ARGENTINA: REFORMING STATE-OWNED ENTERPRISES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000100020001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 22, 2016
• Document Release Date: April 12, 2012
• Sequence Number: 1
• Publication Date: January 1, 1987
• Content Type: REPORT

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Directorate of
Intelligence
Seetet
Enterprises
Argentina:
Reforming State-Owned
Qa-rpt
ALA 87-10004
January 1987
Copy 316
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Directorate of Secret
Intelligence
Enterprises
Argentina:
Reforming State-Owned
with the Directorate of Operations.
Office of Leadership Analysis. It was coordinated
biographical contribution by
This paper was prepared by I (Office
of African and Latin American Analysis, with a
Comments and queries are welcome and may be
directed to the Chief, South America Division, ALA,
Secret
ALA 87-10004
January 1987
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Argentina:
Reforming State-Owned
Enterprises
Key Judgments President Alfonsin is attempting to reduce the drain on the economy from
Information available Argentina's 350 state-owned enterprises (SOEs), whose inefficiencies are
as of 18 December 1986 contributing to inflation and persistent economic stagnation. Progress is
was used in this report.
slow, but even modest cuts in SOE expenditures will indirectly promote
economic stability and reduce the need for new foreign loans, thereby
promoting a better relationship between Argentina and its international
creditors. We believe, however, that Alfonsin's reforms are insufficient to
end the country's economic malaise or to create major new opportunities
for US exporters or investors. Furthermore, if his program unravels,
Alfonsin's credibility with creditors would be weakened. Any such setback
would only complicate matters for a government facing the challenge of
institutionalizing democracy. 25X1
The freeze on new government hirings implemented by Alfonsin in 1985
marked, in our view, a significant break with the populist approach to
economics that had long characterized the President's Radical Party.
Alfonsin has made reform of the unwieldy public sector a major element of
his campaign to modernize Argentina's political and economic institutions.
He has obtained a World Bank loan to improve SOE management and
efficiency and has introduced legislation in Congress that would grant him
more leeway in privatizing the parastatals. Moreover, he recently an-
nounced plans to speed the introduction of efficiency-enhancing measures
to the major SOEs by centralizing them in a semiautonomous holding
company run by senior private-sector executives, and pledged to further
reduce the central government work force through a voluntary early
retirement program.
Notwithstanding Alfonsin's commitment to change and the potential for
progress in certain areas, we doubt he will implement sweeping reforms in
Argentina's parastatal system. For example, we believe that Alfonsin's
most recent initiatives underscore his reliance on promoting efficiency in-
rather than divestiture of-parastatals. While polls indicate that the public
is becoming more receptive to privatization and reform, Argentina's
nationalistic interest groups-including the Peronists, organized labor, the
bureaucracy, and even sectors of Alfonsin's party and the business
community-oppose the selloff of parastatals and other actions that involve
layoffs, control by multinational corporations, or a major reduction in the
state's role in the economy. The President, in our view, has concluded that
antagonizing these powerful sectors might jeopardize his highest priority,
the consolidation of democracy in Argentina.
Secret
ALA 87-10004
January 1987
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Alfonsin, in our view, will make some progress in restructuring SOEs
during the remainder of his term. He has invested considerable political
capital in his reform campaign, and will not jettison his program easily.
Moreover, we concur with the US Embassy's judgment that, given the
depth of problems at the SOEs, relative gains in efficiency could produce
significant savings. We expect Buenos Aires to use noncontroversial
methods such as a hiring freeze, a voluntary retirement program, and
cutbacks in public investment. The savings thereby generated may, in our
view, help narrow Argentina's budget deficit and decrease its need for
additional foreign loans. They will not, however, generate surplus capital to
repay principal on the foreign debt or produce significant economic growth
over the next several years. Parastatal losses, although reduced, will
continue to drain the treasury, and the temptation to cover them by
printing money will keep inflationary expectations high.
Nevertheless, we are guardedly optimistic regarding the longer term
consequences of Alfonsin's initiatives. The administration's goal of relocat-
ing Argentina's capital to a small Patagonian city and shifting many SOE
headquarters to the provinces by 1989, will, if implemented, decentralize
the public sector and permit significant work force reductions through
attrition. Moreover, Alfonsin's efforts to rehabilitate some free-market
concepts are changing the rhetoric-and more slowly the reality-of
Argentine economic decision making, thus laying the groundwork that may
enable a more politically secure administration to take bolder actions at a
later date.
There is about a 1-in-4 chance, in our judgment, that Alfonsin will become
impatient with his current economic game plan and abandon even his
truncated reform program in favor of short-term, growth-oriented policies
aimed at job creation through public investment and expanded SOE
employment. In our view, the results of such a strategy, especially if
pursued aggressively, would be uniformly negative. After a brief, consump-
tion-led boom, inflation would soar and Argentina would almost certainly
lose its sources of foreign financing, forcing the President either to turn to
another round of austerity measures to halt an inflationary spiral or to face
an economic crisis of a magnitude sufficient to threaten his tenure in office.
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The Peronist Party
7
The SOE Bureaucracy
8
Outlook and Implications for the United States
9
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Figure 1
Selected State-Owned Enterprise Infrastructure
San
Juan
BUEMU
AIRES
Argentina
Boundary rrprrn iat~on ~s
,col ni r.r"', uily author tative
San Carlos
de Bariloche
Sarmientd
Colonia
Las Heras
Colonia
Cantriel
Steel plant
(integrated)
Petroleum field
Coalfield
Brazil
Chemical/petrochemical
plant
Petroleum pipeline
Natural gas pipeline
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Argentina:
Reforming State-Owned
Enterprises
Introduction
A review of Argentine economic statistics suggests
that many of the ills plaguing Argentina's economy
stem from inefficiencies associated with the country's
mammoth public sector, specifically the multitude of
state-owned enterprises (SOEs). Buenos Aires's persis-
tent recourse to foreign borrowing and printing of
money to cover the losses by these parastatals has
contributed to its $50 billion external debt and en-
demic inflation. The public companies' dampening
effect on competition has also helped prolong econom-
ic stagnation-Argentina has averaged zero annual
GDP growth over the past decade. Most observers
agree that reinvigorating the economy will entail-
along with deregulation and trade liberalization-
extensive reform of state-owned enterprises
President Raul Alfonsin appears to recognize the
importance of reforming the public sector and has
taken some steps in this direction, but he faces major
roadblocks to significant change in the status of the
SOEs. Since most parastatals are chronic money
losers, few Argentine investors have the desire or the
capital to buy them. Moreover, organized labor, the
Peronist opposition, the state bureaucracy, and even
sectors of Alfonsin's own Radical Party oppose the
massive layoffs needed to restore SOE solvency and
will fight sales of the firms. This paper examines the
current condition of the SOEs, discusses President
Alfonsin's evolving policy toward their reform, ana-
lyzes key interest-group attitudes toward the question,
and reviews the implications of these developments for
Argentine economic performance and for the United
States.
The Weight of the State Sector
Public-sector spending dominates the Argentine econ-
omy. It accounts, according to government statistics,
for 46 percent of GDP, of which two-fifths-18
percent of GDP-is generated by about 350 public
corporations.' These firms participate in myriad
' This assessment addresses only these 350 firms in which the state
has sole or majority interest. In addition, 168 companies have
minority state participation. See appendix for a survey of the state
aspects of the economy, from the utilities and basic 25X1
industries, such as chemicals and steel, to airlines,
television and radio stations, hotels, and banks.F___1
US Embassy reporting as well as academic studies
point to the fact that successive Argentine govern-
ments-like many other Third World countries-
have used their control over major corporations to
pursue a variety of social and economic policy goals.
Featherbedding in public enterprises, for instance, has
helped keep Argentina's combined unemployment and
underemployment-13 percent as of October 1985-
at a remarkably low level for Latin America, while
simultaneously enabling the state to spend little for
social welfare or unemployment compensation. In
addition, Buenos Aires has sometimes used SOEs to
temporarily dampen inflationary pressures by allow-
ing the prices for public services to lag behind changes
in the consumer price index.
In our view, however, the economic cost of Argen-
tina's parastatals is high. The SOEs are steady money
losers, with deficits of about $3.9 billion in 1984 and
$3.3 billion in 1985, according to our calculations.
Transfers from the central administration to cover
SOE losses caused half of the total government
budget deficit in 1985. Statistical studies show that
the state oil company is one of the few major oil
companies in the world that consistently loses money.
One of the greatest drains on the Argentine treasury
comes from the state railroad, which loses about $3.0
million a day, and whose gross sales income covers
only 63 percent of personnel costs, according to the
press.
These losses have contributed to two of Argentina's
most intractable economic problems: inflation and
debt. In our judgment, Buenos Aires's printing-press
financing of SOE expenditures has helped fuel annual
inflation rates that did not dip below triple digits
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YPF. 33,725 employees ... gross income: $3.4
billion ... losses: $675 million ... market share:
80 percent.
Water and Electricity. 11,249 employees ...
gross income: $424 million a market share: 27
percent.
Argentine Airlines. 10,303 employees ... gross
income: $471 million a ... market share: 70
percent.
State Gas. 10,238 employees ... gross income:
$937 million ... losses: $644 million ... market
share: 90 percent.
National Telecommunications. 48,158 employees
... gross income: $702 million ... losses: $24
million ... market share: 90 percent.
Argentine Railways. 107,837 employees ... gross
income: $403 million ... losses: $1.1 billion ...
market share: 99 percent.
Figure 2. Major State Enterprises
Sources: International Monetary Fund, the US Embassy, and
press.
a 1983; all other . Igures for 1984.
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between 1975 and 1985. In addition, government
statistics indicate that SOE borrowing is responsible
for one-fourth of the $50 billion foreign debt. The
public enterprises, in our view, have also played an
indirect role in Argentina's economic stagnation by
thwarting competition and stunting private-sector
growth in key sectors of the economy-such as trans-
portation and energy.
Alfonsin's Push for Parastatal Reform
When he became President in 1983, Alfonsin, accord-
ing to the US Embassy, shared the statist and anti-
free-market bias of his Radical Party (UCR). Largely
ignorant of and uninterested in economics, the Presi-
dent left policy formulation in the hands of party
stalwarts who increased real wages and the number of
government jobs. Although Alfonsin paid lipservice to
reforming the public sector, the Embassy reports that
he shifted responsibility for the undertaking from
ministry to ministry and made few substantive
changes during his first 18 months in office.
The ensuing economic chaos-by June 1985 the
budget deficit equaled nearly 13 percent of GDP and
inflation was averaging over 25 percent per month-
caused Alfonsin to shift gears and implement the
Austral austerity plan (see inset). In our view, the
program's freeze on most new government hirings
marked the President's first serious move to grapple
with SOE reform and represented a significant depar-
ture from past Radical Party positions. Alfonsin
subsequently centralized responsibility for restructur-
ing state enterprises in two new administrative bodies:
? The Secretariat for the Promotion of Growth,
tasked with increasing private-sector participation
in areas dominated by SOE monopolies.
? The Secretariat for the Control of Public Enter-
prises, charged with overseeing all parastatal activi-
ties and devising ways to stem their losses.
Alfonsin followed these initiatives with further moves
in the same direction. In a major policy address in
February 1986, he announced plans to privatize the
wholly government-owned steel producer, SOMISA,
as well as to sell government majority or minority
interests in five petrochemical firms. Several months
later, the President submitted legislation to Congress
During the first half of 1985 the Argentine economy
spiraled downward and inflation reached an annual
rate of over 1,000 percent. President Alfonsin re-
sponded with a new economic program-the Austral
Plan-that froze prices and wages, created a new
currency, halted government hiring, and included a
pledge by the government not to print money to
finance deficits.
The plan won Alfonsin wide popular support and
rapidly stabilized the Argentine economy, reducing
inflation to a monthly average of 3 percent during the
second half of 1985. The plan also shrank the
government deficit as a percent of GDP because of
increased real tax receipts due to the decline in
inflation, stepped-up tax collection efforts, higher
charges for government services, and a `forced sav-
ings plan" that required businesses and individuals to
loan money to the government. Buenos Aires signed
agreements with the IMF and commercial bank
creditors to roll over portions of its $50 billion debt
and obtain $5.6 billion in new lending.
We believe that the Austral Plan was initially an 25X1
emergency measure to overcome hyperinflation and
maintain political stability, rather than a well-con-
ceived project to reform Argentina's economy. The
first policy supplements to the Austral Plan-loosen-
ing, then retightening, price controls and an export
promotion program that has been partially offset by
an overvalued exchange rate-represented, in our
view, incremental changes tailored to the Argentine
statist mindset. Nevertheless, more recent addenda-
highly positive real interest rates and a state enter-
prise reform-appear to indicate the beginning of a
shift toward addressing structural issues.
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Figure 3. President Alfonsin: "Madam, permit
me to privatize you.'1
that would supersede existing restrictive laws and
grant the executive branch greater leeway in selling
off SOEs. In,addition, Alfonsin recently announced
plans to speed the introduction of efficiency-enhanc-
ing measures to the major SOEs by centralizing them
within a semiautonomous holding company staffed by
senior executives from the private sector. He also
pledged to standardize public-sector wage scales and
to cut central government employment through a
voluntary early retirement program. The administra-
tion is now considering a variety of supplementary
approaches to SOE reform:
? Selling on the Stock Exchange. The press reports
that Buenos Aires is examining the possibility of
privatizing some SOEs by selling shares on the stock
exchange. The major exchange, however, is a thin
and highly speculative market, listing only 250
stocks. The government is taking preliminary steps
to deepen the market by reducing the current
securities transfer tax from 0.75 to 0.50 percent and
requiring that firms that receive industrial promo-
tion tax breaks be quoted on either the national or
the smaller local stock exchanges.
? Breaking Up the State Oil Company. Buenos Aires
is considering dividing this enterprise into separate
entities responsible for exploration and production,
refining, transportation, and marketing, according
to press reports. If implemented, such a scheme
could bring about specialized, more efficient man-
agement and encourage private-sector participation.
? Outside Management Contracts. Buenos Aires is
actively seeking outside management assistance for
at least one important parastatal. Argentine Gov-
ernment officials have approached at least two
foreign steel firms about managing SOMISA, ac-
cording to the US Embassy. Alfonsin may believe
that competent outside management will make
SOMISA more attractive to purchasers at a later
date.
? Decentralizing Government Employees. President
Alfonsin has publicly pledged to move the capital of
Argentina to Viedma, located in the underdeveloped
southern region of the country. Moreover, he has
announced plans to move the administrative offices
of several large SOEs-including the state oil and
coal companies-to other small southern cities. Al-
fonsin probably believes this is the least politically
painful way to cut the size of government, as
thousands of workers are expected to quit rather
than move from Buenos Aires.
A Gradual Approach
Alfonsin has publicly made SOE reform and privati-
zation a key item on his economic agenda. While
progress has been slow to date, Alfonsin has chalked
up several concrete accomplishments. The hiring
freeze-which reduced SOE employment by 6.3 per-
cent during the year ending June 1986, according to
government statistics-is, in our view, Alfonsin's most
important achievement in this area. In addition, Al-
fonsin pared the total deficit of SOEs from 6.3
percent of GDP in 1983 to 4.4 percent in 1985. He
also returned a medium-sized steel tubing manufac-
turer to the private sector and privatized the National
Atomic Energy Commission's Special Alloys Factory.
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Juan Vital Sourrouille
Minister of Economy
(since February 1985)
Respected technocrat ... key economic official in
Alfonsin administration ... perceives public-sector
reform efforts as way to invigorate the Austral Plan,
the "economic shock"program he masterminded in
1985... was secretary of planning from 1983 until
appointed to current post ... served as adviser to
several international and national economic commis-
sions during the 1970s ... relative newcomer to the
Radical Party ... 46 years old.
Enrique Jose Olivera
President, Executive
Board of State-Owned
Enterprises
(since November 1986)
Harvard-trained business executive and banker given
task of spurring parastatals' productivity ... appoint-
ment reflects Alfonsin's desire to apply private-sector
expertise to unwield public enterprises ... has held
variety of posts with Fiat Company in Argentina and
abroad, including stint in Italy (1976-77) while that
country was pursuing a reorganization of its public
holdings ... now director of the River Plate Bank of
France and chairman of several companies ... 46
years old.
Pedro Agustin Trucco
Minister of Public
Works and Services
(since July 1986)
Earned portfolio through energy and dedication dis-
played in previous job as under secretary for river
and marine transport ... thought to be close to
Economy Minister Sourrouille ... has taken an
aggressive stance on parastatal reform ... promised
to speed up privatization programs and reduce gov-
ernment influence, especially in maritime sector ...
youngest member of Cabinet (37) ... not in public life
until 1983.
Norberto Bertaina
Secretary of Secretariat
for Promotion of Growth
(since February 1986)
Longtime activist in Radical Civic Union Party ...
may owe current post to close ties to Vice President
Victor Martinez ... advocates directing state re-
sources to young industries rather than "mature"
.. trained as a CPA, has spen
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professional career in government ... approximately
50 years old.
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Political and practical considerations, however, are
apparently forcing Alfonsin to shift emphasis from
privatization. Instead, over the past six months he has
publicly stressed the need to make the parastatals
more efficient. We believe this tack, which placates
traditionalists in his party, also reflects Alfonsin's
appreciation for the many other obstacles to privatiza-
tion. Submission of the SOE-related legislation, for
example, was delayed several months because of
internal UCR opposition. The current version con-
tains many compromises-such as granting newly
privatized companies import protection, tax exemp-
tions, and preferential prices on goods and services
purchased from other parastatals-which will hinder
competition. Moreover, the bill contains a list of SOEs
to remain in state hands that includes virtually all the
largest money losers: the railways, Argentine Airlines,
the state oil company, the telephone company, and
most major utilities. Beyond these impediments, the
high cost of privatization is a problem. Buenos Aires
had to provide generous financial terms in order to
enable an Argentine firm to buy the steel tubing
manufacturer, and plans to assume the debt of Aus-
tral Airlines to attract buyers, according to press
reports.
Alfonsin's decision to bring private-sector executives
into top positions within the SOEs has also been slow
to take off. US Embassy reporting indicates that
private-sector transplants to the Argentine public
sector have often become frustrated by bureaucratic
stonewalling and redtape. For example, Alfonsin's
first Secretary for the Promotion of Growth, business-
man Manuel Tanoira, quit in 1986 after only five
months on the job, publicly claiming to have had
difficulty obtaining even simple balance sheets for the
parastatals. Alfonsin's recent efforts to recruit senior
private-sector executives for jobs in the new parastatal
holding company, however, suggest to us that the
President may now realize he must create a critical
mass of businessmen at high levels of the SOEs in
order for their presence to have an impact. Even this
development might be undermined; for example, an
interministerial committee created to coordinate eco-
nomic and price policy with the parastatal holding
company could hamper the latter's ability to make
changes in individual SOEs. This dilution of the
holding company president's authority was the reason
Alfonsin's preferred candidate for the post declined
the position, according to the US Embassy.
Other key factors are dictating a slow, incremental
approach to parastatal reform. Alfonsin has frequent-
ly publicly pledged to avoid the massive layoffs which,
in our estimation, are needed to restore a measure of
profitability to many state firms. A voluntary retire-
ment program-the one he recently announced could
easily be extended to parastatals in the near future-
would bring only gradual reductions in SOE payrolls.
In addition, the plan to relocate the Argentine capital
and many SOE administrative offices will require,
according to press estimates, over $3 billion in public
and private funds. The major sums involved will, in
our view, necessitate a drawn-out transfer process.
Interest Group Attitudes: Privatization
Versus Reform
Opinion polls indicate that the Argentine public is
becoming more receptive to SOE reform and privati-
zation-a significant shift in attitude (see inset).
According to academic studies, the Argentine public
until recently strongly favored state ownership, seeing
this as both a symbol of Argentine nationalism and a
protection against foreign domination of the economy.
We believe President Alfonsin has now begun to
channel this sentiment in favor of upgrading the
performance of SOEs. His task is complicated by the
fact that Argentina's conservative parties-natural
backers of market-oriented changes-are fragmented,
uninfluential, and ill disposed to work with Alfonsin,
according to the US Embassy. Moreover, the coun-
try's more important interest groups continue, for the
most part, to favor statist and nationalist economic
policies.
The Radical Party. Alfonsin's Radicals have tradi-
tionally advocated considerable state control of the
economy, and the party's national committee assented
to the President's privatization proposals only after a
difficult internal debate
Alfonsin struck a compromise with the
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for the general public.
Argentine public support for streamlining the public
sector and privatizing some industries and services
has grown steadily over the past few years. We believe
the change has occurred primarily because of increas-
ing frustration over the parastatals' inability to sup-
ply basic services at affordable costs. Over the longer
term, however, we think the Argentine mindset may
turn against traditional statist and nationalist eco-
nomic nostrums that have left Argentina so far
behind its economic potential. A poll of city dwellers
sponsored by USIA in November 1985 revealed that
the urban public now favors privatization of most
SOEs, including TV stations, Argentine Airlines, and
utilities such as the gas and telephone companies. A
plurality continues to support state control over the
oil company, largely, in our view, because of peculiar
historical circumstances that have caused this com-
pany to become a symbol of Argentine nationalism
Do you approve or disapprove of
the privatization of the following
state enterprises?
Approve
Disapprove Do Not
Know
Public TV stations
54
23
23
The telephone company
50
27
23
The railroads
49
29
22
44
33
23
The gas company
43
33
24
Argentine Airlines
40
35
25
State petroleum company
34
42
24
party's more statist members by promising to use the
proceeds from divestiture to invest in up-and-coming
sectors such as informatics and biotechnology, and
with the understanding that utilities and many basic
industries will remain in state hands, according to
press reports. Ricardo Angeloz, the governor of Cor-
doba Province who harbors presidential ambitions,
openly repudiated even this position. Other Radical
party leaders may come to conclude that the short-
term economic and political dislocations of a major
privatization effort outweigh the long-term benefits-
especially as the November 1987 congressional and
gubernatorial elections approach.
We judge that support for gradual SOE reform-as 25X1
opposed to privatization-within the UCR is more
widespread. For example, there has been little inter-
nal party resistance to Alfonsin's hiring freeze, proba-
bly because it is flexible enough to allow for new
hirings when deemed politically expedient. In con-
trast, the press reports that the UCR has consistently
opposed actions that would involve laying off govern-
ment workers. Similarly, most UCR members proba- 25X1
bly would accept changes in the regulatory structure,
but would not embrace a drive for deregulation.
The Peronist Party. Peronist philosophy remains high-
ly nationalist and statist. Peronists, according to the
US Embassy, regularly label privatization of indus-
tries over which they believe the state is naturally
sovereign as "selling out" to private interests and the
International Monetary Fund (IMF). Peronist-
controlled local governments near the SOMISA steel-
works and some of the petrochemical industries tar-
geted by Alfonsin for divestiture have vowed to fight
privatization. Furthermore, the Embassy and the
press report that the Peronists will try to block or
water down Alfonsin's privatization bill by inserting
language to forbid the sale of parastatals at less than
book value-effectively halting most offerings-or by
adding other SOEs to the list of companies not to be
privatized. The Peronists' public statements also op-
pose significant SOE reform-perhaps merely a re-
flection of the party's blindly countering all Alfonsin
administration initiatives. Peronist organizational dis-
array, however, may force the party to conserve its
strength for the major privatization debates, allowing
Alfonsin greater leeway in addressing SOE inefficien-
cies through internal restructuring.
Organized Labor. Like the Peronist Party-which the
majority of its members support-organized labor
opposes any policy involving worker layoffs. More-
over, strike patterns indicate that labor is stronger and
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more militant in state-run than in private-sector
companies and probably sees privatization as a move
by Alfonsin to erode its power base. To publicize its
position, Argentina's main labor confederation held a
major rally against privatization last April.
Because of its large constituency among SOE bureau-
crats, labor also opposes efforts to reform the parasta-
tals. The unions, however, are amenable to monetary
suasion, according to the US Embassy. During the
late 1970s, for example, the military government
effectively used generous severance packages and job
retraining programs to minimize the political and
social dislocations caused by its massive reductions in
the number of railroad workers. Labor leadership is
more militant now, and the economy more depressed,
but we believe that a skilled politician such as Alfon-
sin could use similar programs to gain labor's acquies-
cence in reforming selected companies.
The SOE Bureaucracy. This group, which perceives
Alfonsin's proposed changes as a direct threat, is
fighting reform tooth and nail, according to Embassy
reporting. The handful of parastatal chief executives
who are serious about streamlining the public sector
have not been able to overcome bureaucratic resis-
tance. Indeed, the bureaucracy has thwarted adminis-
tration plans to encourage private-sector participation
in sectors dominated by parastatals. The state tele-
phone company, for example, warded off an attempt
to break its monopoly on the installation of telephone
lines by announcing in October 1985 its own drive to
tion.
install 1 million lines by 1989 at an average cost of
$1,100 each, effectively preempting private competi-
Private and foreign participation in the oil industry-
a reform trumpeted by the government as a decisive
break with past statist and nationalist practice-
provides another example of the SOE bureaucracy's
ability to foil administration intentions. Ordered by
Alfonsin to draw up a contract for energy companies
interested in exploring for oil in Argentina, the state
oil company, YPF, granted itself the option of becom-
ing a 50-percent, joint-venture partner in any com-
mercial finds discovered by private prospectors. Fur-
thermore, the contract requires the companies to sell
the oil to YPF, which has also reserved for itself those
geographic areas with the highest potential for oil
discovery. Only $39 million in new investment was
therefore committed during the 18 months following
the government's opening up of the oil sector in
March 1985.
Private Business. Although the Argentine Chamber
of Commerce has publicly endorsed privatization, we
believe most businessmen are ambivalent on this
issue. Many private companies depend on a particular
SOE as their major or only customer. Alternatively,
some businesses have formed anticompetitive partner-
ships with the state. For example, three major news-
papers own a newsprint company jointly with the
government. Protected by high tariffs on imported
newsprint, this company dominates its field and has
used its leverage to financially squeeze a fourth
newspaper by refusing to supply it with paper, accord-
ing to press reports
Since few local businessmen possess the capital to
purchase the larger SOEs, the attitudes of foreign
investors are vital to any progress in privatization.
Multinationals, according to academic studies, are
attracted by Argentina's wealth of natural resources
and its skilled labor force, but experience difficulty
operating in its highly regulated, nationalistic envi-
ronment. Press reports indicate that the Honda Com-
pany, for example, is considering canceling plans to
build a motorcycle factory in Cordoba Province be-
cause of onerous criteria imposed by Buenos Aires,
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such as heavy local content requirements, a specific
export-import ratio, and retroactive payment of value-
added taxes if production does not reach a set percent-
age of original planned production. In addition, three
US pharmaceutical companies have pulled out of
Argentina in the past few years because of price
controls, lack of patent protection, and government
policies that favor local companies. Moreover, the
possibility of a return to power by the xenophobic
Peronist Party raises investors' concerns. These fac-
tors have worked against an enthusiastic foreign
response to Alfonsin's reforms; few new multination-
als have entered Argentina over the past year.
The Military. The armed forces have a major stake in
SOE reform, since they administer Military Indus-
tries, a holding company for state firms whose prod-
ucts range from weapons to lumber and petrochemi-
cals. The military, however, has been eased from top
management of Military Industries by President Al-
fonsin and weakened by a 50-percent budget cut; as a
result, in our view, it retains little influence with the
government in this area. US Embassy reporting shows
that the officer corps has passively accepted aspects of
Alfonsin's program that affect Military Industries,
such as the privatization of its petrochemical plants.
We believe that the military nevertheless would
strongly oppose the sale-particularly to foreigners-
of companies it perceives as vital for national security,
especially the arms industry
Alfonsin may soon take the first steps to
reorganize or privatize Argentina's cumbersome de-
fense industries, which are mammoth money losers
and have consistently produced low-quality, over-
priced armaments.'
Outlook and Implications for the United States
We believe Alfonsin will make some progress on SOE
reform during the remainder of his term. The Presi-
dent, having invested considerable political capital in
this campaign, will not jettison his program easily.
Moreover, we concur with the US Embassy's observa-
tion that, given the depth and breadth of problems at
the parastatals, relative gains in efficiency could
produce significant savings. We expect the adminis-
tration to make its greatest gains through politically
neutral methods: continuation of the hiring freeze, a
voluntary early retirement program, a buy-out pro-
gram for younger employees, or cutbacks in public
investment.
We expect the administration to implement some of
the privatization proposals currently under study over
the next year. Buenos Aires is likely to sell a few of
the firms nationalized by previous regimes-the
showpiece will probably be Austral Airlines-and
may sell a few nondefense industries owned by the
military. Since these divestitures will not involve the
largest money losers, however, they probably will 25X1
generate only limited savings. We note that the
former military government sold off some 120 small
firms without making a dent in aggregate SOE losses
or increasing the net efficiency of the state sector.
Near-term prospects for radical restructuring of the 25X1
public sector in Argentina, however, are bleak. Not- 25X1
withstanding Alfonsin's commitment to change and
the potential for progress in certain limited areas, we
doubt that he will implement sweeping reforms.
the President and
Economy Minister Sourrouille were shocked by the
near-double-digit inflation figure posted in August
and have decided, at least for the present, to empha-
size tight money, rather than fiscal discipline, to
control inflation. This reliance on monetary policy
and improved Central Bank efficiency-which has
triggered bank failures and is already causing a
variety of political headaches for the government-
will almost certainly reduce administration interest in
pushing the politically contentious SOE issue. Fur-
thermore, the congressional and gubernatorial elec-
tions slated for November 1987 will, in our view,
make the President even more wary of innovations-
especially those involving foreign companies-that
could provide ammunition for his rivals within the
Radical Party or for the Peronist opposition.
Finally, the opposition of major interest groups to
Alfonsin's proposals will continue to work against
significant change. Alfonsin, in our view, is not
prepared for a sustained battle with the recalcitrant
bureaucracy or the statist sectors of his own party on
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2bAi
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this issue. Moreover, the President probably will also
want to avoid worsening his already poor relationship
with organized labor. We also expect the Argentine
business community to remain ambivalent on this
subject, and see little prospect of an influx of foreign
capital.
We believe that failure to substantially shrink and
restructure the public sector will continue to generate
economic problems. The modest curbing of SOE
spending likely to result from the President's program
may, in our view, help Buenos Aires narrow its fiscal
deficit and somewhat diminish its need for new loans,
but the savings will almost certainly be insufficient to
generate the surplus capital needed to begin to repay
Argentina's $50 billion foreign debt. Parastatal losses,
although smaller, will continue to drain the national
treasury, and the constant temptation to cover them
by printing money will keep inflationary pressures
high.
Over the longer run, however, we are guardedly
optimistic regarding the consequences of Alfonsin's
actions. His plans to move the federal capital to
Viedma and SOE headquarters to various provincial
cities will, if implemented, permit significant work
force reductions through attrition. Even without this
dramatic measure, Alfonsin's emphasis on some free
market concepts is slowly changing the rhetoric of
Argentine economic policy making. No longer exclu-
sively associated with discredited military regimes,
these ideas, as demonstrated by opinion polls, are
attracting increased support from the Argentine pub-
lic, although they have yet to gain wide acceptance
among special interest groups. Thus, Alfonsin, in our
view, has laid some of the groundwork that may
enable a more politically secure administration to take
bolder actions at a later date.
We believe that even modest success in cutting SOE
expenditures will also indirectly contribute to promot-
ing economic stability in Argentina and fostering a
less contentious relationship between Buenos Aires
and its international creditors. The progress made in
reducing the fiscal deficit will not, in the short term,
significantly improve Argentina's ability to pay its
foreign debt-17 percent of which is owed to US
banks-but it may decrease the yearly sums of new
money Argentina needs from its creditors, thereby
easing the pressure on US banks to lend involuntarily.
These developments will also buttress democratic
institutions in Buenos Aires, since economic stability
would deny antidemocratic elements in the military
and the Peronist party a key issue with which to rally
public support against constitutional rule.
There is a danger, however, that Alfonsin may lose
patience with economic policies that are likely to
generate little economic growth over the next two
years. We see roughly a 1-in-4 chance that the
President will abandon even his truncated reform
program and opt instead for short-term, growth-
oriented policies. The temptation to resort to such a
quick fix will increase as the 1987 elections approach,
especially if political factors-such as the exposure of
any widespread corruption within the government or
greater unity within the Peronist opposition-threaten
The results of such a strategy-whether financed by
the printing press or foreign reserves-would, in our
view, be uniformly negative. Alfonsin might be able to
generate a strong, temporary, consumption-led boom,
but it would quickly dissipate as inflation mounted,
foreign sources of finance dried up, and private
investment slumped. SOE reform would most likely
go by the boards. The President, in all likelihood,
would eventually be forced to turn to yet another
round of austerity measures to halt an inflationary
spiral, thereby destroying any remaining public confi-
dence in his economic policies.
US interests would be undercut if Alfonsin reversed
course and turned to the parastatals as part of a
pump-priming strategy. The resulting high inflation
and debt payments arrears would damage relations
with Western governments and creditors. Alfonsin, in
our view, might turn to measures such as stricter
import controls, heavier government intervention in
agriculture and industry, and even a debt moratorium
to escape his economic quandary, thereby further
harming US lenders, exporters, and investors. A crisis
of this dimension would only complicate matters for a
government facing the challenge of institutionalizing
democracy.
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Appendix
An Overview of
the State Sector
How the Government Got Involved
The Argentine Government's participation in the
industrial and service sectors has expanded over time
to satisfy a variety of economic, populist, and nation-
alistic objectives. During the 19th century the central
government provided only the most basic services,
such as mail, water, and some banking and railroads,
in order to promote the growth and integration of the
young republic, according to academic studies. In
1910 the government employed similar reasoning to
enter the oil exploration business, laying the ground-
work for what was to become the state oil company.
During the depression of the 1930s low commodity
prices and foreign protectionism disrupted interna-
tional trade and spurred the government to assume a
marketing role with the creation of the National
Grain, Meat, and Potato Boards. A decade later, the
desire to ensure the availability of strategic supplies
during wartime led to the state's first direct interven-
tion into industry: the creation of the armed forces-
run Military Industries, which became full or part
owner of 31 armed forces suppliers, largely in the steel
and petrochemical fields.
President Juan Peron-believing that national securi-
ty was at stake and determined to end the dominant
position of foreign-owned corporations in the Argen-
tine economy-set the tone for the postwar years.
Under the official slogan that Argentina was to be
"socially just, economically free, and politically sover-
eign," his government bought the railroads from the
United Kingdom and the telephone company from the
United States. Peron also established the national coal
and gas companies, the state airlines, the chemical
company ATANOR, and the steelmaker SOMISA,
Figure 5
Public Spending as a Percent of GDP
1900-04
1905-09
1910-14
1915-19
1920-24
1925-29
1930-34
1935-39
1940-44
1945-49
1950-54
1955-59
1960-64
1965-69
1970-74
1975-79
1980
1985
among others.
State ownership grew in the 1950s and 1960s, with
the increasing participation of provincial govern-
ments. Taking advantage of multilateral financing,
the state placed new emphasis on large development
projects, including dams, a nuclear power plant, and
petrochemical production facilities. In 1970 a new
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twist was added: the government began to intervene in
bankrupt companies to preserve jobs, allowing them to
continue operating under its administration. In this
manner the state entered the sugar, textile, steel
tubing, and cold-storage industries and took over
Austral Airlines. The state also entered the telecom-
munications industry, expropriating the wire service
TELAM, and, under the second Peron administration
of 1973-76, acquiring 85 television and radio stations.
Buenos Aires tried to reduce its participation in the
economy during the late 1950s and from 1976 to
1982. During the latter period the military govern-
ment liquidated 120 minor holdings, according to
academic literature. Nevertheless, it also created new
enterprises and took over others experiencing finan-
cial difficulties, so that there was probably a net
increase in the state's participation in the economy,
according to one researcher's estimate.
Size of the State-Owned Sector
Public-sector spending dominates the Argentine econ-
omy. It now accounts for 46 percent of GDP, accord-
ing to government statistics, up from 16 percent at the
turn of the century and 29 percent during the first
Peron administration (1946-50) (see figure 5). Parasta-
tals account for roughly two-fifths of public-sector
spending, or 18 percent of GDP. Moreover, SOEs
consumed 45 percent of public investment in 1984, up
from 38 percent in 1980, according to IMF statistics.
Investment in parastatals constitutes 20 percent of the
total investment in Argentina.
Parastatal borrowing is responsible for one-fourth of
Argentina's $50 billion foreign debt, according to
government statistics.' In addition, transfers from the
central government to cover SOE losses caused half of
the total government budget deficit in 1985. Parasta-
tal deficits have, however, decreased from 6.9 percent
of GDP in 1982 to 4.4 percent in 1985 (see table 1).
President Alfonsin hopes to pare 1986 losses to 3.1
percent, according to the 1986 budget.
' A portion of this debt was, according to the US Embassy, actually
central administration debt placed on the books of parastatals to
circumvent foreign banking regulations against overconcentration
The government employs 1.7 million people, or 16
percent of the Argentine work force as of 1980.
Parastatals employ roughly one-fifth of the govern-
ment total, the majority of whom work in the nation-
al, provincial, or municipal administrations. Accord-
ing to government statistics, SOE employment
dropped 43 percent between 1960 and 1982, largely
because of a 100,000 worker decrease in employment
by the declining state railroad. During Alfonsin's first
year in office, SOE employment rose from 312,000 to
324,000 workers. Since the end of 1984, however, the
parastatal work force has dropped 7.7 percent to
299,000 workers, mainly because of the hiring freeze
implemented under the Austral plan (see table 2).
The Major Parastatals
Although the state has total or majority control over
350 enterprises, its holdings are highly concentrated.
The eight largest parastatals-YPF, State Gas,
Greater Buenos Aires Electricity, the telephone com-
pany, Argentine Airlines, Water and Electricity, Ar-
gentine Railways, and Argentine Shipping Lines-
produce about 70 percent of the sector's aggregate
value and absorb more than 30 percent of total public-
sector investment, according to the World Bank (see
table 3).
YPF
YPF, the state-owned oil company, produces, refines,
and markets oil for domestic consumption and export.
YPF is responsible for 80 percent of Argentina's
crude oil production, which totaled 168 million barrels
in 1985. About 13 percent of this production was
exported, earning Argentina $640 million in foreign
exchange in 1985. The remaining 30 percent of oil
output is produced by private Argentine and foreign
companies under contract with YPF.
Plagued with problems, YPF is one of the few major
oil companies in the world that consistently loses
money. YPF's troubles stem, to a large extent, from
high production costs and political pricing decisions.
According to an industry analysis reported in the
press in the spring of 1985, YPF's production costs
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Table 1
Argentina: Operations of State-Owned Enterprises a
Total deficit (-) before transfers from general gov- -6.9 -6.3 -5.1 -4.4 -3.1
ernment
Table 2
Public-Sector Employment
Year National SOEs a Provinces Municipalities Total
Administration
1960
549
486
315
125
1,475
1970
583
370
415
141
1,509
1980
557
315
648
179
1,699
1983
529
312
706
160
1,707
1984
542
324
NA
NA
NA
NA = not available.
Sources: Press and the US Embassy.
a State-owned enterprises.
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Table 3
State-Owned Enterprises: Selected Statistics a
Gross
Income
Gross
Losses b
Foreign
Debt
Number of
Employees
Share
(percent)
(1984)
(1984)
(1985)
(1984)
Total
8,591
3,924
13,268
324,000
Government oil deposits (YPF)
3,428
675
4,684
33,725
80
State Gas Company
937
644
1,850
10,238
90
Greater Buenos Aires Electricity
876
189
725
21,053
55
National Telecommunications Enterprise
702
24
608
48,158
90
Argentine Railways
403
1,115
1,101
107,837
99
National Mail and Telegraph
191
173
7
42,843
85
Argentine Airlines
NA
NA
827
10,303
70
Water and Electricity
NA
NA
2,180
11,249
27
NA = not available.
Sources: International Monetary Fund, General Syndicate of
Public Enterprises, and the US Embassy.
a Converted to dollars using Carta Economica parity exchange rate.
b Before net transfers from federal government.
averaged $19 per barrel-more than double produc-
tion costs in the United States-yet it sold oil to
refineries for $13.17. One press analysis concluded it
would lose less money if it handed over its extraction
business to the private sector and paid its staff to stay
home.
Other difficulties include revolving-door management
and the YPF labor union. During the past 10 years,
according to one academic analysis, YPF averaged
one new chief executive per year, as well as frequent
changes in its board of directors. The directors,
typically political appointees, have little experience in
the highly complex oil industry, and are not around
long enough to learn through on-the-job training. The
industry also supports two separate labor unions, one
for YPF workers, and another for private-sector em-
ployees. YPF union members tend to oppose any
initiatives that could negatively affect the ability of
YPF to provide jobs, regardless of their potential to
benefit the industry as a whole.
In addition, YPF dictates terms to, rather than
competes with, its "competitors." Private oil compa-
nies may operate either directly for YPF or under
contract to the state. Under the terms of the contract,
the private company assumes the exploration risk-
which is substantial in an industry where 19 of every
20 wells drilled are unprofitable-while YPF shares
the reward, granting itself the option of becoming a
joint partner in a commercial discovery. Moreover,
YPF reserves for itself those geographic areas with
the highest potential for oil discovery. The result is
that, in a country with sizable underground reserves
of 2.3 billion barrels, oil deposits are underexplored
and underexploited.
State Gas
The State Gas Company has sole responsibility for the
transportation, distribution, and sale of natural gas in
Argentina. State Gas does not, however, produce gas;
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1984 equaled 14.1 billion cubic meters.
instead, it purchases 85 percent of its gas needs from
YPF and the remainder from Bolivia. State Gas sales
have increased steadily since World War II and in
of $993 million, according to press reporting.
State Gas ran up a $644 million deficit in 1984,
according to IMF statistics. Like most SOEs, State
Gas is overstaffed, employing 10,238 people with sales
of $937 million. By comparison, New York Electric
and Gas Company employs 4,215 people and has sales
almost 20 percent of gas production.
This parastatal's primary problem, however, is with
its purchasing relationships. Since gas production is a
byproduct of the oil industry in Argentina, the separa-
tion between YPF and State Gas is, in our view,
artificial and damages gas exploration and production
incentives. According to an academic study, YPF
views natural gas as a necessary evil to be disposed of
at the lowest cost. Between 1972 and 1984, YPF
flared 37 billion cubic meters of gas, while the state
imported 27 billion cubic meters of gas during the
same period. In 1979 Buenos Aires issued a resolution
to limit this wasteful practice, but YPF still flares
its oil deposits.
State Gas pays YPF a relatively low price for natural
gas, according to an academic study, and is constantly
pushing to pay less. As a consequence, the price of gas
is fixed at zero in most of the old oil exploration
contracts YPF signed with private companies, accord-
ing to an academic study, and at only 14 percent of
the international price in the model contract more
recently offered to the oil companies. More important,
Argentina's proved natural gas reserves-which total
680 billion cubic meters-are even less exploited than
The purchasing relationship with Bolivia is also
skewed against State Gas. Buenos Aires is under
contract until 1992 to purchase natural gas from
Bolivia-despite Argentina's excess gas capacity-in
order to support La Paz's fledgling democracy. Under
current terms, Argentina pays $3.70 per million Btu
(one-fourth in cash, the remainder paid in goods), far
above the current world price of about $2.20 per
million Btu. Although Bolivian gas represents only 16
percent of the volume used by State Gas, it accounts
for 67 percent of its hydrocarbon costs, according to
Embassy reporting. The political decision to support
Bolivia is another major factor behind State Gas's
voracious appetite for treasury financing.
ENTeI
The National Telecommunications Enterprise
(ENTeI) is responsible for 90 percent of Argentina's
telephone service. The remainder is provided by two
regional private-sector firms as well as several cooper-
atives. Argentina had 2.45 million working telephone
lines in 1985, according to press reports, or eight lines
per 100 inhabitants. By comparison, the United States
has 70 telephone lines per 100 inhabitants; Australia,
70; Spain, 30; and Greece, 28.
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25X1
ENTeI telephones are expensive and difficult to ob-
tain. On average, ENTeI charges $3,264 for a one-
line, one-telephone installation, and $1,100 for a home
installation, according to the press. Moreover, there is
usually a several years' wait to have a phone installed.
Telephones are considered such a luxury that some
landlords impose a 17-percent surcharge for an apart-
ment that has one. After installation, service is poor;
for example, customers often have to wait a few hours 25X1
to place an international call.
ENTe1's difficulties stem largely from overstaffing
and poor management, according to academic studies.
High personnel costs have left less money available
for investment; as a result, much of ENTe1's equip-
ment is obsolete or in disrepair. Revolving-door, politi-
cal management has caused lack of continuity in long- 25X1
term planning and lack of coordination between key
tasks such as laying cable and installing lines.
ENTeI has recently attempted to circumvent capital 25X1
shortages and management deficiencies. In mid-1985
the company implemented MEGATEL, a scheme to
install 1 million new phone lines by 1990, to be
financed by monthly payments from line recipients in
advance. Despite the prepayment requirement, cus-
tomers quickly signed up to participate and the
program has been highly successful, according to
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press and Embassy reports. In addition, the govern-
ment hired a senior executive from the private sector
to improve ENTe1 management. However, national-
ists criticized the new executive for maintaining that
Argentina did not need its own telecommunications
satellite, and he was recently replaced.
Argentine Airlines
Argentine Airlines is the largest of five domestic
airlines; two of the other lines are also owned by the
government. Argentine Airlines possesses a modern
fleet of seven Boeing 747s, 12 Boeing 737s, eight
Boeing 727s, three Boeing 707s, and four Fokker 28s,
according to press reports. It controls 70 percent of
the air travel market.
Tight regulation helps thwart airline competition in
Argentina. The National Transport Board for Air
Commerce controls prices, regulates routes, and coor-
dinates various activities of domestic airlines. The
government also reserves intracountry travel and in-
ternational air freight shipments purchased or sold by
any government entity for domestic carriers.
Argentine Airlines is also plagued by overemploy-
ment. Pan Am flies 1,623 kilometers per employee;
British Airways, 1,039 km; Air France, 806 km;
Iberia, 669 km; and Argentine Airlines 570 km,
according to press reports. In addition, absenteeism at
Argentine Airlines averages 51 days per employee per
year, not counting vacations and holidays. The air-
line's president has candidly stated that the airline
could be run comfortably with less than half its
current number of pilots. This executive took the
opportunity of a recent airline pilots' strike to fire all
the strikers and pare employment. Political pressure,
however, forced him to hire them all back at their
previous salaries. This incident exemplifies the diffi-
culties involved in attempting to make the necessary
changes to increase the efficiency of Argentina's
state-owned enterprises.
Secret 16
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04TOO907R000100020001-0
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04TOO907R000100020001-0
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04TOO907R000100020001-0