Protests Stymie Peru’s Drive to Raise Capital

A $100-million sugar project on an abandoned stretch of government-owned desert offers what this country’s ailing economy needs: jobs, tax revenue and a likely end to importation of 30% of the sugar it consumes.

But the developer has been forced to put the project on hold after a rising tide of citizen opposition to government efforts to sell assets to the private sector soured the investment climate.

The same resistance to privatization, often violent, is flaring across South America, fueling street protests in Argentina and the surprisingly strong presidential bids of leftist candidates in Brazil and Bolivia.

Citizen resentment is perhaps most visible in Peru, where a recent poll by Apoyo, a Lima consulting firm, showed 70% of those questioned were opposed to privatization. Last month, riots in Arequipa that left two dead forced the government to suspend the sale of two regional power utilities to Brussels-based Tractabel for $167 million.

Days later, rice farmers opposed to a 14,000-acre resort near the northern city of Tumbes blocked traffic on the Pan American Highway for two days, paralyzing the region. Sugar farmers opposed to privatizing their cooperative near Trujillo also protested, as did woodcutters in the Amazon who demonstrated against granting timber licenses to big companies.

The nervous government has suspended several major privatization plans, causing doubts in the investment community and uncertainty about the future of government auctions of assets ranging from power transmission lines to ports totaling about $3.5 billion.

“We can’t go forward until the situation stabilizes,” said Rex Canon, president and chief executive of Maple Cos. and the company’s top executive in Peru. In 1998, his company, which has been operating in Peru for 10 years, fired up a electric power plant near Pucallpa that supplies 5% of the country’s electricity.

There have been no public demonstrations against Maple’s project, which calls for developing a desolate tract of land the company won through a bid. The project would include 15,000 acres of sugar cane fields, a sugar mill with a small power plant and a five-mile canal to bring water from a nearby reservoir.

But the demonstrations have made Wall Street nervous, driving up interest rates on Peruvian debt and increasing the cost of financing that developers such as Maple Cos. of Dallas need to get projects built. As a cautionary measure, the firm has downscaled the sugar project to reduce or eliminate the need for outside financing.

The anti-privatization rage is not how Latin America’s development script was supposed to read. It was an article of faith of the so-called Washington Consensus that Latin American countries would gain a path to prosperity and modernization by selling inefficiently run state assets and services to private companies.

Instead, privatization has triggered anger because benefits have failed to work their way to the people. After 15 years of asset sales, many citizens equate them with massive layoffs and, in some cases, higher rates for basic services. The continent is as far away from prosperity and First World status as it was before privatization began, according to several studies.

Peru, for example, is suffering through a four-year recession, and poverty and joblessness have been increasing since the early 1990s. During that time, the government has sold about $9 billion in state-owned assets and services, from telephone companies to power utilities. Unemployment is 15% and rising.

“The feeling is that the government has sold off grandmother’s jewels, and that people are left with neither the jewels nor grandmother,” said political analyst Julio Cotler of the Institute of Peruvian Studies, a Lima-based think tank.

Opposition to privatization began building under the authoritarian regime of President Alberto Fujimori, who was in power from 1990 to 2000. Outrage emerged after it was revealed that his disgraced and imprisoned advisor, Vladimiro Montesinos, siphoned off $115 million in privatization proceeds. (About $75 million has been recovered.)

“The image privatizations have here is totally negative, a synonym for cronyism and corruption,” Cotler said.

The recent democratization process under President Alejandro Toledo has given Peruvians more freedom to vent their frustrations.

Displeased Citizens

Although people questioned in recent polls by Apoyo said basic services have improved, they nevertheless use privatization as a focus for their dissatisfaction with the government, Apoyo chief economist Hugo San Martin said.

“Without a giant economic boom, people will not recover their optimism about privatizations,” San Martin said.

Many blame political missteps by Toledo for the recent turmoil. He decided to go ahead with the privatization in Arequipa even though he had promised the citizens of Peru’s second-largest city during his campaign that the power companies were “untouchable regional patrimony.”

“We had a popular rebellion here, because people hadn’t forgotten his promises,” Arequipa Mayor Juan Manuel Guillen said. “Those promises were one reason the province voted 70% for Toledo.”

The riots in Arequipa surprised the government, created the biggest crisis in Toledo’s presidency and revealed the depth of opposition to the sell-offs.

“A privatization is no guarantee of development,” Guillen said. “I am not opposed to foreign investment. But we have a totally empty industrial park here--why not invest in a company and put it there, not sell a utility that is running well?”

The government often has acted without bothering to sell the populace on the benefits of privatization, said Shane Hunt, professor emeritus of economics at Boston University and former advisor to the Peruvian government.

“Throughout the 1990s in Peru, there was essentially no debate on economic policy. The state was so discredited as an economic actor that the advocates of liberalization and privatization had their way without opposition.

Unfortunately, this gave them the habit of running policy initiatives past Washington but not past the Peruvian people,” Hunt said.

Need for Investment

Suspension of the sales comes at a difficult time for Peru, which was counting on $3.5 billion in proceeds from the privatization and business concessions to help balance huge budget deficits over the next two years, said Ricardo Vega Llona, head of Proinversion, the government agency in charge of the sales. But, Vega Llona said, the cash proceeds are of secondary importance.

“The most important goal of the privatizations is not a fiscal one but to remove the state from the production of goods and services and put it in the hands of the citizens,” Vega Llona said.

Long term, the need for foreign investment is just as critical. Peru needs huge amounts of capital if it is to generate jobs and reduce the grinding poverty in which half its citizens live, Apoyo’s San Martin said. The nation has been unable to create 800,000 jobs needed for youths entering the labor market since 1998.

Because Peru doesn’t have enough investment capital, it must seek it elsewhere.

“We need an external source of capital, and privatizations are that source,” said Pedro Pablo Kuczynski, Peru’s minister of economy and finance and a former Wall Street investment banker, who vowed that the privatization process would continue.

Kuczynski said the government will launch an effort late this month, after a Cabinet reshuffling is complete, to convince the country that its policy of seeking foreign investment is correct. As part of the shake-up, he reportedly plans to resign.

The future of Peru’s privatization and its economy may depend on how well the Toledo administration does its selling job.

“Privatization started off being a pragmatic reaction to obvious failures of state management, but it seems to have wound up as an ideological mud fight,” Hunt of Boston University said.

Investors in the Middle

Caught in the middle of the fight are investors such as Canon. His project would be the first sugar mill built in Peru since the 1950s, and the largest investment in the industry since Peru’s socialist leaders nationalized it in 1969 and put most plantations into 12 huge worker-controlled cooperatives.

Once among the highest yielding in the world, Peru’s sugar industry is producing half the annual output of 1.5 million tons it did in 1969. The cooperatives are highly inefficient, subsidized producers and don’t have the money to invest in new technology. The government is trying to get out from under the subsidies by selling the cooperatives to private investors.

Maple’s mill, using modern technology, would be the lowest-cost producer of sugar in Peru, Canon said. It would produce 150,000 tons of sugar annually to start and eventually eliminating the country’s need for imports. Built from scratch, it would create 400 jobs.

But even if it goes forward, the project, called Agricola Cerro Prieto, will be scaled down. The planned initial output is 25% less than first envisioned. The plan included a 30-megawatt power plant fueled solely by sugar refuse, with excess power sold into the local electricity grid. The revised version of the plant will produce only enough power for the mill’s use.

“We’re still hopeful the project will go ahead and that by the time we’re ready to start construction early next year, the political situation will have settled down,” Canon said. “But the climate is more difficult.”