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Doing Business with State Firms?

Is business with state firms in Latin America an opportunity or a risk, as seen in Venezuela recently? Four experts share their views.

Latin America Advisor

Latin America's state-owned companies are gaining in importance as renewed nationalism has taken hold in several countries. But partnerships with the private sector remain key to the success of state-owned enterprises, nearly all government officials in the region say publicly. When and why should a multinational company decide to seek strategic partnership with state-owned industry players? How can these partnerships be structured to be beneficial for all parties, including the region? Aside from the publicly-owned companies, how can the private sector, within itself, best approach strategic partnerships in Latin America in today's business climate?

Jerry Haar, Professor of International Business at Florida International University: Partnerships with state-owned enterprises are like marriages: relatively easy to get into but very expensive to get out of. Multinational firms must be very careful to separate a nation's rhetoric from both reality and past performance. There are high risk nations—Venezuela, Ecuador, Bolivia, Argentina—where rules of the game, both visible and invisible, can change rapidly, without prior notice. And there are high-risk sectors as well, such as utilities and natural resources. The arbitrary power of the state to mandate a change in ownership level, operating control, asset and equity valuations, employment rules, and repatriation terms of profits and dividends raise the risk premium for multinationals firms to do business in 'sensitive' sectors, let alone enter into partnership with the state-owned enterprises. Partnerships work best for all when there is in place a government that respects private enterprise, the rule of law, and the sanctity of contracts, and where there is an environment conducive to foreign investment. For the multinational firm, the nature of the investment (e.g., large, export-oriented) as well as the level of know-how (technology) and human capital required (highly skilled technical and managerial people) will determine its bargaining position. If the investment furthers national development goals and produces positive social impacts, as well, the partnership will be mutually beneficial to the state and to the multinational firm.

César Gutiérrez, president of the board of state-owned Petroperu: In the last four years, the trend of having state-owned companies in strategic sectors such as hydrocarbons and electricity has returned, not just in Latin America, but also in Africa and the Russian Federation. The high price of crude oil, derivatives, and natural gas, which until mid-2006 maintained an unstoppable, upward tendency, has been one of the reasons, to which we can add government eagerness to share in the greater income from natural resources, as well as the need to have a tool so that citizens do not bear all of the impact of elevated prices, and avoid conflicts that lead to political instability. A model that can reconcile state interests with private-sector earnings expectations will allow stability, avoiding the swinging pendulum of the past 40 years of between just the state or just the private sector. It would be the fair way. The issues of reconciliation are: joint investment and dividends—the amount requires skilled negotiation; the benefit for the state in the form of royalties and income taxes; and assuming joint social responsibility for affected groups. Everything above is possible under a long-term model. In Peru, we have been doing this with success.

Rui da Costa, Managing Director for Latin America and the Caribbean at Hewlett-Packard Co.: Identifying and developing key partnership is a vital aspect of conducting business no matter what region you're in. In the technology sector, state-owned and private companies both benefit in many ways from working together. For instance, government entities can offer advantages such as a stronger knowledge of the local market, ability to bypass bureaucratic delays, and the ability to provide local contacts that a multinational company may not easily be able to achieve. Multinational companies can offer a more global business perspective and technological and financial opportunities that a local government entity may not have. Governments are also starting to open their arms and welcome partnerships with multinationals, since they help boost the local economy, decrease unemployment, and position the country as a player in the global market. In the private sector, the right partnerships between industry players can also be beneficial for the businesses and the region. HP currently works with many different companies on issues such as combating piracy and the white box industry. HP also works with other companies in developing products. The beneficial results in working together are many, such as lower costs in product development, shipping costs, and marketing. The end consumer also wins by being able to have the latest products, services, and technology available in the market. Overall, the benefits reach all the players involved. A third form of partnership is working together on corporate social responsibility activities. State-owned and private companies working together for the good of the community not only achieve a better corporate image, but also help improve the quality of life of those living in the region.

Nicolás Mariscal Servitje & Juan Pedro Escobar, Executive Directors at Grupo Marhnos in Mexico.: Infrastructure development will be the theme, and efficient project structures will be the tone, for securing Latin America's much-needed development. The private sector will play a key role in funding and operating these projects. Economic stability as never seen in the region is already attracting the attention of international investment groups, and multinational developers and operators. Nevertheless, local culture, relationships, and knowledge of market conditions need to be addressed through partners in each country to ensure the success of demanding projects. In addition to these obvious conditions, local capabilities in construction and operation are fairly well developed in several Latin American countries. International experience in structuring financial and managerial packages will, no doubt, be instrumental for achieving competitive project profiles. As an example of programs that already integrate these factors is the PPS initiative under development in Mexico. International teams forming SPCs (specific project companies) have successfully bid and won interesting road, hospital and wastewater projects.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.  


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