International Business : Telecom Sale Gives Boost to Peru’s Privatization Plans

ISSUE: Peru’s government recently accepted a bid by Spain’s Telefonica Internacional to buy control of the state-owned telephone and telecommunications monopolies for a surprisingly high $2 billion. That mega-sale has buoyed official spirits as the government prepares to sell 80 more enterprises in an effort to complete a broad privatization program.

BACKGROUND: President Alberto Fujimori put privatization into high gear late in 1992, as Peru’s investment climate improved with a decline in terrorism and the end of a long economic depression. So far, investors have bought control of about 30 government-run companies. They include the Hierro Peru iron mine sold to China’s Shougang Corp. for $120 million; the Aeroperu airline to a consortium headed by Aerovias de Mexico for $54 million; the Cerro Verde copper mine to Cyprus Minerals of the United States for $37 million, and, last week, the Ilo copper refinery to Southern Peru Copper Corp., controlled by New York-based Asarco, for $68.9 million.

Telefonica Internacional de Espana bid more than twice as high as its American competitors--Southwestern Bell and GTE--for a package that included 35% stakes in the telephone company and the telecommunications firm.

“The price is magnificent,” said Carlos Montoya, head of the government’s privatization agency.

OUTLOOK: The telephone deal is not only a landmark in Peruvian privatization, it is a major step toward consolidating Telefonica’s predominance in the South American communications market. The company, partly owned by the Spanish government, already controls privatized telephone companies in Argentina and Chile and owns a minority interest in Venezuela. Analysts say Telefonica needed the Peruvian monopoly to maximize regional administrative efficiency and for economies of scale. Peru is by far the least developed country in Telefonica’s fold, with only 2.4 telephone lines per 100 people, but that means big growth potential.

The Peruvian government has earned a total of $2 billion from privatizations so far. In addition to government earnings from the sale of the telecommunications and telephone companies, buyers will invest an added $2.75 billion over the next few years, including an estimated $1.5 billion by Telefonica to triple Peruvian phone lines.

The 80 companies being prepared for privatization include Petroperu (oil) Electroperu and Electrolima (electricity), Minero Peru subsidiaries and Centromin (mining), Siderperu (steel), ENAFER (railroads), FERTISA (fertilizers), Interbanc and Banco Continental (banks). Experts estimate that Petroperu alone could sell for more than $1.5 billion.

The government says proceeds from privatizations are going into needed social investments.

STRATEGY: The billions of dollars that foreign investors have paid for state assets has provided persuasive evidence that Peru has something to offer foreign investors. Analysts say many of the undercapitalized and neglected companies yet to be sold have nowhere to go but up.

The successful sales have also added to the optimism in Peru that privatization will improve the overall economy. “Peru is categorized as the rising star of Latin America,” said business professor Alejandro Indacochea.

Some political analysts , however, still see risk factors that could dampen investor enthusiasm. Terrorism by the Maoist rebels of Sendero Luminoso (Shining Path) has been reduced but not eliminated. Widespread poverty suggests a threat of social unrest. And although military support seems to bolster the stability of President Fujimori’s administration for now, Peru’s democracy remains imperfect and its politics hard to predict.