RIO DE JANEIRO, Brazil - The privatization of utility companies in Brazil is expected to attract the interest - and money - of domestic pension funds.
The funds have been buying minority participation in state-owned firms ever since the government began its privatization efforts in 1991. Utilities, among the most attractive state companies, will begin coming up for sale this year.
Utility companies are particularly attractive because, unlike goods-making companies, they don't suffer from outside competition. Also, their growth potential surpasses that of goods-making companies. In Brazil, for example, the number of telephone lines installed could easily be doubled, but not the amount of steel produced.
State pension funds (those sponsored by the state or state-owned companies) first showed their interest in state utility companies July 10, when Geracao Transmisao e Distribuicao de Energia Eletrica (a consortium of 11 of Brazil's largest pension funds) spent $89 million to buy a 25% share in Espirito Santo Centrais Eletricas, a regional electricity distributor. GTD acquired the Escelsa stake in an informal partnership with Iven, a consortium of Brazilian investment banks, which also bought 25%. (Iven previously had owned another 25%.)
Escelsa, which made a $40 million profit last year, was the first utility the government sold. The government plans to auction off other subsidiaries of the state-owned energy monopoly, Centrais Eletricas Brasileiras S.A., or Electrobras, and the telecommunications monopoly, Telebras S.A., in the coming years, fueling belief state pension funds will continue to allocate money for such investments.
"State pension funds have, since the privatizations began, learned that one of the most lucrative ways to apply their money has been through buying minority shares in the firms being sold," said Devanir da Silva, the general superintendent of the Association of Brazilian Pension Funds, which unites 328 of Brazil's 332 state and private pension funds. "Now that highly attractive utility companies are going up for sale, state pension fund interest in buying minority participation should increase."
Felinto Coelho, the senior consultant of the Sao Paulo branch of Towers Perrin, agreed.
"State pension funds saw that the state companies being sold turned out to be good investments because they only needed to be privately managed to turn a profit," Mr. Coelho said. "And as utility companies have even greater profit potential than those goods-producing ones already sold, state pension funds will probably increase their investments in these to-be-sold firms."
Since 1991, state company pension funds have bought minority participations in nine of 34 sold-off state-owned firms - mostly big steel mills and petrochemical companies - for a total of $1 billion. They have done so mostly in pools and in partnership with investment banks or industrial consortiums, thus minimizing their risks.
The pension funds have plenty of assets ready for investment. State pension funds account for 85% - $47 billion - of the country's $55 billion in total pension assets.
The privatization investments have not changed drastically the way in which the funds' assets are allocated. The three largest allocations are in stocks, 34%; real estate, 14%; and loans, 8%.
The only change in allocations is that now the pension funds' stock portfolios consist of more private company stocks.
Industry insiders believe state pension funds will continue to invest, as minority partners, in the privatization program. Among the reasons:
The funds are the largest and richest institutional investors in Brazil. On top of their $47 billion in total assets, they have an annual cash inflow of $5.7 billion, comprising $2.5 billion in contributions and $3.2 billion in interest payments.
The previous investments in nine privatized companies have been profitable, in many cases, spectacularly so. The Usiminas S.A. steel mill, the first state firm sold in October 1991, posted 1991 profits of $59 million and 1994 profits of $422 million. That meant big profits for Previ and Valia, the pension funds of the state-owned Banco do Brasil and the state-owned Vale do Rio Doce mining company, each of which bought 15% of Usiminas.
The government, which encouraged state pension fund participation in the privatization effort, is encouraging state pension funds to increase the size of such investments. Since September 1994, it has allowed pension funds to buy up to 25% of the total capital of the companies being sold, as opposed to the previous 15%.
When the privatizations began, the government - which since 1978 had made it compulsory for pension funds to buy government junk bonds - said those bonds could be used in the privatization program.
The state pension funds spent virtually all of the $1 billion in the junk bonds they owned to buy shares in the sold-off firms.
Despite the activity of the state pension funds, private funds haven't participated in the sell-offs, and don't intend to. One reason is they don't have the assets to provide the leverage needed to buy into the firms.
And Yves Roy, the Latin American manager of Mercer MW, a subsidiary of William Mercer, added that "because of the risk factor in buying stock, private Brazil-based companies, especially foreign-owned ones, would prefer to risk their own money for such investments, as opposed to having their pension funds do so and assume the risk."
