CHICAGO - A Bank of America unit is buying into a Venezuelan-based company to take advantage of that nation's newly passed social security reform.
BankAmerica International Investment Corp., Chicago, BofA's private equity investment unit for Latin America, is acquiring a 22% stake in Organizacion Rescarven, a health services company in Caracas. The aim is to help Rescarven set up pension and health plans under Venezuela's social security law, which was passed last month and sent to the president for his signature.
Terms of the deal were not disclosed. However, BankAmerica International, along with its Venezuelan partners, expects it eventually will cost between $20 million to $30 million to establish the new plans.
Bank of America is betting that, despite some political uncertainty, Venezuela will provide an untapped resource of private pension funds when its pension system is privatized. The San Francisco-based financial giant expects this investment might turn out to be the first of several partnerships for the bank in Venezuela.
"The final draft of the (forthcoming) law that will settle the framework for pension and health funds is now awaiting presidential approval," said Jacques Gliksberg, managing director for BankAmerica International. "It's expected that the regulatory framework (for the new pension system) would be in place by midyear, at which point the government would issue the licenses for pension funds."
Once licensing of pension funds is complete, Organizacion Rescarven and its partners, along with about a dozen other applicant firms, would offer defined contribution retirement plans.
"The draft law takes bits and pieces from other private pension fund systems in Latin America, primarily the Chilean example," explained Mr. Gliksberg. "The idea is that employees and employers would make direct contributions into a pension fund pool, with deductions made from each employee's salary. Each employee then chooses which pension fund they want to be associated with, although they would be able to change their choice later on. They will be able to go from one pension fund to the other. The pension funds would be held in trust, strictly regulated by the government."
All pension funds would be managed by private companies, with government-issued licenses.
Mr. Gliksberg estimated that upward of 6 million Venezuelans are potential contributors to a private pension system. He added that, once the system is in full swing, approximately $2 billion per year could flow into the private pension funds.
Tom Tull, principal at Gulfstream Global Investors Inc., Dallas, and an active money manager familiar with Latin America,characterized those expectations as "reasonable numbers given the current situation."
However, Pedro Marcal, a senior portfolio manager at Nicholas-Applegate Capital Management, San Diego, said, "Our people in Venezuela believe that 3 million contributors and up- wards of one-half billion dollars per year are more realistic numbers." According to Mr. Marcal, Nicholas-Applegate has invested approximately $15 million of its $450 million managed emerging market funds in Venezuela.
Venezuela is the latest in a series of Latin American countries moving toward privatization of their pension systems. Venezuela's social security laws were first introduced 30 years ago, but the system is in deficit and reforms were announced in 1995. Under the current system, employers contribute up to 15% of salary with employees contributing 4%. The government has been increasing contributions in a sliding scale to prevent bankruptcy of the system.
A recent report on the Venezuelan pension system by InterSec Research Corp. in Stamford, Conn., cited various reasons for the current lack of development of private pension plans. The report found one of the main factors hindering private pension plans is the current tax structure, as neither employee nor employer contributions are tax deductible now.
According to a study by ING Barings Securities Inc., New York, the forthcoming changes in the Venezuelan system would create the entities that will regulate and oversee five social security "subsystems" including pension, health and severance/training.
The report added the new law is awaiting presidential approval, and the "trilateral commission - government, private sector and unions - has been working toward the instrumentation of the specific guidelines for each of the subsystems."
However, those familiar with the Venezuelan economic and political situation remain cautious about the prospects for early action.
"I guess you could say that (in terms of the timetable) I'm a disbeliever," commented Mr. Tull. "There's a lot of coalition politics at play in Venezuela and instituting these changes is not the kind of thing the government will be doing overnight. Although, I'd add that there's little doubt it will happen sometime as they're following the trend that has evolved in pension reform throughout the region."
Nicholas-Applegate's Mr. Marcal explained that the framework for social security reform is "sitting on the president's desk, and he has the option, which he will likely exercise, of making observations on it." Mr. Marcal added that once the framework is in place, Venezuelan legislators still will have to construct the regulations for the new pension system; estimates are this process will take at least three months.
Regional observers cite differences between Venezuela's pension reform and that of other Latin American countries.
According to Mr. Marcal, one key difference between Venezuelan and Chilean pension reforms is that Venezuela will allow foreign participation from the outset.
"The financial system in Venezuela is about 70% controlled by foreigners, so they're much more open (to foreigners) than Chile is," he said. "You'll likely see foreign investments by pension funds allowed much sooner there than you did in Chile, where it took several years."
While expressing hope that pension reforms in Venezuela would move forward, David Rolley, vice president of global bonds for Loomis, Sayles & Co., Boston, added, "We believe that these economic reforms (including changes to the pension system) are among the key building blocks in a domestic capital market. So we're in favor of anything that moves any country anywhere in the direction of vested pensions. In Argentina, for example, they've had their similar (private) system since 1984, and the good news is that the pension funds have accumulated over $8 billion."
Mr. Rolley explained that approximately "half of all the (Argentinian) government paper" is now purchased by Argentina's mutual and pension funds. He expressed hope that a similar economic environment, wherein government debt could be purchased by domestic investors, would be emulated by Venezuela's move toward privatization.
BankAmerica International's Mr. Gliksberg agreed that "revising the social security laws is a very political issue" in Venezuela, and added it's not yet clear how many pension fund licenses will be issued. Current speculation is the government will issue 12 to 15 licenses.
There is, however, some concern that upcoming presidential elections might serve as a potential roadblock to Venezuelan pension reform. "With a presidential election slated to take place December 1998, you tend not to see a lot of change in that kind of political environment," explained Mr. Tull. Although he was skeptical as to the timeframe of new pension legislation, Mr. Tull added it was a "wise move" for Bank of America to be involved early on in the privatization process.
Despite the political uncertainty, ING's Caracas office stated in its November report that "recent developments suggest Congress might deliver results above our initial expectations."
That's exactly what Bank of America is banking on. Mr. Gliksberg explained BankAmerica International had many reasons for choosing to invest in Organizacion Rescarven. To date, the company is best known for having established the first Venezuelan health maintenance organization.
"First, they basically have a monopoly in the ambulance service business in Caracas and are also the first company to have an HMO program," explained Mr. Gliksberg. "So the name recognition they have in that market is very strong. Also, they have a very solid management team. Given the limited number of pension licenses, we wanted to make sure we were hooked up with the right partners."
Depending on what transpires in Venezuela, Rescarven might be only the first of several BankAmerica International partnerships in that country.
"Once it's clear how the licensing process will work, we will see if it makes sense to bring other local partners in," Mr. Gliksberg said. "We are right now talking with a number of potential partners to see who we might want to ally ourselves with."
Venezuela is late to enter the privatized pension world, Mr. Gliksberg said.
"Other countries such as Chile, Argentina, Peru and most recently Mexico have already moved in this direction," he said. "Venezuela is really the last major Latin American market to undertake these actions. But once the changes are in place, we believe there will be a strong market there for private pension funds."