ENTel there was limited labor reduction (1,431
workers, representing 3.2 percent of the employees) and in GdE and
OSN no firings took place. In SEGBA, the number of employees was
reduced by 22 percent prior to privatization. In YPF the work force
was reduced by almost 27,000 employees (72 percent of the total).
However, this reflects the effects of spin-offs.
Various forms of employee payments were used to secure
employee support. In all cases, except for the gas company, GdE, 10
percent of the shares (Class C shares) were offered; in the case of the
gas company, GdE, 3-5 percent shares were offered because of the
large size of the company in relation to the number of employees.
Generous severance packages, ranging between US$7,000 and
US$10,000 per employee, were provided. In the case of YPF, where
the most drastic reductions took place, many workers (about 5,000)
received supplier contracts for their approximately 200 newly formed
private businesses. The severance payments were financed by World
Bank funding, government sources and, as in the case of SEGBA,
jointly by the public enterprises and the new owners.
1.3 Financial Restructuring

In all cases, except GdE, financial restructuring was under-
taken, the balance sheets were cleared prior to privatization and the
government assumed a large portion of the enterprises' liabilities
which included write-offs from other public enterprises and Trea-
sury books. The total liabilities of the five enterprises were US$21.1
billion, out of which the government assumed US$15.2 billion (72
percent). This included US$4.5 billion (92 percent) of SEGBA's
liabilities2 , US$1.8 billion (82 percent) of ENTel's, US$0.2 billion (9
2US$3.02 billion represents SEGBA's bad debts to other PEs, social security system and the Treasury,
into a total of
therefore in reality only US$1.43 billion was assumed by the govemment which translates
US$12.2 billion for all five enterprises.
Executive Summary
5
percent) of GdE's, US$0.2 billion (100 percent) of OSN's and US$8.5

billion (76 percent) of YPF's.
2. Regulation
The privatization of utilities required the creation of post-

privatization regulatory systems involving: (1) the setting up of regu-
latory agencies, (2) the adoption of rate-setting rules, sometimes by
law and (3) the establishment of performance standards for the
privatized firms to be monitored by the regulatory authorities.
2.1 Rate-setting Procedures

Under the new regulatory systems, the privatized firms fac-
ing direct competition, such as the telecommunications company,
Startel (value-added services); the power generation firms Central
Costanera, Central Puerto, Central Dock Sud and Central Pedro de
Mendoza; railway companies (which competed with trucks); and
the oil and natural gas producers (including YPF), were allowed to
set their own prices. For others new rules for setting rates were es-
tablished. Firms subject to these rules included basic and interna-
tional telephone services furnished by ENTel's three new compa-
nies; new electricity distribution firms created out of SEGBA; natu-
ral gas transmission and distribution by GdE's new companies; and
water and sewerage services provided by the water utility
Rules for rate-setting were simple and clear. This injected
transparency, made administrative interventions difficult, reduced
cross-subsidization across consumer groups and brought prices
closer to market prices.
* The rates for the telecommunications industry are adjusted

annually according to changes in the U.S. Consumer Price
Index (since the Argentine peso is linked to the U.S. dollar)
minus an X percentage for efficiency
* The rates for electricity end-users are based on (1)the whole-

sale generation market price, (2) the distribution value
added (VAD), and (3) price rebalancing factors. The VAD
moves in line with the U.S. Consumer Price Index and is
adjusted by a technological factor every year.
6 Argentina Privatization Program
* Rate-setting in natural gas is based on the principles of op-

timal pricing. The well-head price of natural gas was de-
regulated and is now determined through negotiations by
producers, including the privatized YPF, the distribution
companies and large customers. The rates charged to cus-
tomers, set in U.S. dollars, are adjusted every six months
according to the U.S. Producer Price Index (PPI). Price dif-
ferentiation is adopted to promote the efficient use of the
transmission and distribution networks. The rate regime
must be reviewed and, if necessary, adjusted every five
years.
* The new OSN water rate was determined through bidding.

The concessionaire that offered to provide water to the us-
ers at the lowest rate-given other conditions-was
awarded the contract. The winning bid represented a re-
duction of about 27 percent in the rate prevailing at the
time of privatization. Extraordinary rate increases are al-
lowed only if an index comprised of 14 different types of
OSN operating costs increases by more than 7 percent.
2.2 Regulatory Performance Standards

The regulatory targets, included in the privatization con-
tracts, vary across firms but relate mostly to the quality of service
and new investments.
* In telecommunications, during the initial licensing period,

1991-96, the southern company (renamed Telef6nica) is re-
quired to add 625,000 new customers and to secure a li-
cense extension beyond 1996, add 811,000 new customers.
The company is also required to double the number of pub-
lic phones to 12,948 within the same period. The northern
company (renamed Telecom) is required to add 609,500 new
customers during the initial licensing period (6.2 percent
annual growth rate) and 729,000 new customers to secure a
license extension. The service quality requirements for
Telef6nica and Telecom include increasing call completion
rates of local, long distance and international calls, increas-
ing operator efficiency in assistance, reducing waiting times
Executive Summary 7
for new connections and repairs (see Appendix B of the

ENTel case for details). Failure to achieve the targets dur-
ing two consecutive years could cause a company to lose
its exclusivity rights.
* The new electricity distribution firms, created out of SEGBA,

face targets for a variety of product and service quality in-
dicators. (See Appendix B and C in the SEGBA case for
details). Variations in voltage and the frequency of power
outages are monitored and are subject to penalties. The
penalties on voltage variations are returned to customers
in the form of lower rates.
* During 1993-97, the winning bidders of the GdE conces-

sions were required to invest US$57 million per year in trans-
mission and a total of US$286 million in distribution.
* Mandatory expansion and investment targets were also set

for OSN. The winner of the OSN concession had to invest
over US$1 billion during the first five years of operation
and US$4 billion over the entire life of the concession.
IV. TRANSACTION RESULTS
1. Bidders
Competitive bidding was the norm. The number of bidders

usually ranged from three to six per transaction (as an exception,
SEGBA's power generation company Central Costanera received
only one bid; it was accepted). Typically the bidding consortia con-
sisted of a major financial company (e.g., Citibank, J.P. Morgan), an
experienced international operator (e.g., BellAtlantic, Telef6nica) and
an Argentinean group (e.g., Perez Companc, Techint) (seeAppendix
I for details of the bidders).
2. Decision Criteria
A two-envelope approach was utilized in all privatizations

to strategic investors. The first envelope contained the technical
qualifications of the bidders and the second the financial offer. If the
technical qualifications were fulfilled, the decision then was based
solely on the financial offer.
The financial offer itself was usually based on a single vari-
able making comparison easy In the case of the telephone compa-
nies, for example, the bidders were expected to pay a predetermined
amount in cash (US$114 million for the southern company; US$100
million for the northern company) and then bid solely on the amount
of external debt retired. For SEGBA's generation companies bidding
was based solely on cash. For OSN, three pre-qualified groups bid on a
single number: the greatest reduction in the rates of water for consum-
ers.
3. Closed Execution
Following ENTel's privatization which involved a post-bid-
ding renegotiation of contract terms, bidders had to include a signed
contract in their price offer envelope. This closed execution feature
accelerated the pace of closure of the transactions and considerably
reduced the post-award renegotiation of terms.
V. OUTCOMES/IMPACTS
Preliminary results indicate that privatization has contrib-

uted significantly to the government's fiscal position, improved the
financial and productivity performance of the firms under private
ownership and benefited most stakeholders.
1. Fiscal Impact
For all five enterprises, the fiscal impact was positive and
significant.
Executive Summary 9
* The sale of the five enterprises raised revenues of about

US$12.4 billion. The revenue proceeds consisted of US$6.4
billion from sale to strategic investors (US$2.9 billion in cash
and US$3.5 billion in the cash equivalent of retired debt).
An additional US$6 billion in cash was raised from public
offerings of the shares, mostly of ENTel and YPF.
* The face value of debt retired equaled almost US$9.0 bil-

lion.
* Prior to privatization, none of the five enterprises paid any

taxes; after privatization all five are paying taxes. Telephone
companies have paid over US$800 million during the first
four years after privatization. SEGBA firms paid at least
US$49 million up to the first quarter of 1995 (of this amount,
Central Puerto paid US$2.3 million and Costanera US$1.7
million during the first quarter of 1995). GdE paid US$146
milion in 1993 and US$156 million in 1994 as taxes on in-
come and assets; Aguas Argentinas, the OSN concession-
aire, paid US$8.3 milion in 1993, US$19.8 million in 1994
and US$19.4 million during the first three quarters of 1995.
The accrued income tax amounted to a total of US$11.3
million at the end of this period; the new YPF paid a total
of US$109 milion and US$88 milion as taxes in 1993 and
1994, respectively These included income taxes of US$28
million and US$11 million in respective years (see Table 11
of Synthesis).
* Indirect taxes, resulting from higher output produced by

the privatized firms, have also increased. For example, the
value added tax (VAT) paid by the telephone companies
has tripled since privatization. Aguas Argentinas had to
pay an 18 percent VAT which was not paid before by OSN.
In 1994, the rate was increased to 21 percent.
* Four out of five firms (the exception being YPF) were, prior
to privatization, heavy loss-makers and were dependent
on government support to cover operational deficits. After
privatization, government subsidies are no longer paid. The

total value of savings from subsidies, for all Argentinean
privatizations is estimated to be US$1.5 billion per year. 3
2. FinancialPerfornance
All five firms show improvements in financial performance

after privatization. The estimate for the combined losses of the four
enterprises (YPF made a profit) in the last year of their public own-
ership is over US$2.0 billion. Under private ownership, the profits
of these enterprises in 1994 were almost US$2.0 billion (see Table
12), representing an overall increase of US$4.0 billion.
* ENTel's pre-privatization losses were turned into profits

reaching US$731.6 million in 1994.
* In 1991, the last full year prior to privatization, SEGBA's

losses were US$563 million. These losses were reduced ev-
ery year and by 1994 turned into profits of US$54.1 million.
* GdE's loss prior to privatization, in 1992, was US$841 mil-

lion. The companies created out of GdE showed profits fol-
lowing privatization. In 1994, they earned US$505 million
in profits.
* The OSN concessionaire made losses in 1993 but generated

profit of US$25 million in 1994. Net profit at the end of
1995 was US$54 million.
* YPFs profits jumped from US$256 million in 1992 (before

privatization) to US$706 million in 1993. In 1994, YPF gen-
erated a US$538 million profit.
3
See Alexander and Corti, Argeina's Priv'atizarionP-ogram, World Bank, 1993.
Executive Summary 11
3. Productivity/Qualityof Service
An evaluation of post-privatization performance for tele-

phone and electricity reveals strong improvements in performance
across several productivity and quality of service measures. Produc-
tivity gains are also observable in the gas sector and the ex-OSN.
YPF, because of massive restructuring prior to privatization, is more
difficult to evaluate. In no case is there evidence of a worsening pro-
ductivity performance.
* The physical performance of ENTel's new telecommunica-

tions companies gradually improved: by 1994, the new com-
panies together had installed 63 percent more lines than
under public ownership four years before. The lines-in-
service to employee ratio increased from 72 to 155. The num-
ber of public phones jumped by 143 percent, from 24,178 to
58,844. The international call-minutes almost doubled; and
massive new investments went into the digitalization net-
work and the provision of value-added services.
* SEGBA's newly privatized companies improved their physi-

cal performance following privatization on a wide range
of indicators. At the wholesale level, both power capacity
and energy have been enough to cover demand. The prob-
lem of outages occurred at the retail level, mainly due to
old equipment and infrastructure in the distribution com-
panies. The electricity output to employee ratio in the two
new distribution companies increased from 0.7 for SEGBA
in 1991 to 1.6 for Edesur and 1.9 for Edenor in 1993. The
customer to employee ratio also increased for both distri-
bution companies: from 207 for SEGBA in 1991, to 374 for
Edesur and 482 for Edenor in 1993. The generation and
distribution companies have undertaken new investments
in 1993-94 and this is expected to eventually solve the re-
maining capacity and outage problems.
* During the first half of 1993 compared with the same pe-
riod in 1992, before privatization, the quantity of gas car-
ried by the two new transmission companies increased by
11 percent while the quantity delivered by the eight distri-

bution companies increased by 10 percent. By 1994, total
expanded capacity reached 12 million cubic meters a day
at a cost of US$138 million.
* OSN's concessionaire, in the first six months, undertook

emergency repairs, and modernized the maintenance sys-
tem. Moreover, major investments were made, partially
financed by the IFC, to expand water and sewage treat-
ment and distribution infrastructure. The system's total
water production capacity increased by 22 percent per day,
its pumping capacity grew by 10 percent and water
losses were reduced to the contract target of 25 per-
cent from 40 percent under public ownership.
* The physical performance of YPF is difficult to evaluate

because of the extensive physical restructuring prior to
privatization. Nevertheless, YPF has become one of the
more profitable oil companies in the world; it is listed on
the New York Stock Exchange.
4. Impact on Stakeholders
The impact of privatization on the key stakeholders-the gov-
ernment, consumers, investors and employees-has been favorable.
4.1 Government
The Government of Argentina was a clear winner. The priva-
tization sent a strong signal to the entire world about the commit-
ment of the Argentine Government to the restructuring of the
economy and increased the government's credibility. Privatization
proceeds helped decrease the nation's external debt and attracted
foreign investors to Argentina. The elimination of budget transfers
to money-losing enterprises and the new taxes from the profitable
privatized enterprises also improved the government's fiscal condi-
tion. The government also gained from the appreciation in the value
of the residual shares in the privatized companies.
4.2 Consumers
The impact of privatization on consumers depends upon sev-
eral factors, including the quantity and quality of services and prod-
ucts offered, new investments and price increases. On balance, the
impact on consumers appears very positive.
1. In almost all instances, the quantity of output and ser-
vices provided by the firms after privatization is higher
than their pre-privatization levels.
* The privatized telephone companies installed 63 per

cent more lines over 1990-94 and 143 percent more pub-
lic telephones over 1989-94.
* The firms created out of SEGBA increased the total en-

ergy distributed by 31 percent over 1991-94.
* The privatized GdE companies increased the level of

gas distributed by over 10 percent in the first six months
of operation and helped avert a gas shortage.
* Between May 1993 and December 1995,Aguas

Argentinas increased water supply coverage by 10 per-
cent and expanded sewerage services by 8 percent.
* YPF increased crude oil output from 14.3 million cubic

meters in 1992 to 20.0 million cubic meters in 1994.
Natural gas production, however, declined from 11.1
billion cubic meters in 1992 to 10.7 billion cubic meters
in 1994, as a consequence of the firm's policy
2. The quality of services also improved in the four public

service utilities, most visibly in the telephone companies
and the water utility.
* During the period 1990-94, the new companies created

from ENTel improved in international call completion
rates from 39 percent to 55 percent (Telintar), and in
domestic long distance call completion rates from 30

percent to 93 percent (Telecom) and to 99 percent
(Telef6nica). The proportion of pending repairs de-
creased from 2.5 percent in 1990 to 0.4 percent in 1992
while repair waiting time declined from 11 days to 2.5
days.
* Aguas Argentinas reduced, within six months, the

number of pending claims for leaks/breakdowns from
1,600 to 700 for water and from 3,000 to 1,900 for sewer-
age drains. It also reduced the response time for com-
plaints from 80 to 48 hours for water and from 140 to 80
hours for sewerage.
3. While the investments-often mandatory-and other
changes are providing major expansions in both quality
and quantity to benefit consumers, the effect of
privatization on prices is more difficult to determine. In
some instances the government had adjusted the prices
as part of the rationalization prior to privatization. Some
telephone and electricity prices have been rebalanced to
prevent cross-subsidization and promote better utiliza-
tion of resources. Consumers have gained due to declines
in the price of water, most categories of electricity, some
gas categories and telephone installation charges.
* In the case of electricity, prices declined by 10 percent

(between September 1992 and February 1995) for all
customer categories, except the low consumption resi-
dential group. Low-volume residential customers'
nominal rate increased by 30 percent to eliminate cross-
subsidies and rebalance the rates. Furthermore, fixed
charges increased for all customers by 28 percent.
* In the case of OSN, prices of water actually decreased

by approximately 27 percent as a condition of the trans-
fer to Aguas Argentinas. Subsequent price increases
were supposed to be ruled out for at least five years.
However, Aguas Argentinas filed for a tariff increase
one year after privatization and regulators granted such
an increase.
* For most consumers of gas, the rate rebalancing and

price differentiation adopted after privatization to some
extent have meant an overall price increase. However,
for certain customers the prices have declined. Also
due to the elimination of the fuel tax that was trans-
ferred to the distribution companies, the residential
customers have been buffered.
4. The prices are linked to the movements of other price
indexes and therefore cannot change dramatically
4.3 Investors
Strategic investors have benefited from privatization. These
benefits were due primarily to capital gains resulting from the ap-
preciation of the value of the company and higher profits. For ex-
ample, by January 1995, the combined value of Telef6nica and
Telecom shares increased, from the US$1.16 billion, paid for them
by the strategic investors, to US$11.5 billion. At the same time, the
value of the shares of Central Puerto, one of the electricity genera-
tion companies created out of SEGBA, was 2.12 times higher than
what the consortium paid for them. Shares for Central Costanera
(another electricity generator) were valued 2.33 times as high as at
the time of privatization. In the case of YPF, the initial share price at
the time of privatization was US$19. After privatization, the value
reached a peak of US$29.6 in February 1994. By April 1996, how-
ever, the price declined to US$22, but the company continued to pay
dividend to its shareholders.
Public investors, in general, obtained capital gains follow-
ing the initial public offering of shares. In the case of Telecom and
Telef6nica, public investors did not do so well for the first two years
as the initial share price was high. Nonetheless, both companies are
now trading at higher prices than their initial values. Central Puerto
and Costanera's public investors have also done well so far, although
the gains are much more moderate than those of the telecommuni-
cations companies.
4.4 Employees
The overall impact of privatization on the employees of the
five public enterprises was mixed. Workers who retained their jobs
clearly benefited. Those who lost their jobs (approximately 27 per-
cent of the total; the reductions ranged between 17 percent [ENTel]
and 47 percent [OSNI) were cushioned by a variety of measures in-
cluding generous severance payment packages, training programs,

etc.
VI. LESSONS LEARNED
The big lesson from the Argentine experience is that

privatization on a large scale can be accomplished within a short
time period. This finding is important because few countries have
been able to privatize so quickly across such a broad range of indus-
tries. Since Argentina was able to privatize on a large scale with
speed and transparency the operationally relevant question is: how
were they able to do that and what can other governments pursuing
privatization learn from them?
In Argentina, as in other successful privatizing countries, a
remarkable feature has been the explicit and sustained commitment
of the government to privatization. The most powerful expression
of this commitment has been the willingness of the head of the gov-
ernment, President Menem, to champion the case for privatization.
No country in the world has privatized on a large scale without the
express and publicly articulated support of the head of the govern-
ment. Support from the highest level of government is critical in
overcoming the resistance of powerful interests, including certain
ministers, and evolving a broad-based consensus.
If political commitment is ensured, the main impediments

to privatization are lack of a decision-making mechanism and lack
of technical capacity for implementation. The Argentineans were
able to make swift progress by keeping the policymaking and moni-
toring centralized, decentralizing the implementation process, fix-
ing responsibility on individuals for specific transactions and rely-
ing heavily on consultants. By assigning the task of privatization to
individual interventors accountability for the pace and quality of
the transactions could be better fixed. The potential resistance of
incumbent managements was also diminished by assigning execu-
tive responsibility during the transition to the interventors. Gov-
ernments, serious about privatization, may consider, as a first step,
replacing the chief executive (CE) of the firm selected for
privatization. The incumbent CEs are usually opposed to privatiza-

tion and work in many ways to obstruct and slow down the process
while hoping for a change of policy Replacing the CE with another
individual with a clearer mandate for privatization and less attach-
ment to the status quo-itself a sign of government seriousness-
will contribute to the pace of reform.
The Argentine experience reveals the importance of estab-
lishing appropriate regulatory framework prior to privatization.
Especially, when large transactions with complex industry structures
are concerned, such as telecommunications, gas and electricity, the
role of regulatory agencies becomes crucial. In Argentina, this issue
was not fully addressed before the privatization of the telecommu-
nications utility, however, subsequently, in the gas and electricity
sectors, new laws were enacted and regulatory agencies were estab-
lished prior to privatization. Not surprisingly, today among these
three sectors, the regulatory agencies set up for gas and electricity
function the best.
Another important lesson of the Argentinean privatization
experience is that privatization, particularly of large enterprises, re-
quires resources. There is a period of time before the revenue pro-
ceeds start coming in, when the government has to sustain the pro-
gram from its own resources. Governments and designers of na-
tional programs have in many cases underestimated and not allo-
cated the amount of resources required up-front for launching a major
program. The resources required for setting up the institutional ca-
pacity, conducting preparatory studies, recruiting financial, legal,
technical and marketing advisers and establishing regulatory frame-
works can be huge, and if not mobilized in a timely fashion, can ad-
versely affect the launch and sustainability of the program. In many
countries privatization programs are faltering because the governments
have not backed up their public pronouncements with a sufficient
amount of resources to complete the transactions. TheArgentineans,
again reflecting government resolve, spent the resources necessary
and assigned very good people to complete the transactions.
A related lesson is that funds and support from international
agencies can be acquired for privatization, and other countries can
learn from the Argentinean experience in this area. Argentina is
somewhat unique among the successful privatizers in utilizing the

resources of international agencies, particularly the World Bank. It
diverted existing World Bank loans toward privatization, acquired
a new technical assistance loan and a Japanese founded grant solely
for privatization, and received advisory assistance from World Bank
staff and consultants.
The Argentine Government began aggressively implement-
ing the privatization program immediately after coming into power.
Perhaps there is a lesson here for other governments, particularly
those newly elected, with a fixed term. It may be better to start the
privatization early in the tenure as there is a window of opportunity
when there is initial goodwill toward the government. Also, it takes
at least a year or two for major transactions to be completed and to
show benefits to the consumers in terms of improved quality of ser-
vice and expanded coverage.
There are many lessons related to the implementation of the
program, which are of relevance to countries trying to improve the
speed, quality and transparency of their privatization programs.
Some of these notable features of Argentina's program include: closed
execution (i.e., inclusion of the draft contract in the bidding to mini-
mize post-award negotiations), the two-envelope model of select-
ing the bidder (i.e., pre-qualification followed by decision based
solely on price via competitive bidding) and the unwillingness to
prop up firms prior to privatization. It is important to note that
many of these lessons were learned by doing by the Argentineans
themselves. There was an evolutionary aspect to the program, with
the quality and transparency of the latter privatizations (e.g., elec-
tricity, gas, water) considered generally superior to the earlier ones
(e.g., airlines, telecommunications).
PART I
SYNTHESIS: A REVIEW OF FIVE CASES

Synthesis 21
A Review of Five Cases
L. INTRODUCTION
Argentina's privatization program, introduced in 1989, was

unique in its scope (covered all major enterprises) and the speed
with which it was completed (largely finished in four years). It cov-
ered both competitive enterprises and monopolies and included:
the national airline, banks, railways, fuel, natural gas, electricity, tele-
communications, ports, water and sewerage services, manufactur-
ing including steel, various assembly operations and defense-related
industries. By 1993 the market value of privatized assets was esti-
mated to be at least US$18 billion.'
Privatization had a significant impact on the Argentine
economy. By 1993, privatization had generated around US$8 billion
in cash and had reduced public external debt by over US$10 billion
at face value and over US$4 billion in cash equivalents. The bulk of
subsidies to the former public enterprises were eliminated.
Privatization also contributed to higher output, investments and in-
creased competition in the economy
The objective of this paper is to review the Argentinean priva-
tization program. It describes the national privatization strategy
and analyzes five major privatization transactions. The cases in-
cluded in this study are: Empresa Nacional de Telecomunicaciones
de Argentina (ENTel), the national telecommunications enterprise;
Servicios Electricos del Gran Buenos Aires (SEGBA), the Buenos Aires
Metropolitan Area electricity supplier; Gas del Estado (GdE), the
natural gas transmission and distribution company; Obras Sanitarias
de la Naci6n (OSN), the provider of water and sewerage services in
the Buenos Aires Metropolitan area; and Yacimientos Petroliferos
Fiscales (YPF), the national oil company. The case studies focus on
three questions: (1) How were the five enterprises prepared for
privatization? (2) What were the results of the transactions? and (3)
What were the early post-privatization outcomes? The insights gained
and the conclusions drawn from this analysis can be of use to
IMyma Alexander and Carlos Corti, Argentina'sPrivsatization Program,Washington D.C.: The

World Bank, August 1993, p. 1.
policymakers and practitioners involved in the design and imple-

mentation of privatization programs around the world.
The paper is divided into six sections. Following the Intro-
duction, Section Two provides an overview of Argentina's national
privatization strategy. Sections Three, Four and Five are based on
the case studies. Section Three discusses enterprise preparations,
Section Four provides results of the transactions, while Section Five
evaluates post-privatization outcomes. Finally, Section Six presents
the major lessons learned from Argentina's privatization experience.
II. NATIONAL PRIVATIZATION STRATEGY
This section is an overview of Argentina's national privati-

zation strategy. It reviews the role of public enterprises in the
economy, past privatization attempts, the macroeconomic setting,
the legal-institutional framework, specific strategy measures and
the administration of the national privatization program.
1. The Role of PublicEnterprises and Previous

PrivatizationAttempts
Public enterprises (PEs) played an important role in the

Argentinean economy as part of an economic development strategy
introduced in the 1940s. Major firms in industries such as telecom-
munications and railroads were nationalized. New public enter-
prises were established in the electricity, natural gas and steel in-
dustries. By 1989, there were 297 PEs of which 260 were in the non-
2
financial and 37 in the financial sectors. More than half of them
were under federal jurisdiction, with the remainder under provin-
cial and municipal control.
The 1989 privatization program was not the first attempt to
reduce the state's role in the economy Huge operational losses, the
lack of new investments and the perception of low quality output
generated various attempts-though feeble ones-to privatize. Pe-
ripheral programs were introduced between 1958 and 1980 in the
petroleum and natural gas industries. In 1986 the failed Megatel
Plan tried to obtain customer financing for the expansion of tele-
2Alexander and Corti. p. i.

Synthesis 23
phone services. In 1987 a bid was made to partially privatize the

telecommunications industry All previous attempts at privatiza-
tion were, however, limited in scope, were not rigorously imple-
mented and failed to reduce the size of the public sector.
2. The 1989 Macroeconomic Setting and Privatization

Objectives
By 1989, Argentina's macroeconomic situation was alarm-

ing: the annual rate of inflation was almost 5,000 percent and the
GDP had dropped by 6.2 percent. The budget deficit was 11.5 per-
cent of GDP, the external debt reached US$62.2 billion (81 percent of
GDP) and the debt service ratio amounted to 50 percent. The poten-
tial of the economy, rich in natural resources and with an educated
labor force, remained unutilized. The newly elected government
recognized the need for drastic action. It introduced a large-scale
macroeconomic stabilization program, began restructuring the public
finances and adopted privatization.
The privatization strategy developed in mid-1989 was dic-
tated by the need to take swift action to halt the worsening macro-
economic balances and to increase economic efficiency. The
privatization of the loss-making PEs was expected to have a posi-
tive fiscal impact through transaction proceeds, the elimination of
operational subsidies and higher tax revenues under private own-
ership. Privatization was expected to reduce budget deficits in the
short run and to diminish the public debt servicing burden in the
long run. Privatization revenues were also viewed as an effective,
non-inflationary way to reduce the huge external debt which threat-
ened economic stability. Privatization of the large PEs, including
utilities, would also signal to the world the government's commit-
ment to economic reform. At the micro level the objectives included
the improvement of enterprise efficiency, an increase in the quantity
and quality of output, higher investment levels and, in conjunction
with de-regulation and import liberalization, increased enterprise
competitiveness.
As a consequence of a series of economic policy debates and
past failures, by 1989 the public was more receptive than ever to
drastic economic solutions and to the privatization of PEs. The real-
ization that government resources were not available to improve
and expand PEs had begun to take hold. Opposition political par-
ties and labor unions, even when opposed to privatization, objected
less than in the past. Above all, the government was firm in its
resolve and this contributed to an atmosphere in which privatization
could be pursued on a large scale.
3. Legal and InstitutionalFramework

The Menem Administration quickly obtained Congressional
approval of two laws which made rapid and comprehensive
privatization possible. President Menem had agreed to take power
six months early from departing President Alfonsin if the opposi-
tion, the UCR, agreed to support him in the Congress with the pas-
sage of the two laws. The Economic Emergency Law of 1989 en-
abled the government to suspend transfers and subsidies to PEs and
to apply the national treatment principle to foreign investors. The
Public Sector Reform Law, issued in the same year, authorized Con-
gress to decide which PEs to privatize, declared a state of emergency
for all PEs for one year with the option of extending the measure for
a second year, and suspended all legal actions against the state for
two years. This precluded the filing of lawsuits which could have
delayed the privatization process. The Law also authorized differ-
ent methods of privatization, such as the sale of assets, licensing,
leases with or without purchase options, management contracts, con-
cessions and the issue of exploration permits. It allowed full or par-
tial asset transfers through public bidding to strategic investors and
through public share offerings to public investors in domestic and
foreign capital markets. It authorized the clearing of enterprise bal-
ance sheets and the assumption of liabilities by the Treasury, and the
retirement of domestic and external debt through privatization pro-
ceeds.
The two laws enabled President Menem to issue privatization
decrees without Congressional approval and thus to cut through
the political and legal thicket. Decrees were issued to transform the
legal status of PEs into joint stock companies, to break up large en-
terprises into smaller units through restructuring, mergers, spin-offs
or liquidation and to facilitate privatization in other ways.
The Public Sector Reform Law also established oversight in-
stitutions and procedures to ensure transparency and accountabil-
ity. A Bicameral Congressional Commission was created to provide
legislative oversight while the Sindicatura General de Empresas
Publicas (SIGEP), the public enterprise auditing agency, was autho-
rized to monitor activities on a case-by-case basis.
Synthesis 25
The Public Sector Reform Law put the Ministry of Economy

(later amalgamated into Ministry of Economy and Public Works) in
charge of the administration of the privatization process. However,
the planning and implementation of specific industry privatizations,
including regulatory activities, were the responsibility of the secre-
tariats in the same ministry. The responsibilities of the
Undersecretary for Privatization were (1) to establish standard pro-
cedures providing maximum transparency (36 uniform stages from
the decision to privatize until the ownership transfer) and standard
documents for sale (pliegos), (2) to set detailed calendars following
established procedures by decree with subsequent modifications
subject to ministerial decisions and approvals, (3) to monitor the
whole process on behalf of the Secretary of Economics and (4) to
implement the Employee Stock Ownership Program, Programa de
Propiedad Participada (PPP).
Even with such centralized arrangements, the privatization
process was largely decentralized. Individual privatization projects
were prepared and executed by special committees established by
the minister and the industry secretary, and managed by interventors
or trustees. Committees were assisted by international and local
legal, technical and financial experts. These experts developed the
various privatization terms, conditions and procedures. Many of
their activities were financed through World Bank loans, and the
Bank's staff helped develop the processes to choose privatization
consultants and to supervise the subsequent work.
In addition to managing the privatization process, the inter-
ventors for individual firms were also responsible for the uninter-
rupted functioning of enterprises and had the authority to make all
relevant decisions.
4. Elements of Strategy
The privatization program became a key element of the over-

all macroeconomic strategy coordinated by Economy and Public
Works Minister Domingo Cavallo, after he took over in January 1991,
even though it had been initiated under the earlier minister, Erman
Gonzales. In 1991 the government established the Convertibility
Act which fixed the exchange rate of the austral at parity to the U.S.
dollar and prohibited the issue of local currency not fully backed by
foreign exchange reserves. It also subjected exchange rate adjust-
ments to Congressional approval. Together with other economic
policy measures, the act reduced inflation, bolstered the confidence

of foreign investors in the Argentinean economy and indirectly
boosted the privatization program.
To obtain the support of domestic stakeholders, such as the
general public, labor unions, the provincial governments and the
military, the government introduced several measures. Some of the
privatization revenues generated were earmarked for the social se-
curity system. Retired or laid-off employees received official sever-
ance payments. Employees of the privatized companies received
10 percent of the shares under PPP, to be paid through future divi-
dends and profit sharing plans.3 In the case of the national oil en-
terprise, Yacimientos Petroliferos Fiscales (YPF), provincial govern-
ments were given shares in the restructured company and received
part of the privatization revenues. The Ministry of Defense was
allowed to manage the privatization of its enterprises and the rev-
enues generated were transferred to the defense budget.
To attract investors from abroad, the government reversed
long-standing protectionist policies which limited foreign owner-
ship in the so-called "strategic sectors" of the economy, such as de-
fense, telecommunications, electricity, gas, oil, water, petrochemi-
cals, aluminum and steel. The government also abolished the
Compre Argentino Law, a local content law which required all PEs
to obtain inputs from domestic sources, unless such inputs were un-
available in the country To generate international investors' inter-
est, promotional efforts were launched in many countries including
the United States, several European countries and Chile. Officials
outlined the privatization program, assured audiences about its
transparency and emphasized that multinational corporations and
large financial firms were welcome in Argentina. This signal was
important to convey; the large corporations and financial firms had
the capital and the technology needed for successful privatization.
The organizational, employee and financial structures of the
PEs were often reorganized prior to privatization to facilitate the
transaction and ensure competition. As part of this preparation ex-
ercise, large enterprise structures were broken up, excess employ-
ees were retired or laid-off and the Treasury assumed part of the
financial liabilities. Residual comnpanies were created to take over mi-
nor assets and settle outstanding legal disputes so as to minimize
investor risks.
INatural gas distribution company employees were assigned between 3 and 5 percent of the shares.
Synthesis 27
Payment arrangements were flexible and involved combi-

nations of cash and retirement of debt, both foreign and domestic.
Debt retirement as a form of payment amounted to a self-imposed
limitation on government spending of the privatization proceeds
and a signal to the world about the government's commitment to
fiscal responsibility
To avoid the danger of turning public monopolies into pri-
vate ones the government adopted measures to promote competi-
tion in the affected industries. It deregulated markets and broke up
large monopolies into smaller, more competitive entities. The gov-
ernment also established post-privatization regulatory systems.
Regulatory agencies were created, rules for tariff-setting were de-
termined, and targets were set for physical production, quality of
service and investment.
5. Role of InternationalAgencies
Technical and financial assistance was provided to the priva-
tization program by several multilateral agencies, particularly the
World Bank. The World Bank's support for privatization was chan-
neled primarily through several loans: a Public Enterprise Reform
Adjustment Loan (PERAL I) focused on telecommunications, rail-
ways and hydrocarbons; PERAL II supported the privatization of
defense-related and steel companies; and a Financial Sector Adjust-
ment Loan (FSAL) assisted with the financial sector privatization.
The Public Enterprise Reform Execution Loan (PEREL I) was a purely
technical assistance loan of US$23 million to finance a variety of
privatization-related tasks for any enterprise. As privatization gained
momentum, Bank staff utilized ongoing loans to various enterprises,
such as Servicios Electricos del Gran Buenos Aires (SEGBA), for
privatization purposes. The Bank also provided support through a
series of Japanese grants and with the expertise of its own staff. The
IFC acted as the financial adviser forAltos Hornos Zapla (AHZ), the
steel company, on a purely success fee basis.
Other agencies that actively assisted the process included
the Inter-American Development Bank (IDB) particularly with the
electricity companies Agua y Energia (AyE) and Hidronor, and the
United Nations Development Programme (UNDP), which provided
a US$250,000 grant to assist the overall program, focusing on the

marketing effort. 4
The extensive support of international agencies, particularly
the World Bank, makes Argentina somewhat unique in relation to
the other major privatizers in Latin America; in Chile the Bank's
involvement was minimal and in Mexico it was on a much smaller
scale.
III. THE PREPARATION FOR PRIVATIZATION
This section focuses on the preparatory phase prior to priva-

tization. It specifically tries to answer the following questions for
the five enterprises included in our study: (1) Were the enterprises
restructured prior to privatization? (2) What regulatory framework
was developed for utilities for the post-privatization period? and
(3) What were the sales procedures? These issues are taken up in
turn below, following a brief description of these firms.
The five enterprises studied include Empresa Nacional de
Telecomunicaciones deArgentina (ENTel), the national telecommu-
nications enterprise; Servicios Electricos del Gran Buenos Aires
(SEGBA), the Buenos Aires Metropolitan Area electricity supplier;
Gas del Estado (GdE), the natural gas transmission and distribution
company; Obras Sanitarias de la Naci6n (OSN), the provider of wa-
ter and sewerage services in the Buenos Aires Metropolitan area;
and Yacimientos Petroliferos Fiscales (YPF), the national oil com-
pany. These large enterprises represent all major public sectors ex-
cept for the railway and airline industries. They include four natu-
ral monopolies providing basic services and one state monopoly
engaged in the extraction, refining and marketing of oil.
Table 1 (next page) presents a summary of the basic charac-
teristics of the five PEs at the time of privatization as well as the
dates of their privatization.
'Another source of financing privatization activities was the income generated from the sale of the
bidding documents. For example, ENTel's bidding documents were sold for US$20,000 and GdE's
for US$40,000 to US$60.000 depending on the number of companies the bidder was interested in.
Synthesis 29
TABLE 1: THE FIVE PEs AT THE TIME OF PRIVATIZATION
I M WIRISMVI3S
111Il]
.: .3I .11:o :1 W "..1g-
I2
ENTel Telecom (577),1 988 42,908 Nov-90

SEGBA Electricity (563),1991 15,806 Aug-92
GdE Natural Gas (841),1992 10,273 Jan-93
OSN Water/Sewage (23),1992 7,500 Nov-92
YPF Oil 256,1992 10,600 Feb-93
'The number of employees reflects pre-privatization reductions.
1. Restructuring
All five large PEs (ENTel, SEGBA, GdE, OSN and YPF), be-
fore privatization, had to undergo a change of legal status-the pro-
cess of commercialization-and become separate private legal enti-
ties or joint stock companies with shares still held by the govern-
ment.
In contrast to commercialization, which must be done be-
fore privatization, other types of restructuring-organizational, la-
bor, financial-can either be done before privatization or left to the
new private owners. The motives for restructuring before
privatization are: to facilitate the transaction, decrease private in-
vestor risk and increase potential revenues.
Given the decentralized process of Argentinean privatization,
restructuring decisions were largely left to the five committees-
one for each enterprise-and the interventors. They arranged for a
pre-privatization organizational, employee and financial restructur-
ing of the five enterprises. An important distinction to bear in mind
is that while the Argentinean PEs were restructured, there was no
attempt to turn them around or prop up their operational perfor-
mance prior to privatization. No new funds were invested to achieve
such improvement under public ownership.

One of the striking features of Argentina's privatization is
the degree of de-monopolization that was carried out prior to the
sale of utilities to private operators. Of the five PEs, four-ENTel,
SEGBA, GdE and YPF-underwent extensive organizational restruc-
turing. All four were monopolies and the key motive for reorgani-
zation and breakup was to promote post-privatization competition.
It was also thought, as in the case of YPF, that such restructuring
would make the transactions easier to complete.
The only monopoly that was not organizationally restruc-
tured or broken up prior to privatization was OSN, the water utility.
OSN was not broken up in order to maintain the system's integrity.
It is more difficult to break up water systems and there is very little
international experience available in this area. The organizational
restructuring would have been particularly cumbersome in this case
since three different levels of government-federal, provincial and
local-were involved. Offering the company as is accelerated
completion of the transaction.
Of the four monopolies that were broken up, ENTel was di-
vided geographically into two regions (north and south) and func-
tionally into three areas (basic, international and competitive ser-
vices). As a result, four units were created: two regional companies,
Telecom in the northern region and Telef6nica in the southern re-
gion, providing basic domestic telephone services; an international
telecommunication company, Telintar; and a company providing
value added services, Startel. SEGBA was divided vertically and
horizontally into four generation and three distribution companies.
GdE was also broken up vertically and horizontally into two trans-
mission and eight distribution companies. The most comprehen-
sive and systematic restructuring was done in the case of YPF. The
enterprise was reorganized into an upstream business unit for ex-
ploration and extraction, in some cases through joint ventures and
concessions. Other activities, considered non-strategic, such as ship-
ping, seismic drilling, construction, pipelines and refineries were
placed into downstream business units, which were privatized sepa-
rately, closed down or sold.
The shares of all five enterprises were divided into different
classes. Class A shares were partially held by the federal govern-
ment and/or offered in different proportions to strategic investors.
Class B shares, also in different proportions, were offered to public
investors through successive offerings in the domestic and interna-
tional capital markets. 5 Class C shares, 10 percent of the total is-
sued, were offered to employees remaining on the payroll of the
new companies under PPP. In the case of YPF, a certain number of
I In the case of YPF, the national oil company, Class B shares were also offered to provincial
govemments.
Synthesis 31
Class A and B shares held by the federal and provincial govern-

ments were combined into Class D shares and offered through pub-
lic offerings in Argentina and abroad.
As a result of the organizational restructuring, the units of
sale and ownership structures shown in Table 2 were established.
TABLE 2: SALES STRATEGY: OWNERSHIP STRUCTURE (%)
Strategic Public Federal

Investors Investors Government Employees
Sales Method Direct Sale Public Offering Direct Sale
ENTel' 60 30 0 10
SEGBA
Generation 60 - 90 0 - 30 0 10
Distribution 51 39 0 10
GdE 3
Transmission 70 25 - 27 0 3 -5
Distribution 60 - 90 0 - 30 0 10
OSN 0 0 90 10
45
YPF Varying 39 Varying 10
'Two telephone companies, Telef6nica and Telecom, providing basic telephone services.
2
Four electricity generation companies, Central Costanera, Central Puerto. Central Dock Sud, and Cen-
tral Pedro de Mendoza: and three electricity distribution companies, Edenor, Edesur, and Edelap.
I Two natural gas transmission companies, Transportadora de Gas del Norte and Transportadora de Gas
del Sur. and eight natural gas distribution companies, Distribuidora de Gas Buenos Aires Norte,
Distribuidora de Gas Metropolitana, Distribuidora de Gas del Litoral, Distribuidora de Gas Pampeana,
Distribuidora de Gas Noroeste, Distribuidora de Gas del Centro, Distribuidora de Gas del Sur,
Distribuidora de Gas Cuyana.
4 YPF was organizationally restructured into "upstream" and "downstream" business units which re-
tained different assets and activities. Other assets and activities were sold. For a breakdown of the units
of sale and ownership structures, see the YPF case.
I Public offering of combined Class D shares, a combination of Class A and B shares.

Employees are a key stakeholder in any privatization. Gov-
ernments resisting privatization are often concerned with the nega-
tive effects of privatization-at least in the short run-on employ-
ment. Opposition from employee unions has also thwarted attempts
by different governments. Argentina's handling of unions, and the
instruments and concessions utilized to secure broad-based em-
ployee support, should be of interest to governments and practitio-
ners attempting privatization.
1. The number of employees affected by restructuring prior

to privatization varies across enterprises. Table 3 pro-
vides a summary of the employment changes prior to the
privatization of the five enterprises. In the case of ENTel
there was limited labor reduction (1,431 workers, repre-
senting 3.2 percent of the employees) whereas in the case
of SEGBA the number of employees was reduced by 22
percent. For GdE and OSN no firings took place at all. 6
The official documents for sale (pliegos) of GdE established
that the privatized companies should have absorbed all
employees from the enterprise. The most drastic case of
pre-privatization employee restructuring was in YPF
where the work force was reduced by almost 27,000 em-
ployees (72 percent of the total). However, these num-
bers include contract workers and reflect the effect of spin-
ning off non-core activities.
TABLE 3: PRE-PRIVATIZATION EMPLOYEE RESTRUCTURING
Date of Before At
Company Privatization Privatization Privatization Change
ENTel Nov-90 44,339 42,908 -3

SEGBA Aug-92 20,271 15,806 -22
GdE Jan-93 10,273 10,273 0
OSN Nov-92 7,500 7,500 0
YPF Feb-93 37,400 10,600 -72
Total 119,783 87,087 -27
2. Various forms of employee payments were used to se-

cure employee support and to co-opt the workers.
* In almost all cases 10 percent of the shares (Class C shares)

were offered to the employees of the enterprises under PPP,
the Employee Stock Ownership Program. 7 The only ex-
ception was the gas company, GdE. Given the size of the
"In both GdE and OSN, the magnitude of post-privatization restructuring was greater than in other
cases.
7
Class C shares were offered at the per-share price paid by the investor in the strategic sale. The
dividends corresponding to these shares are kept in escrow accounts until the amount collected
equals the total value of the Class C package. From that moment on. employees are given full
ownership of these shares.
Synthesis 33
company relative to the number of total employees, the

government decided to give less than 10 percent of the
shares; employees were offered 3-5 percent. 8
* The main method for reducing the number of employees

prior to privatization was through attrition and voluntary
retirements. To induce the workers to accept, generous
severance packages were offered, ranging between
US$7,000 and US$10,000 per employee for most
privatizations.
* In the case of YPF, where the most drastic reductions took

place, some of the laid-off workers were transferred to those
areas of the company that were sold to the private sector
as separate business concerns (e.g., exploration areas) while
around 5,000 employees received supplier contracts for
their approximately 200 newly formed private businesses.
* Job security was guaranteed in some instances; ENTel's

existing union contract was retained for six months.
3. The severance payments were financed through World
Bank adjustment loans, by the government and, in the
case of SEGBA, jointly by the public enterprise and the
newly privatized companies.' SEGBA paid US$55.5 mil-
lion in total to 5,601 employees under various schemes.
For YPF, the overall employment adjustment in severance
and other related costs reached US$621 million, which
was financed by the World Bank and internal funds gen-
erated by YPF
4. An important feature of Argentina's privatization pro-
gram is that labor unions, with one exception, accepted
the privatization plans. This was due to the generous
severance payments and related benefits, the employee
stock ownership plan and the various training and re-
training programs offered by the new companies. The
political climate in Argentina was also such that the gen-
eral public was unlikely to support the unions in their
opposition to privatization.
'The same was the case in sales of hydroelectrical projects, where employees received only 2 percent
of Class C shares.
'A creative way was found to use World Bank funding for severance payments. PERAL understand-
ings required the government to make arrangements for voluntary departure of certain workers as a
condition of disbursement. The amount of liabilities accrued by the government in the process was
financed through World Bank disbursements.
5. The government's firm response to an early case of union

opposition also contributed to the unions' subsequent ac-
ceptance of privatization's inevitability The sole resis-
tance came from FOETRA, ENTel's Buenos Aires labor
union which was split between an anti-privatization ma-
jority and a pro-privatization minority When it became
clear that FOETRA was obstructing the privatization pro-
cess, the government reacted by declaring it out-law. The
government's firm handling of FOETRA, early in the
privatization program conveyed the government's com-
mitment to the process and probably contributed to the
lack of resistance in subsequent privatizations.

With the exception of GdE, all of the enterprises in this study
underwent financial restructuring. The balance sheets were cleared
before privatization, and the government assumed a large portion
of the enterprises' liabilities (see Table 4).O
TABLE 4: FINANCIAL RESTRUCTURING (IN US$ BILLION)

Total Liabilities at the Treasurv New ComDanies
Enterprise date of Privatization Amount % Amount %
ENTel 2.14 1.76 82 0.38 18
SEGBA 4.82 4.451 92 0.37 8
GdE 2.66 0.24 9 2.42 91
OSN 0.24 0.24 100 0.00 0
YPF 11.28 8.54 76 2.74 24
Total 21.14 15.23 72 5.91 28
Of this amount, US$3.02 billion represents SEGBA's bad debts to other PEs. social security system and the Treasury.
and was written off. Therefore, in reality the government assumed only US$1.43 billion in commercial and financial
loans.
Out of the total liabilities of US$21.1 billion for the five en-
terprises, the government assumed US$15.2 billion (72 percent). This
included US$1.8 billion (82 percent) of ENTel's liabilities, US$4.5 bil-
lion (92 percent) of SEGBA's, US$0.2 billion (9 percent) of GdE's,
US$0.2 billion (100 percent) of OSN's and US$8.5 billion (76 per-
cent) of YPF's. The US$8.5 billion of YPF's liabilities, assumed by
the Treasury, included US$5.2 billion in debt to multilateral organi-
zations. The Treasury, under the Brady Plan, also retired US$3.3
billion of YPF's external debt held by commercial banks.
"Within the liabilities taken over by the govemment, there were a part of external debt owed to interna-
tional agencies and commercial banks that was renegotiated, refinanced and reduced under the Brady
Agreement that the government signed in 1992.
Synthesis 35
In the case of OSN, all liabilities, including a World Bank

loan, were assumed by the government and the concessionaire was
offered a clear balance sheet. GdE was the only case in which the
bulk of the liabilities were passed on to the new owners. These li-
abilities were distributed in proportion to the size of the various
companies created out of GdE; US$205 million (7.7 percent) was as-
signed to the largest distribution company The Treasury did, how-
ever, assume a US$241.3 million pre-privatization loan that GdE had
received from the Inter-American Development Bank (IDB).
All the minor obligations and liabilities of the five enterprises
were assigned to special state-owned residual companies, specifi-
cally established for each enterprise to handle post-privatization
claims, etc.
In theory, whether the government assumes the financial li-
abilities of a firm prior to privatization should be of little conse-
quence; the price of the firm should adjust accordingly. However, in
practice (reflected in the Argentine approach) it is often desirable to
clear the balaince sheet because the investors prefer it and the sale val-
ues are higher, positively affecting the public perception. Also, given
the condition of the financial statements it is often unclear what the
true extent of the firm's liabilities are. Investors are thus unsure
about the extent of the liabilities they are being asked to absorb and
prefer a cleaner balance sheet. Another factor that motivated the
Argentinean Government to absorb the liabilities was that a large
portion of the PEs' debt, especially external debt owed to the inter-
national agencies, was guaranteed by the government, and these
guarantees could not be applicable to the companies once they were
privatized.
2. Post-privatizationRegulatory Systenis
The privatization of utilities required the creation of post-

privatization regulatory systems. This involved: (1)setting up regu-
latory agencies, (2) adopting a regulatory framework, including rate-
setting rules (in some cases by law), and (3) establishing performance
standards so that the privatized firms could be monitored by the
regulatory authorities.
2.1 Regulatory Agencies

In all four instances of utility privatization included in our
study, agencies were established for post-privatization regulation
(Table 5). Attempts were made to vest autonomous authority in these

agencies and provide them with technical expertise for the task.
TABLE 5: POST-PRIVATIZATION REGULATION

I A: I i_23 I!S t: L; i
Agency CNT ENRE ENARGAS ETOSS
Regulatory Measures
* Deregulation Yes Yes' Yes No Yes
* Rate Adjustments Yes Yes Yes Yes N.A.
Regulatory Systems
* Rate Setting Procedures Yes Yes Yes Yes No'
* Performance Requirements Yes Yes Yes Yes No
* Investment Requirements No No Yes Yes No
'Generation.
2Not applicable.
'The industry continues to be regulated by the Undersecretary of Combustibles and the Undersecretary of Com-
merce.
The regulatory bodies are financed by fees levied on the

privatized firms. For example, Ente Nacional Regulador de la
Electricidad (ENRE), the regulatory agency for the electricity sector,
including SEGBA, and Ente Nacional Regulador del Gas
(ENARGAS), the regulatory agency for gas transmission and distri-
bution, are financed through a fee that all firms have to pay in pro-
portion to their share in total industry revenues. In the case of ENTel,
the Comisi6n Nacional de Telecomunicaciones (CNT), the national
telecommunications commission, is financed through a 0.5 percent
sales tax on telecommunications firms and through payments made
by broadcasters for radio spectrum assignments. For OSN, the op-
erational expenses of the agency Ente Tripartito de Obras y Servi-
cios Sanitarias (ETOSS) are covered primarily by a surcharge of 2.67
percent of billings charged to consumers by the concessionaire.
The establishment of effective regulatory agencies in Argen-
tina, particularly for the earlier privatization project in telecommu-
nications, proved a difficult task. The Argentinean constitution did
not provide for independent regulatory agencies, and Congress and
the government had little experience in establishing and managing
such entities. Further, expert staffs were not immediately available
and the old bureaucracies resented their loss of influence. For ex-
ample, the newly created CNT was virtually inactive between 1990
and 1992. This created an uncertain regulatory environment with
important decisions on regulation left unattended. Eventually the
Synthesis 37
CNT commissioners were removed and a new executive was as-

signed to manage the organization. A consulting firm was hired to
review CNT's structure and recommend ways to increase its effec-
tiveness in regulating the industry
The problem of setting up an effective regulatory body was
not limited to telecommunications. In the electricity industry, the
new regulatory agency, ENRE, and the Secretariat of Energy (SE)
exercise overlapping authority The agency established to regulate
the transmission and distribution of natural gas, ENARGAS, estab-
lished several new provincial branches whose authority was not
clearly defined at the outset. The oil industry continued to be regu-
lated by the Ministry of Energy through the Undersecretary of Com-
bustibles and the Ministry of Economy through the Secretary of
Commerce."
In the case of OSN, the new regulatory agency appeared to

be well structured and its authority well defined. Its responsibili-
ties included: approving the concessionaire's five-year investment
plans and any revisions in rate levels and structures; monitoring
compliance with such plans; and establishing standards to ensure
quality and continuity of the service.
At the present time, among these regulatory agencies, those
set up for gas and electricity seem to work quite well-although a
detailed analysis will probably reveal areas in need of improvement.

Under the new regulatory systems privatized firms facing
direct competition were allowed to set their own rates and prices.
These firms include the telecommunications company Startel (value-
added services); the power generation firms Central Costanera, Cen-
tral Puerto, Central Dock Sud and Central Pedro de Mendoza; rail-
way companies (which competed with trucks); and the oil and natu-
ral gas producers, including YPF. 12
I The Undersecretary of Combustibles is responsible for the enforcement

of natural resource
regulations and the Secretary of Commerce is in charge of protecting consumers and enforcing
competition.
12But these companies are subject to other requirements. Cellular and value-added
telecommunications
service providers are licensed by the govemment and the new oil and gas exploration and extraction
concessionaires and permit holders must transfer technology and train employees.
In the case of privatized monopolies, new rules for setting

rates were established. Firms subject to these rate-setting rules in-
cluded basic and international telephone services furnished by
ENTel's three new companies; new electricity distribution firms of
SEGBA; natural gas transmission and distribution by GdE's new
companies; and water and sewerage services provided by OSN.
Table 6 summarizes these rate-setting rules.
TABLE 6: POST-PRIVATIZATION RATE SETTING PROCEDURES: TARIFF RULES'
__.. a * a
NTel Existing Rates Rates are linked to * X = 0% for the first 2 years
2 2% for the next 5 years
(upwardly adjusted) U.S. 3PIX
3-
* Rates are set in US$ and

adjusted annually
* Gradual elimination of
cross-subsidies
EGBA Wholesale Price VAD is linked to U.S. VAD is:
+ VAD CPI Setin US$
+ Price Rebalancing Adjusted annually by a
Factor technological factor
* Revised every 5 years
following an initial 10 year
period.
* Elimination of cross-subsi
dies within the first 3 years
dE Wholesale Cost of Gas Rates are linked to Rates are set in US$ and
+ Cost of Transmission U.S. PPI'adjusted every 6
+ Cost of Distribution months
+ Cost of Maintenance Revisions every 5 years
+ Cost of Investments* Price differentiation on peak/
off-peak users, direct link to
transmission and distribution
* Subsidies for certain users
SN Price fixed by auctions Extraordinary revisions * Ordinary revisions permis
are based on changes sible after the first 10 years
in OSN's cost index Extraordinary revisions
permissible after the first 5
years
Not applicabl E for YPF.
2 Existing rates increased in real terms by 97 percent before the transfer.
U.S. Consumer Price Index.
Investment costs are charged only to peak (continuous) users.
U.S. Producer Price Index.
'The winning bid was about 27 percent lower than the rate before privatization.
Synthesis 39
The establishment of rules for rate-setting has injected an

element of transparency into the process and made arbitrary inter-
ventions by the government difficult. The rules for tariff-setting also
provide incentives for efficiency and for eliminating cross-subsidi-
zation across consumer groups. An important consequence of
Argentina's privatization has been the movement of prices closer to
market prices as a result of pre-privatization adjustments and post-
privatization rules.
The rates for the telecommunications industry are adjusted
annually according to changes in the U.S. Consumer Price Index
(since the Argentine peso is pegged to the U.S. dollar) minus an X
percentage which is aimed at capturing technological improvements
in the industry The X is designed to provide incentives for effi-
ciency and fixed at 0 percent for the first two years, at 2 percent for
the next five years and at 4 percent during the remainder of the ex-
clusivity periods granted to the two telephone companies. If the
companies succeed in improving their financial results between the
annual rate reviews, they are allowed to keep the additional profits.
Cross-subsidization is also reduced through the rebalancing of rates;
however, rates for outgoing international calls remain much higher
than those for incoming calls, providing a strong incentive for call-
backs.
The rates for electricity end-users are based on: (1) the whole-
sale generation market price, (2) the distribution value added (VAD),
and (3) price rebalancing factors. Wholesale electricity price is cal-
culated as a weighted average of prices charged in the spot market
and the negotiated prices of electricity bought from the generation
companies. Distributors are allowed to add a fixed amount, VAD,
to wholesale price.13 The VAD moves with the U.S. Consumer Price
Index and is adjusted by a technological factor every year. To pro-
gressively eliminate existing distortions among different services,
rebalancing factors are included in the rates for some services.
An elaborate system for rate-setting based on the principles
of optimal pricing was established for natural gas. The well-head
price of natural gas was deregulated following GdE's privatization
and is now determined through negotiations by producers, includ-
ing the privatized YPF, the distribution companies and large cus-
'3The VAD amount, set by the Secretariat of Energy, includes operating, maintenance and expansion
costs, and an allowance for retum on capital. It changes parallel to the U.S. CPI and is adjusted
annually by a technological factor. Following an initial ten-year period during which it will not
change, the VAD will be revised every five years.
tomers. The rates charged to customers, set in dollars, are adjusted

every six months according to the U.S. Producer Price Index (PPI).
In addition, the rate regime must be reviewed and, if necessary, ad-
justed every five years. Price differentiation is adopted to promote
the efficient use of the transmission and distribution networks. Peak
users (residential, business and industrial) are charged a rate that
includes the cost of investments and system expansion in addition
to the variable costs of gas transmission, distribution and mainte-
nance. Off-peak users are charged a lower rate that includes the
variable costs but not the costs of investments. Also, users such as
power plants and large firms that are directly linked to transmis-
sion networks pay lower rates than those linked only to distribution
networks.'4 Certain users, including retirees and residential and busi-
ness customers in Patagonia, continue to be subsidized. However,
such subsidies, reaching approximately US$130 million a year in
1993, are directly paid through the federal budget.
The new OSN water rate was determined through bidding
by the pre-qualified concessionaires. The concessionaire offering to
provide water to the users at the lowest rate-given other condi-
tions-was awarded the contract. The winning bid represented a
reduction of about 27 percent in the rate prevailing at the time of
privatization. Ordinary rate increases-permissible after the first 10
years-can only be made on the basis of detailed financial analysis
of changed investment goals or capital requirements. Extraordinary
rate increases-permissible after the first five years-are based on
changes in the operating costs. Extraordinary rate adjustments are
allowed if an index comprised of 14 different types of OSN operat-
ing costs increases by more than 7 percent. Both ordinary and ex-
traordinary rate increases require that the concessionaire has ful-
filled all the service improvement and expansion goals.
2.3 Performance Standards

In addition to setting the output prices, the respective regu-
latory agencies determine and monitor compliance with the vari-
ous performance targets set for the privatized firms. These regula-
tory targets, included in the privatization contracts, vary across firms
but relate mostly to the quality of service and new investments.
' Users connected to distribution networks are allowed to build a by-pass pipeline and link up with
transmission networks provided they buy gas directly from a producer located in one of the
extraction basins.
Synthesis 41
During the initial licensing period, 1991-96, the southern con-

cession (now called Telef6nica) is required to add 625,000 new cus-
tomers (5.3 percent annual growth rate) and to secure a license ex-
tension beyond 1996 for 811,000 new customers (6.7 percent annual
growth rate). The company is also required to double the number
of public phones to 12,948 within the same period. The northern
concession (now called Telecom) is required to add 609,500 new cus-
tomers during the initial licensing period (6.2 percent annual growth
rate) and 729,000 new customers to secure a license extension (7.8
percent annual growth rate). The service quality requirements for
Telef6nica and Telecom include increasing call completion rates of
local, long distance and international calls, operator efficiency in as-
sistance, waiting times for new connections, and repairs (see Ap-
pendix B of the ENTel case for details). Failure to achieve the targets
during two consecutive years can cause a company to lose its exclu-
sivity rights.
SEGBA's primary requirement, set in general terms, was to
satisfy demand. However, detailed targets were set for SEGBA's
distribution firms for a variety of product and service quality indi-
cators. Variations in voltage and the frequency of power outages
are monitored and SEGBA is subject to penalties for underfulfilhment.
The penalties on voltage variations are returned to customers in the
form of lower rates (see Appendices B and C in the SEGBA case for
details). To verify that the companies meet the targets, the regula-
tory agency ENRE studies random samples of household and in-
dustrial electricity users.
The winning bidders of the GdE concessions were required
to invest, within the first five years, enough to achieve natural gas
transmission and distribution standards roughly similar to those in
the United States. During 1993-97, the two new GdE transmission
companies together were required to invest US$57.3 million per year
in pipes, coating, cathodic protection and telecommunications.
Within the same period, the eight new distribution companies were
required to invest a total of US$285.6 million in main and service
networks, cathodic protection, operation and maintenance manu-
als, leak management, communications equipment and systems to
measure natural gas flows in real time.
Mandatory expansion and investment targets were also set
for OSN. The winner of the OSN concession had to invest US$1.2
billion during the first five years of operation and US$4 billion over
the entire life of the concession. In addition, the new operator was
required to construct and operate three wastewater treatment plants,
extend the coverage to 100 percent for water supply and 95 percent
for sewage collection at the end of the contract. Meanwhile, the
unaccounted-for water had to decrease from 45 percent to 25 per-
cent.
3. Additional PreparatorySteps
3.1 Recruitment of Advisers
In all transactions, international and domestic firms were

hired, on a competitive basis, to assist with various aspects of the
privatization (Table 7). Transactions usually involved a lead finan-
cial adviser (investment bank) and various other firms working on
restructuring, legal and valuation issues.
TABLE 7: CONSULTING COMPANIES
.l : S ! :1
I II 5.
1
ENTel Morgan Stanley, Banco Roberts of Argentina (financial); Klein &Mairal (legal);
Coopers &Lybrand, Harteneck &Lopez (technical); Deloitte Touche Ross,
Ruival Ottone y Asociados (valuation)
SEGBA Credit Suisse First Boston/Kleinwort Benson/Banco General de Negocios
(financial); Estudio Brons y Salas (legal); Hydro-Quebec/Raymond, Chabot
International/Spilzinger &Asociados (technical)
GdE N. M. Rothschild &Son, Goldman Sachs &Co., Banco de Galicia, Buenos
Aires S.A., and Argenbur S.A. (financial); Andrews &Kurth, Marval O'Farrell &
Mairal (legal); Stone &Webster, Arthur Andersen, Pistrelli Diaz and Associates
(technical); Patricio Perkins and Associates (assistance to the Privatization
Committee)
OSN Banques Paribas, Interbonos Capital Markets S.A. (financial); Booz Allen and
Hamilton (legal); Sir William Halcrow (technical)
YPF Ricardo Zin, and Gaffney Cline &Associates (financial); Andrews &Kurth
(legal); Marval O'Farrell &Mairal (technical); McKinsey &Co. (reorganization
of YPF)
The consultants advised the privatization committees estab-

lished for each enterprise. In general, their compensation included
a fixed fee based on expenses and/or a success fee tied to sales value.
However, in SEGBA, in addition to a fixed fee, they received a suc-
cess fee tied not only to sales value but also to the amount of liabili-
ties assumed and the level of investment commitments from the
new owners. In the case of GdE, it was also based on the number of
bidders.
Synthesis 43
The recruitment of top investment banks involved consider-

able costs which the Argentineans were willing to pay to ensure
quality transactions.
3.2 Marketing
The financial advisers were primarily responsible for the mar-
keting of the transactions to potential buyers. The World Bank also
assisted in the marketing effort. As part of the process, members of
the Bicameral Commission, the respective privatization committees
and related officials made presentations (e.g., in the case of ENTel in
New York and London). The focus of these meetings was on the
transaction details. However, in the earlier privatizations, such as
ENTel, emphasis was put on the government's management of the
nation's external debt which was the major concern of international
investors at the time. The marketing of ENTel, and later SEGBA,
generated a great deal of valuable information through which
Argentinean privatization officials learned about the motivations
and concerns of foreign investors. This resulted in a more efficient
and effective subsequent privatization of the other PEs.
3.3 Valuation
Argentinean law required enterprise assets for privatization
to be valued by the National Development Bank (BANADE), which
established a minimum value for each company While the asset
valuation was the responsibility of BANADE, the conditions for re-
tirement of debt were set by the Secretariat of Finance and audited
by the public enterprise auditing agency, Sindicatura General de
Empresas Piuiblicas (SIGEP). In most cases the responsibility of the
financial advisers included assistance in the valuation exercise. The
special assets of YPF, such as the central oil reserve areas, were also
valued by independent consultants whereas the secondary oil re-
serve areas were not valued at all.
Once calculated, the valuations were not subsequently chal-
lenged or changed except in the case of ENTel. The original valua-
tion of its fixed assets, which served as a basis for computing the 16
percent rate of return to investors, was announced in January 1990.
However, owing to the change in Argentina's country risk rating,
this value was reduced three months later. The reduction was widely
interpreted as an attempt on the part of the government to pacify
the political opposition which objected to the original valuation be-
cause it provided investors with higher absolute earnings. Some
qualified bidders viewed the reduction as political interference and

departed.
3.4 Pre-qualification Criteria

All five transactions were based on international public bid-
ding procedures and involved pre-qualification of potential buyers.
In some instances, certain restrictions were imposed to prevent con-
centration of ownership in the industry.
For SEGBA, GdE and OSN, the minimum price to be accepted
for each individual operation was agreed to by the three members
of the bidding committee (Comite de Adjudicaci6n).
The two principal pre-qualification criteria (summarized in
Table 8) are related to asset requirements and industry experience.
TABLE 8: ASSET AND EXPERIENCE REQUIREMENTS
Asset Requirement Operators'

(in US$ billion) Experience Other
ENTel *Combined Assets: 4.0 * 1.5 million customers Performance guarantees on:
* Minimum Net Assets of: * 10%ownership of the *less than 15 day waiting
- Foreign Core Group: 1.0 consortium's equity time for connections
- Foreign Non-core Group: 0.5 * one ortwo members with *80% efficiency inresponse
- Local Core Group: 0.3 at least 20% of consortium's timeto calls for information
- Local Non-core Group: 0.2 shares and repairs
SEGBA
- Generation * Assets: 0.2 No requirements US$150 million innet worth
- Distribution *Edenor: 0.7 * Minimum 4 year experence *10% increase in asset
*Edesur: 0.7 *20% ownership of the value over last 3 years
*Edelap: 0.1 consortium
GdE Minimum Net Worth of:

- Transmission Transportadora del Gas del * Minimum 5 year experience
Sur: 0.4
* Transportadora del Gas del
Norte: 0.2
- Distribution Ranging from * Minimum 5 year experence
0.2 (Metropolitana) * Minimum number of residua
to 0.05 (Noroeste and Cuyana) customers'
OSN * Net Worth: 0.75 *Service to 10 million people *Abilityto incur US$2 billion
Annual billings > US$600M in debt
2
YPF Varying Varying Varying
Ranging from 100,000 to 500,000.

2
Varied from case to case.
Synthesis 45
1. In all instances of sale to strategic investors, minimum

asset requirements were imposed on the potential buy-
ers. The minimum asset requirements varied across the
five enterprises (and the companies carved out of them)
and were related to the size of the company and its in-
vestment needs. For example, the combined assets of any
consortium bidding on ENTel had to be in excess of US$4
billion, some gas distribution companies (Noroeste,
Cuyana) required assets of only US$50 million and the
smaller YPF activities (refinery, tanker company) required
even less.
2. All consortia bidding for the enterprises were required
to include an international operator with industry expe-
rience. In most cases, the operators were required to own
at least 10 percent partnership in the consortium. In some
cases the requirements were quite stringent. For example,
operators in the water sector bidding for OSN's conces-
sion were required to have experience in providing wa-
ter and sewerage services to an urban population of at
least 10 million.
3. Other pre-qualification criteria included investment or
performance requirements, or other measures of finan-
cial success (e.g., bidders for SEGBA had to have an in-
crease of at least 10 percent in their asset values in the
three years prior to bidding-a demanding requirement).
4. The pre-qualification criteria of firms bidding for the vari-
ous YPF assets, exploration and extraction concessions,
permits and joint-venture arrangements varied from case
to case.
3.5 Anti-concentration Measures

To prevent ownership concentration, bidding restrictions
were applied in some cases.
1. In SEGBA, members of a consortium buying any distri-
bution company were excluded from obtaining a major-
ity stake in a transmission company. Bidders were also
prevented from obtaining more than 10 percent of total
installed electricity generation capacity Strategic inves-
tors in SEGBA were prohibited from selling their shares
for five years. Even after five years the sale would re-
quire the approval of the regulatory agency, ENRE, or the

Secretariat of Energy.
2. In the sale of gas companies carved out of GdE restric-
tions, no single bidder could acquire a majority share in
more than one transmission company or buy two distri-
bution companies, or one transmission and one distribu-
tion company Buyers were also prohibited from buying
both of the large distribution companies.
3. In the case of YPF, the winners of joint ventures (with
equity of between 35 and 50 percent) could not transfer
their joint-venture rights to third parties without YPF's
approval.
The issue of overall concentration of assets, especially by the
local conglomerates, however, was not tackled explicitly and remains
a contentious issue in the public debate on privatization.
3.6 Transparency
The transparency of all five privatization processes was de-
termined by the nature of the bidding rules and related circum-
stances. ENTel's privatization, which was the first project, was the
least transparent. This was due to relative inexperience, speed, the
uncertainty associated with the potential outcomes and the political
opposition to privatization. The bidding rules were changed sev-
eral times as, for example, when the original set value of the fixed
assets was reduced, the minimum operator asset requirements were
raised shortly before the bidding and the rate-setting procedures
were revised immediately after the bidding. The last minute intro-
duction of a management contract requirement between the share-
holders and the operators of the new companies, and the delayed
development of the new telecommunications industry regulatory
framework, also contributed to the limited transparency
However, the privatization authorities learned from the
ENTel case. The subsequent privatization of the four other firms
covered in this study, starting with SEGBA, was much more trans-
parent. The bidding rules were published in newspapers, and SIGEP
audited the process.
GdE's privatization process was also well prepared. All rel-
evant information was available on time, including a description of
the post-privatization regulatory environment. Interested bidders
Synthesis 47
were even invited to make informal inquiries to determine their eli-

gibility before the official bid closing dates.
In the case of OSN and GdE, the bidding documents were
available free of charge to qualified bidders, who could comment
on their content up to 30 days before submitting official bids.
Concerns were also raised by the bidders who wanted to
obtain YPF's crude oil extraction concessions in the central areas. It
appeared that the performance and experience standards were not
quantified, which created confusion for the potential bidders.
IV. TRANSACTION RESULTS
As the privatizations included in this study were large pro-

grams and the potential buyers faced strict pre-qualification crite-
ria, only international consortia reached the bidding stage. Typically,
the consortia consisted of a major financial company (e.g., Citibank,
J.P. Morgan), an experienced international operator (e.g., Bell Atlan-
tic, Telef6nica) and a domestic Argentinean group (e.g., Perez
Companc, Techint) (see Appendix A for details of the bidders).
The number of bidders usually ranged from three to six per
transaction. The eight distribution companies of GdE combined re-
ceived 44 bids (see Table 9.2). However, a generation company of
SEGBA, Central Costanera, received only one bid and the lone bid
was accepted. The public auctions of oil exploration permits under
the so-called "PlanArgentina" scheme which was part of YPF's priva-
tization also attracted few bids.
A two-envelope approach was utilized in all privatizations
except theYPF case. The first envelope contained the technical quali-
fications and the second the financial offer. If the technical qualifi-
cations were fulfilled, which they generally were, the decision then
was based solely on the financial offer. The financial offer itself was
usually based on a single variable, making comparison easy. For
example, in the case of ENTel, the bidders were expected to pay a
fixed, predetermined amount in cash and then bid solely on the
amount of external debt retired. In the case of SEGBA's generation
companies, bidding was based solely on cash. In the bidding for
OSN, the choice between three pre-qualified groups was also based
on a single number-the firm offering the greatest reduction in wa-
ter rates for consumers.
Following ENTel's privatization, which involved a post-bid-

ding renegotiation of contract terms, a special transfer condition was
also introduced in all subsequent privatizations: bidders had to in-
clude a signed contract in their price offer envelope. This closed ex-
ecution feature accelerated the closure of transactions and reduced
post-award renegotiation of terms.
1. In the ENTel case, 14 consortia bought bidding docu-
ments, seven applied and were qualified. However, only
three participated in the bidding: three for the northern
company (renamed Telecom) and two for the southern
company (renamed Telef6nica). The same consortium
(Telef6nica, Spain) offered the highest bid for both com-
panies."5 Since both firms could not be sold to the same
bidder, the consortium opted for Telef6nica. Telecom was
offered to the second highest bidder which included Bell
Atlantic and Manufacturers Hanover Trust. However, this
consortium could not raise enough external debt to retire
the bid amount and eventually withdrew. Telecom was
then awarded to the next highest bidder, a consortium
that included Stet (Italy), Cable and Radio (France), J.P.
Morgan (United States) and Perez Companc (Argentina).
2. In the case of SEGBA, Edenor was awarded to a consor-
tium called Electricidad Argentina which was formed
mainly by ENDESA of Spain, EDF, and Astra. Edesur
went to a group composed of Chilectra, Enersis, ENDESA
of Chile, Perez Companc, and PSI Energy. Edelap's win-
ning bidders included Houston Light and Power together
with Techint. The winning consortia paid a total of US$281
million in cash, assumed US$370 million in liabilities and
retired US$1,013 million of domestic and external debt
for their purchase of SEGBA.
3. In GdE's transaction, the transmission company
Transportadora de Gas del Norte, was obtained by the
Novacorp/Transco Gas/Wartins consortium; and the
other transmission company, Transportadora de Gas del
Sur, was obtained by Enron/Perez/Citicorp/ADPT. The
eight distribution companies were awarded to various
consortia; the largest one, Metropolitana, was bought by
15The consortium included Telef6nica (Spain). Citicorp (United States), Banco Central (Spain) and
three Argentinean groups.

Synthesis 49
a consortium including British Gas/Pecom/Astra/

Invertrad.
4. For OSN, the consortium Aguas Argentinas, headed by
Lyonnaise des Eaux-Dumez, offered the highest reduc-
tion in water rates (26.9 percent) to obtain the concession.
The second highest bid was very close: the consortium
led by Thames Water offered a rate reduction of 26.1 per-
cent.
5. The assets, concessions and permits of YPF were sold and
awarded to various different companies (see Appendix B
for details on YPF's transaction).
Tables 9.1 and 9.2 (next two pages) illustrate the details of
the strategic sales.
V OUTCOMES/IMPACTS
The success of a privatization program is based on the im-

provement in efficiency, financial performance and quality of ser-
vice after the transfer of ownership. Not enough time has passed
since the privatization of these five PEs for us to reach definitive
conclusions on the overall impact or the relative gains and losses of
the various stakeholders. However, preliminary results indicate that
privatization has contributed significantly to the government's fis-
cal position: all five firms have improved their financial and opera-
tional performance under private ownership and most stakehold-
ers have benefited.
In the following analysis, four types of outcomes are evalu-
ated: fiscal impact, profitability, operational performance, and the
relative gains and losses of the various stakeholders, such as the
government, consumers, investors and employees.
1. FiscalImpact
The fiscal impact of privatization arises from several sources:
revenue proceeds from the transaction; higher tax payments under
private ownership; elimination or reduction of subsidies to the
former PEs; and, as in the case of Argentina, retirement of debt. Our
preliminary results show that the fiscal impact of privatization of
TABLE 9.1: PRIVATIZATION TRANSACTIONS: STRATEGIC SALE
ENTel
*Telefonica 60 7 year exclusive Debt retired
*Telecom 60 licenses Debt retired
SEGBA
Generation Direct sale of assets Cash
* Central Puerto 60
* Central Costanera 60
* Central Dock Sud 90
* Central Pedro de Mendoza 90
Distribution 95 year concessions Debt retired
*Edenor 51
*Edesur 51
* Edelap 51
GdE
Transmission 35 year concessions Cash
* Transportadora de Gas del 70
Norte
* Transportadora de Gas del 70
Sur
Distribution 35 year concessions Cash
* Distribuidora de Gas 90
del Sur
del Litoral
del Centro
Cuyana
Noroeste
* Distribuidora Buenos Aires 70
Norte
Metropolitana
Pampeana
OSN' 0 30 year concessions Rate reduction
YPF2 Various Various Various
Decision criteria: debt retired, given a fixed amount of cash.
2
YPF's privatization involved various types of transactions. See Appendix B for details.
Synthesis 51
TABLE 9.2: PRIVATIZATION TRANSACTIONS: RESULTS (IN US$ MILLION)
Company - . 3IS 6
ENTel 214 955 2,065

*Telef6nica 2 Telef6nica 114 517 838
*Telecom 3 STET/Cable & Radio 100 438 1,227
SEGBA 281 1,013 229
Generation
* Central Puerto 5 Chilgener 92 - 132
* Central Costanera 1 Endesa 90 - 97
* Central Dock Sud 3 Polledo 25 -
* Central Pedro de Mendoza 2 Acindar/Massuh 9 -
Distribution
* Edenor 5 Electricidad Argentine 30 398
* Edesur 4 Distrilec 30 481
* Edelap 4 Cia de Inv. Electricidad 5 134
GdE 300 1,541 658
Transmission
* Transportadora de Gas del 4 Novacorp, Transco 28 182
Norte Gas, Wartins
* Transportadora de Gas del 2 Enron, Perez Companc 100 256
Sur Citicorp, ADPT
Distribution
* Distribuidora de Gas 3 Camuzzi, Gassometri 14 134
del Sur
* Distribuidora de Gas 6 Tractebel, lberdrola, 14 90
del Litoral Garavaglio, Zorraquin
* Distribuidora de Gas 7 Sideco, Italgas 18 120
del Centro
* Distribuidora de Gas 8 Sideco, Italgas 26 96
Cuyana
* Distribuidora de Gas 4 Castellano, Gasco, 10 62
Noroeste Banco, Frances
* Distribuidora Buenos Aires 4 Gas Natural, Manra, 28 128
Norte
* Distribuidora de Gas 4 British Gas, Pecom 44 256
Metropolitana Astra, Invertrad
* Distribuidora de Gas 8 Camuzzi, Gassometri 18 217
Pampeana
OSN' 3 Aguas Argentinas N.A.2 N.A.
2
YPF N.A. Various Consortia 2,060 N.A. 3,040
'Total debt retired in cash-equivalent
2Not applicable.
the five enterprises was positive and significant on all criteria listed
above.
1. The sale of the five enterprises raised revenues equal to
US$12.36 billion. The revenue proceeds consisted of
US$6.36 billion from sale to strategic investors, US$2.85
billion in cash and US$3.51 billion in cash equivalent of
retired debt. An additional US$5.99 billion cash was raised
from public offerings of the shares, mostly of ENTel and
YPF (Table 10).
TABLE 10: REVENUE PROCEEDS OF THE FIVE TRANSACTIONS AS OF 1993 (US$ MILLION)
1
Debt Retired Public
Cash (Cash Equivalent) Offering2 Total
ENTel 214 955 2,065 3,234
SEGBA 281 1,013 229 1,523
GdE 300 1,541 658 2,4993
OSN N.A. N.A. N.A. N.A.
YPF 2,060 N.A. 3,0404 5,100
Total 2,855 3,509 5,992 12,356
'Nominal value of total debt retired reaches US$9 billion.
2 Both domestic and international public offerings of Class B shares.
'Excludes US$380 million liabilities included in the price.

'Combined Class A and Class B shares sold as Class D shares.
2. The face value of debt retired equals almost US$9 billion.

Debt retirement as an element of privatization has not
been attempted elsewhere on this scale and is unique to
Argentina. Debt retirement of this magnitude had sev-
eral positive macroeconomic effects.
3. Taxes paid by the five companies have increased signifi-
cantly since privatization. Prior to privatization, none of
the five enterprises paid income tax. Since privatization
all firms have been paying income taxes: telephone com-
panies paid over US$800 million during the first four years
after privatiza-tion; SEGBA firms paid over US$49 mil-
lion up to the first quarter of 1995; GdE paid US$146 mil-
lion in 1993 and US$156 million in 1994 as taxes on in-
come and assets; Aguas Argentinas, the OSN concession-
aire, paid US$8.3 million in 1993, US$19.8 million in 1994
and US$19.4 million during the first three quarters of 1995.
The accrued income tax amounted to a total of US$11.3
million at the end of this period; the newYPF paid US$109
Synthesis 53
million and US$88 million as taxes in 1993 and 1994, re-

spectively (Table 11).
TABLE 11: TAX REVENUES FROM PRIVATIZATION
ENTel *At least US$800 million during 1991-94

* VAT tripled
SEGBA * Over US$49 million up to the first quarter of 1995
including US$2.3 million paid by Central Puerto
and US$1.7 million paid by Central Costanera in
the first quarter of 1995
GdE - US$146.1 million in 1993
* US$156.1 million in 1994
OSN * US$8.3 million in 1993
* US$19.8 million in 1994
* US$19.4 million in the first 3 quarters of 1995
* Accrued income taxes of US$11.3 million for the period
1994-95
* VAT on water rate (18% until 1994, 21 % thereafter)
YPF * US$109.2 million in 1993 (including US$28 million as
income tax and US$18 million as real estate tax)
* US$88.4 million in 1994 (including US$11 million as
income tax and US$10 million as real estate tax)
4. Indirect taxes, resulting from higher output produced by

the privatized firms, have also contributed to the posi-
tive fiscal effect. For example, in the case of ENTel rev-
enues from VAT have tripled since privatization and
OSN's water rate includes a 21 percent VAT which was
not paid before.
5. All of the firms except YPF,16 were loss makers and re-
quired government subsidies to cover operational defi-
cits. Government subsidies are no longer paid to these
companies. The total value of savings from subsidies for
all Argentinean privatizations is estimated to be US$1.5
billion per year.17
16YPF was not a continuing loss-maker during that period, although it used to be one of the
world's few oil companies experiencing huge losses. Operating losses amounted to US$2
billion in 1981 and US$1.5 billion in 1982.
7
1 See Alexander and Corti, Argentina's Privatization Programn.
2. FinancialPerformance
The overall financial performance after privatization appears
to be very positive. All five firms show unambiguous improvements
in financial performance. The estimate for the combined losses of
the four enterprises 18 in the last year of their public ownership is
approximately US$2 billion dollars."9 Under private ownership, the
profits of these enterprises in 1994 are close to US$2 billion an in-
crease in profits of about US$4 billion (Table 12).
TABLE 12: FINANCIAL PERFORMANCE, AFTER-TAX PROFITS (IN US$ MILLION)
Date of
Enterprise Privatization 1988 1989 1990 1991 1992 1993 1994
ENTell Nov-90 (577.1) N.A.2 N.A. 191.6 404.4 582.4 731.6

SEGBA 3 Aug-92 (77.0) (941.0) (118.0) (563.0) (61.3) (75.2) 54.1
GdE Jan-93 N.A. N.A. N.A. (523.0) (841.0) 487.2 505.0
OSN Nov-92 N.A. N.A. N.A. N.A. (23.0) (23.0) 25.0
YPF Feb-93 N.A. N.A. N.A. 245.0 256.0 706.0 538.0
After privatization. Telef6nica. Telecom. Telintar and Startel combined.
2 Not available.
After privatization, Edenor, Edesur, Edelap, Central Costanera, and Central Puerto combined.
1. ENTel's pre-privatization losses were turned into profits

after privatization in 1990 and increased every year since
then, to US$731.6 million in 1994. This represents an av-
erage annual increase of 60 percent over the 1991-94 pe-
riod. The post-privatization performance of both basic
service providers, Telef6nica and Telecom, reflects this
upward trend.
2. In 1991, the last full year prior to privatization, SEGBA's
losses were US$563 million. In the first year after
privatization, the losses of all the firms carved out of
SEGBA were reduced to US$75.2 million and by 1994
turned into profits of US$54.1 million. In 1995, on the
basis of the first quarter results, only the three distribu-
tion companies were expected to generate a total of
US$114.7 million net profit.
1 YPF made a profit a year before its privatization.

9
' Includes the 1988 figure for ENTel.
Synthesis 55
3. GdE's loss prior to privatization, in 1992, was US$841

million. The 10 privatized natural gas transmission and
distribution companies created out of GdE showed posi-
tive profits following privatization. In 1994, their second
year of full private operation, they earned US$505 mil-
lion in profits.
4. Owing to the large start-up costs, the OSN concession-
aire lost US$23 million in 1993, which was the same as
OSN's losses under public ownership in 1992. The firm's
net profit was US$25 million and US$54 million in 1994
and 1995, respectively.
5. YPF's operational performance improved following
privatization. Its pre-privatization profits jumped from
US$256 million in 1992 to US$706 million in 1993. In 1994,
YPF generated a US$538 million after-tax profit, 110 per-
cent higher than the pre-privatization figure.
3. OperationalPerformance
Detailed operational performance data are not available for
all five enterprises. The available information (Tables 13.1 and 13.2),
however, allows an evaluation of post-privatization performance for
TABLE 13.1: OPERATIONAL PERFORMANCE OF ENTEL'
Phone Lines 3,458 3,685 4,262 4,968 5,637

Lines in Service 3,096 3,232 3,769 4,092 4,834
Lines in Service/Employees 72.2 92.7 104.4 121.1 154.5
Public Phones NA.2 27,546 37,403 44,551 58,844
'Telecom, Telef6nica.
2
Not available.
TABLE 13.2: OPERATIONAL PERFORMANCE OF SEGBA
Labor productivity 0.6 0.7 1.6 2.1 2.4 1.9 2.4 2.8
Customers/employee 182 207 374 472 542 482 553 610
Energy losses () 25 26 22 16 13 26 20 15
'Estimates based on the first quarter.

ENTel and SEGBA, and reveals strong improvements in performance

across several physical indicators. The performance of GdE and
OSN, though data are preliminary, appears also to have improved.
YPF, because of massive restructuring prior to privatization, is more
difficult to evaluate. In no case is there evidence of worsening op-
erational performance.
1. The operational performance of ENTel's new telecommu-
nications companies gradually improved following
privatization, although problems such as the high rate of
international callbacks could not be immediately elimi-
nated. Between 1990 and 1994 the new companies to-
gether installed 63 percent more lines and increased the
lines in service/employees ratio from 72 to 155. The total
number of public phones jumped by 143 percent from
24,178 in 1989 to 58,844 in 1994 while the international
call-minutes almost doubled over the same time period.
A great deal of new investments went into the digitaliza-
tion network which is necessary to provide access to
highly profitable value-added services.
2. SEGBA's newly privatized companies improved their op-
erational performance following privatization on a wide
range of indicators even though they could not quickly
solve the problem of recurring electricity outages. Labor
productivity more than doubled in the two new distribu-
tion companies, from 0.7 for SEGBA in 1991 to 1.6 for
Edesur and 1.9 for Edenor in 1993. Moreover, both of the
privatized distribution companies showed major im-
provements in their customer to employee ratios. Both
of the generation and distribution companies undertook
new investments in 1993-94 and this is expected to even-
tually solve the remaining capacity and outage problems.
3. The operational performance of GdE's privatized com-
panies improved following privatization. A comparison
between the first half of 1992 and the first half of 1993
shows that the quantity of gas carried by the two new
transmission companies during this period increased by
11 percent, whereas the quantity delivered by the distri-
bution companies increased by 10 percent. By 1994, total
capacity of expansion reached 12 million cubic meters a
day at a cost of US$137.6 million.
Synthesis 57
4. OSN's operational performance improved during its op-

eration as a private concession. Emergency repairs were
undertaken and the entire maintenance system was mod-
ernized. Moreover, the company made several major in-
vestments partially financed by the IFC to modernize and
gradually expand the water and sewage treatment and
distribution infrastructure. As a result, over the first six
months, the system's pumping capacity grew by 10 per-
cent, water losses fell from 40 percent under public own-
ership to the contract target of 25 percent and illegal con-
nections were reduced to about 5 percent of the total. By
December 1995, water supply coverage increased by 10
percent while coverage for sewerage services expanded
by 8 percent.
5. The operational performance of YPF is very difficult to
evaluate owing to the extensive organizational restruc-
turing prior to privatization. Nonetheless, the informa-
tion available implies that the new company's overall
physical performance has improved. In fact, YPF has
become one of the most profitable oil companies in the
world. It is listed on the New York Stock Exchange. Crude
oil production increased from 14.3 million cubic meters
in 1992 to 16.1 million in 1993 and 20.0 million in 1994.
Natural gas output, however, followed a different pat-
tern: it was 11.1 billion cubic meters in 1992, declined to
10.6 billion in 1993 and remained at 10.7 billion in 1994.
The decrease in gas production was a consequence a de-
crease in YPF's market share at the producer level.
The impact of privatization on the key stakeholders has been
favorable. The government has been a major beneficiary of the rev-
enue proceeds, retirement of debt, higher taxes and diminished sub-
sidies. Consumers have gained from an expansion of service by all
the five privatized firms and significant improvement in quality of
service by the four utilities. In some instances, such as water, most
categories of electricity users, some gas users, and installation tele-
phone charges, consumers have also benefited from lower prices.
In other cases, prices have increased. However, most privatization
contracts restricted the extent of permissible price increases, linking
their movement to general inflation. Employees remaining with
the firms have benefited a great deal from share participation and
higher salaries. For the employees who chose to take the retirement
option the impact was probably negative. However, all employees
received very generous severance packages and in most cases
retired voluntarily Strategic investors appeared to have gained in
most privatization cases (exceptions are OSN and the two electric-
ity distribution companies) from an appreciation of the value of the
companies and their profitability. Table 14 gives a summary of
privatization's impact on these stakeholders.
TABLE 14: IMPACT ON STAKEHOLDERS
Government
* Privatization Proceeds + + + N.A.' +
*Tax Revenues + + + + +
* Decreased Subsidies + + +- + +
*Credibility + + + + +
'Other + + + + +
Customers
'Quantity + + + + +
'Quality + + + + +
'Price - + -
Strategic Investors Varying2

'Profitability + + +
* Capital Gains + + + N.A.
Public Investors
' Capital Gains + + + N.A. +-
Employees
*Retained ++ ++ ++ ++ +
*Departed + +- -+ +
Creditors + + + + +
Not applicable.
2The performance of the privatized YPF companies is not yet known.
+ Positive; - Negative: ++ Highly positive; +- Mixed
4.1 Government
The Government of Argentina was a clear winner. Overall,
the privatization of the five PEs sent a strong signal to the entire
world about the commitment of the Argentine Government to the
restructuring of the economy and the privatization process. This
undoubtedly increased the government's credibility at home and
abroad. More directly, privatization proceeds helped decrease the
nation's external debt and attracted foreign investors to Argentina.
Synthesis 59
The elimination of budget transfers to money-losing enterprises and

the new taxes from the profitable privatized companies also im-
proved the government's fiscal condition (see the Fiscal Impact sec-
tion for details).
Provincial governments also benefited, particularly from the
sale of YPF, the national oil company. They gained more control
over the oil-producing areas in their provinces, shared in the
privatization revenues, obtained equity and can look forward to
royalty earnings generated by the various exploration and extrac-
tion contracts.
4.2 Consumers
The impact of privatization on consumers depends upon sev-
eral factors which are discussed separately below. However, the
impact appears very positive.
1. The quantity of output and services provided by the firms
after privatization is higher than pre-privatization lev-
els.
* ENTel has installed 63 percent more lines over 1990-94 and

143 percent more public telephones over 1989-94.
* SEGBA increased the total energy distributed by 31 per-

cent over 1991-94.
* GdE increased the level of gas distribution by over 10 per-

cent in the first six months of operation and helped avert a
gas shortage.
* OSN, renamedAguasArgentinas, increased water supply

by 10 percent sewerage services by 8 percent from July
1993 to October 1995.
* From 1992 to 1994, YPF's crude oil output increased 40

percent, while natural gas production fell 4 percent as a
matter of the firm's policy
Thus consumers who were previously not receiving any
services have benefited. These increases in output are
directly attributable to privatization, as the privatization
contracts include certain requirements for expansion and
service coverage.
2. On the basis of a wide range of performance indicators,

the quality of services also improved. The most signifi-
cant improvements were achieved by ENTel and OSN.
* The new companies created from ENTel have improved in

key areas of service: from 1990 to 1994, international call
completion rates increased from 39 percent to 55 percent
while domestic long distance call completion rates in-
creased from 30 percent to 93 percent (for Telecom) and to
99 percent (for Telef6nica). 20 The operational efficiency ra-
tios have also improved: from 1990 to 1992, the propor-
tion of pending repairs decreased from an average of 2.5
percent to 0.4 percent, while repair waiting time declined
from 11 days to 2.5 days.
* Aguas Argentinas reduced the number of pending claims

for leaks/breakdowns from 1,600 in May 1993 to 700 in
September 1993 for water and from 3,000 to 1,900 for sew-
erage drains. It also reduced the response time for com-
plaints from 80 to 48 hours for water and from 140 to 80
hours for sewerage.
3. The investments undertaken in rehabilitation, mainte-
nance and expansion of capacity will increase both the
quality and quantity of output and services, and will ben-
efit consumers. In many instances these investment re-
quirements are mandatory
4. The effect of privatization on prices-an important fac-
tor affecting consumers-is difficult to determine. In some
instances (e.g., water, telecommunications), the govern-
ment had adjusted the prices as part of the rationaliza-
tion prior to privatization. In other instances (e.g., ENTel,
SEGBA, and GdE), prices have also been rebalanced to
prevent cross-subsidization and promote better utiliza-
tion of resources.
* In the case of SEGBA, prices declined by 10 percent (inclu-

sive of fixed charges) between September 1992 and Febru-
ary 1995 for all customer categories except the low-con-
sumption residential group. Low-consumption residen-
tial customers' nominal rate increased by 30 percent to
eliminate cross-subsidies and rebalance the rates. Fixed
charges increased for all customers by 28 percent.
2
1 Increases in long-distance call completion rates are based on unaudited figures.
Synthesis 61
* In the case of GdE, the rate rebalancing and price differen-

tiation adopted after privatization meant an overall in-
crease in price which had seasonal variations. However,
for certain customers prices have declined. Moreover,
owing to the elimination of the fuel tax, which was trans-
ferred to the distribution companies, the residential cus-
tomers have been buffered. Some customers (e.g., the resi-
dents of Patagonia) received an explicit subsidy to con-
tinue paying the pre-privatization level of tariffs. For large
consumers, the more favorable tariffs are in the interrupt-
ible system since they do not include the cost of invest-
ments.
* For OSN, the price of water decreased by approximately

27 percent as OSN's concession was awarded to the com-
pany offering the lowest price to the consumers. Despite
the subsequent price increase of 13.5 percent, the water
rates were still 17 percent below the pre-concession pe-
riod.
Since the prices are linked to the movements of other price
indices, they cannot change on their own. In telephone services,
apart from the rebalancing that took place in 1992 and 1993, there
have been three changes per year. Two of them take place every six
months to adjust the pulse price with the U.S. CPI, and the other
one refers to the X factor. In the case of electricity, prices change
every six months, according to the U.S. CPI, to technological and
rebalancing factors, and to natural seasonal variations that arise from
the wholesale market.
Although prices do not change significantly, to the extent
that the private sector will enforce collection more zealously than
public companies, some consumers will be worse off, as they were
getting away in the past with theft (i.e., zero price), particularly in
the water and electricity sectors.
4.3 Investors
Strategic investors also benefited. The benefits came from
two sources: (1) capital gains resulting from the appreciation of the
value of the company; and (2) higher profits.
* ENTel: The US$1.16 billion paid by investors in Novem-

ber 1990 for 60 percent of ENTel was worth US$11.5 bil-
lion in 1995. This represented a total market value of
US$18.2 billion for both Telef6nica and Telecom. Both com-
panies have also been highly profitable. The operators of
these companies, who are also shareholders, have benefited

from management contract fees. In 1993 and 1994,
Telef6nica's management fees totaled US$153 million and
US$195 million, respectively, while those of Telecom were
US$70 million and US$85 million, respectively.
* SEGBA: Central Costanera and Central Puerto, SEGBA's

two new generation companies, became profitable imme-
diately after privatization and have remained so. By Janu-
ary 1995, Central Puerto's shares were 2.12 times higher
than what the consortium paid for them. Central
Costanera's shares were valued 2.33 times higher than at
the time of privatization. As for the three distribution com-
panies, in 1994 the profits of Edenor and Edelap were
US$1.3 million and US$8.1 million, respectively, whereas
Edesur incurred a loss of US$15.7 million. However, on
the basis of their first quarter results, their profits in 1995
are estimated at US$59.4 million for Edenor, US$45.3 mil-
lion for Edesur, and US$10 million for Edelap.
* GdE: The new differentiated rate regime enabled GdE's

natural gas transmission and distribution firms to earn a
set rate of return high enough to cover operating expenses
and part of the investment costs, and to generate profits.
In 1994 all of these companies made profits totaling US$506
million, compared with losses of US$841 million in 1992.
However, parallel with trends in the stock market, the share
value of GdE decreased from US$2.7 in June 1994 to
US$1.35 in March 1995.
* OSN: While the OSN concessionaire lost US$23 million

during 1993 because of high start-up costs, the company
became profitable in 1994 (US$25 million) and generated
US$54 million net profits in 1995.
* YPF: The impact of YPF's privatization on strategic inves-

tors is very difficult to evaluate.
Public investors, in general, obtained capital gains follow-
ing the initial public offering of shares. However, recent declines in
the stock market cloud the results: YPF's shares, offered at US$19,
reached US$29.6 before declining again. In April 1996, they were
trading at around US$22. However, the firm has been giving divi-
dends to its shareholders. Both telephone companies' shares are
trading at a higher rate than their initial offerings. Although there
are limitations on the transfer of certain classes of shares, eventually
Synthesis 63
these limitations may be lifted and shareholders could then realize

their capital gains through resales.
4.4 Employees
The overall impact of privatization on the employees of the
five PEs was mixed. Workers who retained their jobs clearly ben-
efited. Those who lost their jobs were cushioned by a variety of
measures including generous severance payment packages, train-
ing programs, etc.
The employees of all five enterprises who retained their jobs
following privatization benefited through dividends from and capi-
tal gains on the Class C shares. In the case of ENTel, they also re-
ceived wage and benefit increases while the employees of the new
SEGBA companies obtained incentive-based pay and became eli-
gible to participate in training programs. GdE's retained employ-
ees received wage increases and those of OSN gained access to train-
ing programs. The retained employees of YPF did not obtain any
special gains beyond ownership of the Class C shares.
At the time of privatization the total number of employees
in the five companies was 87,087. However, after privatization, em-
ployee restructuring was undertaken by all five companies result-
ing in the layoff and retirement of 23,400 employees-approximately
27 percent of the total (Table 15). All companies reduced their work
force, with the reductions ranging from 17 percent (ENTel) to 47 per-
cent (OSN).
TABLE 15: POST-PRIVATIZATION EMPLOYEE RESTRUCTURING
Privatization At After 0/
Enterprise Date Privatization Privatization1 Change
ENTel Nov-90 42,908 35,522 -17
SEGBA Aug-92 15,806 11,307 -28
GdE Jan-93 10,273 6,958 -32
OSN Nov-92 7,500 4,000 -47
YPF Feb-93 10,600 5,900 -44

Total 87,087 63,687 -27
End of 1993.
It is difficult to asses the welfare consequences for employ-

ees who had to leave their jobs because of voluntary retirement and
generous severance packages. In addition, manyArgentinean work-
ers had more than one job and simply moved to a single full-time
job while receiving a liberal package from the privatized company
They also benefited from the PPP 10 percent program.
ENTel's work force was reduced through attrition and spe-
cial retirement programs and cost Telef6nica more than US$100 mil-
lion and Telecom US$80 million in severance payments. The em-
ployees of Edesur, one of SEGBA's new electricity distribution com-
panies, were paid US$30,000 per capita for severance payments.
OSN's 4,000 workers who retired voluntarily received a total of US$87
million, shared by the government (US$37 million) and Aguas
Argentinas (US$50 million). The new YPF laid off and retired 4,700
workers, 44 percent of its work force, after privatization. However,
departing YPF workers retained certain health care benefits.
VI. LESSONS LEARNED
The big lesson from the Argentine experience is that

privatization on a large scale can be accomplished within a short
time period. This finding is important because few countries have
been able to privatize so quickly across such a broad range of indus-
tries. Since Argentina was able to privatize on a large scale with
speed and transparency the operationally relevant question is: how
were they able to do that and what can other governments pursuing
privatization learn from them?
In Argentina, as in other successful privatizing countries, a
remarkable feature has been the explicit and sustained commitment
of the government to privatization. The most powerful expression
of this commitment has been the willingness of the head of the gov-
ernment, President Menem, to champion the case for privatization.
No country in the world has privatized on a large scale without the
express and publicly articulated support of the head of the govern-
ment. Support from the highest level of government is critical in
overcoming resistance of powerful interests, including certain min-
isters, and evolving a broad-based consensus.
If political commitment is ensured, the main impediments
to privatization are lack of a decision-making mechanism and lack
Synthesis 65
of technical capacity for implementation. The Argentineans were

able to make swift progress by keeping the policymaking and moni-
toring centralized, decentralizing the implementation process, fix-
ing responsibility on individuals for specific transactions and rely-
ing heavily on consultants. By assigning the task of privatization to
individual interventors accountability for the pace and quality of
the transactions could be better fixed. The potential resistance of
incumbent managements was also diminished by assigning execu-
tive responsibility during the transition to the interventors. Gov-
ernments, serious about privatization, may consider, as a first step,
replacing the chief executive (CE) of the firm selected for
privatization. The incumbent CEs are usually opposed to privatiza-
tion and work in many ways to obstruct and slow down the process
while hoping for a change of policy Replacing the CE with another
individual with a clearer mandate for privatization and less attach-
ment to the status quo-itself a sign of government seriousness-
will contribute to the pace of reform.
The Argentine experience reveals the importance of estab-
lishing appropriate regulatory framework prior to privatization.
Especially, when large transactions with complex industry structures
are concerned, such as telecommunications, gas and electricity, the
role of regulatory agencies becomes crucial. In Argentina, this issue
was not fully addressed before the privatization of the telecommu-
nications utility, however, subsequently, in the gas and electricity
sectors, new laws were enacted and regulatory agencies were estab-
lished prior to privatization. Not surprisingly, today among these
three sectors, the regulatory agencies set up for gas and electricity
function the best.
Another important lesson of the Argentinean privatization
experience is that privatization, particularly of large enterprises, re-
quires resources. There is a period of time before the revenue pro-
ceeds start coming in when the government has to sustain the pro-
gram from its own resources. Governments and designers of na-
tional programs have in many cases underestimated and not allo-
cated the amount of resources required up-front for launching a major
program. The resources required for setting up the institutional ca-
pacity, conducting preparatory studies, recruiting financial, legal,
technical and marketing advisers and establishing regulatory frame-
works can be huge, and if not mobilized in a timely fashion, can
adversely affect the launch and sustainability of the program. In
many countries privatization programs are faltering because the gov-
ernments have not backed up their public pronouncements with a
sufficient amount of resources to complete the transactions. The

Argentineans, again reflecting government resolve, spent the re-
sources necessary and assigned very good people to complete the
transactions.
A related lesson is that funds and support from international
agencies can be acquired for privatization, and other countries can
learn from the Argentinean experience in this area. Argentina is
somewhat unique among the successful privatizers in utilizing the
resources of international agencies, particularly the World Bank. It
diverted existing World Bank loans toward privatization, acquired
a new technical assistance loan and a Japanese founded grant solely
for privatization, and received advisory assistance from World Bank
staff and consultants .
The Argentine Government began aggressively implement-
ing the privatization program immediately after coming into power.
Perhaps there is a lesson here for other governments, particularly
those newly elected, with a fixed term. It may be better to start the
privatization early in the tenure as there is a window of opportunity
when there is initial goodwill toward the government. Also, it takes
at least a year or two for major transactions to be completed and to
show benefits to the consumers in terms of improved quality of ser-
vice and expanded coverage.
There are many lessons related to the implementation of the
program, which are of relevance to countries trying to improve the
speed, quality and transparency of their privatization programs.
Some of these notable features of Argentina's program include: closed
execution (i.e., inclusion of the draft contract in the bidding to mini-
mize post-award negotiations), the two-envelope model of select-
ing the bidder (i.e., pre-qualification followed by decision based
solely on price via competitive bidding) and the unwillingness to
prop up firms prior to privatization. It is interesting to note that
many of these lessons were learned by doing by the Argentineans
themselves. There was an evolutionary aspect to the program, with
the quality and transparency of the latter privatizations (e.g., elec-
tricity, gas, water) considered generally superior to the earlier ones
(e.g., airlines, telecommunications).
Synthesis 67
APPENDIX A
BIDDING CONSORTIA MEMBERSHIP
ENTel
1. Bell Atlantic (USA), Manufacturers Hanover Trust (USA),

Garfunkel (Argentina), Welbers Insua SA (Argentina), SIAP
(Argentina), Cofiba (Argentina), and Cadipsa (Argentina).
2. Telef6nica (Spain) with Telef6nica International Holding
B.V., Citibank (USA), and Inversoras Catalinas (Argentina).
3. A joint venture between STET (Italy) and Cable and Radio
(France) with J.P. Morgan (USA), a pool of international
investment banks, and Perez Companc (Argentina).
SEGBA
CentralPuerto
1. Chilgener SA (Chile), CompanXia Chilena de Distribuci6n
Electrica Quinta Regi6n SA (Chile), Chilectra Quinta
Regi6n (Chile).
2. Astra (Argentina), Electricite de France (France), Empresa
Nacional de Electricidad de Espafna (Spain).
3. Enron Company (USA), Enron Corporation (USA), Enron
Power Corporation (USA), Enron Power Central Puerto
(USA-Argentina), Cuenca Austral (Argentina).
4. Empresa Nacional de Electricidad de Chile (Chile), Aluar
(Argentina), Inversora Patagonica (Argentina),
Distribuidora Chilectra (Chile), Enersis SA (Chile).
5. Dominium Energy (USA).
Central Costanera
1. Empresa Nacional de Electricidad SA, ENDESA (Spain),
Enersis SA (Chile), Distribuidora Chilectra Metropolitana SA
(Chile), Inversora Patag6nica SA (Argentina), Inter Rio
Holding Establishment (USA), and Costanera Power Corpo-
ration (USA).
Central Pedro de Mendoza

1. Acindar and Massuh and a local construction firm, Benito
Roggio e Hijos SA.
CentralDock Sud
1. Polledo SA (Argentina), Benito Roggio e Hijos SA (Argen-
tina) and Chilgener SA (Chile) and Pacifico Quinta Regi6n
SA (Chile).
Edenor and Edesur

1. Electricidad Argentina SA, composed of Astra-CAPSA
(Argentina), Empresa Nacional de Electricidad de Espafna
(Spain), Empresa Nacional Hidroelectrica del Ribagorzana
SA (Spain), Societe d'Amenagement Urbain et Rural
(France), and Electricit6 de France (France).
2. Compafnia Inversora Electrica de Bs. As. SA, composed of
Sociedad Comercial del Plata SA (Argentina), Powerfin SA
(Belgium), Pirelli Cables SA (Argentina) Pirelli
Constructora SA (Argentina), Elecnor de Argentina SA
(Argentina), and Iberdrola SA (Spain).
3. Compafiia de Inversiones en Electricidad SA, composed of
Techint Cia. T6cnica Internacional e Inversora Catalinas SA
(Argentina), Houston Industries Inc., Houston Lighting
and Power Company, and Houston Argentina SA (USA).
4. Distrilec Inversora SA, composed of Companiia Naviera
Perez Companc SA (Argentina), Distribuidora Chilectra
Metropolitana SA (Chile), Enersis SA (Chile), Endesa SA
(Chile), and the group PSI Energy, Inc. (USA).
5. Fenix del Sur SA, composed of Banco Central
Hispoamericano, Argentina), Banco de Galicia y Bs. As.
(Argentina), DYCASA SAIC (Argentina), Dragados y
Construcciones SA (Spain), and Union Electrica Fenosa
(Spain).
Synthesis 69
Edelap
1. Compafiia de Inversiones en Electricidad SA, a group

formed by Houston Industries, Inc., Houston Lighting
and Power Company, Houston Argentina (USA), and
Techint Cia. Tecnica Internacional SA with Investora
Catalinas SA (Argentina).
2. Electricidad de Bs. As., integrated by Cia. General de
Electricidad Industrial (Chile) and Benito Roggio e
Hijos SA (Argentina).
3. Interamericana de Energia, Chilgener SA (Chile) and
Chilectra Quinta Regi6n (Chile).
4. Inversora Electrica del Sur, a consortium formed by
Iberdrola SA (Spain), Hidroel6ctrica from Catalufia
(Spain), and E1lctrica del Plata SA (Argentina).
GdE
Transportadorade Gas del Norte
1. Novacorp, Transcogas and Wartins.

2. Enron, P. Companc, Citicorp and ADPT.
3. Transcanada and Coastal Bridas y Otros.
4. British Gas, Loma Negre, Tenneco and Polledo.
Transportadora de Gas del Sur
1. Enron, Perez Companc, Citicorp and ADPT.

Distribuidora de Gas Pampeana
1. Camuzzi and Gassometri SpA.

2. Eseba and Gaseba
3. Sideco and Italgas
4. British Gas, Perez Companc, Astra and Invertrad.
5. Seagull, Panam and Gredar.

6. Gas Natural, Discogas and Manra.
7. Tractbel, Ilberdrola and Garovaglia y Zorraquin.
8. BC Gas y Otros.
Distribuidorade Gas del Sur

2. Mepaco Gas.
3. BC Gas y Otros.
Distribuidorade Gas del Litoral
1. Tractebel, Ilberdrola and Garovaglio Zorraquin.

2. Camuzzi, Gassometri and Banco Frances.
3. Sideco and Italgas.
4. Seagull, Panam, Greda, Astra and Invertrad.
5. BC Gas y Otros, Astra and Invertrad.
6. Gas Natural and Discogas.
Distribuidorade Gas del Centro

2. Cartellone, Gasco and Banco Frances.
3. Camuzzi and Gassometri.
Distribuidorade Gas Cuyana.

3. Camuzzi and Gasometri SpA.
Synthesis 71

5. RBS Joint Venture.
6. Tractabel, Ilberdrola and Garovaglio y Zorraquin.
7. BC Gas y Otros.
Distribudorade Gas Noroeste

4. BC Gas y Otros.
Distribuidorade Gas Buenos Aires Norte

4. Gas Natural, Manra and Discogas.
Distribuidorade Gas Metropolitana.

OSN
1. Aquas Argentinas, led by Lyonnaise des Eaux-Dumez

(France).
2. Aquas de Buenos Aires, led by Thames Water PLC (En-
gland).
3. North West Water International (England).
APPENDIX B
PRIVATIZATION TRANSACTIONS OF YPF: STRATEGIC SALE
Method
Privatization "
Upstream Strategic Business Unit 1,788.4
Central Areas J/Vs' 803.6
Tordillo 179.1
El Huemul 170.5
Puesto Hernandez 286.3
Vizcacheras 167.7
Secondary Areas Concessions, J/Vs 520.0
Santa Cruz I 55.0
Santa Cruz II 141.8
Tierra del Fuego 143.5
Aguarague 143.7
Palmar Largo 36.0
Secondary Areas Sold by the Government Concessions 464.8
Downstream Strategic Business Unit 271.5
Refining Outright Sale 88.0
Campo Duran 64.1
San Lorenzo 12.2
Dock Sud Refineries 11.7
Oil Pipelines and Multipurpose Pipelines Sale of Shares 77.0
Main Oil Pipelines/Estacion Puerto Rosales 77.0
Campo Duran - Monte Cristo n.a.2
Oleoducto del Valle n.a.
Maritime and River Transportation 97.8
Terminales Maritimas Patagonicas 10.0
Transporte Maritimos Petroleores S.A. 41.8
Ebytem S.A. 19.0
Ships 27.0
Marketing 8.7
Interpetrol S.A. 8.7
Existing Contracts (24) Conversion n.a.
Class A, B, C and Combined D Shares Domestic and 3,040.0
International Public
Offerings
Total of AllTransactions 5,099.9
'Joint Ventures.
2 Not available.
PART II
CASE STUDIES
The objective of each of the five cases included in this study is to answer the follow-
ing three questions: (1) How was the concerned enterprise preparedfor privatization?
(2) What were the results of the transaction? and (3) What were the early post-
privatization outcomes?
The cases have the following basic structure, with some variations in the case of
Yacimientos Petroliferos Fiscales (YPF), owing to the complexity of its transaction:
Section I of each case describes the company and the industry and presents the role
of the government prior to privatization. Sections II to IV are devoted to the above-
mentioned questions. Section II discusses the preparation for privatization with a
focus on the enterprise restructuring prior to privatization, the development of a
regulatory framework for the post-privatization period and the sales procedures,
such as marketing, pre-qualification criteria and bidding rules. Section III gives the
details of the transaction, including the number of bidders, prices received, selec-
tion of the winner and payment terms. Finally, Section IV provides preliminary
evidence on post-privatization outcomes. It focuses on the fiscal impact, profitabil-
ity, productivity and service quality, and examines the effects of privatization on
various stakeholders such as the government, consumers, investors and employ-
ees.
I
ENTel 75
Case Study 1: Empresa Nacional de

Telecomunicaciones de Argentina
(ENTel)
I. INTRODUCTION
Argentina's telephone company, Empresa Nacional de

Telecomunicaciones deArgentina (ENTel), was privatized at the end
of 1990 as part of a larger privatization program. This case study is a
review of ENTel's privatization.
1. The Company/Industry
The first telephone lines were installed in Buenos Aires in
1881 by a Swiss company Subsequently, other private firms were
licensed to provide telephone service in Argentina's various prov-
inces and cities.
During 1946-48, the largest company, EMTA (owned by ITT),
was acquired by the State under the Peron Administration's nation-
alization strategy In 1956, EMTA was named Empresa Nacional de
Telecomunicaciones de Argentina (ENTel). By 1969 more private
companies had been nationalized and merged into ENTel. Entry of
private operators into the industry was curtailed, and thus ENTel
achieved a virtual monopoly on local and long distance telephone
calls, telex, data transmission, satellite communications, naval ra-
dio exchanges, and some value-added services. By 1990 ENTel had
a 90 percent share of telephone lines, with the remainder operated
by Compafnia Argentina de Telefonos (CAT), Compafnia Entrerriana
de Telefonos (CET) - both owned by the Swedish firm Ericsson -
and many small cooperatives.
In 1990 ENTel contributed 1.7 percent to GNP' and employed
about 45,000 people. Its line-per-employee (72.2) and revenue-per-
employee (US$32,000) ratios indicated that the enterprise was over-
staffed in comparison with the telecommunications companies of
' Estimate by the Ministry of Economy and Public Works.

other major nations. Quality of service was poor and was declin-
ing. Completion rates for domestic long distance calls were below
international standards for mature networks. Repair time was slow
and digitalization of the network amounted to a modest 13.4 percent.
Demand was not satisfied and backlogs were growing. The govern-
ment had to finance ENTel's deficit caused by these inefficiencies.
The regional distribution of services was unbalanced reflect-
ing regional differences in per capita income. In 1990 the three most
populous provinces, with two-thirds of the total population, had 84
percent of all telephone lines. However, even where coverage was
high, as in the cities of Buenos Aires, C6rdoba, and Rosario, there
were high levels of network congestion owing to obsolete equip-
ment and to numerous illegal connections jamming the system. Table
1 shows ENTel's revenues by end-users in 1990.
TABLE 1: ENTEL'S REVENUES BY END-USERS, 1990 (IN US$ MILLIONS)

Percentage
Revenue of total
revenues
Line Rentals 194 13.4
Local and Long Distance Domestic Traffic 834 57.4
New Connections 44 3.0
International Traffic 259 17.8
Others 122 8.4
Total 1,453 100.0
Source: ENTel reports.
Before the privatization of 1990, ENTel's rate structure was

quite distorted. Domestic long distance rates were higher than
the cost of service and were used to subsidize local calls. In ad-
dition, the residential services were subsidized by business and
professional subscribers.
Nominal rate adjustments lagged behind general price in-
creases because the government attempted to use public services
tariffs to curb inflation. Connection charges were very high: resi-
dential users had to pay US$1,000 and business users paid US$2,500.
However, rental charges and the rate for average local calls were
below the international median in 1988. As for domestic long dis-
tance calls, there were ten different rates, which varied according to
distance but bore little relation to the differences in cost of service.
ENTel 77
2. Role of Government
Beginning in 1936, telephone services were regulated feder-
ally by the Secretariat of Communications (SC) of the Ministry of
Public Works. The SC issued licenses, set rates, determined invest-
ments, promoted the local telecommunications industry, and cen-
trally procured equipment and parts. A Federal Council of Tele-
communications (CFT) was also established at that time to repre-
sent the interest of the provinces. Since ENTel was created, its op-
erations have been governed by the statute that created it and,
more recently, by the Telecommunications Law of 1972. ENTel's
degree of autonomy was always low and subject to continual po-
litical pressures.
In 1988, in response to the growing backlog and declining
service, the government attempted to partially privatize ENTel. The
government planned to sell 40 percent of the shares to a strategic
partner and to transfer up to 9 percent to employees. Telef6nica of
Spain was selected as partner and signed a preliminary agreement
for the provision of telecommunications services in March 1988.
Telef6nica was scheduled to pay approximately US$750
million for its share: US$200 million in cash up front, US$300
million in cash within 30 months of sale and the remainder in
external debt retirement.
The new company would have received ENTel's monopoly
for 25 years with an option to renew for another ten years and ex-
tend its operations to the regions served by CAT and CET. Cellular
phone and public telegraphy, however, would not have been part of
the contract.
The privatization plan failed to obtain congressional ap-
proval. While the reasons for rejecting the plan were diverse, the
opposition party's argument focused on the selection of the potential
partner through negotiations instead of competitive public bidding.
II. THE PREPARATION FOR PRIVATIZATION
1. Strategy and InstitutionalArrangements

ENTel was one of the first firms chosen for privatization.
The rationale for its selection was clear: service quality was poor,
backlog was high and labor-management problems were extensive.
Clandestine connections and under-the-table payments to

some labor groups (referred to as the mafia telefonica) were common.
Moreover, the financial losses were high-in contrast to the situa-
tion of telecom in most countries.
Since ENTel was the first utility chosen for privatization, the
outcome was uncertain and opposition could also have been galva-
nized. Thus, the government strategy was to move swiftly. The gov-
ernment initiated the process by relying on presidential decrees and
avoiding new legislation. In addition, the government moved with-
out a comprehensive post-privatization regulatory framework.
A presidential decree set the terms for ENTel's privatization.
In January 1990 this decree was modified by another decree that:
(1) separated basic, international and competitive services; (2) gave
a seven-year monopoly for basic service, with an option for three
more, contingent on the achievement of the required targets; (3)
based rates on a 16 percent return on assets; (4) appointed the SC as
the regulatory authority; and (5) specified a privatization timetable.
The 1990 decree also established a Privatization Committee
that included the Minister of Public Works, the Secretary of Com-
munications and an intervenor to manage the enterprise while it
underwent privatization. A congressional Bicameral Commission
was appointed to provide legislative oversight while Sindicatura
General de Empresas Publicas (SIGEP), the national auditing body
for state-owned enterprises (SOEs), was assigned the task of moni-
toring the process. Advisers were hired to assist in the transaction.
The legal, technical and financial advisers for the
privatization were selected competitively. Klein & Mairal, an
Argentinean firm, was the legal adviser, and assisted in developing
the bidding documents, verifying information about potential buy-
ers and drafting the contracts. Coopers & Lybrand and its local
partners, Harteneck & Lopez, the technical consultants, provided
information about ENTel's operations and assisted in developing
the bidding process and the regulatory framework. Morgan Stanley
of the United States and Banco Roberts of Argentina, the financial
advisers, marketed the process, found potential buyers and assisted
in preparing the bidding documents. The financial advisers received
a fixed fee and a success fee tied to the sales price.
The World Bank provided financial assistance and technical
advice, the privatization of ENTel being one of the conditions of the
Public Enterprise Reform Loan that the Bank made to Argentina.
ENTel 79
2. Restructuring
An issue of great interest to policymakers and implementors
of privatizations worldwide is enterprise restructuring: whether to
restructure the company prior to privatization and how best to un-
dertake that restructuring.
ENTel was broken up, a large share of its liabilities were ab-
sorbed and a few of its employees were let go prior to privatization.
However, no attempt was made to "prop it up" by reforming it prior to
sale, since previous attempts under public management had not proved
successful. The details of the restructuring are discussed below.

ENTel was broken up both functionally and geographically.
Functionally, it was separated into basic, international and competi-
tive services, the latter two comprising telex and data transmission
services and naval radio communications. Basic services were di-
vided geographically into the northern and the southern regions.
Four new joint stock companies were created to provide all of these
services. Two of the new companies, one in the southern region
(now called Telef6nica) and the other in the northern region (now
called Telecom), were established exclusively to provide basic ser-
vices. The third, Telintar, was created to provide international ser-
vices, and the fourth, Startel, was created to offer competitive ser-
vices throughout the country.
The shares of the four new companies were divided into
Classes A (51 percent), B (39 percent) and C (10 percent) 2 In the first
stage of privatization in November 1990, 60 percent of the shares
(consisting of 51 percent of Class A and 9 percent of Class B) of the
two basic service companies were offered to qualified consortia.
More than a year later, the remaining 30 percent of shares of Class B
were offered in domestic and foreign capital markets (40 percent
domestic, 60 percent foreign). The Class C shares were offered to
employees under Programa de Propiedad Participada (PPP), the
Employee Stock Ownership Plan. The winning consortia were to
receive 50 percent stakes in Telintar and Startel.
2 Shares of all classes are ordinary and indivisible, with one voting right each. Class A shares cannot
be transferred without the consent of the Comisi6n Nacional de Telecomunicaciones (CNT), the
national telecommunications commission. The winning consortia are obliged to retain all their Class
A shares during the exclusivity period and to keep a 51 percent stake of total capital at all times.
There are no restrictions on the transfer of Class B shares. Class C shares are reserved for personnel.
80 Argentina PrivatizationiProgram

Prior to privatization, ENTel had 44,339 full-time employ-
ees. This number was reduced by 3 percent to 42,908 in November
1990 at the time of privatization. Thus, there was no major reduc-
tion in full-time employees prior to privatization. However, a large
number of part-time workers (1,710) were affected by the restruc-
turing. When ENTel was broken up, Telef6nica inherited 21,770
employees and Telecom 19,000 employees. Table 2 summarizes the
employment situation when the privatization process began.
Before At
Company Privatization Privatization
(1989) (1990)
Telef6nica 21,770
Telecom --- 19,002
Telintar --- 1,506
Startel --- 630
ENTel Residual' --- n.a.
Total 44,3392 42,908
ENTel Residual was the unit created within the Ministry of Economy and PublicWorks to handle
ENTel's unresolved issues after privatization.
2 Before divestiture figure does not include 1,710 workers with temporary contracts.
Sources: ENTel and annual r-eports from Telefonica, Telecom, Telintar and Startel.
Although no major restructuring of the labor force took place

before privatization, the government forcefully overcame employee
union resistance to privatization. ENTel's labor union FOETRA was
split between a pro-privatization group and an anti-privatization
group. In the district of Buenos Aires, the anti-privatization faction
opposed the privatization of ENTel. The pro-privatization group
was in the minority but received support from the rest of the feder-
ated telephone unions throughout the country. When it became clear
that FOETRA was obstructing the privatization process, the gov-
ernment reacted by declaring it outlaw. The new companies were
required to comply with the existing collective bargaining agree-
ments whose term was to end six months after privatization. New
agreements were signed after the expiry of the term.
ENTel 81
In July 1990, four months before privatization, ENTel's

liabilities were US$2.14 billion. Out of this amount, US$1.76 bil-
lion (82 percent) was absorbed by the government as part of the
financial restructuring and transferred to the Treasury. The re-
maining US$380 million was transferred to the newly privatized
companies. These liabilities consisted of commercial debt, accounts
payable to other public enterprises, and social security obligations.
A special unit, ENTel Residual, was created in the Ministry
of Economy and Public Works to deal with the unresolved issues of
the former public enterprises, such as pending lawsuits, existing
contracts with suppliers, and the final liquidation of the company.3
3. Post-privatizationRegulatory System
3.1 Regulatory Agency

Originally the post-privatization regulation of the indus-
try was assigned to the Secretariat of Communications (SC). In
June 1990, a presidential decree created a new regulatory body,
4
the Comisi6n Nacional de Telecomunicaciones (CNT), the na-
tional telecommunications commission. The CNT's operations were
to be financed through a 0.5 percent sales tax on telecommunica-
tions firms and through payments made by broadcasters for radio
spectrum assignments.
Under the new regulatory framework, provisions for rate
rebalancing were expected to correct the distortions between long
distance and local rates, and between residential and commercial
rates. Open access was granted to independent operators and pro-
viders of competitive services.
'By November 1993, three years after privatization. there were nearly 15,000 pending lawsuits. 80
percent of which were related to labor demands from the pre-privatization period. The value of the
claims against ENTel was estimated at US$400 million.
'The CNT was given responsibility for the continuity, regularity, quality, and wide availability of
basic telephone services at fair and reasonable rates. It was authorized to grant and revoke
licenses, and regulate local and domestic long distance rates as well as intemational services. The
CNT resolved conflicts between operators and users: approved the use of equipment: and had the
authority to change regulatory requirements, review investment plans, prevent anti-competitive
behavior, and administer the radio spectrum and satellite services.
Operators were free to set access charges for interconnec-

tions, although any party could appeal to the CNT in case of dis-
agreements. Interconnection agreements had to be made public
and approved by the CNT, which had to verify that no cross-subsi-
dization was involved in setting the charges. To avoid favoritism in
procurement, all goods and services over US$500,000 were subject
to competitive bids, with local suppliers given a 10 percent prefer-
ence - a result of lobbying on the part of local suppliers. The im-
porting of second-hand telephone exchanges was banned.

Under the new regulatory system, privatized firms facing
direct competition were allowed to set their own rates and prices.
Accordingly, Startel was free in rate-setting whereas the other three
companies were subject to new rules.
A new rate-setting system was introduced. The rates were
allowed to adjust annually according to changes in the U.S. Con-
sumer Price Index (CPI) minus an X percentage which was aimed
at capturing technological improvements in the industry (CPI-X).
The X value was fixed at 0 percent for the first two years, 2 percent
for the following five years, and 4 percent during the remaining
exclusivity periods granted to the two telephone companies. This
was expected to provide an incentive to minimize costs inter-tem-
porally The government's plan to liberalize the market once the
exclusive licenses expired reinforced this expectation. In addition,
cross-subsidization was reduced through the rebalancing of rates.
However, rates for outgoing international calls remained much
higher than those for incoming calls, providing a strong incentive
for callbacks.

During the initial contract period, 1991-96, Telef6nica was
required to add 625,000 customers (5.3 percent annual growth rate)
and to secure an extension of exclusivity beyond 1996 for 811,000
new customers (6.7 percent annual growth rate). The company was
also required to double the number of public phones to 12,948 dur-
ing the same period. Telecom had slightly lower requirements:
609,500 new customers (6.2 percent annual growth rate) during the
initial period and 792,000 new customers (7.8 percent annual growth
rate) to obtain a license extension beyond 1996.
ENTel 83
Service quality requirements for Telef6nica and Telecom in-

cluded rising rates between 1991 and 1996 for call completion rates
of local, long distance and international calls; operator efficiency in
long distance and international assistance; repairs; and waiting times
for new connections (Appendix B provides a summary of these re-
quirements). Failure to achieve these targets during two consecu-
tive years could cause a company to lose its exclusivity rights.
Exit conditions were not defined. Thus, it was not clear how
assets could be transferred if the licenses were revoked. Moreover,
customer protection policies were not developed. It was necessary
for the CNT to issue decrees in 1992 and 1993 to specify the rights
and obligations of customers and establish penalties for violations
by operators.
4. Sales Procedures
4.1 Valuation and Marketing

The valuation of ENTel was assigned to BANADE, the Na-
tional Development Bank, which delegated the task to a team of
consultants from Deloitte Touche Ross, and Ruival Ottone y
Asociados. The consultants used a discounted cash-flow method to
establish alternative sales values. The discount rates ranged from
20 to 30 percent, reflecting Argentina's unfavorable overall country
risk rating at that time.
In March 1990, BANADE announced that the value of
ENTel's fixed assets, the basis for setting the rate of return, had fallen
from US$3.2 billion in January of that year to US$1.9 billion. This
was the result of Argentina's worsening country risk rating, which
affected the discount rate used. One implication of this reduction
in the asset base (denominator) was that the absolute amount of
estimated profits available to the private buyer, given a 16 percent
rate of return, was reduced. This contributed to the withdrawal of
several qualified bidders.
The effort to market the company was undertaken mainly
by the financial advisers, Morgan Stanley and Banco Roberts of Ar-
gentina. As part of the process, members of the congressional Bi-
cameral Commission, the Privatization Committee and related offi-
cials made presentations in New York and London. They discussed
various issues with investment bankers concerned about Argentina's
ability to service its external debt and assured them of the
government's commitment to the privatization process.

Each consortium bidding for the new companies was re-
quired to have one or more telecommunications operators as part-
ners that together owned at least 10 percent of the consortium's eq-
uity. In addition, each consortium had to have one shareholder, or
at most two, each holding 20 percent or more of the consortium's
shares. Hence, at least 30 percent of the consortium's shares were to
be held by two or three shareholders. These shareholders were re-
ferred to as the core members of the consortium.
The combined assets of consortium members had to be in
excess of US$4.0 billion. Foreign consortium partners were required
to have net assets exceeding US$1 billion (for core members) and
US$500 million (for non-core members). Domestic consortium par-
ticipants were required to own US$300 million (core) and US$200
million (non-core) in net assets, respectively The operator company
was required to have net assets of US$1.5 billion and to have served
a telephone network of at least 1.5 million customers in its home
country Operators also had to guarantee an average waiting time
for connections of 15 days or less, and had to show 80 percent effi-
ciency in responding to information calls within 10 seconds and
repair calls within 20 seconds.
The CNT was given responsibility for the continuity, regu-
larity, quality and wide availability of basic telephone services at
fair and reasonable rates. It was authorized to grant and revoke
licenses, and regulate local and domestic long distance rates as well
as international services. The CNT resolved conflicts between op-
erators and users; approved the use of equipment; and had the au-
thority to change regulatory requirements, review investment plans,
prevent anti-competitive behavior and administer the radio spec-
trum and satellite services.
4.3 Bidding Rules
Bidding documents were sold by the government at
US$20,000 per set. They contained the pre-qualification criteria,
rights and obligations of the operators and an outline of the post-
privatization regulatory framework which was prepared by the gov-
ernment with World Bank assistance. The final bidding opened in
June 1990.
ENTel 85
Bidders (strategic investors) were competing for 60 percent

of the shares, and a seven-year exclusive operating license with an
automatic option of renewal by company for three more years based
on fulfillment of minimum performance requirements.
A management contract between the operator and share-
holders was also introduced shortly before the bidding began. It
called for transfer of technology, development of general policies,
preparation of detailed plans, design of formal organizational struc-
tures, hiring of qualified staff and formulation of annual operating bud-
gets.
The management contract was not transferable, although
sub-contracting was permitted. The contract could be terminated
for several reasons, for example, the arbitrary removal of exclusiv-
ity rights, bankruptcy of the operators, unresolvable differences be-
tween the operators and shareholders and delays in payment of the
management fee, set at 1.5 percent of gross profits. Although both
parties, shareholders and operators, were subject to Argentine laws,
they had an option to go to a mediator, the International Chamber
of Commerce of Paris, which would have to arbitrate in situ, in the
city of Buenos Aires.
Once the bidding consortia were qualified, they had two
months, until June 1990, to arrange joint ventures and to prepare
their financial offers for 60 percent of shares in the two companies.
They were also expected to assume US$380 million of ENTel's liabili-
ties that were not transferred to the Treasury (Telef6nica's share was
US$202 million and Telecom's was US$178 million). The bidding was
based on one factor, the amount of Argentine debt retired by the quali-
fied consortia.
Basic bidding and evaluation procedures were clear and well
publicized. Bids were opened in public and the decision criteria
were straightforward. Nevertheless, ENTel's privatization process
was not trouble free. One week before the deadline for the submis-
sion of qualification criteria, the minimum operator asset require-
ments were raised; shortly before the biding process began, quali-
fied bidders were asked to comply with the new legal requirements
and regulatory targets that were not part of the original set of re-
quirements; and after the completion of the bidding process, only a
few weeks before the deals were concluded, the rate-setting method
5 The other 40 percent were Class B and C shares held back for public offerings and employees.
respectively.
was changed from a rate of return on assets to the US CPI-X for-

mula.6
The last minute changes reduced the transparency of the pro-

cess and introduced an element of uncertainty. These changes re-
sulted in the withdrawal of a number of qualified bidders. The un-
certainty surrounding the post-regulatory environment was particu-
larly harmful because it forced the government to renegotiate vari-
ous aspects of the process with the winning consortia, who were
able to negotiate from a position of strength.
Nevertheless, the government learned from the experience
and improved the process in the subsequent privatization of other
public enterprises increasing the credibility of the privatization pro-
cess both at home and abroad.
III. TRANSACTION RESULTS
This section reviews the transaction phase of the

privatization. The focus is on evaluating the number of participants,
the bidding results and the terms of payment.
1. Bidding Process
Fourteen international consortia bought bidding documents.
Seven applied and were qualified. However, only three consortia
participated in the bidding: of these, three bid for Telecom and two
for Telef6nica (Appendix A provides a list of the consortia mem-
bers).
When the bids were evaluated, it was found that the same
consortium (Telef6nica, Spain) had offered the highest bid (propor-
tion of debt retired) for both companies. Since bidding terms did
not allow the same consortium to obtain a majority share in both
companies, the consortium obtained the southern region company,
now called Telef6nica. The northern region company was awarded
to the bidder with the next highest offer (Bell Atlantic and Manu-
facturers Hanover Trust). However, this consortium could not raise
6In the US CPI-X formula, the X is a given percentage aimed at capturing technological improve-
ments in the industry. This change specified that, between March 1990 and the date of finalizing the
contract, the pulse rate in australes would be tied to the U.S. Consumer Price Index (CPI). Since this
period coincided with a strong appreciation of the austral it yielded a high effective rate in dollars. As
a result, following privatization, customers faced an average 96.6 percent increase in the pulse rate
charged.
ENTel 87
enough external debt to retire the debt promised in the bid, and
although it was granted extra time, it eventually withdrew. The
northern region company was then awarded to the bidder with the
next highest offer (STET/Cable and Radio) and named Telecom. The
transactions were completed on November 8,1990. Table 3 provides
a summary of the transaction process.
TABLE 3: THE TRANSACTION PROCESS (IN US$ MILLIONS)
Company No. of Winning dIF!I

=1
Telef6nica 2 Telef6nica 114 517 838 202

(Spain)
STET!
Telecom 3 Cable & 100 438 1,227 178
Radio
Total 5 214 955 2,065 380

Source: UndersecretariatforPrivatization.
The financial transactions were completed when the Class B

shares (30 percent of each company) were sold through two public
offerings. The shares were sold retail and wholesale at different
times, owing to the size of the offerings in relation to the size of the
domestic capital market. 7 Telef6nica's shares generated US$838 mil-
lion in December 1991, reflecting a price per line-in-service of
US$1,549. The sale of Telecom shares in March 1992 amounted to
US$1.2 billion, or US$2,827 per line-in-service. Telecom shares
brought a higher price because of a bullish trend in the Buenos Aires
Stock Market at the time of the offering.
In late 1991, Telef6nica purchased, for US$52.5 million, a part
of one of the smaller telephone companies, CAT, in the Provinces of
Mendoza and San Juan (121,000 lines in service and 1,020 employ-
ees). The remaining CAT areas, Santiago del Estero, Salta, Tucuman,
and Entre Rios (160,000 lines-in-service and 2,000 employees), were
taken over by Telecom for US$67 million in March 1992. Also, as
7
Telef6nica and Telecom shares represented 40 percent of total market capitalization for the ENTel
privatization.
called for by the privatization terms, Telef6nica and Telecom ob-

tained the second band of cellular telephone services for the entire
country in 1992. The first band had been operated in Buenos Aires
by Movicom since 1989. The second band was assigned to
Miniphone, a company that Telef6nica and Telecom formed in 1992.8
2. Payment Arrangements
The winning consortia swapped various financial instru-
ments, such as senior notes and preferred stock in their holding com-
panies, for external debt held by commercial banks. The markets
valued Argentina's external debt at 19 cents to the dollar; thus US$5
billion nominal debt was retired by strategic investors. This was ap-
proximately the US$955 million cash equivalent of the debt retired.
As part of the payment arrangements, the new companies
issued notes to the government for US$380 million of ENTel accounts
payable. This was a debt-for-debt swap in which the government
transferred part of ENTel's existing liabilities to the new com-
panies, thereby reducing the total amount of liabilities assumed
by the Treasury.
According to the privatization terms, the value of the 10 per-
cent PPP packages should have been calculated on the basis of the
total price paid by the winning consortia for 60 percent of the shares.
However, a later agreement between the union, FOETRA and the
government based the PPP package on only the cash component of
the transaction, thus giving the employees a massive discount. The
total value of the 10 percent package was set at US$35.7 million-
US$19 million for Telef6nica and US$16.7 million for Telecom. By
October 1993 the market value of the packages had risen to more
than US$1 billion, reporting tremendous gains for the employees.
IV. OUTCOMES / IMPACTS
1. FiscalImpact
The immediate fiscal effect of the transaction was positive,
with gross proceeds approximating US$3.25 billion (Table 4). The
'By November 1993, ENTel had also sold assets such as inventories and real estate worth about
US$3 million.
ENTel 89
proceeds from 60 percent of the sale to strategic investors

equaledUS$214 million in cash and US$5.0 billion in debt retired
(with a cash value of US$955 million). The Treasury had to take over
liabilities equal to US$1.76 billion. The public offering of 30 percent
of Class B shares raised US$2.06 billion and the sale of 10 percent of
Class C shares to employees raised an additional US$35 million.
TABLE 4: FISCAL IMPACT OF PRIVATIZATION (IN US$ BILLIONS)
(FrlT;:ei
M,1- r
Sale of 60 percent to stategic investor 1.16

Cash 0.21
Cash equivalent of debt retired 0.95
Public offering of 30 percent of shares 2.06
Sale to employees of 10 percent of shares 0.03
Gross sales proceeds 3.25
Liabilities absorbed by Treasury 1.76
Net sales proceeds 1.49
A more positive and continuing source of fiscal impact was

the fact that the government no longer had to finance ENTel's defi-
cit and in addition, could expect corporate income taxes after
privatization. In the first four years after privatization, the cumula-
tive amount of taxes is estimated to total at least US$800 million.
Following privatization, the telecommunications tax was
abolished but a new tax of 0.5 percent on income was introduced to
finance the activities of the regulatory body, the CNT. Under gov-
ernment ownership, ENTel had not paid corporate income taxes.
However, the four privatized companies created out of ENTel paid
income taxes worth more than US$125 million in 1991, US$180 mil-
lion in 1992 and about US$240 million in 1993. (The figures for 1994
are estimated to be at least US$255 million, bringing the total for
four years to US$800 million.) In addition, value-added tax collec-
tions tripled as a direct consequence of increased sales.
2. Profitability
Table 5 shows ENTel's profitability before privatization dur-
ing 1985-88. As can be seen, by 1988 ENTel had lost a substantial
amount and had become a serious financial burden on the Treasury.
TABLE 5: ENTEL PROFITABILITY (IN US$ MILLIONS)
After-Tax Profits - 106.9 - 494.0 186.0 - 577.1

Profitablility (%)' - 2.6 - 12.6 4.2 - 11.7
Profitability measures after-tax profits over total net worth.

Source: Undersecretariatof Privatization.
Table 6 summarizes the operating financial performance of

all four privatized telephone companies during 1991-94. The oper-
ating profits of both basic service telephone companies, Telef6nica
and Telecom, show a remarkable turnaround and a continuous up-
ward trend after privatization. The four-year period 1991-94 repre-
sents spectacular growth in operating profits, reaching US$903 million
for the two basic service companies in 1994 (and exceeding US$1 bil-
lion for all four companies). The trend in net profits is similar twith
US$732 million in the same year.
Telintar's operating profits rose considerably (262 percent
in 1992), in spite of the network bypass calls, and Startel began to
show positive net profits in 1994. Telef6nica and Telecom also ob-
tained revenues from the management contract. Telef6nica (Spain)
was paid US$47.2 million in 1991 and US$59.1 million in 1992, for
Telef6nica's management contract. STET/Telecom (France), the op-
erator of Telecom, earned US$41.3 million in 1991 and US$54.2 million
in 1992. In 1993 and 1994, the management fees for Telef6nica were
TABLE 6: PROFITABILITY OF PRIVATIZED COMPANIES 1991-94 (IN US$ MILLIONS)
Telefonica Telecom
91 92 93 94 91 92 93 94
Operating Profits 162.1 392.8 543.7 543.7 92.8 182.3 269.3 358.8
Net Profits' 121.2 219.1 300.5 391.9 55.2 150.3 196.1 267.8
Profitablility (%)2 5.0 8.7 11.2 13.4 3.2 8.2 10.2 13.0
Operating Profits 16.8 60.9 n.a. n.a. 4.1 - 8.2 n.a. n.a.
Net Profits1 12.6 43.2 92.4 70.8 2.6 -8.2 - 6.6 1.1
Profitablility (%)2 13.5 31.6 n.a. n.a. 2.9 -9.6 n.a. n.a.
Net profits are after-tax profits.
2 Profitability measures net profits over total net worth.
Sources: Balance sheets of Telefonica, Telecom, Telintar and Startel
ENTel 91
US$153 million and US$195 million, respectively, while Telecom's op-

erator earned $70 million and $85 million in the same years.
3. ProductivitylQualityof Service
Table 7 compares the physical performance of ENTel during
the period 1985-90 with that of the newly privatized companies over
four indicators: installed lines, lines in service, lines in service per
employee (labor productivity) and number of public phones. All
four indicators demonstrate that physical performance has signifi-
cantly and continuously improved since privatization.
TABLE 7: PHYSICAL PERFORMANCE OF ENTEL AND PRIVATIZED COMPANIES

BEFORE AND AFTER PRIVATIZATION
ENTel Privatized Companies Change

1987 1988 1989 19901 1991 1992 1993 19942 90 94
Installed lines
Total (000) 2,969 3,326 3,437 3,458 3,685 4,2623 4,968 5,637 63%
* Telecom 1,662 2,004 2,301 2,624
* Telef6nica 2,023 2,258 2,667 3,013
3
Lines in service
Total (000) 2,721 2,856 3,057 3,096 3,232 3,769 4,092 4,834 56%
*Telecom 1,429 1,710 1,879 2,238
* Telef6nica 1,803 2,059 2,213 2,596
Lines in service/
employee
Total 58.0 60.9 66.0 72.2 92.7 104.4 121.1 154.5 114%
* Telecom 88.8 101.5 120.1 154.9
* Telef6nica 96.1 107.0 122.3 1,803
Public phones
Total 23,493 23,775 24,178 n.a. 27,546 37,403 44,551 58,844 143%
*Telecom n.a. 11,730 15,814 20,524 25,173
* Telef6nica 15,816 21,589 24,027 31,671
4 144 175 114%
Internat'i calls 51.0 59.4 68.3 81.9 99.0 126.7
(millions of
minutes)
'1990 data are as of November 8, the date of ownership transfer.
1994 data reflect fiscal year ending September 30.
1992 network size includes the acquisition of 270,432 lines in service from CAT by Telecom and Telef6nica.
4 International calls refers to millions of minutes of outgoing calls.
Source: Balance sheets of ENTel, Telef6nica, Telecom, Telintar and Startel.
During the decade prior to privatization, telephone lines in

service installed by ENTel increased at an average annual rate of 5.1
percent. From 1990 to 1994, the number of installed lines increased
by 63 percent-an annualized average growth rate of 15.7 percent.
The growth in number of public telephones was even more dra-
matic. Under public ownership, the number of public telephones
hardly increased from 23,493 in 1987 to 24,178 in 1989. However,
after privatization, within four years the number had more than
doubled to over 58,000.
Required network expansion targets were achieved by
Telef6nica in 1991 and 1992, while Telecom met the minimum re-
quirement but did not exceed the threshold regulatory requirement.
With respect to public telephones, both companies exceeded the re-
quired expansion targets.
The new companies have also improved their quality of ser-
vice. Appendix C illustrates these improvements and Appendix D
shows service coverage before and after privatization. Other qual-
ity targets not mentioned in Appendix C also improved. Telintar
reported that the percentage of calls assisted by international op-
erators in less than 10 seconds was 57.9 percent in September 1991
and 65.3 percent in September 1992. The targets specified for those
two years were 50 and 57 percent, respectively.
Following privatization, new telecommunications services
developed rapidly. For example, in September 1991 only 39 percent
of international services customers had access to direct dialing, but
this increased to 49 percent in 1992 and 76 percent in 1994. Cover-
age is expected to reach 100 percent by 1997.
4. Investments
During the period 1980-90, ENTel had averaged US$500 mil-
lion to US$600 million in annual investments. Following
privatization, investments by the new firms were low during the
first year but in 1992 reached twice the rate of ENTel's investments.
Appendix E summarizes the changes in investment levels before
and after privatization.
ENTel 93
A wide number of new value-added services are being

offered by both companies. These services are either provided
directly by Telef6nica and Telecom or offered through new subsid-
iaries. Telecom is investing in projects such as the Flexible Digital
Network and the Intelligent Network, which will be used to offer
digital connections and new services. Through Telintar, both com-
panies are also investing in a submarine fiber optic cable called
Unisur, which connects 1,650 km between Argentina and Brazil.
Telintar participates with a 36 percent stake in this US$75 million
project, together with 24 other companies, including Embratel of
Brazil and Antel of Uruguay.
Privatization of ENTel, had many beneficial effects. Since
privatization, operational performance of the telephone system has
improved, with increasing coverage and better quality of services.
The reduction in external debt improved the overall macro position
of the economy and contributed to a higher flow of capital into Ar-
gentina. The government was a clear winner: it eliminated the
operational deficits, gained revenues from the transaction and
has been receiving higher taxes under privatization. The strate-
gic sale also received the value of the residential government
shares, and the government received higher revenues from sub-
sequent public share offerings.
The price increase (an average of 96.6 percent increase in the
pulse rate owing to the strong appreciation of the austral) immedi-
ately following privatization left the consumers in a worse position
in the short run; as a result, demand for domestic and long distance
calls declined by 8 percent in 1991. However, this negative effect
was offset by the major improvements in the quality of service, the
massive expansion of access and the limited real increases in tariff
subsequently In addition, installation telephone charges went down
after privatization.
94 Argenititna PrivatizationProgram
The US$1.16 billion paid in November 1990 by strategic in-

vestors for 60 percent of the basic telephone services was worth
approximately US$11.5 billion in 1995, representing a total market
value of US$18.2 billion for both Telef6nica and Telecom. Thus the
strategic investors benefited from the capital gains resulting from
the appreciation of the value of the company Additionally, they
gained from the turnaround and the resulting higher profits of the
company Class B shareholders (the public) paid US$2.06 billion for
30 percent and their share value increased in February 1994 to ap-
proximately US$5.75 billion. Thus they also gained. The gains to
the public shareholders of Telef6nica were relatively higher than
those of Telecom. 9
Employee numbers were reduced over the next three years.
By June 1993, Telef6nica had 18,744 employees and Telecom had
15,638. Telef6nica paid more than US$100 million in severance pay-
ments and Telecom paid US$80.5 million. Table 8 summarizes the
employment implications of privatization. It is possible that the
continuing expansion of telephone services may lead to a rebound in
employment, however, that effect is not shown by these numbers.
Number of Employees
At After
Company Privatization Privatization Change
(1990) (1993) (%)
Telef6nica 21,770 18,090 -16.9

Telecom 19,002 15,638 -17.7
Telintar 1,506 1,066 -29.2
Startel 630 663 - 5.2
2
ENTel Residual n.a. 65 n.a.
Total 42,908 35,522 - 17.21
'After divestiture figures are from 9/30/92 for Startel and Telintar, 9/30/93 for Telecom and Telef6nica,
and 11/30/93 for ENTel Residual.
2 ENTel Residual was the unit crated within Ministry of Economy and Public Works to handle ENTel's
unresolved issues after privatization.

Sources: ENTel, and annual repottsfrom Telefj5nica. Tele(om, Telintar and Startel.
9On January 31. 1995, these values had decreased by 40.4 percent and 44.8 percent, respectively,
following the negative effects of the Mexican peso devaluation. However, these effects are not
privatization-related.
ENTel 95
Privatization resulted in an overall 20 percent reduction in

the work force through layoffs and attrition (17 percent of this re-
duction took place after privatization). Those laid off received sev-
erance payments from the new companies during their first two
years of operation. Employees who retained their jobs and partici-
pated in the PPP program obtained exceptionally high financial
gains. The initial value of their 10 percent package for which they
had paid only US$35 million was estimated to be worth US$1.8 bil-
lion in 1994. The capital multiplied 50 times. The new collective
bargaining agreement increased the work week from 35 to 40 hours,
linked payment to productivity and eliminated certain types of over-
time and long vacations. However, wages and other benefits were
increased. Telef6nica's total wage bill, for example, increased by 46
percent from US$406 million in 1991 to US$593 million in 1994.
Telecom's wage bill increased 73 percent, from US$292 million in
1991 to US$505 million in 1992.
Cooperatives providing basic services gained through
privatization if they were charged the same rates as Telef6nica and
Telecom. However, they had to begin paying access fees to these
companies. Finally, the creditors of ENTel had their claims trans-
ferred to the Treasury, which guaranteed payment.
ENTel 97
APPENDIX A
THE BIDDING CONSORTIA MEMBERSHIP
The bidding consortia included the following companies:
1. Bell Atlantic (USA), with Manufacturers Hanover Trust

(USA), Garfunkel (Argentina), Welbers Insua SA (Argen-
tina), SIAP (Argentina), Cofiba (Argentina), and Cadipsa
(Argentina).
2. Telef6nica (Spain), with Telef6nica International Holding

B.V, Citibank (USA), and Inversoras Catalinas (Argentina).
3. A joint-venture between Stet (Italy) and France Cables and

Radio (France), with J.R Morgan (USA), a pool of interna-
tional investment banks, and Perez Companc (Argentina).
APPENDIX B
REGULATORY SERVICE QUALITY REQUIREMENTS 1
Years 1991 1992 1993 1994 1995 1996
Cal Completion in %
* International 41 42 45 47 50 55
* Domestic Long-Distance 60 64 72 80
Telef6nica 40 50
Telecom 33 45
* Local Calls 53 63 70 74 78 85
Operator Efficiency in %
(all catagories) 50 57 67 69 72 75
Repairs and Connection

* Average number of days
waiting for repairs 7 6 5 3
Telef6nica 8 8
Telecom 12 9
* Average Months Waiting for
New Connections <36 <24 <12 <8 <6 <4
' Targets shown are those needed to keep exclusivity rights. To extend these rights for three more years all targets
must be 5 percent higher.
Source: Decree 677/90 and CNT Resolution 1935/93 (Reglamento de Calidad del Servicio Basico Telefonico).
ENTel 99
APPENDIX C
SERVICE QUALITY BEFORE AND AFTER PRIVATIZATION
Average %
pending repairs2 1.9 1.4 1.5 1.3 1.6 2.0 2.5 1.3 0.4
* Telecom 1.7 0.6 n.a. n.a.
Telef6nica 0.9 0.2 n.a. n.a.
Quality Index3 7.9 6.4 6.5 6.3 6.6 7.5 8.0 4.3 1.7
*Telecom 4.7 2.4 n.a. n.a.
* Telef6nica 3.2 1.1 n.a. n.a.
Repair wait-time
(days)4 12.0 10.0 10.0 10.0 10.0 11.0 11.0 5.9 2.5
*Telecom 6.0 3.6 2.5 3.8
*Telef6nica 4.6 1.7 2.7 1.8
% completed int.
calls 46.0 n.a. 33.5 n.a. n.a. 39.0 39.0 n.a. 54.8 55.2 55.0
% completed
local calls 47.0 43.7 44.6 46.0 47.0 47.1 49.0
*Telecom n.a. 90.2 89.3 96.9
*Telef6nica 90.9 98.8 99.0
% completed
domestic long-
distance calls 24.8 21.6 18.4 n.a. 23.0 29.2 29.7
*Telecom n.a. 82.4 82.6 93.3
*Telef6nica n.a. 81.0 98.3 99.0
Backlog-new
connections-wait-
time (months)
-Telecorn n.a. n.a. 8.5 4.4
*Telef6nica n.a. 7.7 10.7 4.4
' 1991-92 are fiscal years ending on September 30.
2 Average percentage of pending repair is calculated over lines in service
3 Quality Index is the sum of average pending repairs and the days of repair waiting time divided by
two. The accepted standard is 1.5.
4Total repair waiting time for 1991-92 is the average between the tow companies weighed by lines in
service.
Source: ENTel's report, SIGEP, and annual reportsfrom Telecom and Telef6nica and CNT
APPENDIX D
SERVICECOVERAGE BEFORE AND AFTER PRIVATIZATION
ENTel Privatized Firms

Indicator' 1984 1985 1986 1987 1990 1991 1992 1993 1994
Physical:
Telex n.a. 12,169 13,024 13,024 n.a. 12,841 9,325 n.a. n.a.
* Telecom
*Telef6nica
Customers on Data
Trans Network
(ARPAC) n.a. 1,112 1,664 2,365 n.a. n.a. n.a. n.a. n.a.
% Network 2
Digitalization n.a. n.a. n.a. n.a. 13.4 17.2 31.5 n.a. n.a.
*Telecom 11.1 15.9 33.3 54.4 72.2

* Telef6nica 14.6 18.5 30.0 34.43 52.9
Commercial:
Revenue (US$ 505 567 671 n.a. 1,096 2,294 3,219 3,650 3,883
millions)4
*Telecom 881 1,200 1,468 1,784

*Telef6nica 1,151 1,583 1,784 2,099
Revenue/Line in 194 208 235 n.a. 328 12.2 11.7 12.8 15.0
Service
* Telecom 11.4 10.3 11.3 13.4

* Telef6nica 12.8 12.9 14.1 12.9
Lines service/i 00
population 9.4 9.7 10.1 10.6 10.8 12.2 11.7 12.8 15.0
* Telecom 11.0 11.4 10.3 11.3 13.4
* Telef6nica 12.0 12.8 12.9 14.1 12.9
Commercial indicators correspond to fiscal years, whereas physical indicators refer to calendar years, unless
otherwise stated.
2 Total for network digitalization in 1991-93 is an average of the two companies weighted by installed lines.
3 Data on digitalization percentage of Telef6nica in 1993 is as of June of that year.
4 1990 ENTei's revenue estimated from Abdala (1992). 1991-93 total revenue includes Telef6nica, Telecom, Telintar
and Startel. For 1993. revenues from Telintar and Startel correspond only to the first three quarters.
Source: Own elaboration based on balance sheetsfrom ENTel, Telefonica, Telecom, Telintar and Startel.
ENTel 101
APPENDIX E
INVESTMENT LEVELS BEFORE AND AFTER PRIVATIZATION

(IN US$ MILLIONS)
Physical:
ENTel 412 866 1,849 654 n.a. l
Total Private1 345 1,241 n.a. n.a.
Telef6nica 207 611 925 987
Telecom 131 604 977 1,033
Other2 7 26 n.a. n.a.

'In privatized firms, investment levels correspond to fiscal years ending on September 30.
2 Missing information on Startel and Telintar in 1993 and 1994.
Source: Own elaboration based on FIEL (1992) and balance sheets from Telef6nica, Telecom, Startel and Telintar.
SEGBA 103
Case Study 2: Servicios Electricos del

Gran Buenos Aires (SEGBA)
I. INTRODUCTION
Argentina's largest electricity utility, Servicios El6ctricos del

Gran Buenos Aires (SEGBA), was privatized in 1992. It was the
third large public enterprise to be privatized after the privatization
of Aerolineas Argentinas, the national airline and that of Empresa
Nacional de Telecomunicaciones de Argentina (ENTel), the telecom-
munications company. This is a review of SEGBA's privatization.
1. The CompanylIndustry
Electricity was introduced inArgentina at the end of the nine-
teenth century under concessions to private firms from abroad. The
concessions included regulatory measures such as caps on residential
rates. In the 1940s, many of these private firms were nationalized and
Agua y Energia (AyE) was created to supply electricity to areas out-
side BuenosAires. In 1958, SEGBAwas created with assistance from
the World Bank and through the merger of existing companies to
provide electricity services in and around Buenos Aires. At first,
the State obtained 80 percent of the shares. However, in 1961, it pur-
chased the remaining 20 percent and thus acquired full ownership.
Until the privatization of SEGBA in 1992, the electricity in-
dustry consisted of six public enterprises (constituting 74 percent of
capacity), several utility companies owned by provincial govern-
ments (constituting 14 percent of capacity), a number of coopera-
tives and hundreds of small self-generators (constituting 12 percent
of capacity). Electricity represented about 1.7 percent of GDP by
1991.1
The above-mentioned bodies were linked through the inter-
connected national systems, Sistema Interconectado Nacional (SIN),
' Secretariat of Energy (SE). The six public enterprises were SEGBA; AyE, a vertically integrated
firm; Hidronor SA, a hydro generation and transmission company; CTMSG (Salto Grande) (1979), a
bi-national hydroelectrical venture with Uruguay; CNEA (Comisi6n Nacional de Energia At6mica),
which handled nuclear generation and related activities since 1974; and Yacyreti, a bi-national hydro
project with Paraguay.
which SEGBA started in 1973. SIN connected the electricity sys-

tems of all provinces, with the exception of Misiones (at the border
with Paraguay and Brazil), and the southernmost part of Patagonia.
Investments were financed through special funds generated
by taxes on electricity revenues. Additional financing was obtained
through loans from multilateral organizations such as the World
Bank and, on occasion, from the national Treasury. Self-financing
was rare.2 In spite of large investments, funds allocated to the main-
tenance of existing capacity were insufficient.
Capacity expansion plans were based primarily on SEGBA's
forecasts and official government projections. Optimistic demand
forecasts led to overbuilding. The time difference between planned
and actual completion of projects was, on the average, four years
and resulted in substantial cost overruns (average cost per kW was
about US$6,500 during 1970-89).
SEGBA was the largest electricity public enterprise, with
about 20,000 employees-nearly 50 percent of total industry em-
ployment. It accounted for 15.4 percent of the nation's total electric-
ity capacity and served over 4 million customers (one-third of the popu-
lation of Buenos Aires)-40 percent of total national demand. 3
SEGBA owned and operated five generation units with a
total capacity of 2,701 MW: Central Costanera (1,260 MW), Central
Puerto (1,009 MW), Central Pedro de Mendoza (92 MW), Central
Dock Sud (211 MW) and Dique (129 MW). All the units, except
Dique, were located in Buenos Aires. SEGBA also owned part of
the 500 kV main transmission lines that transported electricity from
the Comahue region to the Buenos Aires area. SEGBA's distribu-
tion network totaled 17,600 km in high and medium voltage lines
and 52,200 km in low voltage lines. Within SIN, SEGBA was a net
buyer of electricity
Table 1 (next page) shows the composition of SEGBA's elec-
tricity sales in 1991, the year before its privatization. Total revenues
for that year amounted to US$1.04 billion.
2According to a study by Sindicatura General de Empresas Publicas (SIGEP), the public enterprise
auditing agency, in the 1966-83 period only 4 percent of all SEGBA investments were intemally
funded. During the same period. special funds accounted for 27 percent of funding, the Treasury for
17 percent, loans from banks and institutions for 39 percent. and other sources for 13 percent.
I SEGBA, "Servicios Electricos del Gran Buenos Aires: Estatuto," Buenos Aires, 1991.
SEGBA 105
TABLE 1: SEGBA's SALES BY END-USERS, 1991
Residential 5,438 39.2

Commercial 2,096 15.1
Industrial 4,114 29.6
Public Lighting 861 6.2
Government 680 4.9
Others 691 5.0
Total 13,880 100.0
Source: SIGEP.
Government regulation of the electricity industry began early
in the twentieth century through local municipalities. In 1945, the
Direccion Nacional de la Energia (DNE) was created. DNE's func-
tions included the study, exploration, production, transport and dis-
tribution of solid and liquid combustibles and of electricity, as well
as the promotion of the rational use of energy DNE was thus both
producer and regulator.
In 1958, the Secretariat of Energy and Combustibles (SEC)
was created and in 1960 a new law gave SEC sole responsibihty for
regulating the electricity industry at the federal level. SEC's respon-
sibilities were expanded to include issuing licenses, setting techni-
cal norms, preparing tariff schedules, promoting SIN and planning
the national electricity supply system. The Federal Council of Elec-
trical Energy (FCEE) was created to represent the interests of the
provinces and to manage the various special investment funds.
The three largest public enterprises, SEGBA, Hidronor and
AyE, were administratively dependent on SEC within the govern-
ment structure. The nuclear power plants were constructed, regu-
lated and operated by the Comisi6n Nacional de Energia At6mica
(CNEA) under the direct supervision of the President. Bi-national
hydroelectric projects, such as Comisi6n Tecnico Mixta Salto Grande
(CTMSG) and YacyretA, were under the administration of the Min-
istry of Foreign Affairs.
As regulator, SEC granted SEGBA an indefinite concession

to provide electricity to the Buenos Aires region, set rates to gener-
ate an 8 percent return on SEGBA's assets and impose penalties
whenever service quality was unsatisfactory. If the return was less
than 8 percent, SEGBA was allowed to adjust its rates the next fiscal
year. Conversely, if it exceeded the set rate of return, SEC reduced
the base on which the following year's return could be calculated.
The regulations were not consistently enforced, however. At times,
owing to political considerations, the government demanded that
rates be set at a level which conflicted with SEGBA's rate of return
targets. Also, service penalties were rarely imposed. 4

By the time SEGBA was put on the market, macroeconomic
conditions in Argentina had improved from the low profit of 1989
when the privatization program was launched. The country's risk
rating had also improved and the government had demonstrated
its commitment to the privatization program with the sale of the
national airlines and telecommunications company. SEGBA was
the first electricity public enterprise to be privatized. The enabling
legislation had been enacted in 1989, and by 1992, when SEGBA
was privatized, 5 the problem of frequent outages had become a po-
litical priority and restructuring was no longer viewed as a possible
solution.
The State Reform Law of 1989 provided for the immediate
privatization of SEGBA's distribution activities through concessions.
In addition, guidelines were issued for the participation of private
investors, the development of concessions, public bidding processes,
and employee stock ownership plans.
In 1990, a state of emergency was declared for SEGBA, AyE,
Hidronor, CTMSG and YacyretA, and privatization was authorized.
The process was delayed owing to lack of coordination between the
4
SEGBA's rate setting practices were studied by Navajas and Porto (1991). They found ten
different criteria applied during the 1958-88 time period and concluded that several times (in 1973,
1975, 1983 and 1984) SEGBA had given in to govemment pressures and had set rates on the basis
of political considerations rather than economic considerations of redistributing income among
users according to consumption.
I The privatization of its distribution activities had already been decided on under Act 23.696 of the
State Reform Law of 1989.
SEGBA 107
Ministries of Economy and Public Works and an attempt to create a

new federal public enterprise through the merger of parts of SEGBA
with AyE and Hidronor. The appointment of a Minister of Economy
and Public Works following the consolidation of the two ministries
in early 1991, and the abandonment of the merger plans accelerated
the pace of privatization.
In April 1991, the rules governing the restructuring of the
industry were issued and privatization was extended to generation
companies. By fall 1991, SEGBA's privatization schedule was set.
In early 1992, Law 24.065 set the guidelines for the privatization of
SEGBA, AyE, and Hidronor and established the post-privatization
regulatory framework.
A congressional Bicameral Commission was designated to
oversee the privatization process. A Privatization Committee, un-
der the leadership of the newly established Secretariat of Energy
and including members of SEGBA's Board of Trustees and of the
Undersecretariat of Privatization, managed the process.
The National Development Bank (BANADE) was formally
responsible for the valuation of assets. The conditions for retire-
ment of debt were set by the Secretariat of Finance and audited by
the public enterprise auditing agency, Sindicatura General de
Empresas Publicas (SIGEP).
The government hired various advisers to assist with the
privatization. A World Bank loan paid for their services. These
legal, technical and financial specialists played an important role in
the privatization process.
The legal advisers (Estudio Brons y Salas) assisted in inter-
preting new regulatory guidelines, preparing documents and es-
tablishing transparency conditions. The financial advisers (Credit
Suisse First Boston, Kleinwort Benson, Banco General de Negocios)
facilitated the development of cash-flow projections for the distri-
bution companies and helped in marketing the privatization in
Buenos Aires, New York and London. They received a retainer and
a success fee tied to the volume of cash proceeds, the amount of
liabilities transferred to investors and the level of minimum invest-
ment commitments secured from the investors. This was a rather
unusual financial arrangement, which was not previously present
in other privatization ventures in Argentina.
2. Restructuring

The privatization process began with the vertical breakdown
of SEGBA into generation, transmission and distribution activities.
Seven different units-four generation units and three transmission/
distribution units-were created as joint stock companies.
Generation activities were horizontally divided into Central
Costanera, Central Puerto, Central Pedro de Mendoza and Central
Dock Sud. Entry restrictions were removed, and a wholesale mar-
ket was organized around SIN. As part of this process SEGBA's main
high voltage transmission lines were merged with those of AyE and
Hidronor, and transferred to a new company, Transener SA, which
was required to maintain open access to the system. Transener was
privatized under a concession and now operates SIN.
Generation companies were expected to compete on the ba-
sis of combustible operating costs. Spot rates were determined on
an hourly basis by the marginal cost of the system. Imports were
allowed provided that the Secretariat of Energy (SE) approved the
extent to which such imports were subsidized.
SEGBAs distribution activities were horizontally divided into
concessions granted to Edenor and Edesur to serve the Gran Buenos
Aires area, and to Edelap to serve nearby La Plata. Physical assets
that the new companies did not need were sold.
SEGBA was broken up into the seven companies mentioned
above. Their shares, which could not be split and possessed equal
voting rights, were offered for sale in three blocks: Class A, Class B,
and Class C. Class A shares were sold to strategic investors, the
majority owners. Distribution companies and their subsidiaries were
not allowed to obtain a majority stake in a transmission company
In addition, Class A shares were not transferable for five years after
privatization, following which they could be transferred only with
the approval of the Ente Nacional Regulador de la Electricidad
(ENRE)6 or the Secretariat of Energy.
Class B shares were to be sold to the general public in two
stages prevent ownership concentration and to promote the de-
to
velopment of domestic capital markets. Class C shares were of-
fered to employees at the per share price paid by the strategic inves-
'A new regulatory agency. ENRE is discussed later in this case study.
SEGBA 109
tors, under Programa de Propiedad Participada (PPP), the Employee

Stock Ownership plan. They were paid for out of future dividends
and profit-sharing plan proceeds which were kept in escrow ac-
counts, Once they are fully paid for and are transferred to employ-
ees, such shares are automatically converted into Class B shares,
which can be freely sold. Table 2 shows the distribution of SEGBA
shares as of 1993.
TABLE 2: DISTRIBUTION OF SEGBA SHARES AFTER PRIVATIZATION, 1993 (%)
Class A51 60 90
Class B 39 30 0
Class C 10 10 10

Prior to privatization, SEGBA's work force was reduced by
22 percent from 20,271 to 15,806. Out of these 4,465 employees, 2,965
left owing to attrition and the rest through special retirement programs.
Employees who were laid off received special compensation.
Before privatization, the average compensation payment per em-
ployee (US$9,912) was approximately 10 percent higher than was
legally required.
Employment adjustment programs were jointly financed by
SEGBA and the new private companies. As was reported by SEGBA
in June 1993, the enterprise paid a total of US$55.5 million to 5,601
employees under various schemes. Of this amount, US$52 million
represented credits provided to the new companies.
Table 3 (next page) provides a summary overview of the em-
ployment implications of SEGBA's privatization.
SEGBA's new management, appointed in 1991, was prima-

rily made responsible for privatization. No attempt was made to
achieve financial turnaround via improvements in performance.
However, SEGBA's balance sheets were "cleaned-up."
Before At
Privatization Privatization
(1991)1 (1992)
Central Puerto - 1,115

Central Costanera 795
Edenor 6,433
Edesur 6,529
Central Dock Sud 75
Central Pedro de Mendoza - 59
Edelap 741
Segba Residual - 59
Total 20,271 15,806
Total for 1991 does not include those employed under special contracts.
Sources: SEGBA, Central Costanera, Central Puerto, Edesur, and El Economista (February 26,
1993).
In 1992, SEGBA's total liabilities were US$4.82 billion. Out

of this, US$0.37 billion (7.7 percent) was transferred to the newly
created private companies; the remaining US$4.45 billion was as-
sumed by the government. About two-thirds of the amount assumed
(US$3.02 billion) represented outstanding bad debts that SEGBA had
with other public enterprises, the social security system and the Trea-
sury. The government wrote off this amount. The net amount taken
over by the government was US$1.43 billion in commercial and fi-
nancial loans. The remaining liabilities included US$1.4 billion in
commercial and financial loans, US$72 million in social security and
labor compensation obligations and US$87 million in other liabili-
ties. More than half of the commercial and financial loans (US$866
million) originated abroad and were rescheduled under the Brady
Plan.
The Secretariat of Energy has estimated that, at the time of
privatization, SEGBA had accumulated approximately US$48 mil-
lion in accounts receivable. Edenor and Edesur were given the op-
portunity to act as collection agents and earn a commission with
recovery of these accounts receivables. However, this arrangement
was misinterpreted as a "giveaway" to the new private owners and
resulted in media attacks on the privatization process.
SEGBA 111
Following SEGBA's privatization, a SEGBA Residual Unit

was created in the Ministry of Economy and Public Works to com-
plete the unfinished business. Its main function was to clear pend-
ing lawsuits and debts, and complete the liquidation process.
In the preparation of SEGBA for sale, transparency was
achieved by enforcing a detailed procedure that was monitored by
the Undersecretary for Privatization. The qualification requirements
for buyers and the final decision criteria were published in the news-
papers. SIGEP, the public enterprise auditing agency, was autho-
rized to audit the entire process. The post-privatization regulatory
environment was established and announced in advance of the bid-
ding process and was not subsequently changed in major ways.

To regulate the industry, Ente Nacional Regulador de la
Electricidad (ENRE) was established. This was a difficult process,
because the Argentine Constitution did not provide for the estab-
lishment of independent agencies. ENRE's mission included the
promotion of competition, the regulation of transmission and dis-
tribution, the setting of rates which generate enough new invest-
ments to satisfy growing demand, and consumer protection. ENRE
is financed through a fee that all firms must pay in proportion to
their share of total industry revenues.
To verify that regulatory targets are being met, ENRE ran-
domly samples customers and industrial users. It has also asked
distributors to install special meters at user locations so that it can
monitor voltage variations and energy levels. To provide an oppor-
tunity for the public to express its concerns, ENRE also plans to
hold public hearings.
ENRE has acquired the necessary technical capabilities to
be the regulatory authority of the sector. Conflicts are resolved by
ENRE, although in practice the Secretariat of Energy is always con-
sulted on relevant matters. Most important decisions, particularly
issues that can be politically sensitive (theft, tariff revisions, etc.),
are coordinated between the ENRE directors and the Secretariat.
In July 1992 another institution, Compafnia Administradora
del Mercado Electrico Mayorista Sociedad An6nima (CAMMESA),
was established to run the dispatch of the system and to administer

the business transactions among the companies connected to the
national grid. CAMMESA is a non-profit public corporation in
which the government participates through the Secretariat of En-
ergy and in which the generation, transmission and distribution
companies, as well as industrial users, are also represented.
CAMMESA's activities include managing SIN, administering busi-
ness transactions among the companies connected to the system,
and participating in wholesale rate setting. CAMMESA is financed
through a tax (less than 0.65 percent) on wholesale electricity sales.

The new regulatory system allows privatized firms facing
direct competition to set their own rates and prices. Therefore, the
power generation firms are free to determine their rates, whereas
the electricity distribution firms are subject to new rate-setting rules.
Tariff rates to end-users, in nominal pesos, are based on a
cost-plus-fixed fee regulation that includes: (1) the wholesale gen-
eration market price; (2) the distribution value added (VAD); and
(3) price rebalancing factors. Wholesale prices are based on the
weighted average of rates charged in the spot market and the nego-
tiated rates for electricity purchased from generation companies.
Distributors are allowed to add a fixed amount, the VAD, to whole-
sale prices. The VAD amount is set by the Secretariat of Energy and
includes operating, maintenance, expansion costs, and an allowance
for return on capital. It increases in line with the U.S. Consumer
Price Index and is adjusted by a technological factor every twelve
months. Following an initial ten-year period during which it can-
not change, the VAD will be revised every five years. To progres-
sively eliminate existing distortions among different services, re-
balancing factors are also included in the rates for some services.
Cross-subsidies were to be eliminated within the first three years
after privatization.

Unlike the case of ENTel, there are no quantitative targets
on service coverage that SEGBA would have to meet in the future.
Distributors are obligated by regulation to satisfy all incremental
demand (subject to penalties), but no specific targets have been set
as to the future numbers of customers, line extensions, transform-
ers, transformation power capacity, or any figures related to out-
put levels. Appendix C provides SEGBA's past performance and
SEGBA 113
the post-privatization regulatory requirements for the key per-

formance indicators.
Variations in voltage and the frequency of power outages
are monitored and are subject to penalties (see Table 4 for the allow-
able range for voltage variations). Penalties on voltage variations
are not collected by ENRE but are returned to customers in the form
of lower rates.
TABLE 4: RANGE OF VOLTAGE VARIATIONS ALLOWED IN DISTRIBUTION (%)
Stage 1 Stage 2
(1993-1995) (Post-1995)
High Voltage 7.0 5.0

2 10.0 8.0
Overhead Lines (MV' or LV )
Underground Lines (MV or LV) 7.0 5.0
Rural 13.0 10.0
'Medium voltage.
2 voltage.
Source: Secretariatof Energy.
4. Sales Procedures

The valuation of SEGBA's assets was undertaken by
BANADE which used the discounted cash-flow method. The Sec-
retariat of Energy also projected the value of each company, using
the same method, but kept the results confidential.
The privatization was marketed under the direction of the
Secretary of Energy, with the assistance of the financial advisers.
Because of the demanding qualification criteria and the search for
international investors, the marketing was carried out abroad, in
the United States and Europe. The Secretary of Energy participated
in the process and conducted personal interviews with various for-
eign business groups. The Ministry of Foreign Affairs also partici-
pated through its embassies abroad. The most important domestic
business groups were kept abreast of the opportunities.
The marketing effort generated considerable useful infor-
mation on the expectations and concerns of foreign investors, and
was helpful in the structuring of the privatization.

In the case of the generation companies, no bidding consor-
tium was allowed to obtain more than 10 percent of total installed
capacity of the country. This condition was introduced to avoid
concentration and prevent the Chilean consortium Chilgener from
bidding for the large generation company, Central Costanera, af-
ter it had already obtained Central Puerto, the other major gen-
eration company.
All of the consortia bidding for the two large generation com-
panies had to have operating experience and assets worth US$200
million, as well as a minimum of US$150 million in net worth. The
qualifications for the purchase of Central Pedro de Mendoza and
Central Dock Sud, the two smaller companies, were less stringent.
Consortia bidding for the distribution companies had to in-
clude a qualified operator with at least four years of experience in a
large distribution network and a minimum 20 percent ownership in
the consortium. Moreover, these bidders had to have assets of at
least US$700 million if they were bidding for Edenor and Edesur
and of US$100 million if they were bidding for Edelap. All bidders
had to prove an increase of at least 10 percent in their asset values in
the three years prior to bidding. Finally, to promote the participa-
tion of large international companies, a guarantee to carry out the
bidding process was also required.
4.3 Bidding Rules
Bidders in the strategic sale were competing for partial own-

ership of the generation companies (60 percent of the larger compa-
nies and 90 percent of the smaller ones) and for 51 percent of shares
in the distribution companies, together with a 95-year concession to
provide electricity to end-users.
Various types of documents were required as part of the bids.
These documents included a statement on the joint stock company's
status, a list and description of the companies' assets and liabilities,
and the concession statements which specified the legal rate, ser-
vice and penalty requirements. Also required were the technical
specifications under which electricity had to be supplied, the trans-
fer document that enabled the winners to obtain the shares, and the
list of employees transferred. In addition, the documents used in
the privatization of the generation companies included a special
limitation on the disposition of assets, which had to be commit-
SEGBA 115
ted to generation for 25 years. Quantitative emission restrictions

were also imposed.
To preclude the problems that usually arise with concessions
with asset reversal clauses, a public bidding process was to take
place to find new owners should the concession owners be unable
to fulfill the requirements of their contract. The privatization of the
distribution companies involved the division of the 95-year conces-
sion into "administrative periods," with the first extending over 15
years and all subsequent periods over 10 years. At the end of each
administrative period, the concessions would again be subject to
public bidding, with potential new investors able to bid for 51 per-
cent of the Class A shares, the value of which the concession own-
ers would have to state in a sealed envelope. If any bid was higher
than this stated value, the owners would have to accept the bid.
If the bids were lower, no ownership change would take place.
This is a mechanism that helps to improve the exit conditions of
the industry.
Distribution company Class A shares are subject to a perfor-
mance guarantee during the concession period. This guarantee can
be activated if the concession owners do not comply with contrac-
tual requirements, if total yearly penalties exceed 20 percent of rev-
enues, or if the voting rights of the Class A shareholders are changed
in any way.
The existing supply contracts between the two larger gen-
eration companies, Central Puerto and Central Costanera, and the
two main distribution companies, Edenor and Edesur, were main-
tained following privatization. This was done to promote the long-
term market for electricity The rates were set at US 4 cents per kWh,
with changes limited to movement in fuel prices and U.S. inflation
(5/8 based on fuel prices and 3/8 based on U.S. inflation). Some of
the existing maintenance contracts with providers were also trans-
ferred to the privatized generation companies.
1. Bidding Process
To attract a sufficient number of bidders, no reference prices

were used in the solicitation. Minimum prices were set but were
announced only a few minutes before the bidding process began.
To ensure competition among potential buyers, bidders had

to submit two envelopes: one listing their technical qualifications
and the other containing the price offer, including the method of
payment (the cash/debt retired combinations). Technical qualifica-
tions were carefully evaluated and the second envelope with the fi-
nancial offer was opened only after the qualifications were verified.
The decisionmaking rule was simple. In the case of the gen-
eration companies, from among the pre-qualified consortia, the con-
sortium offering the highest cash was declared the winner. For the
distribution companies, in addition to cash, the major consideration
was the amount of debt retired. The number of consortia entering
the final bidding process for the seven companies and the winning
bids are summarized in Table 5. Appendix A provides a summary
of the consortia membership.
Company No. of Winning Sales Proceeds _ Date of

RIII
rI Consortium Transfer
Cash .
Central 5 Chilgener 92.2 132.0 51.0 04-01-92

Puerto
Central 1 Endesa 90.1 97.0 66.0 05-29-92

Costanera
Central 3 Polledo 25.0 - 4.0 09-22-92

Dock Sud
Central 2 Acindar/ 8.6 - 09-22-92

Pedro de Massuh
Mendoza
Edenor 5 Electricidad 30.0 397.9 95.0 08-31 -92

Argentina
Edesur 4 Distrilec 30.0 481.0 136.0 08-31-92
Edelap 4 Cia de Inv. 5.0 134.0 18.0 12-18-92

Electricidad
Total 24 280.9 1,012.9 229.0 370.0 -
'Debt/equity swap values were set by the government.

Source: Secretar-iat of Energy and Ambito Financiero data.
SEGBA 117
To ensure the bidders' acceptance of the concession require-

ments, all the bidding documents were signed by the participants and
validated before the name of the winning consortium was announced.
Following the announcement, the winner and the government im-
mediately signed the transfer contracts so as to prevent any post-bid-
ding negotiations for better terms. This so-called "closed execution" of
the transfer procedures grew out of the experience of privatizating
ENTel, the telecommunications enterprise. Because the execution
of the ENTel transfer had not been closed, the government had en-
gaged in extensive post-bidding negotiations with the winning con-
sortia in order to show its goodwill concerning the transactions.
In addition to the sales to strategic investors, Class B shares
were offered to public investors under various schemes. As a re-
sult, 39 percent of the shares in each distribution company and 30
percent of the shares in two generation companies (Central
Costanera, Central Puerto) sold to the public generated a total of
US$229 million. Furthermore, US$22 million worth of SEGBA's real
estate assets were sold in 1993.
Payment methods included cash and both domestic and ex-

ternal debt retirement. The cash-equivalence of debt papers was
established in May 1992 at 60 cents on the dollar for domestic debt
and 47.5 cents on the dollar for external debt. This did not reflect
the market prices at the time of sale. For example, in the case of
Edelap the 50 percent external share of the debt was exchanged at
0.475 of its nominal value when the price in the secondary market
in New York was 0.466. For Edenor and Edesur, there was no dis-
parity between the swap value and market value of domestic debt
papers. Overall, the government valued debt at 4 percent higher
than the market.
IV. OUTCOMES/IMPACTS
1. FiscalImpact
The fiscal benefits to the government from SEGBA's

privatization arise from the transaction proceeds, increases in sub-
sequent tax revenues, and reduction in subsidies. Proceeds from
the transaction totaled US$1.54 billion and included the cash equiva-
lent of debt retired (US$1.01 billion) and cash from strategic sales
(US$281 million), public offerings (US$229 million), and sales of re-
sidual assets (US$22 million). After the subtraction of assumed li-
abilities (US$1.43 billion), the net proceeds were US$110 million.
Table 6 presents a summary of the net fiscal impact of the transactions.
TABLE 6: FISCAL IMPACT OF PRIVATIZATION (IN US$ BILLION)
Transaction Proceeds
Sale to stategic investor 1.29

Cash 0.28
Public offering 0.23
SEGBA Residual 0.02
Gross sales proceeds 1.54
Liabilities absorbed by Treasury 1.43
As regards tax changes, the privatized distribution compa-

nies were exempted from paying any provincial or municipal taxes
with the exception of two revenue taxes that existed before
privatization: a 6.0 percent tax collected by municipalities and a 0.6
percent provincial tax paid to the government of Buenos Aires. Three
revenue taxes at a 5.0 percent rate which financed the industry's
special investment funds were eliminated and replaced by a levy of
0.24 cents per kWh on energy bought by distributors and industrial
users in the wholesale market. 7 A new tax was also created to fi-
nance ENRE's activities which was based on the industry revenue
share of each new generation and distribution company.
Table 7 (next page) shows the taxes paid by the new compa-
nies in 1993 and 1994. The total tax paid up to the first quarter of
1995 exceeded US$49 million which included US$2.3 million paid
by Central Puerto and US$1.7 million by Central Costanera in the
first quarter of 1995. The income tax paid by the companies, US$20.5
million in 1994, is the effect of improved performance after
privatization. Before privatization SEGBA paid no taxes.
'Fondo Nacional de la Energla El6ctrica.

SEGBA 119
TABLE 7: DIRECT TAXES PAID BY PRIVATIZED FIRMS, 1993-94 (IN US$ MILLIONS)
Edenor 0.00 5.04 14.48

Edesur 0.00 0.35 2.26
Central Costanera 9.36 1.51 0.77
Central Puerto 10.64 n.a. n.a.
Others 0.50 n.a. n.a.
Total 20.50 6.93 17.51
"'Edenor" 1993 data is as of June 30.

Sources: Undersecretariatfor Privatization. Central Puerto, Central Costaneraand Edesur reports.
In addition to increasing tax revenues, privatization elimi-

nated the need for the Treasury to continue financing SEGBA's sub-
stantial operational deficits, as is shown in the next section.
2. Profitability
Before privatization, SEGBA showed losses in four consecu-
tive years, with a loss of US$563 million in the last year of opera-
tion. In contrast, the performance of the firms into which SEGBA
was broken up showed a marked improvement in 1992, 1993, and
1994. Table 8.1 (next page) shows SEGBA's profitability during the
period 1988-91, while Table 8.2 (next page) illustrates the profitabil-
ity of the five larger firms created out of SEGBA. The results of the
privatized companies are for the years 1992 through 1994. In 1995, on
the basis of the first quarter results, only the three distibution compa-
nies were expected to generate a total of US$115 million net profit.
After privatization the two large generation companies were
profitable. Both Central Costanera and Central Puerto improved
profitability through increased labor productivity; cost savings from
various sources, including improved procurement practices; in-
creased output owing to better maintenance; and higher wholesale
rates. The increase in labor productivity was due not only to reduc-
tions in the labor force but also to incentive schemes included in
new collective bargaining agreements: salaries were tied to both
the operational and financial performance of the firms. High whole-
sale prices in the spot markets and inherited contracts were addi-
tional factors in improving financial performance.
TABLE 8.1: SEGBA's PROFITABILITY (IN US$ MILLIONS)
Net Profits' -77.0 -941.0 -118.0 -563.0

Profitability (%)2 -1.5 -19.1 -2.5 -13.2
Net profits are profits after income tax paid, which SEGBA did not pay during this period and
profits include extraordinary losses that reflect inflation accounting adjustments over current assets
and liabilities. In 1990 this item also included a special compensation amount for SEGBA, the
Treasury, the Province of Buenos Aires and several municipalities (decrees 404/90 and 1866/90).
2 Profitability measures net after tax on total net worth.
Sources: SIGEP, SE and SEGBA balance sheets.
TABLE 8.2 PROFITABILITY OF PRIVATIZED COMPANIES (IN US$ MILLIONS)
19921 1993 1994

Company Net *JTu=11.01l Net Me¶f:lefl1RfUlJ Net Me 11tM11MYZU
Edenor -52.0 -6.8 -60.4 -8.2 1.3 -0.9

Edesur -31.0 -3.2 -56.0 -6.2 -15.7 -1.6
Edelap 0.1 0.3 0.2 0.7 8.1 14.5
Central
Costanera 7.5 2.1 15.5 4.5 30.2 8.7
Central
Puerto 14.1 4.9 25.5 10.0 30.2 11.3
Aggregate -61.3 -75.2 54.1
The 1992 figures correspond to months of private operation only.

2 The 1993 figures show first half performance, except for Central Costanera, Central Puerto, and Edesur, for which
information is available as of September 1993.
Sources: Undersecretariatfor Privatization;Central Puerto, Central Costanera, Edenor, and Edesur balance sheets.
The two large distribution companies, Edenor and Edesur,

made losses during 1992 and 1993. However those losses declined
significantly in 1994. The major reason for the losses was the con-
tinuing problem of theft. Edenor has estimated that in its area more
than 40 percent of theft occurred in low-income neighborhoods,
known as villas de emergencia, comprising about 200,000 customers.
This resulted in yearly losses of more than US$50 million. Neither
company could install the necessary meters to stop the losses be-
cause the municipalities have not completed all the needed lines.
The companies asked for government assistance and received some
SEGBA 121
subsidies from the municipalities (which, beginning in mid-1993,

were also paying a lump sum to the companies for one year of un-
paid bills in the federal district). However, these arrangements made
up for only about 2 percent of the losses.
In January 1994 the federal government and the Province of
Buenos Aires signed an agreement with Edesur and Edenor with
respect to the normalization of electricity supply in low-income
neighborhoods located in the province. The agreement allowed the
companies to start invoicing electricity bills in these homes from
July 1,1994. Both the federal government and the Province of Buenos
Aires agreed to pay up to a global amount of US$20 million for all
the electricity supplied but not invoiced to these homes from Sep-
tember 1, 1992, the date of takeover, to January 31, 1994. In exchange,
Edenor and Edesur gave up the right to make any claims on elec-
tricity bills during this period. The companies undertook the obli-
gation to normalize and install new individual meters within a pe-
riod of two years for all homes whose urban characteristics permit-
ted such metering. 8
The outcomes of the SEGBA privatization are linked not only
to ownership changes, but also to changes in market structure. Prior
to SEGBA's privatization, the electricity industry was dominated
by integrated public enterprises. Privatization was initiated by the
unbundling of activities into electricity generation, transmission, and
distribution. In generation, entry barriers were removed and a spot
market was created to promote competition. Transmission and dis-
tribution activities, however, continued to be regulated with respect
to rates and exit from the industry. Nevertheless, ownership changes
resulted in increased competition. In 1991 Argentina's five public
enterprises operating in the electricity sector represented 74 percent
of the nation's installed generation capacity. After privatization, by
August 1993 the share of these five companies had diminished to
34.4 percent. The largest company, now privately owned, had a mar-
ket share of less than 8 percent. 9
As illustrated in Tables 9.1 and 9.2 (next page), after SEGBA's
The US$20 million was to be released in relation to the degree of advance in the payments made
through these new bills. Up to September 1994, Edesur had received US$0.71 million in this way.
9The Herfingdahl index. which shows the extent of competition, yielded 0.126 before privatization in
1991 and 0.042 in 1993, after the process was completed.
122 ArgentinaPrivatizationProgram
privatization, the new companies considerably improved the op-

erational efficiency despite the problem of electricity outages. Over
the first three years the output increased by 30 percent. Labor pro-
ductivity (output/employee) more than doubled in both Edesur and
Edenor. Customer to employee ratio increased almost 170 percent
for Edenor and 130 percent for Edesur. The estimates for 1995 show
even more drastic improvements in these indicators.
TABLE 9.1: SEGBA'S PHYSICAL PERFORMANCE BEFORE PRIVATIZATION
Invoiced Electricity (GWh) 12,109 13,007 13,880

Number of Customers (000) 3,918 3,948 4,007
Output/Employee 0.57 0.60 0.72
Customers/Employee 171.8 182.4 206.9
Energy Losses (%)1 23.0 24.8 25.9
'Energy losses are expressed as a percentage of electricity delivered to the distribution network.
Sources: Instituto de Ecotnomia Energitica, IDEE (1991); SEGBA balance sheets; Undersecretariat
for Privatization;and Edesur reports.
TABLE 9.2: PHYSICAL PERFORMANCE IN DISTRIBUTION AFTER PRIVATIZATION

_- ____
Indicator 91*1111111IN
Invoiced Electricity (GWh) 7,149 8,150 9,059 9,683 7,293 7,977 9,086 10,031
Number of Customers (000) 1,872 1,891 2,043 2,148 1,914 2,009 2,083 2,146
Output/Employee n.a. 1.61 2.09 2.44 1.54 1.91 2.41 2.85
Customers/Employee n.a. 374.3 472.4 542.4 403.9 482.4 553.4 610.0
Energy Losses (%)' 23.2 22.1 16.2 12.5 29.2 26.1 20.2 15.0
' Energy losses are expressed as a percentage of electricity delivered to the distribution network.
Sources: Instituto de Economia Energetica, IDEE (1991 ): SEGBA balance sheets: UndersecretariatforPrivatization:and
Edesur reports.
4. Investments
Privatization has led to new investments in the electricity
sector. Since privatization, Edesur placed commercial papers worth
US$280 million and obtained a stand-by credit facility of US$90
million. Edenor obtained a US$173 million loan from the IFC. Cen-
tral Costanera formed Central Termica Buenos Aires SA in July 1994,
to install a 220 MW combined cycle station in the City of Buenos
Aires. This investment is worth US$120 million. Central Costanera
SEGBA 123
also issued commercial papers worth US$50 million to reschedule

its liabilities. Finally, Edelap also issued commercial papers worth
US$30 million in October 1994, to reschedule its liabilities.
Central Dock Sud's majority owners placed commercial pa-
per amounting to US$5 million, while Central Puerto installed a
new generation unit of 370 MW in the Comahue region, involving a
US$110 million long-term credit from suppliers. Central Pedro de
Mendoza plans to increase its existing capacity from 58 MW to 183
MW by 1996. In total, the new companies' investment were more
than SEGBA's.
The privatization of SEGBA increased the Argentine
Government's international credibility. The Government's structured
and consistent privatization approach as well as its willingness to
learn from the ENTel experience signaled to potential investors
throughout the world that the Government was committed to eco-
nomic reforms and to privatization of public enterprises.
The nation benefited from SEGBA's privatization, particu-
larly from the fiscal outcomes (the debt retirement) which reduced
the principal and the cost of servicing the external debt and attracted
foreign investors to Argentina.
Post-privatization comparisons (between September 1992
and February 1995) show that prices for all customer categories (ex-
cept the low consumption residential group) declined by an aver-
age of 10 percent (inclusive of fixed charges). Low-volume residen-
tial customers' nominal rate increased by 30 percent following
privatization to eliminate cross-subsidies and rebalance rates. Also
as a part of rate rebalancing, fixed charges increased 28 percent on
average for all categories in the same period analyzed.
Overall customer coverage and service in the Buenos Aires
region has improved. Although outages still occur, the distribution
company Edesur, for example, has reported a rate of growth in the
number of new customers of 8 percent in 1994, seven points higher
then the previous year. Industrial users are now allowed to buy
electricity directly from generation companies, 10 and distributors
must maintain open access to their transmission networks.
"Industrial users can sign term contracts with private generation companies if their monthly electric-
ity demand is at least 100 kW.
Investors have also benefited from the privatization. Both

domestic and foreign shareholders obtained significant capital gains
through higher share prices following privatization. The value of
Central Puerto shares was 2.12 times higher by January 1995 than
the price paid for them by the winning consortium in August 1992.
Central Costanera's shares were 2.33 times their value at the time of
privatization. In the case of distribution companies, the profits of
Edenor and Edelap reached US$1.3 million and US$8.1 million, re-
spectively, whereas Edesur made a loss of US$15.7 million. Based
on the first quarter results, profits are estimated at US$59.4 million
for Edenor, US$45.3 million for Edesur and US$10 million for Edelap
in 1995.
Foreign investors obtained additional benefits from the debt
retirement by securing favorable Argentine currency rates, which
in turn lowered the discount rate at which they calculated the net
present dollar value of their investments.
The impact of privatization on workers was mixed. After
privatization the number of employees was reduced by 4,499 (28
percent) through special retirement arrangements (Table 10). This
reduction was made possible partly by the cooperation of the most
powerful union in the industry, Luz y Fuerza.
At After Cag
Company Privatization Privatization Change
(1990) (1993)1 (%/6)
Central Puerto 1,115 798 -28.4
Central Costanera 795 661 -16.8
Edenor 6,433 4,164 -35.3
Edesur 6,529 5,051 -22.6
Central Dock Sud 75 60 -20.0
Central Pedro de Mendoza 59 31 -47.5
Edelap 741 542 -26.8
Segba Residual 59 n.a. n.a.
Total 15,806 11,307 -28.4
1993 figures Edesur, Central Puerto, Central Pedro de Mendoza and Central Costanera are as of September/October,
whereas the others are as of February.
Sources: SEGBA, Central Costanera, Central Puerto, Edesur and El Economista (2/26/1993).
SEGBA 125
Employees laid off after privatization were compensated on

the basis of seniority and the nature of their jobs and received, on
average, three times the pre-privatization amount. For example,
Edesur paid approximately US$30,000 per employee in 1993. Em-
ployees who retained their jobs had to work harder under private
management. The newly privatized companies renegotiated labor
contracts which increased daily working hours from 6 to 8 but also
enhanced safety conditions and employees obtained incentive-based
salary increases that linked wages to performance and company prof-
itability. Employees also received Class C shares and were given an
opportunity to participate in training programs to improve their skills.
SEGBA 12 7
APPENDIX A
SEGBA
CentralPuerto
1. Chilgener SA (Chile), Compafiia Chilena de Distribuci6n
Electrica Quinta Regi6n SA (Chile), Chilectra Quinta
Regi6n (Chile).
2. Astra (Argentina), Electricite de France (France), Empresa
Nacional de Electricidad de Espafia (Spain).
3. Enron Company (USA), Enron Corporation (USA), Enron
Power Corporation (USA), Enron Power Central Puerto
(USA-Argentina), Cuenca Austral (Argentina).
4. Empresa Nacional de Electricidad de Chile (Chile), Aluar
(Argentina), Inversora Patagonica (Argentina),
Distribuidora Chilectra (Chile), Enersis SA (Chile).
5. Dominium Energy (USA).
Central Costanera
1. Empresa Nacional de Electricidad SA, ENDESA (Spain),
Enersis SA (Chile), Distribuidora Chilectra Metropolitana SA
(Chile), Inversora Patag6nica SA (Argentina), Inter Rio
Holding Establishment (USA), and Costanera Power Corpo-
ration (USA).
CentralPedro de Mendoza
1. Acindar and Massuh and a local construction firm, Benito

Roggio e Hijos SA.
CentralDock Sud
1. Polledo SA (Argentina), Benito Roggio e Hijos SA (Argen-
tina) and Chilgener SA (Chile) and Pacifico Quinta Regi6n
SA (Chile).
Edenor and Edesur
1. Electricidad Argentina SA, composed of Astra-CAPSA

(Argentina), Empresa Nacional de Electricidad de Espahna
(Spain), Empresa Nacional Hidroelectrica del Ribagorzana
SA (Spain), Societe d'Amenagement Urbain et Rural
(France), and Electricite de France (France).
2. Companifa Inversora Electrica de Bs. As. SA, composed of
Sociedad Comercial del Plata SA (Argentina), Powerfin SA
(Belgium), Pirelli Cables SA (Argentina) Pirelli
Constructora SA (Argentina), Elecnor de Argentina SA
(Argentina), and Iberdrola SA (Spain).
3. Compania de Inversiones en Electricidad SA, composed of
Techint Cia. Tecnica Internacional e Inversora Catalinas SA
(Argentina), Houston Industries Inc., Houston Lighting
and Power Company, and Houston Argentina SA (USA).
4. Distrilec Inversora SA, composed of Compafiia Naviera
Perez Companc SA (Argentina), Distribuidora Chilectra
Metropolitana SA (Chile), Enersis SA (Chile), Endesa SA
(Chile), and the group PSI Energy, Inc. (USA).
5. Fenix del Sur SA, composed of Banco Central
Hispoamericano, Argentina), Banco de Galicia y Bs. As.
(Argentina), DYCASA SAIC (Argentina), Dragados y
Construcciones SA (Spain), and Union Electrica Fenosa
(Spain).
Edelap
1. Companlia de Inversiones en Electricidad SA, a group

formed by Houston Industries, Inc., Houston Lighting and
Power Company, Houston Argentina (USA), and Techint
Cia. Tecnica Internacional SA with Investora Catalinas SA
(Argentina).
2. Electricidad de Bs. As., integrated by Cia. General de
Electricidad Industrial (Chile) and Benito Roggio e Hijos
SA (Argentina).
3. Interamericana de Energia, Chilgener SA (Chile) and
Chilectra Quinta Regi6n (Chile).
4. Inversora Electrica del Sur, a consortium formed by
Iberdrola SA (Spain), Hidroelectrica from Catalunia
(Spain), and Electrica del Plata SA (Argentina).
SEGBA 129
APPENDIX B
PENALTIES ON POWER OUTAGES AT THE DISTRIBUTION

LEVEL (US$/KWH)
Residential 1.40
Commercial and RL. 1.40
Industrial (LV) 2.27
Industrial (MV and HV) 2.71
Source: Secretarial ofEnerg.

APPENDIX C
SEGBA's PAST PERFORMANCE AND THE NEW REGULA-

TORY REQUIREMENTS
CompanyiYear
SEGBA 1993 1995
Indicator .- . .- .. Edenor, Edelap
_ __ | | __ ~~~~Edesur
Avg Outage 17.9 21.9 18.91
Time Duration
(hrs/year)
Annual Outage North 16.1 19.1 14.7 24.0 27.2 4to20 23.0
Time/installed depending
Transformers South 13.5 16.2 13.7 on type of
(hrs) user2
Annual Outage North 11.0 12.3 9.2 14.0 17.4 15.0

Time/KVA
Installed (hrs) South 7.8 8.9 7.6
Frequency of North 4.8 5.3 4.7 6.0 6.4 6 to 12 6.0

Outages/ depending
Transformers South 3.7 3.7 3.7 on type of
user2
Frequency of North 3.3 3.6 3.1 3.8 4.6 4.2

Outages/
KVA Installed South 2.3 2.4 2.2
SEGBA's average outage time duration reported for 1991 corresponds to data for August 1992.
2 Regulation targets refer only to total time and frequency of outages. varying according to type of user
(LV, MV, HV, etc.).
Source: IDEE (199]). SEGBA's balance sheets, and concession contracts.
SEGBA 131
APPENDIX D
COMPARATIVE SERVICE COVERAGE BEFORE AND AFTER

PRIVATIZATION
Physical:
Overhead LV 39,064 39,277 39,434 19,234 11,221
Network (kin)
Underground LV 12,652 12,683 12,734 3,537 6,624
Network (km)
Overhead MV 5,332 5,377 5,404 2,573 1,508
Network (km)
Underground MV 9,482 9,510 9,557 3,688 4,245
Network (km)
Transformers 7,557 7,633 n.a. n.a. n.a.
Transformation 6,461 6,476 n.a. 2,788 3,556
Power (MVA)
Commercial:
Number of Clients 3,919 3,949 4,007 1,914 1,874
(in thousands)
Energy Invoiced 12,909 13,007 13,880 5,994 6,240
(GWh)
Revenue/GWh 57,135 80,899 74,904 n.a. 88,100
(in 1991 US$)
Density 799 n.a. 8693 1,324 1,664
(Inhab/km 2 )
Figures for 1992 correspond to month of divestiture, except for Revenue/GWh, which is as of December
31.
2 Network size values for 1991 were calculated with aggregate (LV and MV) observed annual rate growths.
Shares between LV and MV were kept constant.
3Density value for 1991 has been estimated.
Source: SEGBA's balaince sheets and transfer contracts.
Gas Del Estado 133
Case Study 3: Gas del Estado (GdE)
1. INTRODUCTION
Argentina's natural gas transmission and distribution com-

pany, Gas Del Estado (GdE), was privatized in 1993. This case study
is a review of GdE's privatization.
1. The CompanylIndustry
Gas del Estado (GdE) was created as a public enterprise in

1952. Its main function was to transmit and distribute the natural
gas it purchased from Yacimientos Petroliferos Fiscales (YPF), the
national energy enterprise, and from Bolivia. GdE also maintained
extraction plants that could process 18 million cubic meters of gas
and produce 315,000 metric tons of ethane per day. In addition,
GdE had several treatment stations for extracting gasoline and re-
siduals. GdE's total extraction capacity in December 1992 was
298,080 tons of propane, 224,750 tons of butane, and 155,200 tons of
gasoline.
Sales of natural gas inArgentina have increased steadily since

the construction of the main national transmission pipeline system
in 1952, and doubled between 1980 and 1991, from about 9 billion
cubic meters to about 19 bilhon cubic meters (Table 1). Natural gas
reserves in Argentina were estimated to be about 540.5 billion cubic
meters in December 1992. From 1972 to 1992 Argentina also im-
ported, from Bolivia, 2.2 billion cubic meters of natural gas a year.
TABLE 1: SALES OF NATURAL GAS, 1980-91 (MILLIONS OF CUBIC METERS)
1980 2,158 378 4,053 2,693 9,282
1985 3,463 527 5,197 4,426 13,613
1991 4,442 593 7,886 6,109 19,030
Other includes power plants, compressed natural gas (GNC), and official entities.
In the 1960s and early 1970s, GdE brought natural gas chiefly
through the Southern Pipeline from the Austral and San Jorge ba-
sins to Buenos Aires, and through the Northern Pipeline from Bo-
livia and the northern basin to other parts of the country. A regional
pipeline network also served several cities. In later years additional
systems were constructed. The General San Martin Pipeline was
built in 1974, the Midwest Pipeline in 1981, and the Neuquen Bahia
Blanca (NEUBA) II Pipeline in 1988. Beginning in 1980, GdE al-
lowed cooperatives to construct limited distribution networks, which
were transferred to GdE upon completion for payment in natural
gas.
By 1992, GdE's transmission capacity had reached 65.5 mil-
lion cubic meters per day. Sales were concentrated in the Litoral
Region and the Buenos Aires metropolitan area. Together these ar-
eas account for 60 percent of total consumption, which reaches its
peak during the winter. GdE's sales revenues were a little over US$1
billion in 1980 (Table 2). Sales revenues increased to about US$1.7
in 1986 but had declined to US$1.5 billion by 1990.
Although the Ministry of Economy and Public Works had
expected GdE to add 120,000 new customers each year, the Ministry
had not provided adequate financial resources to make this pos-
sible. As a result, there were natural gas shortages in regions with-
out main pipelines or with insufficient links to main pipelines.
TABLE 2: GDE TOTAL SALES AND REVENUES, 1980-90
Year Sales Income

(Mmm 3 ) (US$ billions)
1980 9,282 1.14
1985 13,613 1.33
1990 17,779 1.53
Before privatization, GdE had a monopoly on the transmis-
sion and distribution of natural gas. Its rates, partially subsidized,
were set by the Ministry of Economy and Public Works. The tariffs
differentiated among residential customers, power plants, and re-
Gas Del Estado 135
fineries but not between peak and off-peak use. The enterprise was
unable to meet demand during winter: while services for residen-
tial, business, and official users were not interrupted, industries and
power plants experienced service problems.
The Ministry set GdE's rates in line with political and social
objectives, such as fighting inflation, rather than on the basis of cost.
The rates were generally 35 percent below actual costs, thus provid-
ing a subsidy to the users but generating losses for GdE. In July
1989, the rates for industrial and commercial users as well as for
power plants were equal to 90 percent of the price of fuel oil in Buenos
Aires, to promote the substitution of natural gas for fuel oil. The 10
percent saving was intended to be used by industrial customers to
convert fuel oil burners or production processes to the use of natu-
ral gas. For compressed natural gas, which is used in automobiles,
the rate was set at 70 to 75 percent of the price of gasoline to pro-
mote the conversion to compressed natural gas by taxis in large cit-
ies in order to reduce air pollution. The Menem Administration
increased the rates in real terms during the period 1989-92.
GdE was put on the privatization list in 1992, in line with

government policy, because it was an inefficient transmitter and
distributor of natural gas. GdE had failed to expand capacity to
meet demand, the quality of its services was declining, and its oper-
ating deficits had become a burden to the Treasury.
Through privatization, the government hoped to introduce
competition into the industry, to improve overall efficiency, to raise
the quality of service, and to eliminate the financial drain on the
national budget. As part of the privatization process, the govern-
ment deregulated the well-head price of natural gas upstream and
established a rate system to promote efficient use downstream. The
government also invited private domestic and foreign companies
to invest in the industry and to acquire transmission and distribu-
tion concessions.
In early 1991, the government issued several decrees that

outlined the objectives of GdE's privatization. In 1992, Congress
approved Gas Law N24.076, which set out the conditions under
which the natural gas market would function and established a regu-
latory authority to oversee the transmission and distribution pro-
cess. In particular, the law (1) specified the nature of transmission
and distribution activities and the obligations of the transmission
and distribution companies; (2) defined the terms for export and
import of gas; (3) set general principles for establishing the rates for
customers; and (4) outlined the post-privatization regulatory sys-
tem. In the same year, the government issued another decree to
implement these regulatory arrangements and formed a
Privatization Committee that included the Secretary of Energy, the
Undersecretary of Fuel and an interventor to manage GdE during
the privatization process.
Consultants were selected through a competitive bidding
process on the basis of their technical expertise and fees. Legal ser-
vices were provided by Andrews & Kurth (U.S.) and by a local law
firm, Marval O' Farrell & Mairal. The legal advisers drafted the
bidding documents and transfer agreements. Financial advisory
services were provided by N.M. Rothschild & Son (U.K.), Goldman
Sachs & Co. (U.S.), and local firms Banco de Galicia and Buenos
Aires S.A. and Argenbur S.A. The financial advisers prepared the
valuations, developed financial projections and marketed the com-
panies. Financial and economic forecasts for each of the new com-
panies were prepared by the consulting firms Stone & Webster (U.S.)
and Arthur Andersen (U.S.) and a local firm, Pistrelli Diaz and As-
sociates. Pistrelli Diaz and Associates also assisted in setting trans-
mission and distribution rates. Patricio Perkins was recruited to
assist the Privatization Committee in managing the process and di-
rected the tasks carried out by the four external consulting firms.
The consulting activities were primarily financed through a
World Bank loan, although the government paid for some services
with revenues generated from the sale of the bidding documents
and with a contribution from GdE. All consultants received only a
fixed fee except Goldman Sachs & Co., which also received a suc-
cess fee based on the sale proceeds. A total of US$6.7 million was
spent on consultants.
Gas Del Estado 137
2. Restructuring

GdE's activities were divided vertically into transmission and
distribution activities. To generate competition in the industry, these
functions were assigned horizontally to two transmission and eight
distribution units. All units were then transformed into joint stock
companies and the total number of shares was divided between in-
vestors and employees.
GdE's transmission network was split between
Transportadora de Gas del Norte in the northern region and
Transportadora de Gas del Sur in the southern region. The distribu-
tion functions were assigned to the following eight companies:
Distribuidora de Gas Metropolitana, Distribuidora de Gas Buenos
Aires Norte, Distribuidora de Gas del Litoral, Distribuidora de Gas
Pampeana, Distribuidora de Gas del Noroeste, Distribuidora de Gas
del Centro, Distribuidora de Gas Cuyana, and Distribuidora de Gas
del Sur. The selling of liquid petroleum gas (LPG) was transferred
to YPF, the privatized national energy enterprise.
Three share categories were established and assigned to the
new companies in different proportions (see Table 3). Class A shares
were offered to private investors that wanted to obtain the trans-
mission and distribution concessions; Class B shares (not estab-
lished for all companies) were sold in domestic capital markets; and
Class C shares were offered to employees under the Programa de
TABLE 3: SHARE DISTRIBUTION AMONG NEW JOINT STOCK COMPANIES (IN PERCENT)
.. __
Transmission
Transportadora de Gas del Sur S.A. 70 27 3
Transportadora de Gas del Norte S.A. 70 25 5
Distribution
Distribuidora de Gas Buenos Aires Norte S.A. 70 20 10
Distribuidora de Gas Metropolitana S.A. 70 20 10
Distribuidora de Gas del Litoral S.A. 90 - 10
Distribuidora de Gas Pampeana S.A. 70 20 10
Distribuidora de Gas del Noroeste S.A. 90 - 10
Distribuidora de Gas del Centro S.A. 90 - 10
Distribuidora de Gas del Sur S.A. 90 - 10
Distribuidora de Gas Cuyana S.A. 60 30 10
Propiedad Participada (PPP). Given the large number of employees

of transmission companies, the Government decided to offer them
3-5 percent of the equity instead of 10 percent (which was the com-
mon policy in the privatization of the other utilities). Table 3 shows
the distribution of the types of shares among the ten new joint stock
companies.
A special unit, Gas del Estado Residual, was created in the
Ministry of Economy and Public Works with a budget of US$225
million, to take care of the unfinished business of the former public
enterprise, such as unassigned liabilities and pending lawsuits.

The original number of employees of GdE (10,273) was not
reduced prior to privatization. Employees were reallocated to the
newly created companies. Employee restructuring was left to the
new owners of these companies.

Before privatization, GdE's total liabilities amounted to some
US$2.7 billion. Included in this amount was US$395 million in short-
term debt owed to the government, US$350 million in long-term
debt owed to YPF for unpaid gas bills, and US$205 million of vari-
ous other obligations. The liabilities were assigned to the ten new
companies in proportion to their size, with the largest amount,
US$205 million, going to the transmission company Transportadora
de Gas del Sur. The Treasury assumed a US$241.3 million loan that
had been provided by the Inter-American Development Bank (IDB)
for several projects. The rationale behind the assumption of this
loan was that the loan had been warranted by the national govern-
ment and the Central Bank. The Privatization Committee decided,
for institutional reasons, to transfer this loan to the public sector
rather than the private companies.

With the deregulation of the hydrocarbons sector and the
privatization of YPF, both private gas and oil exploration and pro-
duction increased. While YPF is still the major natural gas producer,
Gas Del Estado 139
a number of other private producers have entered the industry, in-

creasing competition in production.
A new agency, Ente Nacional Regulador del Gas
(ENARGAS), with several provincial branches, was established to
administer the post-privatization regulatory system. The agency
was financed through a fee that all firms had to pay in proportion to
their shares in total industry revenues.
Under the new regulatory rules, transmission and distribu-
tion companies must provide services on demand. If they own a
transmission network, they must provide available capacity upon
request in a non-discriminatory fashion. Transmission companies
are not permitted to buy or sell natural gas except for their own
consumption and may not have a controlling interest in a distribu-
tion company Gas producers, brokers, storage companies and large
customers are not permitted to own a controlling interest in a trans-
mission or distribution company. The import of gas is permitted
but exports need the approval of the Secretary of Energy, who must
consider domestic supply conditions in making a decision. In addi-
tion, exports requiring new infrastructure have to be approved by
Executive Power, with the agreement of the Secretary of Energy and
ENARGAS.

Natural gas rates prior to privatization did not cover GdE's
costs. The new rate regime, introduced at the time of privatization,
attempted to equate rates to long-run marginal costs. The rates of
transmission and distribution are capped and the cost of natural
gas at the well-head is passed through to those tariffs. Transmis-
sion and distribution rates are "dollarized" and are subject to auto-
matic adjustments every six months in accordance with the U.S.
producer price index (PPI). The rate regime is to be reviewed and, if
necessary, adjusted every five years, based on the level of invest-
ments made by the firm.
The natural gas well-head rate was deregulated after the
privatization of GdE and is now determined through negotiations
among producers (including the privatized YPF), distribution com-
panies and large customers, such as power plants and energy-in-
tensive industries. To promote the efficient use of the transmission
and distribution networks, rates are differentiated according to the
services required by the various types of customers. Residential,
business and industrial users (peak users) who need continuous
service are charged a fixed rate that includes the cost of transmis-
sion, distribution, maintenance and incremental investment. Cus-
tomers whose services can be interrupted during peak winter peri-
ods (off-peak users) are charged rates that include only the cost of
gas transmission, distribution and maintenance, but not the cost of
investments.
Rates are further differentiated for large customers such as
power plants and industrial firms depending on whether they are
directly linked to transmission or distribution networks. Firms that
are directly linked to transmission networks, regardless of whether
they receive continuous or interruptable services, pay lower rates
than firms that are linked to distribution networks. Customers linked
to a distribution network are allowed to build a bypass pipeline
from their plant location to the transmission network, but are then
required to buy gas directly from a producer in one of the basins
and also to purchase spare capacity from a transmission company
to move the gas to where they need it.
The federal government continued its subsidies, which
reached US$85 million for retired persons and US$44 million for
residential and business customers in Patagonia in 1993.

Each winning bidder was expected, within the first five years
of operation, to invest sufficiently to achieve the required standards
in transmission and distribution; these were similar to US standards
but were adjusted for conditions in Argentina.
The mandatory annual investment for the period 1993-97
for the transmission companies was US$57.3 million (US$39.9 mil-
lion for Transportadora de Gas del Sur and US$17.4 million for
Transportadora de Gas del Norte) and paid for pipe installation and
coating, cathodic protection and telecommunications.
The required investment for each distribution company in-
cluded replacement of main and service networks, cathodic protec-
tion, operation and maintenance manuals, leak management, com-
munications equipment, and SCADA, a system for measuring the
natural gas flow in real time. SCADA is presently used by all distri-
bution and transportation companies. Distribuidora de Gas Buenos
Aires Norte was required to make other investments as well, in-
cluding the construction of a peak shaving plant. In all, the eight
distribution companies were required to invest US$285.6 million
between 1993 and 1997.
Gas Del Estado 141
4. Sales Procedures

Valuation was carried out by the National Development Bank
(BANADE) and separately by Stone & Webster, Goldman Sachs, N.
M. Rothschild, and the consulting firm Patricio Perkins and Associ-
ates. BANADE was required by law to establish a minimum value
for each company and came up with lower values than those deter-
mined by the consulting firms.
Marketing was carried out by the Undersecretariat of Fuel
with the assistance of Patricio Perkins and Associates. Promotional
meetings were held in countries with potential bidders, such as the
United States, Canada, Spain, the United Kingdom, Germany, Italy
and France, to inform potential investors about the benefits of par-
ticipating in GdE's privatization. The Undersecretariat of Fuel also
held international seminars in Buenos Aires, attended by the Direc-
tor of the Regulatory Board of the Federal Energy Regulatory Com-
mission (FERC) of the United States and the President of the British
Gas Board, among others.

The financial pre-qualification criterion for the bidders re-
quired a minimum net worth which varied with the size of the ten
firms offered for sale. To bid for the transmission companies, inves-
tors had to show a minimum net worth of US$400 million for
Transportadora de Gas del Sur and a minimum US$200 million for
Transportadora de Gas del Norte. The minimum net worth for ac-
quiring the distribution companies ranged from US$200 million for
Distribuidora de Gas Metropolitana to US$50 million for
Distribuidora de Gas del Noroeste and Distribuidora de Gas Cuyana.
Each bidding consortium was also required to include a tech-
nical operator with at least five years of experience in operating a
transmission or distribution network. Additional technical require-
ments included the minimum number of residential customers that
bidders for the distribution companies needed to have served in the
past.'
'100.000 for Distribuidora de Gas del Noroeste, Distribuidora de Gas del Centro. Distribuidora de
Gas Cuyana. and Distribuidora de Gas del Sur, 200,000 for Distribuidora de Gas Pampeana, and
500,000 for Distribuidora de Gas Metropolitana, Distribuidora de Gas Buenos Aires Norte.
4.3 Bidding Rules

The bidding documents were sold to interested investors for
US$60,000 for information on all ten companies and US$40,000 for
information on either the transmission or the distribution compa-
nies. Purchase of the documents gave bidders access to a data room
and the right to visit GdE's plants and interview its staff. The docu-
ments included a general description of the companies, qualifica-
tion requirements, a detailed description of the bidding process, the
investment requirements for each company, the rates that could be
charged, and the amount of GdE liabilities assigned to each of the
new companies.
Bidders were competing for the Class A shares available in
each company, together with a 35-year concession to transmit or
distribute natural gas with an option to renew for another ten years.
Transmission capacity was allocated to the distribution com-
panies under a ten-year contract. To improve efficiency, the compa-
nies were allowed to sell excess capacity to customers from May
1994 to May 2001 in stages according to the following schedule: until
May 1994, up to 15 percent of excess capacity; June 1994 to May
1996, up to a cumulative 30 percent; June 1996 to May 1997, up to a
cumulative 40 percent; June 1997 to October 1999, up to a cumula-
tive 50 percent; and November 1999 to May 2001, up to a cumula-
tive 60 percent.
During their first year of operation the distribution compa-
nies were expected to buy a minimum monthly amount of gas from
YPE In the summer months they were obligated to "take or pay
for" a higher minimum amount. Beginning with the second year,
however, they could negotiate new gas purchase contracts on their
own with any producer. The bidders were also expected to submit
a maintenance guarantee of US$2 million for the two transmission
companies and the Metropolitana and Buenos Aires Norte distribu-
tion companies, and US$1 million for each of the other distribution
companies.
To prevent collusion among the different companies, limits
were imposed on share ownership. No single bidder could acquire
the majority of shares in more than one transmission company, or in
more than two distribution companies, or in more than one trans-
mission and one distribution company Nor could the distribution
companies Metropolitana, Buenos Aires Norte, or Pampeana be ac-
quired by the same bidder.
Gas Del Estado 143
If, owing to these limitations, a company could not be

awarded to the highest bidder, a second round of bidding was to
take place in which bidders would be given the opportunity to match
the highest offer made in the first round. The companies not awarded
in the first or second rounds would be made available in a third
round under the same conditions. A tie was to be resolved with
rebidding on the part of the tied bidders.
The bids were submitted in two parts, the technical proposal
and the financial proposal, each enclosed in a separate envelope.
The financial proposal which included a signed transfer agreement
to prevent post-bidding negotiations (as had happened during the
privatization of Ente Nacional de Telecomunicaciones (ENTel), the
telecommunications enterprise), had to be made in U.S. dollars.
To ensure transparency, the privatization process was
planned in detail, and the post-privatization regulatory framework
was developed and announced prior to the bidding process. All
necessary information was made available to all participants in a
timely fashion, and interested bidders were invited to make infor-
mal inquiries before the official bid closing dates to determine their
eligibility Information such as the value of the business unit deter-
mined by the consulting firms, and data from BANADE, was dis-
seminated prior to the bidding process.
1. Bidding Process
Both transmission companies were sold in the first round,

as were five of the distribution companies (Centro, Cuyana,
Pampeana, Sur and Litoral). The Distribuidora de Gas del Noroeste
was sold in the second round while the Distribuidora de Gas Buenos
Aires Norte and the Distribuidora de Gas Metropolitana were
awarded in the third round. In all cases, the winning offers were
below the asset values set by BANADE. This was due to interest of
the bidders in awarding the transportation and distribution compa-
nies.
The results of the transaction process are summarized in Table
4 (next page). The table lists for each company, the number of bid-
ders, the winners, the composition of the sales proceeds and other
Company No. of Winners

Sales Proceed Other
Debt
MUMZ8II4
"M wir' '
in Price
Transmission
Transportadora 4 Novacorp, 28 38 182 - 76

de Gas del Transco Gas,
Norte Wartins
Transportadora 2 Enron, Perez 100 205 256 121 409
de Gas del Companc,
Sur Citicorp,
ADPT
Distribution
Distribuidora 3 Camuzzi, 14 10 134 16

de Gas del Sur Gassometri ___
Distribuidora 6 Tractebel, 14 13 90 44
de Gas del lberdrola,
Litoral Garavaglio,
Zorraquin
Distribuidora 7 Sideco, 18 7 120 39
de Gas del Italgas
Centro
Distribuidora 8 Sideco, 26 96 8
de Gas Cuvana __ _ Italgas
Distribuidora 4 Castellano, 10 12 62 12
de Gas Gasco, Banc
Noroeste Frances
Distribuidora 8 Camuzzi, 18 - 217 55
de Gas Gassometri
Pampeana
Distibuidora 4 Gas Natural, 28 33 128 111
de Gas Buenos Manra,
Aires Norte __ . Discogas-_ _ _ __.
Distribuidora 4 British Gas, 44 62 256 537 177
de Gas Pecom, Astra
Metropolitana Invertrad l
TOTAL 300 380 1,541 658 947

'Cash-equivalent of debt retired.
liabilities assumed. Appendix A lists the members of all participat-

ing consortia.
Gas Del Estado 145
The allocation of Class C shares within the PPP program has

not yet been implemented by the transmission and distribution com-
panies. In 1994, the national government offered Class B shares of
Transportadora de Gas del Sur and Distribuidora de Gas
Metropolitana which generated revenues of US$121.5 million and
US$536.7 million, respectively.
The total amount paid by the winning consortia for shares

in the strategic sale of the ten new companies amounted to US$2.2
billion. This included a US$1.5 billion cash equivalent of debt re-
tired. The nominal debt retired was equal to US$3 billion, which
meant a 50 cent payment on the dollar. The US$947 million of addi-
tional liabilities assumed by the companies was exchanged for bonds.
IV. OUTCOMES/IMPACTS
1. FiscalImpact
The fiscal impact of the privatization was positive. It in-

cluded (1) the elimination of the subsidies that had to be transferred
to GdE to cover its deficits in the past; (2) the revenues generated by
the transaction process; (3) the retirement of the US$3 billion nomi-
nal debt (cash equivalent, US$1.5 billion); and (4) the new taxes paid
by the privatized companies.
The transaction proceeds generated by the privatization of
GdE are summarized in Table 5 (next page). The direct sale pro-
ceeds were equal to US$2.2 billion. The sale of Class B shares gener-
ated US$0.66 billion. In addition, US$0.9 billion worth of liabilities
were passed on to the new owners.
The ten newly privatized firms paid US$146 million in 1993
and US$156 million in 1994 in taxes on income and assets (Table 6).
In addition, as is shown in the next section, privatization eliminated
the need for the Treasury to finance GdE's regularly occurring op-
erational deficits.
TABLE 5: FISCAL IMPACT OF GDE PRIVATIZATION (IN US$ BILLIONS)
Transaction Proceeds
Sale to strategic investor 2.22

Cash 0.30
Liabilities included in price 0.38
Public offering 0.66
Gross sales procedures 2.88
Liabilities assumed by Treasury (IDB Loan) 0.24
Liabilities assumed by companies 0.94

Short term 0.59
Long term 0.35
TABLE 6: DIRECT TAXES PAID BY PRIVATIZED FIRMS, 1993-94 (IN US$ MILLIONS)
Transmission Companies
Transportadora del Norte 6.1 16.5
Transportadora del Sur 50.0 54.0
Distribution Companies
Distribuidora de Gas Pampeana 7.4 12.2
Distribuidora de Gas del Sur 2.7 4.2
Distribuidora de Gas del Litoral 2.9 6.6
Distribuidora de Gas del Centro 10.1 6.3
Distribuidora de Gas Cuyana 8.7 9.3
Distribuidora de Gas Noroeste 3.7 3.2
Distribuidora de Gas Buenos Aires Norte 24.6 23.3
Distribuidora de Gas Metropolitana 29.9 20.5
TOTAL 146.1 156.1
2. Profitability
Before privatization, GdE had incurred large operating defi-

cits between 1988 and 1992. Tables 7 and 8 (next page) provide sum-
maries of the financial results. The companies created out of GdE
have improved their financial performance considerably after
privatization.
Gas Del Estado 147
TABLE 7: FINANCIAL INDICATORS (IN US$ MILLIONS)
1991 1,636.2 -522.6

1992 1,878.4 -841.0
19931 2,426.3 487.2
19941 2,611.1 505.0
Combined figures for the firms privatized out of GdE.

Source: 1991 and 1992 Balance Sheets of GdE and ENARGAS.
TABLE 8: PROFITABILITY OF PRIVATIZED COMPANIES 1994 (IN US$ MILLIONS)
S. -_ _ - -
Transmission Companies
Transportadora de Gas del Norte 136.5 50.5
Transportadora de Gas del Sur 366.0 181.3
Distribution Companies
Distribuidora de Gas Pampeana 337.4 55.2
Distribuidora de Gas del Sur 198.1 38.2
Distribuidora de Gas del Litoral 186.4 19.0
Distribuidora de Gas del Centro 126.6 17.6
Distribuidora de Gas Cuyana 106.2 24.4
Distribuidora de Gas del Noroeste 79.7 13.6
Distribuidora de Gas Buenos Aires Norte 379.9 54.0
Distribuidora de Gas Metropolitana 694.3 51.2
TOTAL 2,611.1 505.0
Source: ENARGAS.
The information available is not sufficient to fully evaluate

the impact of privatization on productivity. However, the gas loaded
by transmission and distribution companies (the output) has in-
creased, and with labor declining, labor productivity has improved.
As can be seen from Table 9 (next page), following
privatization, the quantity of gas carried by the two transmission
companies increased by 11 percent during the first half of 1993 com-
pared with the same period for 1992, while the quantity delivered
by the distribution companies increased by 10 percent.
TABLE 9: GAS TRANSMISSIONS AND DELIVERIES BY THE PRIVATIZED COMPANIES
Month
Total First Half, 1991 8.60 9.70

Source: ENARGAS.
The amount of gas delivered by the privatized distribution

companies to residential and industrial customers also increased.
Table 9 provides a summary of the amounts delivered in 1993 as
compared with 1991 (14 percent increase) and 1992 (10 percent in-
crease).
4. Investments
The mandatory investment requirements for the new com-
panies are based on the maintenance of the existing transmission
and distribution networks. These investments are supervised by
ENARGAS.
The newly privatized companies have undertaken capacity
expansions themselves. Transportadora del Sur has requested
ENARGAS' approval for expanding the NEUBA II Pipeline by 2.5
million cubic meters per day, with an estimated cost of US$70 mil-
lion. Transportadora del Norte has applied for the expansion of 3.5
million cubic meters per day in the Midwest Pipeline (US$30.1 mil-
lion), and the expansion of 0.9 million cubic meters per day in the
North Pipeline (US$5.7 million). The total investment will reach
US$105.8 million and the total transmission capacity will be in-
creased by 6.9 million cubic meters in 1994 - an increase of more
than 10 percent.
The Buenos Aires Norte distribution company is required to
construct a peak shaving plant of 5 million cubic meters at a cost of
US$105 million. This plant will improve the quality of service in
the greater Buenos Aires area during the winter months, a problem
that GdE was not able to solve.
Gas Del Estado 149
The privatization of GdE signaled to the domestic and inter-
national communities that the Argentine Government was commit-
ted to the rapid and consistent implementation of its economic re-
form program. The privatization process was well designed and
managed. All required information was available on time, and the
terms were not subsequently altered.
The new differentiated rate regime enabled the transmission
and distribution companies to earn a set rate of return that was high
enough to cover the operation cost and part of the new investment
costs and to generate reasonable profits. The new rate regime also
promoted the efficient use of natural gas by all customers.
The impact on customers of price changes was mixed. While
certain rates were reduced, others increased. Residential user rates
went up but by less than in rates charged by the distribution com-
panies for residential gas.
Tariffs charged to residential customers have increased by
less because they were buffered with the elimination of the fuel tax
(which was transferred to the distribution companies). The resi-
dential consumers of Distribuidora de Gas del Sur (Patagonia) re-
ceived an explicit subsidy paying the same tariffs as before the
privatization of GdE. For medium-size industrial plants demand-
ing firm service, there has been an increase in the tariffs. However,
the increases in the prices for natural gas will allow the distribution
companies to supply more trustworthy services with adequate pres-
sure levels and without unpredictable interruptions. For large con-
sumers, the more favorable tariffs are in the interruptable system. If
customers choose this system combined with buying fuel oil in the
peak period of winter, the customers will decrease their fuel costs.
Only Distribuidora de Gas Metropolitana and Transportadora
de Gas del Sur are quoted on the domestic stock market. For the
rest of the companies, the government has not as yet conducted
public offerings. As of June 1995, the value of Class B shares in the
domestic market for these two companies had decreased by 24
percent for Distribuidora de Gas Metropolitana and 17 percent for
Transportadora de Gas del Sur since they were issued.
Shortly after privatization, the total number of employees in
the ten new companies declined to about 70 percent of the GdE to-
tal. By December 1993, the number of employees was further re-
duced through layoffs, particularly in the two transmission compa-
nies and Distribuidora de Gas Metropolitana and Distribuidora de

Gas Buenos Aires Norte. As a result of these retirements and lay-
offs, by December 1993 the number of employees in the privatized
companies was 6,958, 32 percent lower that the pre-privatization
figure. The reduction in number of employees in 1993 was accom-
panied by an increase in the salary that was affordable because of
increased productivity.
Those workers who have retained their jobs in the new com-
panies will benefit from capital gains through the increase in the
value of their Class C shares and will also receive pay raises tied to
productivity improvements. 2
2The values of Class C shares are the same as Class A and B shares.
Gas Del Estado 151
APPENDIX A
Four consortia bid for 70 percent of shares in Transportadora

de Gas del Norte.
3. Transcanada and Coastal Bridas y Otros.
4. British Gas, Loma Negre, Tenneco and Polledo.
Two consortia bid for 70 percent of shares of Transportadora

de Gas del Sur.
Eight consortia bid for 70 percent of shares in Distribuidora

de Gas Pampeana.
2. Eseba and Gaseba
3. Sideco and Italgas
7. Tractbel, Ilberdrola and Garovaglia y Zorraquin.
8. BC Gas y Otros.
Three consortia put in bids for 90 percent of shares in

Distribuidora de Gas del Sur.
2. Mepaco Gas.
3. BC Gas y Otros.
Six consortia bid for 90 percent of shares in Distribuidora de

Gas del Litoral.
2. Camuzzi, Gassometri and Banco Frances.
Seven consortia bid for 90 percent of shares in Distribuidora

de Gas del Centro.
3. Camuzzi and Gassometri.
Eight consortia bid for 60 percent of shares in Distribuidora

de Gas Cuyana.
3. Camuzzi and Gasometri SpA.
5. RBS Joint Venture.
6. Tractabel, Ilberdrola and Garovaglio y Zorraquin.
7. BC Gas y Otros.
Gas Del Estado 153
Four consortia bid for 90 percent of shares in Distribudora

de Gas del Noroeste.
4. BC Gas y Otros.
Four consortia bid for 70 percent of shares in Distribuidora

de Gas Buenos Aires Norte.
3. British Gas, Perez Comp., Astra and Invertrad.
Four consortia bid for 70 percent of shares in Distribuidora

de Gas Metropolitana.
3. British Gas, Perez Comp., Astra and Invertrad.
Obras Sanitariasde la Naci6n 155
Case Study 4: Obras Sanitarias de la

Naci6n (OSN)
I. INTRODUCTION
In 1993 Argentina privatized the provision of water and sew-

erage services in the Buenos Aires metropolitan area. The public
enterprise, Obras Sanitarias de la Naci6n (OSN), was given to the
private sector under partial sale and long-term concession. This
case study is a review of OSN's privatization.
Infrastructure developments in the Buenos Aires region be-
gan in 1869 with the first water supply services in the City of Buenos
Aires. In 1912 the government created the public enterprise OSN to
manage these city services. OSN's mission was soon extended to
the entire country.
In 1966, rural water and sewerage services were placed un-
der the management of a new government entity, Servicio Nacional
de Agua Potable y Saneamiento Rural (SNAP).' In 1980, rural water
and sewerage services were transferred to the provinces and OSN's
activities were limited to the City of Buenos Aires and the 13 sur-
rounding districts that comprise the BuenosAires metropolitan area.
OSN's physical infrastructure consists of a unique system of
underground tunnels and pumping stations. At the time of
privatization, OSN's water facilities included 77.5 kilometers of un-
derground tunnels, nine pumping stations, two treatment stations,
367 kilometers of water mains and more than 10,000 kilometers of
distribution pipes.
IIn 1988 SNAP was transformed into Consejo Federal de Agua Potable y Saneamiento (COFAPYS)
provinces outside of
which now oversees the development of the water and sewerage sector in the
Buenos Aires.
Provision of water and sewerage services to the BuenosAires

metropolitan area was facilitated by the area's proximity to the plen-
tiful supply of fresh water from the La Plata River. Over 90 percent
of OSN's pre-treated water was obtained from the La Plata River,
with the remainder taken from local groundwater. However, by
1990 the pollution of the groundwater supply made that source in-
creasingly hazardous and the river gradually became the sole source
of raw water.
The strong flow of the La Plata River was important to OSN's
sewerage services. OSN treated only 2 to 3 percent of total effluent,
although an estimated 1.5 cubic kilometers of effluent were dis-
charged into the river each day.2 The sewerage system consisted of
four pumping stations, three sewer mains of 60 kilometers each,
and about 7,000 kilometers of network pipelines. The system had
only one sewerage treatment plant which was small and in poor
condition.
While OSN provided almost complete water and sewerage
coverage in the City of Buenos Aires, coverage was limited in the
suburban areas, where demand was increasing at a rate of 5 to 6
percent a year. Prior to privatization, the enterprise provided water
to 99 percent of the 3 million inhabitants of the City of Buenos Aires,
but to only 55 percent of the suburban area's population of 6 mil-
lion. OSN maintained more than 1.2 million domestic, commercial
and industrial water connections over an area of approximately 500
square kilometers. The sewerage service covered a smaller area of
400 square kilometers and served a total urban/suburban popula-
tion of 5 million with more than 700,000 domestic, commercial and
industrial sewerage connections. Sewerage services were provided
to 99 percent of the population in the City of Buenos Aires but to
only 36 percent of the suburban population (see Table 1).
TABLE 1: OSN SERVICE COVERAGE, 1992
Population Served in Metropolitan Area (%) 70 58

Coverage in Buenos Aires Capital District 99 99
Coverage in Suburban Areas 55 36
Number of Connections (millions) 1.2 0.7
Area Covered (kM2) 500 400
Source: Aguas Argentinas Concession Contract.
2 B. Walton, Halcrow Management Sciences Limited.

Obras Sanitariasde la Nacion 157
By the early 1990s the maintenance and expansionof OSN's

infrastructure were limited by financial constraints. Investments
had fallen from 1.5 percent of gross domestic investment (GDI) in
1970 to 0.58 percent in 1990. Resources were not available for badly
needed maintenance and rehabilitation.
OSN's services were also affected by inefficient management.
The classification of users was outdated and inefficient and was
based primarily on lot size rather than on actual water usage. About
20 percent of the consumers (150,000) had meters, but most meters
were broken and few of those that worked were actually read. As a
result, approximately 90 percent of the water supply was unmetered.
Average per capita consumption was very high - an estimated 300
to 500 liters per day This figure reflected unaccounted system losses,
which were estimated at least 40 percent of the total production of
100 million cubic meters of water per month in 1992.3 In addition,
OSN was overstaffed, with a total of 7,500 employees. There were
eight to nine employees per 1,000 connections - about five times
4
more than in European enterprises.
In spite of these inefficiencies, the rate charged in the Buenos
Aires metropolitan area (US$0.40/cubic meter) was sufficient to
5
cover all operating and maintenance costs. Therefore, with in-
creased efficiency, particularly in billing, collection and water con-
sumption control (i.e., the reduction of system losses), the operation
could be profitable, especially if the infrastructure were to be reha-
bilitated and modernized. Buenos Aires not only had an adequate
rate level but also managed to collect about 80 percent of customer
payments due.6
The activities of OSN were regulated. Its rates were calcu-

lated on the basis of metered (10 percent) and unmetered (90 per-
by
"The Approach in Buenos Aires - A Case Study in Water Franchising." Paper presented
of
B. Walton. Halcrow Management Sciences Limited, in December 1993 at a meeting of the Institute
Civil Engineers and Institution of Water and Environmental Management. United Kingdom.
4 Emanuel Idelovitch and Klaus Ringskog, "Private Sector
Participation in Water Supply and Sanita-
tion in Latin America," World Bank, May 1995.
5As a comparison, the rate charged in Caracas, Venezuela, in 1992 was only US$0.04 per cubic meter.
far below operating costs.
' "Regulatory Barriers to Private Sector Participation in Water and Sanitation Services in Latin America
(Draft), prepared by Apogee Research, Incorporated for the World Bank, February 1994.
cent) services. Charges for unmetered potable water supply and

sewerage service were determined on the basis of the customer's
geographic location, the age and quality of the physical facilities to
which service was provided and the surface area of the enclosed
structure and land where service was provided. These factors were
multiplied by a general rate level (pesos 0.0279/m3 for residential
customers and pesos 0.0558/m3 for nonresidential customers) and
by the coefficient K, which was supposed to reflect operating costs. 7
The K factor was set periodically by the directors of OSN, subject to
approval by the executive branch of the federal government. At the
time of privatization, it was equal to one.
Under the rate structure for metered services, customers were
required to pay a minimum of 50 percent of what they would pay
according to the rate formula for unmetered services. However, resi-
dential customers were not charged for the first 30 cubic meters con-
sumed during a two-month period. But bimonthly metered con-
sumption and discharge above 30 cubic meters were charged a rate
of pesos 0.66 per cubic meter multiplied by the K factor. Water sup-
ply alone was charged at pesos 0.33 per cubic meter, also multiplied
by the K factor.
The following were exempt from water and sewerage tar-
iffs: (1) property belonging to religious organizations dedicated to
worship; (2) property belonging to foreign embassies and consu-
lates, subject to reciprocity; and (3) mutual benefit associations listed
in the National Registry of Benefit Societies.
OSN was selected for privatization in 1990 because of the

urgent need to upgrade and expand its infrastructure and improve
its services. The government was commited to expand the
privatization program after initial success in privatizing other sec-
tors.
I The tariff formula was: Tariff = K x Z x TG x [(SC x E) + (ST/lO)], where K is the coefficient that
reflects operating costs, Z reflects the geographic location of the customer, TG is the general tariff
level, E reflects the age and physical qualities of the structure, SC reflects the total surface area of the
enclosed structure to which service is being provided and ST reflects the total surface area of the land
occupied by the customer
The enterprise had already undergone a restructuring prior

to privatization, beginning in 1986 with the assistance of a World
Bank loan.8 A German firm, Rhenag-Lahmeyer and Associates, had
been recruited to work with OSN to identify existing problems, rec-
ommend solutions and assist in implementing them. However, the
process was slow and little had been accomplished by 1990 when
the decision to privatize was made. The World Bank loan was modi-
fied to support privatization and the contract with the German firm
was terminated. New terms of reference were developed for re-
cruiting consultants to prepare OSN for privatization.
A number of privatization options were considered and,
given the need for large-scale investments, a concession arrange-
ment appeared to be the most effective method for achieving the
privatization objectives. A concession arrangement is a type of
management contract where the contractor has responsibility for
long-term fixed investments, in addition to short-term investments
and management responsibility.9
The two key strategic issues considered were (1) the possi-
bility of dividing OSN's operations into several concessions and (2)
the duration of the concession. It was decided not to break up the
enterprise but to grant a single concession covering all of OSN's
existing operations. This decision was influenced by the
government's wish to transfer OSN to private operators, expand
coverage through the integrated supply system and develop a uni-
fied sewerage system as soon as possible. A period of 30 years was
determined to be suitable for the concession, since it would be long
enough to enable long-term investments to be financed and to al-
low the concessionaire a reasonable return on investments.
The privatization of OSN was authorized by the State Re-
form Law of 1989 and four Executive Decrees spanning the period
from 1989 through 1991. 1 Implementation of the process was as-
signed to the Undersecretary for Privatization within the Ministry
of Economy (now called Ministry of Economy and Public Works).
A Privatization Committee was established in early 1991 to oversee
and coordinate all the activities relating to the preparation of the
private concession. The Committee included representatives from
the Ministry of Economy and Public Works, the Undersecretary for
IWorld Bank. Project 2641-AR: Argentina Water Supply Project, 1986.

'For a tax on any of various types of management contracts, see Shield and Minori (1995).
'° State Reform Law No. 23696 of 1989 (No. 23696/89) and Executive Decrees No. 1105/89,
No. 2074/90, No. 1443/91 and No. 2408/91.
Privatization, the municipality of Buenos Aires, the Province of

Buenos Aires, the congressional Bicameral Privatization Commis-
sion, the auditing agency Sidicatura General de Empresas Pceblicas
(SIGEP), OSN management and OSN's two labor unions (the Na-
tional Federation of Obras Sanitarias Workers and the Greater Buenos
Aires Union of Obras Sanitarias Workers). To ensure the continuity
and quality of services, the enterprise was managed by an interventor
during the privatization process.
Consultants were recruited through a competitive tender to
help with the privatization preparation for OSN and their fees were
financed by the World Bank loan mentioned earlier."' The primary
technical consultant was Sir William Halcrow of the United King-
dom whose responsibilities included evaluating the overall
privatization strategy, preparing technical and economic evaluation
of OSN's existing assets and services, providing the potential inves-
tors with technical information on OSN's operations and develop-
ing the expansion plans to be implemented by the concessionaire.
Financial advice was provided by the French firm Banque
Paribas and the Argentine firm Interbonos Capital Markets S.A.,
which were responsible for marketing the process and evaluating
the financial bids. In addition, the consultants helped the govern-
ment draft the regulatory framework, the bidding documents and
the concession contract. They received a success fee of about US$2.5
million paid by the winning bidder. The total consulting cost added
up to approximately US$4 million.' 2
Since Argentina had limited experience in regulating private
concessions, the World Bank also supported the development of the
post-privatization regulatory framework by financing the activities
of a team of international consultants from the U.S. firm Booz Allen
and Hamilton.
II The technical consultant was selected on the basis of technical proposals and then price was nego-
tiated with the winner. The financial consultants were recruited on a combination of technical proposals
and price, with a weight of 85 percent given to the technical proposal and 15 percent given to the
price, which was a mix of retainer and success fee.
12 Infrastructur-eNotes, No. WS- 10, Thelma Triche, Abel Mejia and Emanuel Idelovitch "Arranging
Concessions for Water Supply and Sewerage Services: Lessons from Buenos Aires and Caracas."
Transportation, Water and Urban Development Department, The World Bank, May 1993.
2. Restructuring

In order to maintain the system's integrity, OSN was not bro-
ken up prior to privatization. Instead, it was offered as is, which
also hastened the process. The concession was for the distribution
and commercialization of potable water and sewerage services, in-
cluding the operation of the plants for water production and sew-
age treatment.
The privatization took the form of a concession arrangement
in which the government maintained ownership of the assets but
transferred the responsibility for operation of the assets to a private
operator through a 30-year concession contract. The concessionaire
was obliged to meet specific targets for service quality and cover-
age, assuming all commercial and financial risks.

Before privatization, OSN had 7,500 employees all of whom
had to be employed by the concessionaire on the basis of existing
contracts. Thus no labor retrenchment took place in preparation for
the privatization. However, the concessionaire had the right to re-
negotiate the contracts and reduce the labor force after privatization
through a voluntary retirement program.

All of OSN's liabilities, which totaled US$238.5 million, were
assumed by the State Treasury 13 Seventy-four percent of these was
short term and the remaining amount was long term owed prima-
rily to the World Bank and the Inter-American Development Bank
(IDB). External debt accounted for US$47.7 million of the total.14
1 These debt figures are from OSN's financial statements as of December 31, 1991, audited by
SIGEP
and reviewed by technical consultants. No additional debt was assumed between that date and the
transfer of the concession.
4 The IDB approved a US$98 million denominated loan to OSN (No. 552 OC/AR) in December
1988 to develop the water supply system of the westem side of the City of Buenos Aires and the
surrounding area. The project had three main components: (1) tubing an underground river to supply
fresh water to pumping stations; (2) rehabilitating a water plant; and (3) metering expansion. During
the negotiation of the concession agreement, the govemment requested from the IDB the substitution
of Aguas Argentinas for OSN as the executing agency for the project. Since then, the request has
been approved by Ente Tripartito de Obras y Servicios Sanitarias (ETOSS), the water sector regula-
tory agency. The IDB approved the change in the loan agreement on January 5, 1995.
The outstanding legal claims against OSN and supplier debts,

were placed in a new entity, OSN Residual, within the Ministry of
Economy and Public Works.
3. Post-PrivatizationRegulation

To manage the new regulatory system, an independent tri-
partite regulatory agency, Ente Tripartito de Obras y Servicios
Sanitarias (ETOSS), was created. Its Board of Directors includes two
representatives each from (1) the federal government, (2) the Prov-
ince of Buenos Aires and (3) the City of Buenos Aires.
The main objective of ETOSS is to enforce the concession
contract and to protect consumer rights. Specifically, it is respon-
sible for approving the concessionaire's five-year investment plans
and tariff revisions, monitoring compliance with such plans and
tariffs, supervising the maintenance and expansion of the system
and establishing performance standards to ensure service quality
and continuity. ETOSS is also required to guarantee the operation
of current and future services as well as the protection of public
health, water resources and the environment. The operational ex-
penses of the agency are covered primarily by a surcharge of 2.67
percent of billings charged to consumers by the concessionaire.

The new rate regime attempts to ensure a rational and effi-
cient use of services and resources, facilitate an equilibrium between
supply and demand, attend to social and sanitation objectives and
see that prices and rates reflect the economic cost of the services,
including investments and the profit margin of the concessionaire.
Any modifications to the rate must be carried out in accordance with
the guidelines set out in the concession contract and not penalize
the concessionaire for efficiency improvements nor compensate for
losses resulting from inefficient operation.
The new rate regime covers both metered and unmetered
services. Metered service must be applied to nonresidential users,
bulk users, and selected other customers. The concessionaire has
two years to comply with the requirements for metered services.
Ordinary rate increases cannot occur during the first ten years
of the concession. No revisions are permitted during the first five
years and only decreases in the rate are permissible during the sec-
ond five-year period. Decisions to implement ordinary revisions
must be made on the basis of a detailed financial analysis of neces-
sary changes in the investment goals or required capital projected
in the investment plan. No revisions can be made if the concession-
aire has not met all of the service improvement and expansion goals.
Extraordinary rate revisions can occur after the first five years
on the basis of changes in the concessionaire's operating costs. Four-
teen key operating costs are identified in the concession contract
and combined into a cost index. Revisions are permissible when
the cost index changes by more than 7 percent. Revisions can also
occur because of changes in: (1) the water quality standards, (2) the
demand for services or the work needed to provide the services, (3)
the tax structure, or (4) the environmental laws that affect the provi-
sion of services. All such revisions have to be approved by the Min-
istry of Economy and Public Works. The rate regime can also be
modified if the concessionaire demonstrates that such modification
would result in a reduction of costs.
The rate regime can be modified for extraordinary reasons
only if the concessionaire has met all the service targets. Any re-
quest for modification of the regime must show how the change
would be the most appropriate way of complying with each of the
principles set out in the regulatory framework.'- It must also ad-
dress the question of whether the concessionaire has efficiently used
assets and resources for the provision of service.

The contract did not include any specific investment require-
ments. Instead, gradual performance targets were set for such pa-
rameters as water and sewerage coverage, percentage of wastewa-
ter to receive primary and secondary treatment, percentage of net-
work to be renovated and maximum possible unaccounted-for wa-
ter levels (see Appendix B). Accordingly, at the end of the contract,
the coverage was to reach 100 percent for water supply (compared
to the existing 70 percent) and 95 percent for sewage collection (com-
pared to the current 58 percent). Unaccounted-for water was to be
reduced from 45 percent at the beginning of the contract to 25 per-
cent in year 30.
"5 The principles are listed in Article 44 of Decree 999/92. which defines the regulatory framework.
The contract also addressed the quality of service required.

On the basis of national and international standards as well as his-
toric data on OSN, a set of water quality parameters was established,
to serve as standards for potable water, that the operator would be
required to meet. The contract also determined two sets of effluent
quality parameters for wastewater undergoing primary and second-
ary treatment.16 Both quality requirements were set to tighten gradu-
ally every five years.
4. Sales Procedures
4.1 Marketing
Through the technical and financial consultants retained by
the Government of Argentina, Sir William Halcrow and Banque
Paribas, respectively, major private operators of water systems
worldwide (the United Kingdom, France and Spain) were informed
of the new business opportunities in Argentina. The privatization
of OSN was also promoted through international presentations in
Europe, supported by the UNDP-World Bank "Marketing the Ar-
gentine Privatization" program. Promotional materials prepared
by the consultants focused on the potential profitability of the op-
erations, the security of the area and the possibilities for expansion.

The pre-qualification criteria were designed to limit the bid-
ding to firms with strong technical and financial capabilities and to
ensure that only top international operators could participate. To
participate in the bidding process, investors were required to have
a net worth of at least US$750 million, the ability to incur debt of at
least US$2 billion to finance investments, experience in providing
water and sewerage services to an urban population of about 10
million consumers and annual billings of at least US$600 million.
4.3 Bidding Rules

The bidding documents were issued in June 1992 and were
given free of charge to pre-qualified investors. These investors could
comment on the documents during a period of 30 days before sub-
mitting bids. The documents included a description of all essential
"' Idelovitch and Ringskog, 1995.

Obras Saniitariasde la Naci6n 165
elements of the concession and the regulatory framework, such as

details of the existing rate system, current tax system and consumer
regulations. Any additional information needed was supplied by
the technical consultants.
Although the concession arrangement did not provide the
concessionaire with subsidies for the provision of services, there was
a significant subsidy component in the granting of the concession.
No payment was required for operation of the concession or for
access to the water resources. The concessionaire received OSN's
productive assets free of liabilities, which were all assumed by the
government. Although labor restructuring was implemented after
privatization, the government provided the concessionaire with
US$37 million to finance severance payments for about 25 percent
of the work force.
The state would continue to own all of OSN's assets but
would grant the private operator the right to operate, maintain and
invest in the assets during the entire life of the concession. The
concessionaire would be entitled to a rate of return that would cover
all operational expenses, provide for required investments and gen-
erate a profit. However, the concessionaire would also have to as-
sume all commercial and financial risks.
The results of the analysis of the privatization strategy that
had been conducted by the technical consultant were summarized
in a situation report that was made available to all bidders. The
report addressed the capital investments needed in infrastructure,
operations and administration, as well as key issues such as the age
and condition of assets, required system expansion and rehabilita-
tion, demand/supply projections. It also covered operational and
administrative expenditures and organization, human resources,
legal searches and contract status, and relationships among gov-
ernment departments .17
To develop a business plan, the technical consultant analyzed
over 25 possible investment scenarios, including performance tar-
gets that the concessionaire could meet while earning a reasonable
return on investment. Among the variables analyzed were popula-
tion growth, water demand and usage that was not accounted for.
B. Walton, Halcrow Management Sciences Limited.

Water quality control and the approval of sanitation equip-

ment were to remain under the federal government, while the col-
lection of rainwater was assigned to the municipalities. Several ac-
tivities carried out by OSN, which were complementary but not es-
sential to the primary operations, remained with the company, but
the concessionaire was given the right to maintain, modify or dis-
continue these services after taking over operations. These services
included the production of chemicals, testing laboratories and re-
pair shops.
In anticipation of privatization, the government imple-
mented two adjustments. In February 1991 there was a 25 percent
increase in the average rate that partially compensated for inflation
in the first quarter of the year. On April 1, 1991, there was an addi-
tional increase in the average tariff of about 29 percent, which en-
abled OSN to operate without injections of capital from the State
Treasury or assumption of debt. In March 1992 an 18 percent value
added tax was added to the rate. Each bidder calculated the "re-
quired average rate" to earn its expected return on its investment
plans.
The concession was awarded through an international com-
petitive tender. The bidding documents specified that no cash pay-
ment was required, instead the concession would be granted on the
basis of the greatest reduction offered in overall rate levels (K fac-
tor). The concessionaire would be required to invest extensively to
expand and improve the services and would be monitored by a regu-
latory body consisting of representatives from national, provincial,
and municipal government.
The key element of the bidding documents was the bidder's
investment plan for the expansion and improvement of services.
The concessionaire had to (1) reduce the amount of unaccounted for
water; (2) improve the quality of drinking water; (3) increase the
water pressure; and (4) renovate all essential systems, including
pumping stations, underground tunnels and treatment stations.
Moreover, the documents called for increasing the primary and sec-
ondary treatment of effluents, renovating the existing pipes for dis-
tributing potable water and sewerage and constructing new infra-
structure to allow for system expansion. The plan had to be de-
signed in six five-year segments, with each segment detailing the
objectives to be achieved in each area and the projects to be imple-
mented to meet the objectives. Appendix B summarizes the specific
expansion targets.
Bidders were judged according to their technical and finan-

cial ability to implement the extensive investment plan. The tech-
nical requirements included (1) plans for the improvement of man-
agement, organization, training for employees and career develop-
ment; (2) procedures and scientific systems to be used to measure
water quality, procedures and operating systems; (3) details on the
technology to be used for operating and maintaining the system;
and (4) procedures for managing the company's financial system.
The government realized that it would not be financially fea-
sible to fix the rate level for the duration of the concession. It was
concerned with the specific mechanism for revision and decided
that automatic revisions based on a price index were politically un-
acceptable."8 Hence, rate revisions were based on changes in con-
struction and operating costs. Particular conditions for "ordinary"
and "extraordinary" revisions to the rate level were specified and
all revisions had to be authorized by the regulatory agency
The concessionaire was authorized to collect all customer
payments and impose a penalty, including cutting off service, for
nonpayment of bills."8 However, the concessionaire is required to
reinstate service within 48 hours for customers who pay their bills
and penalties.
The bidding documents also defined the authority of the
regulatory agency, which can impose warnings and fines and can
recommend that the national government cancel the concession for
noncompliance with the contract. Fines, which must be paid in pe-
sos, range from 5,000 to 500,000 pesos, depending on the infraction.
Finally, failure to meet the investment targets set in the con-
tract is also subject to penalty. Essential delays (that is, more than
10 percent below the target) would result in a fine of 1 million pe-
sos. Nonessential delays (less than 10 percent below target) would
result in a fine of 100,000 pesos. Along with the fine, the agency
was empowered to impose a new timetable to meet the target. If
the new timetable was not met, the fine could be imposed again.
18 B. Walton, Halcrow Management Sciences Limited.

'9 After a payment is one month late, the penalty is 5 percent of the original bill; after 60 days the
penalty is 10 percent. If the concessionaire is forced to go to court in order to receive payment, the
client is charged an additional 12 percent of the original invoice and a monthly penalty accrues at I
percent of the original invoice.
Under the terms of the bidding, the concessionaire was to

be responsible for measuring the quality of sewerage and reporting
to the Secretary of the Environment if any waste treatment did not
meet the requirements. However, the concessionaire was not given
the authority to cut off sewerage services where standards were not
met. Only the Secretary of the Environment could enforce compli-
ance with the standards.2 0
Moreover, to ensure compliance with contractual obligations,
the concessionaire was required to provide a guarantee of US$150
million deposited in cash, debt papers, or other instruments, which
had to be accessible during the concession period. The amount was
to be adjusted according to U.S. inflation to maintain its original
value. Upon termination of the concession (unless termination was
due to the concessionaire's nonperformance), the guarantee would
be returned.
1. Bidding Process
The concession was awarded through an international com-
petitive tender based on a two-envelope bidding process. The bids
were divided into technical and financial offers and submitted to-
gether in two sealed envelopes. The final choice of a qualified bid-
der was based on the proposed rate level (the K factor). The bids
had to be accompanied by a security deposit of US$3 million, which
was returned to all bidders, including the winner. All offers had to
be valid for 180 days after they were submitted.
The Secretary of Public Works called for bids to select the
concessionaire and the service operator (Resolutions No. 97/91 and
No. 178/91). On June 30, 1992, the Executive Power approved the
regulatory framework for the the water and sewerage sectors
through Decree No. 999/92. Through Resolutions No. 53/92 and
No. 186/92, the Secretariat of Public Works (now merged with the
20 The environmental issues, which were heightened with the cholera epidemic, are a serious concern
in the Buenos Aires area. The groundwater supply has dangerously high levels of nitrate concentra-
tion and the La Plata River is becoming increasingly contaminated by untreated waste which is
discharged directly into the river, even though discharges that supposedly occur downstream from the
pumping stations. These problems require extensive investments which are not covered in the con-
cession contract.
Obras San itariasde la Naci6n 169
Ministry of Economy) pre-qualified prospective bidders and ap-

proved the bidding documents for the concession.
Six consortia from France, England, Spain and the United
States purchased pre-qualification documents but only five submit-
ted applications. All five were qualified, but two subsequently
merged so that finally there were only four bidders. Appendix A
lists the participating consortia.
During the first stage, the technical offers were evaluated by
the technical consultants, who then passed on their recommenda-
tions to the Privatization Committee, which was responsible for the
final decision. The technical offers were evaluated on the basis of
the bidders' plans for meeting the quality standards and targets for
improvements and expansion. Proposals had to provide the details
of how the operation would be managed over the life of the conces-
sion and how the plans were applicable to the specific conditions of
the BuenosAires metropolitan area. The consultants recommended
the qualification of theAguasArgentinas andAguas de BuenosAires
consortia and the disqualification of the Canal del Plata and North
West Water consortia. The Committee's decision, announced in
October 1992, was to qualify all bidders except Canal del Plata, be-
cause of an unrealistic investment plan. 2 1 North West Water was
qualified on the condition that its financial offer adequately matched
the investment plans in the technical offer.
During the second stage, the financial offers of the three
qualified bidders were opened. The consortium Aguas Argentinas,
headed by Lyonnaise des Eaux-Dumez, was selected as the winner
since it presented the lowest number for the K factor (0.731). Be-
cause the factor was 1.0 at the time of privatization, the Aguas
Argentinas offer represented a reduction of existing rates by 26.9
percent. 2 2 The second-place bid was very close: the consortium
Aguas de Buenos Aires, headed by Thames Water, offered a rate
reduction of 26.1 percent. The offer of North West Water was far
lower, with a proposed reduction of only 10.5 percent.
21 Canal del Plata's proposal included an unusual method of disposing of waste which involved the
construction of two artificial islands in the middle of the La Plata River. The consortium's proposal
failed to prove the cost effectiveness of this plan.
22 In July 1994, ETOSS granted the concessionnaire a 13.5 percent extraordinary rate increase owing
in part to the advancement of investments to increase coverage targets and to solve urgent water and
sewerage problems. and owing in part to the higher labor costs incurred by the concessionaire, be-
yond the inflation formula included in the contract. Even after this increase, the water rates remained
17 percent below their previous levels.
On December 28, 1992, the Secretary of Public Works

awarded the concession to theAguasArgentinas consortium, which
was composed of: Lyonnaise des Eaux - Dumez S.A.; Sociedad
Comercial del Plata S.A.; Sociedad General de Aguas de Barcelona
S.A.; Meller S.A.; Banco de Galicia y Buenos Aires S.A.; Compagnie
General des Eaux S.A.; and Anglian Water PLC S.A.
The award was ratified and signed in April 1993, including
an allocation of 10 percent of the share capital to the workers (PPP).
The consortium began operation of the concession on May 1, 1993.
IV. OUTCOMES / IMPACTS
1. FiscalImpact
Because the OSN concession was awarded without having
the winning bidder make a cash payment, the privatization of OSN
did not generate any immediate direct revenue for the government.
The fiscal impact of the OSN concession transaction was negative at
the end of 1993, the first year of the concession. This was primarily
due to the government's assumption of OSN's liabilities (US$238.5
million) however, these liabilities were the government's responsi-
bility, in any case. A number of factors indicate that there will be a
positive fiscal impact in the future.
OSN's privatization had an indirect positive fiscal impact
because of the changes in subsidies and taxes generated through
the water and sewerage services. Prior to privatization, OSN was
exempt from taxes on imports of any goods related to the provision
of service, including construction and exploitation of resources. After
privatization,AguasArgentinas became subject to four types of taxes:
First, Value Added Tax (VAT), whose rate was 18 percent until 1994,
is currently at 21 percent. Second, one percent tax on both existing
and newly acquired taxes. However, this tax was eliminated in 1995.
Third, 50 percent corporate income tax. However, Aguas Argentinas
did not actually pay income taxes during the 1993-95 period since it
had initial fiscal credit with the government. Finally, there are rev-
enue taxes levied by the province of Buenos Aires and by the Fed-
eral District (Capital Federal). Overall, tax revenues to the govern-
ment, including the accrued income tax, totaled US$8.3 million in
1993, US$25.1 million in 1994 and US$25.4 million in 1995 (see Table
2).
TABLE 2: TAX REVENUES (IN US$ MILLIONS)
Value Added Tax 3.60 9.37 9.561
Asset Tax 0.58 1.68

2 5.30 6.00
Accrued Income Tax -
Revenue Tax 4.13 8.73 9.883
B.A. Province 1.10 2.97 4.00
C.F 3.03 5.76 5.88
Total 8.31 25.08 25.44
During the first three quarters of 1995.

2 Based on estimated net income of the next fiscal year.
I During the first three quarters of 1995.
Sources: Agutas Argentinas Balance Sheets of 1994 and 1995, Sudbsecretarfa de Recursos Hidricos.
The privatization also had a positive indirect fiscal effect

because of the decreased expenditure from the national budget and
the elimination of government subsidies in the form of transfer of
funds from Treasury. The audited financial statements of OSN
through 1989 reflect direct transfers from the State Treasury of US$1.5
million in 1989, US$6.8 million in 1988, US$27.6 million in 1987 and
US$16.7 million in 1986. In line with the privatization policy, no
transfers were made in 1990 or 1991. The termination of direct trans-
fers is an indirect positive fiscal result of privatization.
2. Profitability
Although Aguas Argentinas reported a loss of US$23 mil-
lion in 1993 (at the end of the first eight months of its operations), it
showed a profit of US$25 million in 1994 (Table 3). In 1995 profits
jumped to US$54 million. By the fifth year of the concession Aguas
Argentinas is expecting a net income of US$96 million.
The improvements in profitability are mainly due to actions
taken by Aguas Argentinas. Within a few months of taking over the
concession, Aguas Argentinas was able to lower operating costs by
improving the management of purchases and the internal use of
goods; eliminating waste; negotiating lower prices for inputs; and
implementing faster, more reliable systems for budgets, authoriza-
tion and control.
TABLE 3: FINANCIAL RESULTS (IN US$ MILLIONS)
1993
May-Dec 1994 1995
Net revenues 163 308 361
Net Income (23) 25 54
Total Equity 95 126 185
Return on Sales (%) (14) 8 15
Return on Equity (%) (24) 20 29
Sources: IFC Board Paper (R94-52): Aguas Argentinas Balanc-e Sheets.
Aguas Argentinas expects to increase its revenue in the fu-

ture through (1) creating a central billing system, (2) reclassifying
all users, (3) removing errors from the existing customer data base
and (4) cracking down on clandestine connections.
Aguas Argentina's primary objective was to convince the
public of its credibility (that is, to create a "culture of service" within
the company and to stop the deterioration of service). To achieve
these objectives, it instituted emergency repairs and rehabilitation
of the equipment to reduce service disruptions; restructured the
maintenance system, with more personnel and new equipment, in-
cluding a fleet of new trucks; and implemented a system of moni-
toring service quality
As a result of these actions, employee productivity, service
quality and system maintenance improved within six months of the
concession. The ratio of number of employees per 1,000 connec-
tions decreased from 8 to 3.5. AguasArgentinas also reduced stopped
filters in the main water plant, which resulted in a 10 percent in-
crease in pumping capacity for the entire system; reduced the num-
ber of pending claims related to leaks or breakdowns for water from
1,600 in May 1993 to 700 in September 1993 and for sewerage drains
from 3,000 in May 1993 to 1,900 in September 1993; and reduced the
time taken to respond to consumer complaints from 80 hours to 48
hours for water and from 140 hours to 80 hours for sewerage. 2 3
" Presentation by Aguas Argentinas at the AIDIS Congress of Mar del Plata in October
1993.
Aguas Argentinas also addressed the emergency rehabilita-

tion needs of the system, as specified in the concession contract.
These included rehabilitating the General San Martin water treat-
ment plant with the installation of new filters, valves and pumps;
reducing water leaks and increasing drilling to supply the distribu-
tion system in the most critical areas; repairing 120 kilometers of the
distribution network in areas with very low water pressure; and
importing a fleet of modern trucks with the capacity to clean out
clogged drains.
As a result of these actions, the water production capacity
increased by 22 percent from 3.8 million cubic meters per day in
May 1993 to 4.6 million in December 1994.24 Water losses were re-
duced to the contract target of 25 percent from about 40 percent.
Illegal connections were reduced, but they still account for about
200,000 to 300,000 connections, or 5 percent of the total. In terms of
coverage, between May 1993 and December 1995, the number of
people receiving potable water increased by 10 percent, from 6 mil-
lion to 6.6 million, while those receiving sewerage services increased
25
by 8 percent, from 4.9 million to 5.3 million.
4. Investments
The coverage targets established in the contract imply an

increase in the number of connections of about 1 million inhabit-
ants every five years for the first half of the concession. This means,
on average, a US$130 million annual investment, or a total of US$4
billion over the entire period of the concession. In the first five-year
investment plan, Aguas Argentinas management aims at a total in-
vestment of some US$1.2 billion or US$240 million per year.
According to the Aguas Argentinas management, the com-
pany has received favorable responses from the international finan-
cial community Aguas Argentinas expects to obtain US$631 mil-
lion in long-term debt financing during the first five years of the
concession, when the value of its assets will increase to about $US1
billion.
24 Aguas Argentinas. Memoire, December 1994.

25 Aguas Argentinas. Memoire, December 1995.
Of this loan amount, IFC has already provided Aguas

Argentinas with US$172 million and is preparing another US150
million. The role of IFC in the project will involve assisting in struc-
turing the financial plan and mobilizing long-term financing; pro-
viding confidence to long-term lenders; and mitigating some of the
risks associated with such a long-term, phased project, which is
dependent on continued access to financing and on a transparent
and effective regulatory environment. 2 6
In addition, a US$98 million IDB loan has been transferred
to the concessionaire and another US$90 million loan from EIB is in
progress.
The participation of well known international operators in
bidding on the privatization of OSN demonstrated growing inves-
tor confidence in Argentina's reform program and its overall
privatization program.
The privatization of OSN through a long-term concession
provided an example for other countries, particularly in Latin
America and the Caribbean, of how to privatize a water utility. While
there were no immediate proceeds from the initial transaction, the
overall fiscal impact has been positive and the government has re-
duced its burden of subsidies.
An important event related to the concession was an extraor-
dinary rate increase of 13.5 percent granted to the concessionaire by
ETOSS in July 1994. This was due to (i) the advancement of invest-
ments to increase coverage targets and replace nitrate-contaminated
wells (ii) pressure by various municipalities to solve urgent water
and sewerage problems; and (iii) higher labor costs incurred by the
concessionaire, beyond the inflation formula included in the con-
tract. Even after this increase, the water rates were still 17 percent
lower than OSN rates before the concession.2 7
Consumers appear to have been positively affected by the
privatization. They have benefited from the higher quality of ser-
vice and lower water rates (even after the 13.5 percent increase fol-
26 IFC Board Paper (R94-52), "Proposed Investment in Aguas Argentinas," March 23, 1994.
27 Emanuel Idelovitch and Klaus Ringskog, "Private Sector Participation in Water Supply and Sanita-
tion in Latin America," World Bank. May 1995.
lowing the privatization). In addition, service coverage has been

expanded.
The investors inAguasArgentinas have also benefited. From
the financial projections for the first five years, the concession will
be as profitable as was expected. In addition, the experience gained
in Buenos Aires is expected to strengthen the position of the Aguas
Argentinas shareholders in bidding for future concessions in Latin
America.
The experience of the employees has been mixed. The gov-
ernment agreed to provide up to US$37 million to finance the sever-
ance payments for approximately 1,800 workers, or about 25 per-
cent of the work force. An additional 1,700 workers were2compen-
8
sated byAguasArgentinas at a cost of about US$50 million. Aguas
Argentinas completed the voluntary retirement program within the
first six months in accordance with the concession contract, leaving
the concession with a total of 4,000 employees as of November 1993
2 9 The management has initiated
(3.5 employees per connection).
various training courses for the remaining employees.
From the time the concession was granted, AguasArgentinas
has been working closely with the two labor unions (the Greater
Buenos Aires Union of Obras Sanitarias Workers and the National
Federation of Obras Sanitarias Workers) to plan retirement, renego-
tiate new collective bargaining agreements and work out the details
of the Employee Stock Ownership Plan, Programa de Propiedad
Participada (PPP program), under which the employees were en-
titled to 10 percent of the shares in the new company.
Those employees who were kept on the payroll have ben-
efited from renegotiated labor contracts and additional training. It
is difficult to determine the impact on the 3,500 workers who lost
their jobs, since they all elected to leave through the voluntary re-
tirement program and each worker received severance payments in
the range of US$10,000.
21 IFC Board Paper (R94-52), "Proposed Investment in Aguas Argentinas," March 23, 1994.
29 Presentation by Aguas Argentinas at the AIDIS Congress of Mar del Plata
in October 1993.
Obras Sanitariasde la Nacidn 177
APPENDIX A
1. AguasArgentinas, led by Lyonnaise des Eaux-Dumez

of France.
2. Aguas de Buenos Aires, led by Thames Water PLC of
England.
3. Canal del Plata, led by Canal Isabel II of Spain.
4. North West Water International of England.

APPENDIX B
SERVICE COVERAGE TARGETS
Pop Serv Serv Pop. Serv Sev Pop. Serv. Serv. Pop. Serv. Serv.
(MM) () 0) (MM) (1 10 (MM) (MM)
Federal 2.961 99 99 2.976 100 99 3.006 100 100 3.051 100 100
Capital
North Zone 0.989 69 44 1.013 82 65 1.057 95 92 1.093 100 100
West Zone .520 54 45 2.715 71 51 3.056 92 69 3.451 100 85
South Zone .112 49 21 2.245 73 40 2.484 92 77 2.658 100 100

Total Area .582 70 58 8.949 82 66 9.603 95 84 10.253 100 95
under
Concession
Source: Aguas Argentinas Concession Contract.

APPENDIX C
TERMS OF THE CONCESSION FOR OSN
Period The concession is for thirty years starting May 1,

1993.
Modality The concession is free (no payments to the goverment
are involved).
Assets The use of all OSN's assets is transferred to Aguas
Argentinas S.A., although they remained state
owned.
Regulation The service and the concessionaire are under the
control of ETOSS, the water sector regulatory agency
Service There are substantial quality requirements.
Coverage There is a detailed service expansion and investment
program.
Labor After a voluntary retirement period, all staff will be
retained.
Tariffs The average tariffs cannot be modified without the
approval of ETOSS.
Yacimientos Petroliferos Fiscales 181
Case Study 5: Yacimientos Petroliferos

Fiscales (YPF)
I. INTRODUCTION
Argentina's national energy enterprise, Yacimientos

Petroliferos Fiscales (YPF), was privatized in early 1993, as part of
an overall privatization program introduced in 1989. In this case
study the preparations for privatization, the results of the transac-
tion and early post-privatization outcomes are analysed.
As part of the preparation for privatization, YPF was restruc-
tured. This resulted in numerous different units of sale, sales proce-
dures and transactions. The discussion in this case study is limited
to seven selected transactions ranging from the auction of explora-
tion and extraction concessions through the outright sale of refinery
and transportation companies to the conversion of contracts and
the domestic and international placement of shares. Each transac-
tion discussion addresses the issues of buyer qualification criteria,
bidding rules, the number of bidders, prices received, payment terms
and special considerations, if applicable.
Yacimientos Petroliferos Fiscales (YPF) Sociedad del Estado,
a public enterprise, was created as an integrated oil producer in the
early part of the century to develop the oil industry in Argentina. It
had an almost absolute monopoly in all activities until 1989, when
the industry was deregulated and new competitors entered. By 1991,
YPF was Argentina's largest company as measured by its annual
sales of more than US$4 billion. It was also the fourth largest em-
ployer in the country representing 13 percent of total public sector
employment.
YPF extracts both crude oil and natural gas and is Argentina's
largest hydrocarbon producer. The 1967 "Hydrocarbon Law" regu-
lated YPF's activities in both the oil and natural gas industry Crude
oil production had steadily increased during the years before the
privatization of the enterprise in 1993. In 1989 country's total crude
oil production was 26.7 million cubic meters and in 1994 it reached
38.4 million cubic meters, representing an average annual increase

of 8.8 percent. Natural gas production, however, decreased from
24.2 billion cubic meters in 1989 to 21.4 billion cubic meters in 1994.
Table 1 shows annual crude oil and natural gas output produced by
YPF between 1989 and 1994. Although in 1989 YPF's crude oil and
natural gas production accounted for almost 98 percent of
Argentina's total hydrocarbon supply, its share was reduced to
around 50 percent by 1994. This was caused by YPF's loss of mo-
nopoly due to the deregulation of upstream activities beginning in
1989 and the subsequent sale of the Central and Secondary extrac-
tion areas by the Ministry of Economy In addition, all trade barri-
ers were eliminated, exposing YPF to both domestic and interna-
tional competition.
TABLE 1: CRUDE OIL AND NATURAL GAS PRODUCTION', 1989-94
Crude o012 26.1 26.1 17.2 14.3 16.1 20.0
Natural Gas3 24.2 24.2 17.7 11.1 10.6 10.7
'Historic information
3
backward adjusted to the areas owned by YPF.
In millions of m.
3
In billions of m.
Source: YPF 1994 Memoir and Balance Sheets.
Until 1989, basic tenets of Argentina's national oil policy in-
cluded self- reliance in production, low prices to customers and the
provision of employment. The achievement of these objectives re-
sulted in high costs and low revenues yielding deficits for YPF which
were financed by the Treasury. In just 1991, the enterprise received
US$38 million to cover its losses.
The Hydrocarbon Law of 1967 empowered the federal gov-
ernment to develop the hydrocarbon reserves. It reserved for YPF
areas in which it could carry out oil and natural gas exploration as
well as undertake development activities in the areas assigned to it,
either directly or through contracts. Under the 1967 law, YPF's man-
agement reported to the Secretariat of Energy that was part of the
Ministry of Public Works and Services. The Secretariat of Energy,
through YPF, controlled the export and import of oil. In 1991, the
Yacimientos PetroliferosFiscales 183
Ministry of Public Works and Services was merged with the Minis-
try of Economy, and the Secretariat became Undersecretariat of En-
ergy The Ministry of Economy was in charge of preparing YPF's
annual budgets for functions such as exploration, drilling, produc-
tion, investment, transportation, commercialization and adminis-
tration Typically, the upstream activities remained underfunded.
Between 1967 and 1990, hydrocarbon prices were set admin-
istratively based on a combination of factors including non-economic
considerations. Crude oil, natural gas and refined oil products were
priced at levels lower than the prices of comparable imports. While
private contractors received the full price, sometimes this amount
was higher than the prices at which YPF could export and charge
local refineries. This tariff regime resulted in losses which had to be
made up through subsidies.
Federal, provincial and municipal tax charges on explora-
tion and extraction permit revenues were used by the government
to deal with fiscal crises. The continuous changes in taxation greatly
affected YPF's financial performance. After deregulation and with
the privatization of YPF, all tax benefits and preferences previously
granted remained in effect until the government became a minority
shareholder in the enterprise.
The objective of YPF's privatization was to turn the enter-

prise into an efficient, competitive, integrated oil and natural gas
production company As stated in the authorizing decrees, the gov-
ernment wanted to increase the production of both crude oil and
natural gas through efficient extraction of existing basins under com-
petitive conditions. It also wanted to promote competition in the
marketing of processed oil products and achieve an equitable dis-
tribution of oil revenues among the federal and provincial govern-
ments. YPF's monopoly was eliminated through a two-stage strat-
egy:
1.1 Stage One

Starting in November 1989, in the first stage, the entry barri-
ers in crude oil production, refining and processed product distri-
bution and natural gas production were removed. Price and restric-
tions on crude oil exports and imports were eliminated and free
establishment of new service stations was allowed. Tables 2 and 3
show the resulting decline in YPF's crude oil refining shares and
reduced domestic market share in processed oil products.
TABLE 2: CRUDE OIL REFINING SHARES (%)
YPF 69.3 66.9 58.7

Shell 12.6 14.5 14.2
ESSO 14.1 14.5 15.8
Isaura 3.5 3.7 3.8
Others 0.5 0.4 7.5
Total 100.0 100.0 100.0
TABLE 3: YPF's DOMESTIC MARKET SHARE IN PROCESSED OIL PRODUCTS (%)
Standard Gasoline 69.7 75.6 61.3

High Grade Gasoline 55.8 55.2 50.0
Kerosene 77.5 80.2 64.9
Gas Oil 70.4 58.1 59.3
Fuel-Oil 71.5 61.5 44.0
Lubricants 52.0 52.1 50.5
Jet Fuel 65.4 56.7 61.7
Deregulation and the elimination of import barriers closed

the gap between local and international market prices for crude oil.
However, price differentials continued to exist for refined products
for two reasons. First, YPF's principal competitors, Shell and Esso,
have managed to increase prices through product differentiation,
while sustaining market shares. Second, in the continuing environ-
ment of contracts between refineries and service stations, the fear of
losing secure suppliers has curtailed price competition at retail lev-
els.
The Secretary of Energy, through the application of the 1967
Hydrocarbon Law in early 1989, allowed the surface exploration of
land not covered by existing exploration permits or extraction con-

cessions. However, new exploration permits can be applied only to
unproved areas not exceeding 10,000 km2 . If commercially exploit-
able quantities of crude oil or natural gas are discovered in these
areas, permit holders can obtain exclusive extraction concessions.
But they have to agree to pay royalties to the provincial govern-
ments of 12 percent of the well head price for crude oil and 12 per-
cent of the market value for natural gas produced. Any oil and gas
extracted prior to the granting of concessions is subject to a 15 per-
cent royalty When extraction concessions are terminated or have
expired, all oil and gas well operating and maintenance fixed equip-
ment and facilities revert back to the federal government free of
charge. Crude oil refining activities are subject to government reg-
istration requirements as well as to safety and environmental regu-
lations.
Transportation concessions include the right to ship oil, gas

and processed oil products. They also authorize the construction
and operation of oil, gas and product pipelines, storage facilities,
pump stations, compressor plants, roads, railways and other facilities
and equipments necessary for the efficient operation of a pipeline
system. Rates are subject to approval by the Undersecretariat of
Energy.
1.2 Stage Two

The privatization law issued in November 1992 introduced
the second stage of ending YPF's monopoly. The law authorized
the privatization of the enterprise and shifted ownership of crude
oil and natural gas basins from the federal to the provincial
governments. However, once the four year exploration permits and
twenty-five year extraction concessions expire, land ownership will
revert to the federal government. The privatization law also granted
a high degree of autonomy to YPF by stating that "...while the State
could have a majority stake in the capital of the company, the
company shall not be subject to the enforcement of any legislation
or administrative regulation (already enacted or those enacted in
the future), that could affect the management and control of such
public enterprises."
Several resolutions and decrees as well as two laws were
issued to provide the institutional framework for the deregulation
of the oil and natural gas industries and the privatization of YPF
The first was a December 1990 decree authorizing the transformation
of YPF from a public enterprise into a joint stock company with 100
percent of its shares owned by the Ministry of Economy The same

decree also authorized the subsequent initial public offering of these
shares in the domestic and international capital markets. The other
legal measures addressed specifics of the deregulation and
privatization process.
The privatization task was assigned to the Undersecretariat
of Public Enterprises (abolished in 1992) and the Undersecretariat
of Energy within the Ministry of Economy. The ministry was
supported by a Privatization Committee comprised of the
representatives of the federal government, Congress, YPF's labor
union as well as those of a Federalization Commission in charge of
redistributing ownership among oil producing provinces. An
interventor was appointed to head YPF's restructured Board of
Directors and manage the enterprise during the privatization
process. The congressional Bicameral Commission and the
Sindicatura General de Empresas Piiblicas (SIGEP), the public
enterprise auditing agency, monitored the privatization.
Oversight functions were defined in the Hydrocarbons Law
of 1967, the 1989 deregulation decrees and in various public enter-
prise related rules and regulations. The Undersecretariat of Energy
continued to oversee the industry by enforcing regulations, and safe-
guarding competition, natural resources, the environment and cus-
tomers.
A number of consulting firms were hired. McKinsey and
Company provided advice concerning the restructuring of YPF while
Andrews & Kurtz offered legal guidance. Marval O'Farel & Mairal
dealt with the various technical issues, Ricardo Zin and Gaffney
Cline & Associates provided financial consulting. The advisory ser-
vices were financed through several World Bank loans as well as by
YPF.
2. Restructuring
YPF was a large complex, vertically integrated oil company.

Its privatization was undertaken after a thorough physical, employ-
ment and financial restructuring based on strategic considerations
developed by McKinsey and Company

YPF's assets and activities were divided into several catego-
ries based on their strategic value and profit potential. Assets and
activities critical to the restructured company's future profitability
in competitive markets were retained. Non-strategic but profitable
assets, such as exploration and extraction rights in the various ba-
sins located in the provinces, were temporarily transferred through
permits and concessions. Assets and activities without any strate-
gic importance and with limited profit potential, such as certain cen-
tral areas with proved oil and natural gas reserves, refineries, pipe-
lines, seismic drilling, shipping and construction, were put up for
sale.
Based on this classification scheme, YPF's retained assets and
activities were reorganized into an Upstream Strategic Business Unit
comprised of exploration and extraction. Other activities such as
refining, transportation, wholesale, retail as well as export market-
ing of crude oil, refined fuels, lubricants, liquid petroleum gases,
petrochemicals, compressed natural gas and other refined oil prod-
ucts were assigned to a Downstream Strategic Business Unit.
Twenty-four existing contracts involving a variety of activities were
identified as worthy of conversion and continued ownership.
Table 4 (next page) provides an overview of YPF's organiza-
tional restructuring and the resulting asset, activity and share cat-
egories. It also indicates the ownership shares retained by YPF at
the time of privatization.
According to the "Resource Federalization" and "YPF
Privatization" laws, Class A shares, representing 51 percent of the
total, were assigned to the federal government. Class B shares, 39
percent of the total, were provided to the provincial governments
on whose land the reserves were situated, while the remaining 10
percent was reserved for the employees under the PPP Program,
the Employee Stock Ownership Program. The laws further state
that the federal government must retain 20 percent of its share to
maintain its right to review and veto any decisions concerning merg-
ers, the acquisitions of more than 50 percent of shares in any busi-
ness unit, the transfer of exploration and extraction rights to third
parties resulting from the termination of YPF activities as well as
the voluntary dissolution of the enterprise. The last two measures
also require congressional approval.
TABLE 4: UNITS OF SALE
Upstream Strategic Business Unit

Central Areas
Tordillo 10
El Huemul 30
Puesto Hernandez 40
Vizcacheras 10
Secondary Areas
Santa Cruz I 30
Santa Cruz II 30
Tierra del Fuego 30
Aguarague 45
Palmar Largo 30
Downstream Strategic Business Unit

Refining
Campo Duran 30
San Lorenzo 0
Dock Sud Refineries 0
Oil Pipelines and Multipurpose Pipelines
Main Oil Pipelines to Estacion Puerto Rosales
Campo Duran - Monte Cristo
Oleoducto del Valle 30
Maritime and River Transport
Terminales Maritimas Patagonicas 30
Transporte Maritimos Petroleros S.A. 30
Ebytem S.A. 30
Tankers 0
Marketing
Interpetrol S.A. 51
Existing Contracts (24) 100

Class A, B, C and Combined D Shares 100
Class D shares consisted of combined offerings of Class A

and B shares authorized for public sale in domestic, U.S. and other
international equity markets, with the initial public offering involv-
ing at least 20 percent of the total. The federal government decided
to sell 31 percent of the shares in the first round. Table 5 (next page)
shows the distribution of YPF shares among the federal and pro-
vincial governments as well as employees before and after the ini-

tial public offering in June 1993.
TABLE 5: SHARE DISTRIBUTION BEFORE AND AFTER PUBLIC OFFERINGS (%)
Government A 51.0 20.0

Provinces (5) B 39.0 22.4
Employees C 10.0 10.0

Through a pre-privatization employment study, YPF's man-
agement identified surplus workers. These workers were either
laid off or asked to retire and were not allowed to seek employment
in other public enterprises. Consequently, between August 1990
and February 1993, YPF's payroll, including 15,000 contract work-
ers, was reduced by 72 percent from 37,400 to 10,600. The overall
employment reduction was expensive. It cost the company US$621
million of which US$408 million was paid in 1991, US$152 million
in 1992 and US$61 million in 1993. Some of the laid off workers
were employed by the new companies established through
privatization while 5,000 started private businesses providing YPF
with various contract services.

Before privatization, YPF's liabilities amounted to US$11.3
billion. The government wrote off all of YPF's accumulated losses
and assumed all credits and liabilities, except for US$2.7 billion.
SIGEP determined that this amount was not shown in the financial
statements prior to December 31, 1990 and hence had to be retained
by YPF. The government assumed responsibility for all financial
contingencies caused by events or transactions prior to December
31, 1990 which were not reported in the financial statements. It also
assumed the US$5.2 billion debt to multilateral organizations. In
addition, under the Brady Plan, it retired US$3.3 billion of external
debt held by commercial banks, including interest arrears. Finally,
the government also either rescheduled or wrote off a substantial
part of YPF's tax liabilities to recover some of the costs incurred and
to maximize shareholder equity. It required YPF to pay special divi-
dends in the future.
Deregulation did not create truly competitive markets. Even
after its privatization YPF continues to be the largest Argentinean
company as measured by its US$4 billion annual sales. There are
two reasons for this. The inadequate transportation infrastructure,
storage and terminal facilities make entry into the oil industry costly.
Moreover, profit margins in Argentina are not large enough to en-
able foreign companies to cover the high transportation costs and
remain price competitive.
Prior to the deregulation of the hydrocarbon sector in 1989,
the Ministry of Economy and the Secretary of Energy regulated YPF.
Deregulation was designed to increase competition in the upstream
activities and limit oligopolistic behavior in the downstream. How-
ever, at the time of YPF's privatization the regulatory system was
not fully in place and shortly after deregulation some controversies
emerged.
One of the controversies involved the newly introduced oil
transfer tax, which the government assumed that the producers
would absorb. Due to the absence of clear regulations and increas-
ing demand, producers did not do so and passed the tax on to the
consumers of moto-napthas. The Secretary of Energy immediately
denounced YPF, ESSO and Shell for abusing their oligopolistic mar-
ket power. Politicians blamed the price increase on privatization
and the mass-media kept the issue alive. In the end, the producers
reduced the price by a nominal amount, but the controversy raised
questions about the post-privatization regulations of the industry.
3.1 Special Issue

The 1967 Hydrocarbon Law regulates the upstream activi-
ties of both the oil and natural gas industries. It states that the oil
and natural gas basins are a property of the federal government.
Another law (17.319) establishes procedures for allocating explora-
tion permits and extraction as well as transportation concessions
and contains environmental protection rules applied to the natural
gas and oil industries. However, as the ownership rules of the oil
and natural gas basins were changed, a new Hydrocarbon Law will
eventually be passed by Congress.
4. Sales Procedures
This section addresses only the sales procedure issues of
valuation and marketing. It does not deal with the qualification
criteria and the bidding rules which were specific to the seven se-
lected transactions and are discussed in subsequent transaction spe-
cific sections.

Valuation of the central and secondary oil reserves included
in concession and joint-ventures was carried out by independent
consultants whose decisions were binding on the bidders.
The initial US$19 public offering price of shares was jointly
set by the Ministry of Economy, YPF's managers and the underwrit-
ers. The price decision was based on supply and demand condi-
tions, financial and operating data, level of dividends, sales, earn-
ings and operating information, price/earnings and price/cash flow
ratios and the market price of shares of companies with similar ac-
tivities.
The marketing of YPF's assets and activities was done by
the various consulting firms. The Board of Directors of YPF also
participated in several promotional events in the U.S. and Europe.
The combined public offering of YPF's Class D shares was carried
out by the underwriters according to the rules and regulations of
the respective domestic and international capital markets.
III. TRANSACTIONS RESULTS
The following discussion deals with seven selected transac-

tions. They involve the auction of exploration and extraction con-
cessions in various crude oil and natural gas reserve areas, the out-
right sale of a refinery and a transportation company, the conver-
sion of crude oil extraction contracts into extraction concessions and
the placement of YPF's combined Class D shares in the domestic
and international capital markets. Each description of a transaction
covers the various aspects of the sales procedure and transaction
considerations that were specific to it.
In all transactions transparency was insured through the
timely publication of bidding documents and conditions which were
remained unchanged throughout the process. The bidding guide-

lines for the extraction concessions in the central areas were the only
documents which were not entirely transparent. They lacked a mea-
surable definition of performance and experience standards which
were to be used to evaluate technical qualification. This defect
caused some uncertainty among the bidders.
Table 6 (next page) shows the methods through which the
different assets and activities were privatized and the revenues gen-
erated through these transactions.
1. CentralArea Oil Reserves

The privatization of oil reserves was initiated under the
"Public Sector Reform Law" of 1989. Basin areas with production
over 200 cubic meters were considered "central", but insufficiently
explored by YPF due to lack of appropriate production methods.
One of the objectives of privatization was to attract private inves-
tors in joint ventures, who would provide the technology and fi-
nancial capability required for exploration in these areas.
The purpose of the joint ventures was to extract the maxi-
mum volume of hydrocarbons, optimizing final extraction in each
location and increasing reserves while preserving the ownership
rights of the provinces. Thus, in June 1990 the government an-
nounced an international joint venture public bidding process for
the extraction of four central areas in four different provinces. In
July 1990 the qualification terms and conditions were published.
The value of the reserves was defined and certified by an indepen-
dent consultant and then provided to the bidders.
The qualification requirements specified experience and fi-
nancial terms. Five standards were set to evaluate exploration ca-
pacity and experience, twelve to evaluate extraction capacity and
experience, three to evaluate technological capability and two to
evaluate employee training and technology transfer potentials. Fi-
nancial statements covering the last five years of activities as well
as bank, commercial and financial references were required. As the
standards were not stated in measurable terms, the bidders could
not assess the performance levels required. This limited the trans-
parency of the process and disabled YPF to qualify bidders objec-
tively
Yacimientos PetroliferosFiscales
193
TABLE 6: THE TRANSACTION PROCESS (IN US$ MILLION)
Method of
Privatization -
Upstream Strategic Business Unit 1,788.4

Central Areas J/Vs' 803.6
Tordillo
179.1
El Huemul
170.5
Puesto Hernandez
286.3
Vizcacheras
167.7
Secondary Areas Concessions, J/Vs 520.0
Santa Cruz I
55.0
Santa Cruz II
141.8
Tierra del Fuego
143.5
Aguarague
143.7
Palmar Largo
36.0
Secondary Areas Sold by the Government Concessions 464.8
Downstream Strategic Business Unit
271.5
Refining Outright Sale 88.0
Campo Duran
64.1
San Lorenzo
12.2
Dock Sud Refineries
11.7
Oil Pipelines and Multipurpose Pipelines Sale of shares 77.0
Main Oil Pipelines/Estacion Puerto Rosales
77.0
Campo Duran - Monte Cristo
n.a. 2
Oleoducto del Valle
n.a.
Maritime and River Transportation Outright Sale 97.8
Terminales Maritimas Patagonicas
10.0
Transportes Maritimos Petroleores S.A.
41.8
Ebytem S.A.
19.0
Ships
27.0
Marketing
8.7
Interpetrol S.A.
8.7
Existing Contracts (24) Conversion n.a.
Class A, B, C and Combined D Shares Domestic and 3,040.0
International Public
Offerings
Total of All Transactions
5,099.9
'Joint Ventures.
2 Not available.
Bidders could not obtain more than 50 percent or less than

35 percent of the joint-venture equity and were expected to pay YPF
in cash for their share. A development plan for the basin and a
training plan for workers needed to be submitted, including an ex-
planation of how advanced technology would be used. The win-
ners were not allowed to transfer their joint-venture rights to third
parties without approval. Contributions from both YPF and the
winners were expected towards operating expenses, royalties and
to invest in the extraction of reserves in proportion to their owner-
ship share. Joint ventures were permitted to dispose of the extracted
oil however they wished.
YPF was not expected to contribute to investments which
involved risks such as increasing the output of the reserve areas.
For undertaking these investments, the joint venture partners were
to receive a percentage of any increase in production. These trans-
actions generated US$804 million in revenues.
2. Secondary Area Oil Reserves

More than eighty-six reserve areas designated as "second-
ary" were also not sufficiently exploited by YPF i.e. they were out of
production for at least five years or their daily production in 1988
was less than 200 cubic meters. In February 1990, the Ministry of
Public Works and Services published the terms and conditions of
an international public bidding process involving concession rights
to explore, extract and develop these areas. The unofficially deter-
mined value of the concessions was relatively low and strict techni-
cal qualifications were not required. Bidders had onlyto demon-
strate adequate technological, economic and financial capabilities.
The concessionaires were expected to produce 80 percent
more hydrocarbons per year during the first three years than was
extracted by YPF during its last year of activities. They were, how-
ever, free to dispose of the crude oil found and/or extracted in the
area.
The concessions, which included the ownership of the exist-
ing equipment and facilities, were granted through a competitive
public bidding process with offers submitted in two sealed enve-
lopes. The first envelope contained the technical and the second the
financial offer. The winner was selected on the basis of the highest
price offered for the exploration rights and set in accordance with
the remaining reserves and the investments already made in the
area. Payment had to be made in cash. Cash revenues totaling

US$985 million were raised from these transactions, of which four
percent was transferred as an advance on royalty payments to pro-
vincial governments.
3. Plan Argentina
Under the 1991 "Plan Argentina", 385 million acres previ-

ously explored by YPF were offered for exploration through per-
mits in 172 blocs through sixteen bidding rounds. These were not
well attended and resulted in the issuance of only 47 permits. The
individual blocs were not to exceed 15,000 square kilometers off shore
and 1,000 square kilometers onshore.
The permits were awarded through public auctions on the
basis of technical considerations and the units of work offered within
the shortest possible time periods. The work units included seismic
drilling, the drilling of wells and were each valued at US$5,000.
There was high geological risk exploring these blocs Since 1991,
projects started through these auctions have resulted in investments
of US$200 million.
4. The Privatizationof Physical Assets and Activities
YPF's assets and activities which were considered to have

low strategic importance and limited profit potential, were put up
for sale. They included three refineries (Campo Duran, Duck Sud
and San Lorenzo); two oil pipelines (Allen-Rosales and Rosales-La
Plata); and all tankers, airplanes, a shipyard, port and navigation
assets, shipping and storage plants as well as the marketing com-
pany and research center.
All these assets and activities were sold outright under the
supervision of the Ministry of Economy The sales process involved
a public bidding procedure similar to that used in other privatization
projects. The following section provides a description of the sale of
refineries and transportation assets.
4.1. The Destileria (Refinery) San Lorenzo

This refinery was sold together with its storage and port fa-
cilities through a public bidding process in the first quarter of 1993.
The technical and financial advisors hired to carry ou the transac-

tion were Solomon Brothers Inc., Phibro Energy Inc., and Merchant
Bankers Asociados S.A.. The minimum price was set at US$12 mil-
lion and the offer had to be guaranteed by a bond.
The pre-qualification requirements for the bidders included
a net worth of over US$20 million, two years of experience in crude
oil processing, the production of derived products and/or petro-
chemicals as well as the marketing of these products. The bidding
documents were sold for US$5,000. Technical proposals had to in-
clude a presentation letter and qalification form and be submitted
separately, in the first envelop. Price offers had to be presented by
short-listed bidders, in a second envelope by the end of January
1993.
Three existing contract obligations were mandatory; the
transportation of oil through the terminals and storage plant would
remain a function of the refinery; virgin naphtha would be provided
from the refinery to a petrochemical company (PASA S.A.) together
with related services; and for up to six months, water, gas and elec-
tricity services would be furnished to nearby homes of YPF refinery
executives, even though assets transferred did not include these
homes. The new refinery owners were allowed to restructure em-
ployment, with YPF paying for all the severance payment arrange-
ments. The sale of all three refineries generated US$88 million in
transaction revenues.
4.2. Transporte Maritimos Petroleros S. A.

This company, which owned four tankers with a capacity of
175,624 metric tons, was sold through an international public bid-
ding process. The successful bidder obtained 70 percent equity and
the right to use leased YPF office facilities for three years and would
need to fulfill a YPF transportation contract consisting of the ship-
ping of up to three million cubic meters oil between two Argentinean
ports. The multiple envelope international public bidding process
was announced with the assistance of Eggar Forrester Sale & Pur-
chase Ltd.
Pre-qualification requirements included experience of man-
aging at least three tankers of tonnage greater than 500 tons; and
naval experience in the transportation of 100,000 tons of freight and
a net worth of US$2 million. Consortia were required to include an
operator with a minimum of 10 percent equity in the consortium
and required experience and technical capability All of these re-
quirements had to be backed by audited financial reports and certi-
fied supporting statements issued by independent shipping spe-

cialists and had to be put in the first envelope. A confidentiality
statement, a signed transfer contract, and other legal documents were
also required and had to be provided in a second envelope.
Bidders were notified of the minimum price forty-eight hours
in advance of the bidding process. Price offers were required to be
submitted in a separate (third) envelope together with the other two
envelopes at a specified time. The winner was selected on the basis
of the price offer. The Ministry of Economy had to approve the
entire transaction, requiring the offers to remain valid until the
Ministry's final approval. If the winner did not pay on time, YPF
had the right to sign a contract with the second highest bidder. The
winner was authorized to restructure employment, but the sever-
ance payments had to be financed by YPF. The sale of all maritime
and river transportation assets generated around US$100 million in
revenues.
4.3. Conversion of Extraction Contracts

The twenty-five extraction contracts established under the
1980's "Houston Plan" were changed and converted into conces-
sions granted as part of the secondary area bidding processes. The
changes involved the free disposal of the extracted oil and the re-
versal of assets obtained under the concessions to the state at the
end of the concessionary period.
The converted contracts granted 25-year concessions with-
out cash payments. The concessionaires had to agree to provide
YPF with a negotiated percentage of gas and crude oil output at a
price which was set low so as to avoid possible lawsuits resulting
from the changes.
Under the converted contracts, YPF purchases oil from the
concession holders and transports oil free of charge. It also pro-
vides water and electricity services below market rates and has
agreed to delay the billing of concessionaries.
5. Domestic lInternationalPublic Offering of YPF Shares
Altogether 160 million Class D shares, comprised of Class A

and Class B shares, were offered for sale. Table 7 (next page) pre-
sents a placement information and the revenues generated in Ar-
gentina, the United States and other foreign markets.
TABLE 7: PLACEMENT OF COMBINED CLASS D SHARES
Market .- X.=
Argentina 40,000,000 760 Class D

Shares
USA 74,285,715 1,412 ADRs'
Other Foreign 45,714,285 868 ADRs
Total 160,000,000 3,040

shares
'American Depository Receipts are securities issued by an American Bank in place of foreign
held in trust by that bank, thereby facilitating the trading of foreign shares in the U.S. markets.
As domestic and international capital market regulations did

not permit a direct promotion of the initial public offering, the un-
derwriters in Buenos Aires launched a promotion campaign which
referred to YPF but did not mention it by name. Even though the
minimum lot price was US$10,000, promotion desks were placed in
shopping centers. The U.S. offering consisted of 74 million Ameri-
can Depository Receipts (ADRs) sold in lots of 100 or more to a
minimum of 2,000 investors in the United States. Altogether, the
domestic and international public offerings generated US$3,040
million in revenues.
IV. OUTCOMES/ IMPACTS
1. FiscalImpact
YPF's privatization transactions generated US$5.1 billion

in cash and incurred US$13.5 million in costs. Table 8 (next page)
provides a breakdown of the total revenue obtained by unit of sale
categories, type of privatization, method applied and costs incurred.
As part of the privatization process, the government as-
sumed liabilities in the amount of a US$5.20 billion debt to multi-
lateral organizations and a US$3.34 billion external debt held by
commercial banks, including interest arrears. It also either resched-
uled or wrote off a substantial part of YPF's tax liabilities and agreed
to fund for future health care plan obligations of US$105 million
granted by YPF to its retirees.
TABLE 8: TRANSACTION PROCEEDS (IN US$ MILLIONS)
Upstream Strategic Joint Ventures and Sales 1,788.4 N.A

Business Unit by the Government,
Downstream Strategic Outright Sale 271.5 2.02
Business Unit
Class D Shares Public Offering 3,040.0 11.53
Total 5,099.9 13.5
'Include Secondary Areas sold by the Govemment.
2
Partial figure by Perel.
I Estimated by YPF.
Source: UndersecretariatfivrPrisatization, PrivatizationReport, September 1993,
In addition to the transaction revenues, the new YPF paid a

total of US$109 million and US$88 million as taxes in 1993 and 1994,
respectively These included US$28 million and US$11 million as
income tax in respective years. The other main revenue contribu-
tion for the Treasury has been dividends which increased from
US$239 million in 1992 to US$587 million in 1994. Table 9 summa-
rizes major tax revenues and other contributions between 1991 and
1994.
TABLE 9: YPF PRE- AND POST-PRIVATIZATION REVENUE CONTRIBUTIONS (IN US$ MILLION)
Income Tax 0.0 0.0 28.0 11.0

Provincial Revenue Tax 48.4 46.4 63.2 67.4
Other Direct Taxes' 47.5 49.0 18.0 10.0
Subtotal 95.9 95.4 109.2 88.4
Oil and Gas Royalties 438.0 305.0 272.0 264.0
Dividends 0.0 238.7 215.0 587.0
TOTAL 533.9 639.1 596.2 939.4
Mainly real estate taxes and contributions paid to municipalties.

Source: YPF Balance Sheets of 1991-1994.
2. Profitability
Table 10 (next page) shows YPF's increased profitability fol-

lowing restructuring and privatization.
TABLE 10: YPF's PROFITABILITY (IN US$ MILLION)
Sales 4,030 3,867 3,956 4,192

Net Profit 245 256 706 538
Profitability' (%) 3.14 5.69 14.20 7.20
Net Profit/Assets.
The increase in profitability from a 3.14 percent return on

assets in 1991 to a 7.20 percent in 1994 was the result of efficiency
improvements such as employment adjustments, more focused pro-
duction activities, improved raw material procurement practices and
better maintenance. The 14.20 percent peak in 1993 was mainly due
to the US$224 million extraordinary revenues from conversion of
contracts and sales of areas, which accrued directly to YPF.
3. Productivity/Qualityof Output
The physical performance of YPF before and after privatization
is difficult to compare because of the restructuring. Nonetheless, Table
11 shows some of the early physical performance outcomes which in-
dicate improved performance.
TABLE 11: PRE- AND POST-PRIVATIZATION PHYSICAL PERFORMANCE'
Crude Oil Reserves (million m3) 152.4 150.4 166.2

Developed 104.1 106.7 112.1
Undeveloped 48.3 43.7 54.1
3 241.3
Natural Gas Reserves (thousands m) 254.6 251.7
Developed 204.3 203.0 202.8
Undeveloped 50.3 48.7 38.5
3 20.0
Crude Oil Production (in millions of m) 14.3 16.1
3
Natural Gas Production (in billions of m) 11.1 10.6 10.7
'Historic information, backward adjusted to the areas owned by YPF at the end of 1994.
Source: YPF 1994 Memoir and Balance Sheets.
Despite a slight decrease in 1993, the overall crude oil re-

serves increased 10 percent from 1993 to 1994. Natural gas reserves,
however, decreased from 254,600 cubic meters in 1992 to 241,300
cubic meters in 1994. In terms of production, while crude oil pro-
duction increased from 14.3 million cubic meters to 20.0 million cu-
bic meters between 1992 and 1994, total natural gas production de-
clined slightly from 11.1 billion cubic meters to 10.7 billion cubic
meters.
4. Investments
Following privatization, YPF has completed an oil pipeline
to Chile and developed a rail and truck transportation program for
one of the central reserve areas. It modernized and expanded its
retail service-station network, investing US$90 million through 1994.
By 1995 it had also invested US$150 million to increase the efficiency
of the refinery operation it retained by producing more lead-free
gasoline that generates higher profit margins while reducing en-
ergy and maintenance costs.
The quick deregulation of the hydrocarbon industry and the
rapid privatization of the national oil public enterprise is unique to
Argentina. To date, no other nation has engaged in such compre-
hensive deregulation and privatization of this critical sector of the
economy
The nature, scope and speed of the carefully designed pro-
cess sent a signal to the world concerning the Argentinean
government's commitment to the restructuring of its economy It
also set an example of how deregulation and privatization can be
used to improve the competitiveness of a strategically important
industry. The domestic and international public offering of YPF
shares is particularly important in this respect.
YPF's privatization benefittedArgentina. Crude oil and natu-
ral gas output and competition in the hydrocarbon sector increased.
The transaction process generated revenues through direct sales of
assets and the public placement of shares, the restructured com-
pany improved its efficiency and began paying various taxes. The
Treasury no longer had to subsidize the enterprise and provincial
governments shared in the transaction proceeds and obtained par-

tial ownership in YPF and will continue to earn additional revenues
through the exploration permits and extraction concessions.
Public investors, while not receiving any major capital gains
through their shareholdings , maintained the value of their invest-
ments. YPF shares issued at US$19 in July of 1993, reached a peak of
US$29.6 in February 1994 and then declined to US$22 in April 1996.
The impact of the restructuring on YPF's workers appears
mostly negative. After privatization, the workforce was reduced by
44 percent to 5,900, through layoffs and special retirement plans.
The labor union, representing 60 percent of YPF's workers, accepted
the employment adjustment arrangements and did not obstruct the
privatization process. Those who remained on the payroll benefited
a great deal receiving Class C shares, representing 10 percent of the
total shares issued.
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The findings, interpretations and conclusions expressed herein are en-

ARGENTINA PRIVATIZATION PROGRAM

PART I: SYNTHESIS: A Review of Five Cases 19

Appendix A: Bidding Consortia Membership 67

PART II: CASE STUDIES 73

II. THE PREPARATION FOR PRIVATIZATION 77

Appendix A: Bidding Consortia Membership 97

Case Study 2: Servicios E1lctricos del Gran Buenos Aires

Appendix A: Bidding Consortia Membership 127

Case Study 3: Gas del Estado (GdE) 133

Appendix A: Bidding Consortia Membership 151

Case Study 4: Obras Sanitarias de la Naci6n (OSN) 155

IV. OUTCOMES/IMPACTS 170

Appendix A: Bidding Consortia Membership 177

Case Study 5: Yacimientos Petroliferos Fiscales (YPF) 181

This Study provides a review of the Argentine privatization program with a

We are pleased to present this review of the Argentine privatization pro-

Magdi Iskander Kevin Young

Argentina's privatization program, initiated in 1989, was

This paper is a review of the Argentine privatization pro-

II. NATIONAL PRIVATIZATION STRATEGY

1. PoliticalCommitment and Support

A notable feature of the Argentinean privatization program

The macroeconomic situation in Argentina was quite bad in

Several central agencies were involved in the policy and

enterprise auditing agency, to audit activities on a case-by-case

Argentina's privatization program received considerable as-

III. THE PREPARATION FOR PRIVATIZATION

Some of the main findings on the preparation of the five

Restructuring of enterprises prior to privatization was clearly

1.1 Organizational Restructuring

tensive organizational restructuring and breakup to promote post

1.2 Employee Restructuring

1.3 Financial Restructuring

percent) of GdE's, US$0.2 billion (100 percent) of OSN's and US$8.5

The privatization of utilities required the creation of post-

2.1 Rate-setting Procedures

* The rates for the telecommunications industry are adjusted

* The rates for electricity end-users are based on (1)the whole-

* Rate-setting in natural gas is based on the principles of op-

* The new OSN water rate was determined through bidding.

2.2 Regulatory Performance Standards

* In telecommunications, during the initial licensing period,

for new connections and repairs (see Appendix B of the

* The new electricity distribution firms, created out of SEGBA,

* During 1993-97, the winning bidders of the GdE conces-

* Mandatory expansion and investment targets were also set

IV. TRANSACTION RESULTS

Competitive bidding was the norm. The number of bidders

A two-envelope approach was utilized in all privatizations

Preliminary results indicate that privatization has contrib-

* The sale of the five enterprises raised revenues of about

* The face value of debt retired equaled almost US$9.0 bil-

* Prior to privatization, none of the five enterprises paid any

* Indirect taxes, resulting from higher output produced by

privatization, government subsidies are no longer paid. The

All five firms show improvements in financial performance