Report No. 4088&PE

Peru: The Management and Sale ofState-owned Enterprises

August 27, 1982

FOR OFFICIAL USE ONLY

Document of the World Bank / Intemational Finance Corporation

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without authorization of the institutions.

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CURRENCY EQUIVALENTS

Currency Unit = Sol (S/.)

Annual Averages

1979 1980 1981I ~~

US$1 = S/. 224.6 S/. 288.7 S/. 426.6

SV. 1,000 = US$ 4.45 US$ 3.46 US$ 2.34

FISCAL YEAR

January 1 to December 31

GLOSSARY OF PRINCIPAL ABBREVIATIONS

AEROPERU - Aerolinas del Peru

(Peruvian Airlines)

BCR - Banco Central de Reserva del Peru(Central Reserve Bank of Peru)

BN - Banco de la Nacion

(National Bank)

CENTROMIN - Empresa Minera del Centro del Peru(Central Peruvian Mining Enterprise)

CIAEF - Comision Interministerial de Asuntos Economicos yFinancieros

(Interministerial Commission on Economic and FinancialAffairs)

COFIDE, S.A. - Corporacion Financiera del Desarrollo, S.A.(Development Finance Corporation, Inc.)

CONADE - Corporacion Nacional del Desarrollo(National Development Corporation)

CPV - Corporacion Peruana de Vapores(Peruvian Shipping Company)

DAASA - Deshidratadora de Alimentos de Arequipa(Arequipa Vegetable Freeze Drying Plant)

ELECTROPERU - Empresa Electrica del Peru(Peruvian Electricity Enterprise)

EMDEPALMA - Empresa para el Desarrollo y Explotacion de la PalmaAceitera

(Palm Oil Development and Production Enterprise)

- - FOR OFFICIAL USE ONLY

ENAFER - Empresa Nacional de Ferrocarrilles(National Railroad Enterprise)

ENAPU - Empresa Nacional de Puertos(National Ports Enterprise)

ENATA - Empresa Nacional del Tabaco(National Tobacco Enterprise)

ENCI Empresa Nacional de Comercializacion de Insumos(National Input Marketing Enterprise)

ENTELPERU - Empresa Nacional de Telecomunicaciones del Peru(Peruvian National Telecommunications Enterprise)

FERTISA - Fertilizantes Sinteticos(Synthetic Fertilizers)

HIERROPERU - Empresa Minera del Hierro del Peru(Peruvian Iron Mining Enterprise)

ICSA - INVERSIONES COFIDE(COFIDE Investments)

INP - Instituto Nacional de Planificacion(National Planning Institute)

MEFC - Ministerio de Economia, Finanzas y Comercio(Ministry of Economy, Finance and Commerce)

MINEROPERU - Empresa Minera del Peru(Peruvian Mining Enterprise)

MINPECO - Empresa de Comercializacion de Productos Mineros(Mining Products Marketing Enterprise)

PEPESCA - Peruana de Pesca(Peruvian Fishing Enterprise)

PESCAPERU - Empresa Nacional Pesquera del Peru(National Peruvian Fishing Enterprise)

PETROPERU - Petroleos del Peru(Peruvian Petroleum Company)

QUIMPAC - Quimica del Pacifico(Pacific Chemicals)

SEDAPAL - Servicio de Agua Potable y Alcantarillado de Lima(Lima Water and Sewerage Service)

SIDERPERU - Empresa Siderurgica del Peru(Peruvian Steel Company)

TASA - Tractores Andinos

(Andean Tractors)

This document has a restricted distribution and may be used by recipients only in the performance of |their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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This report is based on the findings of a joint WorldBank/International Finance Corporation mission that visited Peru inNovember/December 1981. The mission was composed of:

Mary M. Shirley (Chief of Mission)

Joel Bergsman (Sale of Enterprises)

Alfred Saulniers, Consultant (Public Enterprise Management)

Frank Veneroso, Consultant (Sale of Enterprises)

Sybile Lazar, Consultant (Research Assistant)

The text and tables were typed by Miss Alexandra Blackhurst.

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TABLE OF CONTENTS

Page No.

I. SUMMARY AND CONCLUSIONS ..................................... 1

Size, Structure and Importance of the Parastatal Sector ..... IAssessment of Performance ................................... 1Main Problems of State-Owned Enterprises .................... 2Recommendations for Improved Management ..................... 4Other Measures .............................................. 4The Sale of State-Owned Enterprises ......................... 5Recommended Selling Strategy ................................ 6

II. SIZE, STRUCTURE AND IMPORTANCE OF THE PARASTATAL SECTOR ..... 9

Background .................................................. 9Structure of Administration ................................. 10Legal Framework ............................................. 11Significance of the Parastatal Sector to the Economy ........ 12State-Owned Enterprises and the Treasury .................... 13

III. ASSESSMENT OF THE PERFORMANCE OF STATE-OWNED ENTERPRISES.... 16

Overview .................................................... 16Characteristics of the Sample ............................... 17Performance ................................................. .20Summary ..................................................... 30

Main Problems of State-Owned Enterprises .................... 30

Issues Related to State Control ............................. 31Relations Between State-Owned Enterprises .................... 35Problems of Firms ........................................... 36

IV. RECOMMENDATIONS FOR IMPROVED MANAGEMENT ..................... 39

Management by Objectives .................................... 39Measures to Improve the Environment for Parastatal Enterprises 44Measures to Improve the Operations of State-Owned Companies. 46

V. THE SALE OF STATE-OWNED ENTERPRISES ......................... 49

Objectives of the Government ................................ 49Magnitude of the Sale ....................................... 50Issues Related to the Sale .................................. 54Recommendations for Selling Strategy ........................ 57Mechanics of the Sale ....................................... 59

STATISTICAL APPENDIX ....................................... 62

ANNEX I (Effects of Inflation on Financial Accounts) ....... 74

v

TABLES IN THE TEXT

Page

CHAPTER II:

1. State Owned Enterprises by Activity, November 1981 ............ 102. Current Savings of Nonfinancial Public Enterprises ............ 133. Public Enterprise Cost to the Treasury ........................ 144. Public Enterprise Debts Assumed by the Central Government..... 15

CHAPTER III:

5. Net Profits of Selected State-Owned Enterprises in 1979 and 1980 166. Sample of State-Owned Enterprises ............................. 187. Prices, Production Sales and Employment of a Sample of State-

Owned Enterprises ........................................... 228. Profit Margins and Returns to Net Equity of a Sample of State-

Owned Enterprises and Publicly-Traded Private Companies ..... 259. Returns to Assets of a Sample of State-Owned Enterprises and

Publicly-Traded Private Companies .......................... 2710. Comparison of Debt and Liquidity Ratios for Sample of State-

Owned Enterprises and Publicly-Traded Private Companies..... 28

FIGURES IN THE TEXT

1. Management by Objectives System for State-Owned Enterprises.. 402. Hypothetical Example of a Management by Objectives System for

a State-Owned Power Company ................................ 433. Strategic and Other Implications of Various Objectives for the

Sale of State-Owned Enterprises ............................ 51

CHAPTER I - SUMMARY AND CONCLUSIONS

1. This report examines the present role of state-owned enterprises inPeru, assesses their performance and identifies key macro and micro problemsthat affect these companies. Based on this analysis it recommends policymeasures to help improve the efficient operation of these enterprises.Finally, as requested by the Government, the report examines major issuesrelated to the proposed sale or transfer of publicly-owned companies andrecommends a strategy for divestiture.

Size, Structure and Importance of the Parastatal Sector

2. The number of state-owned enteprises in Peru grew quickly and inan uncoordinated fashion after the military takeover in 1968. Someenterprises were created by the State, but most were acquired throughnationalization or the takeover of bankrupt companies. Today there are about140 state-owned enterprises in a wide variety of activities. They range insize and nature from the large public mines and petroleum company tosupermarkets. The shares of these companies are administered through acomplex, overlapping system. Their legal status and corporate structuresvary widely as does their degree of autonomy.

3. State-owned enterprises are responsible for an estimated 20 percentof Peru's GDP. Parastatal companies dominate certain sectors of Peru'seconomy, notably the production of electricity, gas, water, fertilizers, ironand steel, pulp and paper, fish products, petroleum and cement, railtransport and telecommunications. They also control much of the country'smining, commerce and financial sectors.

4. The Central Government of Peru made transfers which averaged US$24million a year for 1978-1980 to those (approximately 30) public enterpriseswhich are considered part of the public budget. Most of the currenttransfers are subsidies for petroleum derivatives and essential foodstuffsmarketed by public enterprises. If these consumer subsidies are excluded,the bulk of the cost of these companies to the Treasury is investmentfinancing. The State supports this investment mainly through capitaltransfers but also by assuming the debts of some companies and foregoingdividends when firms reinvest their profits. Given the size of thisinvestment burden to the Treasury, there is a clear need to assure thatthese resources are used for high priority projects.

Assessment of Performance

5. Judging from the incomplete data available for 97 state-ownedenterprises, as a whole these companies earned a profit that amounted to a 4percent return on equity in 1980. 1/ Profits of public enterprises aregenerally difficult to evaluate, however, and there are also considerableproblems with the accounts of Peru's state-owned companies. (For example,assets may not be correctly valued.) To better judge the performance of theparastatal companies, a more in-depth assessment was made of a smaller sampleof 20 firms chosen to represent some of the most important state-ownedcompanies. The sample includes 13 companies producing cement, paper, steel,

1/ Profits after depreciation of fixed assets are partially adjusted forinflation (60 percent in 1980). Full inflationary accounting coulddramatically change these returns -- see Annex 1.

petroleum, copper and other minerals, fish products, freeze dried vegetables,tractors and petroleum and 7 service enterprises providing electricity, portservices, telecommunications, air and water transport, water and sewerage andmarketing services. All but one of the firms are wholly state-owned.

6. The firms in the sample appear to fall into two main categories:(a) companies, often nationalized, which were allowed to operate withconsiderable autonomy under private law, enjoyed continuity of management anddid not receive transfers from the State; and (b) companies, often Statecreations, which were subject to extensive government interference in theirstructure and daily operations, had high turnover of managers and oftenreceived transfers.

7. In general the more autonomous firms in Group a earned higherprofits and had lower debts and greater liquidity than the rest of thesample. At the same time, their production was expanding more slowly,probably reflecting the fact that their investment decisions were moreattuned to market and financial constraints than to strategic, political orother considerations. In contrast some of the companies with the largestlosses were expanding output. These companies undertook -- sometimesill-advised -- investment programs, which were financed principally by debt.As a result, some of them show the highest debt:equity ratios. The lessautonomous firms were also more likely to be used to pursue some social goalto the detriment of their financial performance.

8. The performance of the 20 state-owned companies in the sample waswell below that of the average private firm. 2/ The 1980 return on assetsof the sample, for example, was 0.4 percent compared to 10.1 percent for asample of private manufacturing companies in Peru. Profits were sacrificedto social goals, such as subsidized prices, and eroded by costly governmentintervention. In addition, price controls and the monopoly position of thesefirms, plus a lack of incentives to maximize profits, contributed to a loweroperating efficiency in these firms than in private companies. The moreautonomous publicly-owned companies (Group a) did perform better than thesample as a whole, although still below private firms (6 percent return onassets in 1980). Group a firms also show debt:equity and liquidity ratiosmore on a par with private firms in Peru.

Main Problems of State-Owned Enterprises

9. Based on its analysis of the sample companies, the missionidentified three categories of problems that are especially significant forparastatal enterprises in Peru: (i) problems related to CentralGovernment control; (ii) problems of relations between state-ownedenterprises; and (iii) problems specific to the firm. The more autonomouscompanies have been able to escape some, but not all, of these problems.Some of these problems have been alleviated by measures adopted by thepresent Government in 1980 and 1981.

10. Central Government Control. In the past publicly-owned companiesfaced multiple, unrealistic and often poorly defined goals. Demands on firmswere not coordinated with other state actions and companies were not giventhe resources to fulfill their objectives. A confusing and uncoordinated

2/ The sample's performance was also below that of the larger group of 97parastatal companies (0.7 percent return to net worth versus 4 percent),probably reflecting the fact that the larger sample includes more mixedcompanies whose performance was superior to wholly state-owned firms in1980.

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system of ex ante and ex post control resulted in conflicting signals,delays and excessive interference in enterprises' operations, yet affordedthe Government little effective control over results. In addition, certainlaws, notably the law governing procurement, may hamper operations. 3/ TheController General's office may have added to the problem by applyingcriminal penalties for poor business practices and undertaking lengthyinvestigations of complaints. Managers complained that this has led to anatmosphere of suspicion resulting in timid management and overextendedreviews of decisions.

11. In the past, price controls hampered efficient management; theGovernment often delayed price increases for political reasons or was late inpaying subsidies. This problem has been much reduced by the recentelimination of many price controls. Past efforts to control public foreignindebtedness created a bureaucratic bottleneck that could seriously delayinvestment projects, yet did not succeed in rationing borrowing orchannelling foreign credits to the best uses. New procedures for approval offoreign borrowing have enhanced State control but can continue to causeneedless delays.

12. Relations Between Publicly-Owned Corporations. The relationsbetween state-owned enterprises in Peru can create problems. Enterprises areoften forced to subsidize other publicly-owned companies by charging lowerrates or buying their output at artificially high prices. The result is acomplex system of hidden subsidies which distorts the performance of theenterprise. Furthermore, the costs of these cross-subsidies cannot beweighed against their benefits. Late payments of bills by other publicenterprises and the Central Government are common and also distortperformance.

13. Forcing publicly-owned companies to use public monopolies (such asthe insurance company or shipping line) can also be costly for these firms.Managers in particular complained about being required to use the Banco de laNacion (BN). The BN pays no interest on deposits, will not conductoperations by telephone or telex and does not have sufficient branches orliquidity to handle the demands of the larger parastatal firms.

14. Problems of Firms. A major problem of some of the state-ownedfirms has been the high turnover of their boards of directors and, even moreimportantly, of their top managers. In addition, the less autonomous firmslack sufficient skills in some key areas, specifically: financialmanagement, marketing, corporate planning, in particular, planning andevaluation of investments, and project preparation. Production problems alsoarise in some firms because their operations are unbalanced or excessivelycomplex. Having to manage unrelated subsidiaries further complicates thingsfor Peru's public executives. Many publicly-owned firms may also have excessunskilled staff, which are almost impossible to fire under Peruvian law. Inaddition, because of the way the parastatal sector grew with reorganizationsand mergers, employees of the same firm may fall under different labor laws.The lack of uniform norms for salaries, vacations or pensions creates a largepersonnel management burden for these companies.

3/ The bidding law requires all government agencies and majority-ownedenterprises to follow a lengthy and cumbersome procedure for relativelysmall purchases. Under its provisions the bid with the lowest evaluatedcost cannot be selected.

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Recommendations for Improved Management

15. Management by Objectives. There are about 70 state-ownedenterprises which seem likely to remain under public management for sometime, assuming the Government retains traditionally public utilities, most ofthe public financial institutions, and enterprises in strategic sectors orthe commanding heights of the economy. The Government of Peru hasbegun to implement measures to improve the management of these enterprises byincreasing their autonomy. Increased autonomy can be combined with moreeffective State control by means of a system of management by objectives.

16. Recent legislation (Law 216, mid-1981) created a structure forcontrolling the parastatal sector that could form the framework for amanagement by objectives system. The cabinet-level InterministerialCommission for Economic and Financial Affairs (CIAEF), which has been maderesponsible for coordinating Government planning and action in thestate-owned sector, could oversee the management system. The CorporacionNacional de Desarrollo (CONADE) has been designated by law the general agencyin charge of the parastatal sector. As such, it would seem the appropriateentity to develop general objectives for the sector and coordinate theministries, the enterprises and INVERSIONES COFIDE (ICSA, the public holdingcompany) in negotiating specific objectives for each state-owned enterprisein line with the general and sectoral goals. If CONADE is to play this roleit -- and ICSA -- would have to be strengthened.

17. Each enterprise's obJectives would be quantified as performancegoals that the enterprise's management pledges to achieve. Enterprises wouldbe compensated for the costs of pursuing non-commerical objectives.Management would be held accountable for results with allowance made foraspects that they cannot affect, such as the condition of capital stock. Anappropriate system of incentives would be designed to reward managers fortheir achievements. Also, an information system to monitor results wouldhave to be created. Such a system could be housed in ICSA and ICSA wouldprepare a yearly report on the results, which, after discussion with theministries and enterprises, wou d be finalized by CONADE and presented toCIAEF. The management by objectives system assumes that enterprises would begranted sufficient autonomy to operate more independently and be evaluated onresults.

Other Measures

18. For this system to function effectively, many problems mentionedearlier would have to be resolved. Enterprises which already operate withconsiderable autonomy can probably adapt most easily to this system. Theless autonomous enterprises will require more assistance.

19. Some of the measures that would improve the success of thismanagement system are:

A. Improve the Environment of Parastatal Enterprises by:

(1) Reforming the legal framework for parastatal companies and inparticular revising the bidding law to allow these firms to followmore cost effective procurement procedures;

(2) Curbing any excessive interference by the Controller and allowingfirms to select their own external auditors;

(3) Streamlining the debt control procedures and involving COFIDE,S.A. at an early stage of project preparation to avoid excessivedelays;

(4) Requiring state-owned enterprises to pay a portion of their profitsas dividends -- except as justified by their investment programs --to control better the allocation of resources and the growth of thepublic sector (this measure should be combined with profit sharingto offset any disincentive to earn profits);

(5) Strengthening competition and improving the commercial environmentby further reducing tariffs (the Government plans to lower tariffsto an average of 25 percent by 1984), eliminating price controlsand public monopolies, reducing state control of certain sectors ofthe economy and eliminating cross-subsidies and late payments;and

B. Improve the Operations of State-Owned Firms by:

(6) Strengthening the enterprises' ability to do long- and short-rangecorporate planning and in particular to evaluate and prepare newinvestment projects;

(7) Reducing the high turnover of managers and directors by raisingsalaries, developing a career service and lengthening the terms forboards;

(8) Studying the capital structure of the enterprises to determinewhich firms are severely undercapitalized and how this can bealleviated; and

(9) Providing state-owned enterprises with technical assistance asneeded including comprehensive management advice on reorganization.

The Sale of State-Owned Enterprises

20. The Government of Peru plans to sell or otherwise transfer a numberof state-owned enterprises over the next three years. A number of reasonswere given for the divestiture, including reducing the burden on governmentofficials, improving the efficiency of resource allocation, injecting newcapital in these companies and rationalizing the role of government in theeconomy. In order to design an appropriate strategy for the sale, theGovernment will be defining its objectives and determining what it seeks inthe way of price, timing and terms. There are a number of issues related toa sale of this size that must also be considered in formulating a salesstrategy.

21. Although the Government has not specified what equity it willdivest, the mission compiled an unofficial list of about 70 likely candidatesfor sale. Partial financial data are available for only 50 of these firms.Using both discounted book value and earnings capitalization approaches andadding estimates of the value of firms and other assets for which there areno data, the mission estimates the fair market value of the sale to be around

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US$400-600 million. 4/ To develop a strategy for a sale of this magnitude itis important to consider potential market and political constraints as wellas possible economic and social costs.

22. Market Constraints. The combined value of the state equity forsale represents about 2-3 percent of Peru's GDP and about one fourth of thestock of private domestic quasi-money. It could require a sizeable ch,ange inportfolio preferences of private financial holdings in Peru to absorb anassettransfer of this magnitude. The experience of other countries is thatportfoilo preferences change only slowly. Existing preferences, therefore,constitute a constraint which should not be underestimated.

23. The constraint on the domestic market may be overcome by sellingsome shares to foreign investors. The Andean Pact, however, prohibitsselling to investors outside the Andean Group. Further, foreign buyers maybe wary of purchasing previously nationalized firms.

24. Political Constraints. The controversy surrounding the sale mayalso constrain the Government's scope for action. Not any price or termswould be acceptable politically. It might also be politically difficult tosell large blocks of shares to a few wealthy groups or to foreigners.

25. Economic and Social Costs. Depending on how it is conducted, thesale could also entail some economic and social costs. The sale of a largevolume of existing assets for cash could sate demand for new equities andthus reduce new productive investment in Peru to the detriment of futuregrowth. Similarly, foreign investors may buy an existing asset from theState rather than make new investments in Peru. This might limit Peru'saccess to new technology and foreign markets that often accompanies foreigndirect investment.

26. If the enterprises were sold at low prices or on generous terms tothe small number of Peruvian business groups, it could increase ownershipconcentration. Such a sale could create monopolies and ologopolies or stronglinks between financial institutions and industries that could have adverseeffects on the allocation of resources, hampering government's efforts tostrengthen competition. If the sale prices are low and the returns high,income distribution could become more skewed.

Recommended Selling Strategy

27. Strategy. Selling the smaller and/or less profitable companiesfirst could be the best strategy given the constraints on the Government andthe costs that might be associated with the sale. Loss-making companiescould probably be sold at a deep discount without strong political oppositionand their sale would reduce the fiscal and human resource drain on theState. The sale of these firms at a low price and of smaller firms is notlikely to depress new investment or contribute to the creation ofmonopolies.

4/ According to a recent draft law, the State would sell its equity in 62enterprises. This excludes companies and assets included in the missionestimates valued at about US$250 million. On this basis INVERSIONESCOFIDE estimates the value of this sale to be only about US$200 million,which would also imply a greater discount than that used by themission.

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28. This strategy would allow the Government time to build channels tosell or transfer part of the firms, particularly the larger, profitablecompanies, to a larger number of Peruvians. Given some time, institutions,such as pension funds or social security schemes, could be developed to tapadditional sources of savings to purchase shares of publicly-ownedcompanies. In addition, ICSA could organize a campaign to market shares tosmall savers. In this way the Government could sell the better calibercompanies at more generous terms without strong political opposition and alsoreduce the risk of increasing the concentration of assets or curbing newproductive investment.

29. Classifying the Companies. The sale candidates can be groupedaccording to different suggested sales strategies:

(1) Not Economically Viable. Some companies should probably beliquidated and the assets sold off separately;

(2) Economically Viable with Restructuring. Companies with serious butsolvable problems might best be sold at generous terms or leased toentrepreneurs who would reorganize them for a share of the profit.It would probably be too large a drain on the public sector'sscarce managerial resources to reorganize such firms prior to sale;

(3) Immature Projects. New and not fully developed projects should beallowed to mature and be sold later when they command a higherprice;

(4) Medium- and Small-Companies in Fairly Good Financial Shape.Many of the smaller, profitable firms can probably be sold quicklythrough private placement; and

(5) Large, Profitable Enterprises. Part of the shares in the largerprofitable companies, which represent the bulk of the market valueof the sale, could be sold to a wider group of investors. Inaddition, some of these larger enterprises might lend themselves tosubdivision into smaller companies which could be more easily sold,or the Government might sell portions of the shares in the companygradually, according to the absorptive capacity of the market.

30. Mechanics for Sale. According to this proposed strategy thestate-owned enterprises would be sold both through private placement to largebusiness groups and through savings schemes and ICSA to a large number ofsmall investors. Private placement would mean negotiating with prospectivebuyers followed by an auction. This would require a sophisticated financial,engineering and marketing analysis, probably by a group of outside experts.Establishing prices and terms for each sale would involve complex anddifficult negotiations. ICSA, which has been designated to manage thedivestiture, will need to expand and strengthen its own staff and also toreceive assistance from outside experts such as foreign investment banks anddomestic banks or law firms.

31. Selling shares to a broader base of investors would require someinstitution-building. In most developed countries, the bulk of all long-termfinancial assets are held by contractual savings institutions. Similarchannels could be created in Peru, possibly through forced savingsinstitutions such as social security funds. For this arrangement to besuccessful the funds should be decentralized and operate like a private

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market with full ability to change the composition of their portfolio. Togive these institutions that sort of flexibility, a small part of the sharesof the companies transferred to the savings funds could also be soldeventually on the local stock exchange. The existing securities market ispresently too small to function as a secondary market for these shares. Itwould have to expand gradually by a modest amount as the savings institutionsdevelop. The experience of other countries indicates that the market couldgrow sufficiently to absorb the limited amount of shares needed for thisscheme some institution building, a proper regulatory framework and somestrictly limited fiscal incentives.

32. ICSA could also underwrite the sale of the shares it owns andorganize a selling group to campaign actively to reach smaller savers. Inaddition, ICSA could trade actively to help develop a secondary market forthe shares. Although this strategy will require some time andinstitution-building efforts, it would reduce the risks of assetconcentration, stimulate savings and encourage the growth of capital marketsin Peru.

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CHAPTER II - SIZE, STRUCTURE AND IMPORTANCE OF THE PARASTATAL SECTOR

Background

33. The number of state-owned enterprises in Peru increased dramaticallyafter the military takeover in 1968. That year there were 40 state-ownedenterprises. This number grew to a high of about 175 and was subsequentlyreduced to about 142 today. 1/ Close to 100 of these 142 enterprises arewholly or almost wholly state-owned (over 90 percent of shares pertain to theState) and the Government controls over 50 percent of the shares of another17.

34. The expansion of the parastatal sector was largely uncoordinated andunplanned, often without clear objectives. Some of the companies werecreated by the State, but most were acquired through nationalization or thetakeover of bankrupt firms. During 1968-75 most large foreign companies werenationalized and the State also expropriated private firms operating indesignated strategic sectors (such as fishing, paper, cement, fertilizer,chemicals). In addition, the Government acquired title to shares of other,often unrelated, companies that were held by the intervened firms. Throughnationalization and takeover of bankrupt companies and banks, the PeruvianGovernment became owner or part-owner of a wide variety of companies,including movie houses, supermarkets, a tractor assembly plant, a nylonproducer, a plywood factory. As a result, the activities of theseenterprises run the gamut from the traditional public services, such aselectricity, water or transport, to mining, banking, marketing andmanufacturing (see Table II.1). There are state-owned enterprises invirtually every sector of the economy, including some of the largest Peruvianfirms and some of the smallest.

35. The present Government, which took office on July 28, 1980, hasannounced its intention to reduce the number of state-owned companies byselling or transferring all or part of its shares, and to improve themanagement of parastatal enterprises by reorganizing the parastatal sectorand reducing direct State interference in operations. Thus far the approachto these goals has been rather disjointed. The 1979 Constitution confirms acommitment to economic pluralism, free private initiative and a marketeconomy and calls on the State to act to promote economic development,provide basic services and protect national security. A special commissionof leading private and public officials, meeting in mid-1981 to study Peru'sstate-owned enterprises, reached the conclusion that the State shouldprincipally act to promote the private sector, limiting its directinvolvement in the economy to priority areas where, because of size, risk orlow private (versus social) returns, the private sector will not act. Beyondthese broad guidelines, however, there is still much to be done towardestablishing a coherent approach to the parastatal sector. Theadministrative and legal framework for state-owned companies, describedbelow, illustrate the need for a more systematic treatment of the parastatalfirms.

1/ A complete inventory was not available to the mission. Thereport of the Multisectoral Commission on Public Enterprises(August 1981) found about 140 enterprises but there are somestate-owned enterprises that apparently were not counted.

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Table II.1: PERU - STATE-OWNED ENTERPRISES BY ACTIVITY,NOVEMBER 1981

(Number of Enterprises)

% State OwnershipActivity Total 90-100 50-90 20-50 20

1. ProductionAgriculture, Agro-Industry & Wood 11 7 1 - 3Fishing & Fishmeal 8 5 2 - 1Mining 17 11 3 2 1Oil & Gas 2 1 1 - -Paper 4 4 - - -Cement 5 2 - 3 -Chemical 4 4 - - -Steel, Metalwork & Related 11 2 4 2 3Other Manufacturing 4 1 - 2 1

2. FinanceBanking & Investment 29 19 3 - 7Insurance 2 2 - - -

3. Other ServicesMarketing & Related Services 7 7 - - -Electricity 8 8 - - -Water & Sewerage 4 4 - - -Transportation 6 6 - - -Communications 7 5 - 1 1

4. Misc. (incl. Military Companies) 13 8 3 1 1

TOTAL 142 96 17 11 18

Source: Table 1 of the Statistical Appendix

Structure of Administration

36. The system for administering the shares of the enterprises is complexand confusing (see Table 2 of the Statistical Appendix). 2/ The shares of46 companies are held directly by a ministry, which means the ministryappoints the shareholders' board and may appoint or approve some or all ofthe board of directors. The shares of the remaining companies are held byother public enterprises, such as the National Development Corporation,CONADE (Corporacion Nacional de Desarrollo), or the Banco de la Nacion. Withsome exceptions, the enterprises run directly by a ministry have had far lessautonomy than those run indirectly.

2/ The system is also changing rapidly and some of the informationin Table 2 of the Statistical Appendix may already be out ofdate.

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37. Recent legislation (mid-1981) gives CONADE "custody" of all stateshares but responsibility for appointing boards remains with the shareholdingentity. The Government is now considering streamlining ownership bytransferring all State shares to INVERSIONES COFIDE, a subsidiary of CONADE.CONADE consists of a board of directors and a manager with a small staffwhose main function has been to administer its two subsidiaries: COFIDE,S.A. and INVERSIONES COFIDE (ICSA). COFIDE, S.A. must approve and negotiateforeign borrowing by publicly-owned enterprises. ICSA will act as theholding company for the State's shares in 33 enterprises and is the entitydesignated to administer the sale of state-owned enterprises. Both COFIDEand ICSA have their own boards of directors appointed by CONADE.

38. More than one public entity may hold the shares of one company. Forinstance, ownership of public shares in the refrigerator manufacturer,Moraveco, is split between INVERSIONES COFIDE (46.6 percent), the BancoInternacional del Peru (39.1 percent), the steel company, SIDERPERU (4.0percent) and other owners (10.3). Furthermore, shares of similar kinds ofcompanies may be held by a number of different public entities. For example,there are mining companies under the auspices of COFIDE, the Ministry ofEnergy and Mines, public mining enterprises (MINEROPERU and CENTROMIN) andthe mining bank (Banco Minero).

Legal Framework

39. The legal framework for state-owned enterprises is especiallyconfusing. Parastatal enterprises can be either under public or privatelaw. The essential legal distinction between the two is that companies underpublic law can be transferred certain attributes of government sovereignty,such as the right to levy fines, issue regulations or exercise power ofeminent domain. Enterprises under public law have their attributes definedby special public legislation, their budgets are part of the national budgetand subject to a lengthy approval procedure and they cannot go bankrupt or besold. Generally these enterprises are run by the ministries. Althoughcircumstances vary, they usually need prior ministerial approval of theirproduction and investment plans, large purchases, prices, salaries, and a

number of other operating decisions. Their directors and managers oftenchange whenever the minister does. Since the early 1970s, the bulk of publicand mixed companies have operated under private law with the same legalstatus as private limited liability corporations. In mid-1981, 27 Stateenterprises under public law were converted into limited liabilitycorporations under private corporate law. Only 15 public companies are nowoperating as "enterprises under public law" and they have also been givencorporate form similar to private firms. 3/

40. Ordinarily, State-owned enterprises under private law are subject tothe same legislation as private corporations with some exceptions, such asforeign borrowing, choice of auditors and investment plans. In practice thisusually means they can determine their corporate structure, they can settheir salaries, draw up budgets and make most operational decisions subjectto review by the board of directors. The 27 enterprises that were recentlychanged to corporations under private law, however, have their ownlegislation which in some cases strictly limits their autonomy and prohibits

3/ The enterprises still under public law are: CONADE, four watercompanies, five development banks and the Banco de la Nacion,the food marketing institute, the housing construction firm,the military industrial enterprise, the fishing quality controlinstitute, and the agricultural marketing enterprise.

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their sale or liquidation. Further, the legal attributes of companies withapparently similar corporate status varies according to the State's positionas shareholder. For example, the ministries or agencies acting asshareholders always appoint the stockholders' board and the board ofdirectors is then appointed by the stockholders' board. If the enterprisehas majority state ownership, the President of Peru must also approve thedirectors. The chairman of the board of 100 percent state-owned companies isappointed by the minister and approved by the President, the chairman ofmajority-owned companies is appointed by the stockholders' board and approvedby the President. Only in minority state-owned companies is presidentialapproval not required.

41. The powers of the boards of directors and the stockholders' boardsalso vary from company to company. The principal power of most stockholders'boards is to appoint directors, but some have the attributes of a board ofdirectors, and approve investment plans, budgets, new debts and the like.(This is the case, for example, with the fishing company, PESCAPERU.)

Sigificance of the Parastatal Sector to the Economy

42. The number of Peruvian state-owned enterprises is not especiallylarge by Latin American standards. Ecuador, for example, has over 100 publicand mixed enterprises, Argentina has over 300, and the number in Brazil andMexico exceeds 400. Unlike Peru, however, these countries count aconsiderable number of local and municipal bodies as public enterprises. Thediversity of the parastatal sector in Peru is also less typical.

43. The state-owned enterprises play a major role in the economy.They are responsible for an an estimated 20 percent of GDP. The four largestcompanies in Peru are owned by the State (the petroleum company, PETROPERU; amining firm, CENTROMIN; the steel plant, SIDERPERU; and a paper company,Paramonga) and their 1979 value added alone was 4 percent of GDP or 11percent of mining and industrial value added. Public enterprises accountedfor over half of all public investment and 18 percent of total fixedinvestment during 1975-1980. 4/

44. State-owned enterprises dominate certain sectors of the economy.They control all production of electricity, gas, water, fertilizer, iron andsteel, rail and telecommunications and dominate the fish processing industry,as well as the production of paper and cement. The public petroleum companypurchases all oil production (four foreign petroleum companies are active inPeru) and controls domestic sales and exports. Government mines produceabout 25 percent of copper output, and 40-50 percent of zinc, silver andlead.

45. State-owned companies also control much of Peru's commerce. Untilrecently mineral exports were dominated by a public marketing monopoly.Public marketing enterprises also import or purchase domestically and sellsuch basic foodstuffs as rice, wheat, corn, sugar, coffee, vegetable oil, andmilk products. In 1980, for example, about 70 percent of all exports and 35percent of consumer and raw material imports passed through the hands of

4/ Includes only enterprises treated as part of the public sectorby the BCR. In this report these companies are termed publicenterprises; state-owned or parastatal is used to refer to allcompanies with state participation.

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publicly-owned enterprises. Similarly, state banks and investment housesprevail in Peru's financial sector. In 1980 public financial institutionsplus the Central Bank were responsible for three-fourths of all loans andtwo-thirds of all sight and savings deposits. State financial institutionsdo virtually all medium- and long-term lending in Peru.

State-Owned Enterprises and the Treasury

46. An oft-heard argument for the sale of state-owned enterprises is thatthe companies represent a sizeable financial drain on the Treasury. Theburden is usually overstated since it includes current transfers forsubsidies for petroleumderivatives and essential foodstuffs marketed by stateenterprises. If these sums are excluded from their fiscal accounts, thepublic enterprises show much larger current savings (see Table II.2). 5/

Table II.2: PERU - CURRENT SAVINGS OF NONFINANCIAL PUBLIC ENTERPRISES a!

(Millions of Soles)

1976 1977 1978 1979 1980 b/

Current Savings of NonfinancialEnterprises -2,510 143 12,595 43,101 -70,506

Current Transfers for Food andPetroleum Price Subsidies 17,634 57,029 61,312 155,761 94,074

ENCI & ECASA 7,145 20,592 4,695 57,431 94,074PETROPERU 10,489 36,437 56,617 98,330 -

Current Savings Excluding Costof Price Subsidies 15,124 57,172 73,907 130,132 23,568

Tax Payments 4,925 6,872 54,471 130,600 244,700

Current Savings Excluding Taxes 20,049 64,044 128,378 260,732 268,268

a/ State-owned enterprises under public law.b/ Preliminary, excludes CENTROMIN.

Source: Central Reserve Bank

47. Excluding the transfers for these price subsidies, most of the costto the Treasury results from the enterprises' capital expenditures. From1976-1980, current and capital transfers to enterprises plus interest on thatpart of the enterprises' foreign debt which was assumed by the CentralGovernment (and excluding dividend payments to the Treasury) averaged 49percent of the Central Government deficit and 7.5 percent of CentralGovernment expenditures (see Table II.3).

5/ Fiscal accounts were constructed by the Central Reserve Bankof Peru for those enterprises which were under public lawplus a few others (principally MINPECO and AEROPERU).

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Table II.3: PERU - PUBLIC ENTERPRISE COST TO THE TREASURY

(Billions of Soles)

1976 1977 1978 1979 1980

A. Current Transfers a/ 4.8 2.2 5.0 0.8 5.7

B. Capital Transfers 15.4 11.5 14.0 32.4 84.5 b/

Nonfinancial 10.3 9.1 10.6 19.4 62.3 b/Financial 5.1 2.4 3.4 13.0 22.2

C. Interest on Foreign DebtsAssumed by Central Govt. 0.1 1.1 2.2 3.5 4.9

D. Dividend Payments toTreasury 0.6 0.3 0.3 0.1 0.1

Total (A+B+C minus D) 19.7 14.5 20.9 36.6 95.1

Central Govt. Deficit 50.0 79.1 84.9 25.1 143.4

Central Govt. Expenditures 160.3 233.2 348.7 577.3 1160.0

Total as % CentralGovernment: Deficit 39.4% 18.3% 24.6% 145.8% 66.3%

Expenditures 12.3% 6.2% 6.0% 6.3% 8.2%

a/ Excludes transfers for petroleum and food price subsidies.b/ Includes S!. 23.6 billion in taxes which PETROPERU pays to the

Treasury for its contractors and which was retained by PETROPERUin 1980.

Source: Central Reserve Bank of Peru

48. The total cost to the Central Government of public enterpriseinvestments is not just the expense to the Treasury, but also the dividendpayments foregone when enterprises reinvest their profits. Despite a lawrequiring that 80 percent of anticipated profits (100 percent for financialinstitutions) be turned over to the Treasury, actual transfers are quitelow. In 1980, for example, profitable enterprises with over 90 percent stateparticipation earned net profits of S/. 62 billion while unprofitablecompanies had losses of S/. 27 billion. Total dividends to the Treasury,however, were only S/. 92 million. 6/ In addition, revenue is sacrificedwhen the Treasury capitalizes the taxes associated with public enterpriseinvestment projects. COFIDE estimates that capitalized taxes will be S/. 24billion in 1981.

6/ An additional S/. 294 million were paid in dividends to COFIDEby enterprises with over 90 percent state shares.

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49. The Government also supports the enterprises' investment programs byguaranteeing their foreign credits and in some cases assuming their debts.As of June 30, 1980, the debt outstanding and disbursed of the directlyadministered public enterprises was US$1,918 million, all of it contractedwith goverment guarantee (see Table 3 of the Statistical Appendix). Thiscompares to a total outstanding and disbursed public foreign debt ofUS$6,203.6 million. These guarantees represent a potential drain on theTreasury which has become an actual cost in some cases. From 1976 to 1980the Central Government assumed US$422 million of the foreign debt of thepublic enterprises. The 1980 service of the debt assumed by the Governmentwas US$37.7 million.

Table II.4: PERU - PUBLIC ENTERPRISE DEBTS ASSUMED BY THECENTRAL GOVERNMENT, 1976-1980 a/

(US$ Thousands)

Enterprise Debt

ENATRU (Tourism Enterprise) 41,445.6ENAFER (Railroads) 41,009.1AEROPERU (Airline) 26,251.5ELECTROPERU (Electricity Co.) 151,250.8SIMA-PERU (Naval Industry) 20,758.9ENCI (Agri. Prds. Marketing) 5,939.7PETROPERU (Petroleum) 79,543.6

TOTAL 421,657.0

a/ Excludes credits for imports of food and hydrocarbons.

Source: Central Reserve Bank

50. Controlling the fiscal drain of the state-owned enterprises clearlygoes beyond the sale of enterprises or even the more profitable management ofretained companies. Also at issue is whether the retained profits, capitaltransfers and foreign credits are being invested in high priority, profitableprojects. Presently, only investments which require foreign credits arereviewed in any systematic way. The reinvestment of profits is virtuallyautomatic. Efforts to improve the profitability of state-owned enterprisesshould be combined with measures to ensure that the major shareholder -- theState -- benefits from greater profits, either through dividend payments orby investing the profits in high priority projects (see Chapter IV).

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CHAPTER III - ASSESSMENT OF THE PERFORMANCE OF STATE-OWNED ENTERPRISES

Overview

51. Financial data are available for 97 of the 142 parastatal enterprisesfor 1979 and 1980. Most of the information covers the larger companies withover 90 percent state ownership. These data show that, as a whole, theenterprises earned a profit. In 1980 close to 70 percent of theseenterprises earned profits totaling US$239 million (see Table III.5). Theremaining firms recorded losses of slightly more than US$100 million. 1/The 97 enterprises thus earned a net profit of almost US$140 million in1980. (Profits were $120 million in 1979 when six enterprises which wereprofitable in 1980 registered losses and nine of the 1980 loss-makers earnedprofits.) This yields a return to net worth of 3-4 percent, well below thatearned by a sample of Peruvian private companies (see Table 1II.8).

52. In general, profits alone are an inadequate measure of theperformance of public enterprises. In many countries state enterprises losemoney because of price controls or government procurement, credit orpersonnel regulations. On the other hand, enterprises frequently holdlucrative monopolies or receive (sometimes hidden) subsidies. Since theyoften must meet a number of social goals, profit maximization may not be avery high priority objective. For the same reasons, there are usually fewincentives for public managers to maximize profits or minimize costs.

Table III.5: PERU - NET PROFITS OF SELECTED STATE-OWNED ENTERPRISES IN1979 AND 1980 a/

(Millions of soles)

1979 1980

Profits (net of taxes) 54,520 64,367Losses (net of taxes) 27,349 23,046

Net Profits 27,171 41,321

Less Current Transfers b/ 60 1,311

Net Position 27,111 40,010

Net Worth 632,783 1,273,620

Return to Net Worth (%) 4.3 3.1

Memo Item:Capital Transfers b/ 26,403 39,261

a/ 97 state-owned enterprises (includes depreciation of assets partiallyrevalued for inflation).

b/ Transfer data differ from data in Table II.3 because of differences irLcoverage and definitions. In particular, current subsidies to ENCI arndPETROPERU are excluded.

Source: COFIDE

1/ Four enterprises account for two-thirds of the losses: two fishprocessing companies (PESCAPERU and PEPESCA), the Peruvian airline(AEROPERU) and MINEROPERU.

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53. The situation is similar in Peru. Some state enterprises enjoylucrative monopolies or captive markets, for example, the Banco de laNacion, the Reinsurance Company, or, until recently, the Mineral MarketingCompany (MINPECO). On the other hand, many of the companies were subject toprice controls. Besides the rates for electricity, gas, water andtransportation, the State set prices for many foodstuffs, petroleum,fertilizer, cement, and construction steel. In addition, the prices ofproducers operating in a sector where the State held a monopoly -- such aspaper, chemicals or tractors -- were regulated by the government. As part ofits liberalization progam the Government has lifted many of these controlsand reduced tariffs to allow a more competitive market to signal prices.

54. Results can also be distorted by anomalies of the companies'accounting methods. For example, the telecommunications company, ENTEL,recorded a lossin 1980 because it was allowed to deduct 25 percent from grossoperating income for an expansion fund. If that deduction had been corectlyclassified as a capital expense the company would have earned a profit. Incontrast, the food dehydration company, DAASA, depreciated its assets at arate of only 3 percent a year, substantially understating its truedepreciation. Poor information and accounting systems in some parastatalenterprises also affect the financial accounts (see below). Furthermore, thefailure to use full inflationary accounting distorts the accounts of publicand private firms in Peru. 2/

55. To get a clearer picture of the performance of state-owned companies,the mission analyzed a sample of enterprises. The mission interviewed themanagers and collected production and financial data on 20 parastatal firms.In addition, the mission spoke with a number of government officials andpersons from the private sector, including some of Peru's largestindustrialists and financiers, as well as lawyers, accountants andstockbrokers. Based on this information the mission evaluated theperformance of these companies and identified some of the key problems --both internal and vis-a-vis the Government -- common to Peru's parastatalsector.

Characteristics of the Sample

56. The sample covers thirteen production and seven service enterprises,including some of the largest companies in Peru (see Table III.6). Thesample was chosen to represent some of the most important state-ownedcompanies, excluding financial institutions. With the exception of the

2/ For example, plant and equipment are only partially adjusted forinflation; profits are after depreciation of these revalued assets.Since land and inventories are not revalued, net worth, operating costsand depreciation are understated. Monetary gains (purchasing power gainson net monetary assets) and holding gains (increases in the current valueof inventory, plant, property and equipment in excess of inflation) arenot computed. See Annex I.

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Table III.6: PERU - SAMPIE CF SrA=-OW E)N1ES

State Nuaber of Net Equity Net Profit Budgeted Transfers fraoMain Participation Eployees in 1980 in 1980 d/ the Central Covenment

Name of Eiterprises Full Title Activities (%) 1980 (IlS$000) (IS$0) 1981 (in milnion soles)

Produrtion Enterprises

ClENlDS YUA* Canentos Yura S.A. CGent 100 320 37,021 ( 6,862) 700CE2rR(llN PERU Empresa Minera del Centro del Peru MIning 100 16,905 241,870 69,411DAASA Deshidratadora de Alintos de Food 100 99 1,280 ( 489)

Arequipa S.A. ProcessingEMEPAIMA* Empnresa para el Desarrollo y Explor- Edible Oil 100 a/ 849 16,693 ( 2,002)

tacicn de la Palm Aceitera S.A.FEEalSA* Fertilizantes Sinteticos S.A. Fertilizer 100 410 7,514 232MINENIPEj Empresa Minera del Peru Mining 100 2,665 146,585 (22,833) 1,754PARAMXE Sociedad Paramoga Ltda. S.A. Paper 100 c/ 3,702 153,040 8,438

PEPESCA* Peruans de Pesca S.A. Fishing 100 1,600 12,996 ( 7,041) 1,1%PESCAPJ Empresa Nacional Pesqtera del Peru Fishing 100 7,OXD 155,034 (17,489)PE1FIIJw Petroleos del Peru Oil Ccaawy 100 8,682 340,995 23,734 12,000QJDeAC2 Qutuica del Pacifico S.A. Cheuical ODFlE 1OD 260 13,210 835SIIERPER1 Empiresa Siderurgica del Peru Iron-Steel 100 4,809 163,169 ( 5,210) 225TASA* Tractores Andinos S.A. Tractors 51.0 b/ 153 4,367 1,077

Service Enterprises

AE.DPERL* Empresa de Transporte Aereo Airline 100 1,527 3,400 (12,106) 3,718del Peru

C(7 Corporacion Pertxa de Vapores Transport 1OD 1,588 33,200 10,ODOZEC12)PERU EBresa Electrica del Peru Electricity 100 5,612 942,920 ( 5,300) 23,041

ENAWU Empresa Nacional de Prartos Ports 100 4,328 78,185 ( 2,116)EaEpresa Nacional de Mrketing 100 1,226 22,103 5,258 915

C'arcializacircn de InsuasENIELPERI Empresa Nacional de Telecriunica- 100 7,093 45,917 ( 1,278)

Telecomnnicaciones del Peru tionsSEAPAL Servicio de Agua Potable y Water Supply 100 3,360 171,539 436

Alcantariliado de Lina

* Possible andiidate for sale.a/ WFIDE 60(, HUI 40a.b/ ODFIDE 25.5%, QINlP 25.5%, Massey Fergusson 49% of shares.

Ol WFIDE 98.1%, IIDUERU 1.08% of shares.d/ Figures in parenthesis indicate a loss.

Source: DWIERSICNES ODFEs and mission estimntes

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tractor assembly plant, TASA, all the sample companies are over 90 percentstate-owned. Eight of the firms are likely candidates for sale and a ninth,the Paramonga paper conglomerate, may also be sold. The Freeze Dried FoodCompany of Arequipa (DAASA) is presently shut down and will likely beliquidated.

57. Nine of the state-owned production companies were either nationalizedfirms or enterprises created out of several smaller, expropriated companies(such as MINEROPERU and PESCAPERU). Three companies were created by theState: Cementos Yura, DAASA and EMDEPALMA.

58. Interviews with the managers of these companies indicated that theirdegree of autonomy varied widely in the past. Seven of the firms wereallowed to operate with much of the freedom of private companies: the fournationalized firms (the mining company, CENTROMIN, the chemical producer,QUIMPAC, the Paramonga paper conglomerate and the FERTISA fertilizer plant),two of the State created enterprises (the Arequipa cement plant, CementosYura, and the palm oil plantation, EMDEPALMA) and the mixed ownershipcompany, TASA.

59. The nationalized firms have kept many of the same managers andprocedures they had as private companies. They were able to pay salarieshigh enough to retain experienced staff. Most of them adjust their payaccording to a published quarterly survey of industrial wages. Of course,these firms have experienced some degree of Government intervention beyondthat of purely private companies. First, their boards of directors wereappointed by the State and in some cases changed frequently. Second, theaccounts of all majority state-owned enterprises are audited yearly by theController General's office, which also investigates complaints ofirregularities. Third, they are also supposed to maintain their deposits inthe Banco de la Nacion (interest free) and abide by the public procurementlaw, but some of the firms are ignoring these requirements. Finally, most ofthe companies also confronted government-controlled prices; many of thesecontrols have since been removed.

60. The Government has also interfered more directly in the operations ofsome of these semi-autonomous companies. For example, since the end of 1978Paramonga has been forced to run a money losing plant set up by the State toreach self-sufficiency in newsprint. The plant represents a large financialand managerial burden for Paramonga. It produces newspaper from bagasseusing a new and complex technology. The plant is operating at aboutone-third capacity because of technological problems. It has also lost partof its market to imports because of the drop in tariffs and quality controlproblems. Further, the factory was set up with 90 percent debt financing andParamonga has been forced to assume part of its debt service. The cost ofthis unprofitable plant has sharply reduced Paramonga's profits.

61. Notwithstanding such interventions, these companies operated morelike private firms than the rest of the sample enterprises. Most of theother state production companies and service firms in the sample were lessautonomous. All except ENCI (Basic Food and Material Inputs MarketingEnterprise) operated under public law until July 1981, when all but SEDAPAL(Lima Water and Sewerage Service) were transformed into limited liability

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corporations under private corporate law. These companies are, in fact,state creations, even when they were formed out of nationalized elements. Inmost cases, the impetus behind their creation was more political or socialthan commercial, and as a consequence even the commercial companies were notdesigned to be successful business ventures. DAASA, for example, was set upby the State to freeze-dry garlic for export in an area that consumes almostall of its fresh garlic production. No market study or adequate appraisalwas done and the plant soon faced marketing as well as supply problems. Itsproduction costs exceeded sales income and it is now shut down.

Performance

62. The performance of the sample enterprises was assessed on the basisof several quantitative indices. Operating performance was judged accordingto trends in: (i) production volume; (ii) sales in constant prices; and(iii) labor productivity. Since prices have a major impact on results,individual price indices were calculated for each company. Financialperformance was measured using: (iv) profit; (v) debt; and (vi) liquidityratios. The financial data are distorted because of lax internal controlsand poor information as well as deficient accounting practices. For thesereasons, and because the controls affecting the enterprises differed greatly,cross-company comparisons must be treated cautiously and the indices taken asonly a crude indication of performance. These indicators were complementedwith evidence gathered from the interviews.3 /

63. The data show certain similarities between the production enterpriseswhich operated with relatively greater autonomy compared to those operatingwith less autonomy. To facilitate comparison the production enterprises weredivided in two groups: Group A contains enterprises subject to lessinterference than Group B. With the exception of two borderline cases(Cementos Yura and EMDEPALMA) that were founded by the State, the companiesin Group A share certain characteristics: they were set up as privatecompanies, they never operated under public law and hence were not directlyunder the Government's budgetary control, they have had the same managers formany years and they do not receive transfers from the State. The firms areon a continuum, however, and the distinction is not always clear. Theservice companies seem to fall generally in the less autonomous category butsome of them (notably the State Shipping Company, CPV) operate withconsiderable independence.

64. Market Position and Prices. The performance of the sampleenterprises was influenced by their operating environment. The marketposition of most of the firms and government price regulations reduced thepressures and incentives for efficiency. Only 5 of the 20 companies operatedin something resembling a competitive market -- the 2 mining enterprises,DAASA, CPV and AEROPERU. Even their exposure to market forces was limitedsince the mining companies sold to a public minerals trading monopoly andGovernment agencies were required to use CPV and AEROPERU. Of the rest, ENCIhas import monopolies for certain products; TASA until recently had a virtualtractor monopoly; the service companies are public monopolies; SIDERPERUcontrols steel imports and PETROPERU controls the domestic petroleum market.The other firms confronted competitors owned and operated by the State, or

3/ Ideally the enterprises should also have been judged on the achievementof their social objectives, especially since these social costs seriouslyaffected financial performance. The social goals, however, were usuallyunclear, changing and difficult to quantify and information on resultswas not always available.

t

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sold to State monopolies. Further, at one time most of the sampleenterprises were subject to some form of government price regulation. Theexceptions are the fishing companies and the mining firms, although again thelatter had to sell to a government monopoly. Generally, prices weredetermined by negotiations between the enterprise and the ministry and weresupposed to cover costs. Price increases were often delayed, however, andthe enterprise had to absorb any losses resulting from inflation during theinterium period. Furthermore, price hikes were often kept below costincreases for political reasons.

65. The situation has changed for many companies. Tariff reductionssince 1978 have increased competitive pressures and the Government is in theprocess of removing most of the price controls and eliminating the monopoliesof the State trading companies. This has the added advantage of reducing theneed for government subsidies (see below).

66. Unit prices were calculated by dividing sales in soles by the volumeof sales (Table III.7). The problems these firms have in covering costs isshown by the fact that the 1980 unit price indices for firms with regulatedprices were usually below the wholesale price index and well below the WPIfor imports. (In some cases, the unit price index may be rising faster thanthe rate increase authorized by the Government, since firms which receivepart of their sales income in foreign currencies are allowed to reap thebenefits of the devaluation of the sol.) Nevertheless, some of theenterprises, such as Fertisa, were able to earn profits notwithstanding lowprices by keeping their costs down.

67. Expansion of Production. To determine how quickly production andsales were increasing, volume production indices were calculated and the netsales of the sample enterprises for 1976 to 1980 were deflated by eachcompany's price index. Although these data and the production figures varygreatly from firm to firm, the more autonomous companies (Group A in TableIII.7) generally show modest increases in output and sales. EMDEPALMA isgrowing quickly because it is a new plantation, not yet fully operative,while Paramonga's growth is partially due to the addition of the newsprintplant mentioned earlier. The largest expansion in real sales occurred insome of the least autonomous companies which are also usually the largestloss-makers (MINEROPERU, PEPESCA, ELECTROPERU, ENTEL and SEDAPAL).In somecases, the investment programs of the less autonomous enterprises weredirectly determined by the State. In other cases, the company pushed througha project over government opposition. Price controls insulated thecompanies' investment decisions from market signals. Much of this expansionwas financed by debt since these companies generated little self-financing --most show losses -- while government capital transfers were concentrated onthe largest firms (MINEROPERU, PETROPERU and ELECTROPERU) and covered lessthan half of their investment.

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Table III.7: PERU - PRICES, PRODUCTION, SALES AND EMPLOYMENTOF A SAMPLE OF STATE-OWNED ENTERPRISES a/

Average Annual Increase1976-1980

1980 Sales in Produc- Number 1980 Index ofPrice Constant tion of of OutputIndex 1976 Prices Volume Employees per Worker

(1976=100) (Percentages) (1976=100) f/

Production Enterprises 0.8

A. CEMENTOS YURA 538 11.1 5.8 -0.9 128.6CENTROMIN 1607 -7.4 1.8 1.5 101.2EMDEPALMA 520 18.4 a/ 13.7 n.a. -FERTISA 473 13.5 b/ 2.7 0.2 112.8PARAMONGA 789 6.2 9.6 n.a. -QUIMPAC 557 11.3 28.0 9.9 193.4TASA 593 -1.5 2.4 9.2 85.5

B. DAASA 840 -12.7 -20.3 -5.4 47.2MINEROPERU 834 27.0 19.0 1.4 189.4PEPESCA 825 16.0 b/ 15.5 7.2 144.6PESCAPERU 771 -16.2 -20.3 -25.9 106.7PETROPERU 969 7.4 6.7 1.9 120.0SIDERPERU 606 1.3 1.3 1.7 112.8

Service Enterprises 8.9

AEROPERU 779 3.1 7.2 e/ 2.6 119.4CPV n.a. -4.9 c/ -3.0 c/ 2.1 99.7ELECTROPERU 532 13.7 14.0 4.2 143.5ENAPU 1134 -9.2 -7.0 3.1 84.7ENTEL 508 19.2 8.6 d/ 16.4 75.0SEDAPAL 595 14.5 2.8 5.9 88.8

MEMO ITEMS

Wholesale Price Index 673- For imports 804

Consumer Price Index 578

a/ Excludes ENCI.b/ 1977-1980.c/ 1976-1979.d/ No. telephones.e/ Passengers.f/ Index of production/index of employment.

Source: Tables 4 and 5 of the Statistical Appendix

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68. The more autonomous production firms of Group A were not facing anyState mandated expansion program. Most chose to keep their indebtedness downand undertake only moderate, largely self-financed investments (see Table 6of the Statistical Appendix). This may also reflect a cautious, sometimesoverly cautious, attitude of boards of directors, which is explored in moredetail below. In addition, the slow expansion of some of the formermultinational companies may have been a consequence of a lack of skill incorporate planning. Policy formulation and corporate planning was usuallycentered in headquarters and the firms were left with limited in-housecapacity in these areas after they were nationalized.

69. Productivity. Judging from the index of output per worker in TableIII.7, labor productivity in two thirds of the sample enterprises has beenimproving. In the case of some firms, such as MINEROPERU or Cementos Yura,this reflects a large increase in capacity, while PESCAPERU's productivityincreased thanks to the sale of its fishing fleet to the crews. In othercases, for example, FERTISA and QUIMPAC, there were no large expansionprojects and rises in labor productivity apparently stemmed from improvedoperating efficiency.

70. Despite these improvements, the level of productivity in thesefirms may still be quite low. Many of the managers interviewed complained ofexcess staff. Since firing of workers is very difficult for public andprivate firms under Peruvian law, those publicly-owned enterprises which areespecially vulnerable to political pressures for hiring could beoverstaffed. Some random cross-country comparisons seem to bear thisout. 4/

71. One of these firms was more able to follow market signals and shows adifferent trend. CENTROMIN's real sales fell by an average of over 7 percenta year during the period, but it was able to keep profits up by shifting fromproduct to product to adjust to varying market conditions. (Silver wasresponsible for 60 percent of its income in 1980 compared to 28 percent in1976.)

4/ For example, Cementos Yura averaged 1.51 employees per thousand tons ofcement during 1976-1980 compared to the 1974 average in Colombia of 1.4and the 1972 OECD average of 0.55. SIDERPERU averaged 73 MT of steel peremployee during 1977-1979 compared to 235 MT in U.S. plants and 200 MT inJapan in 1976. An Argentine company with similar total capacity asSIDERPERU but not an integrated producer (Acindar) averaged 79 MT per manyear during 1974-76. (These examples must be treated carefully sincefirm circumstances may not be similar.)

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72. Profits. The profitability of parastatal companies is much lowerthan their private counterparts (see Table III.8).5/ The ratio of profits tosales of state-owned enterprises averaged less than 3 percent during 1976-80,compared to 11 percent for private industrial companies. The profitabilityfigures for the private firms are also much less volatile than those of thestate-owned firms and show an increasing trend. The low profits ofstate-owned firms in part reflect the sacrifice of profits to social goals,such as subsidized prices or expanded employment, plus the imposition ofgovernment regulations which raise costs, and in part result from loweroperating efficiency. Thus, profits were eroded by the failure to raiseprices to cover costs and to pay subsidies promptly to cover artificially lowprices or government-imposed costs. Government red tape and directintervention in their operations also reduced profits. Paramonga's profits,for example, were sharply reduced by the imposition of the newsprint plant inNovember 1978, while AEROPERU is forced to operate unprofitable domesticroutes. Furthermore, as mentioned, the expansion programs of firms wereusually financed by debt. As a result, these companies must meet sizeableinterest payments. Some also have idle capacity because of ill-advisedexpansions while other plants, such as the steel mill, are a suboptimalsize. At the same time, price controls, their monopoly position, and thelack of incentives to earn profits or minimize costs, contributed to lowerefficiency than their private counterparts. Many of the problemscontributing to the lower profits of these firms are explored in more detailbelow.

5/ Care should be taken in pushing this comparison too far. It is based onthe -- perhaps unrealistic -- assumption that Peruvian publicly-owned andprivate companies follow generally similar accounting practices, as theyare required to do by law. Some of the extreme cases of poor accountingand control practices (PEPESCA or AEROPERU) are unlikely to be found inpublicly-traded companies. On the other hand, the extent of thedifferences in performance is such that it cannot be attributed todifferences in accounting alone. Further, the profits of thepublicly-owned companies are overstated by the inclusion of currenttransfers as operating income. Private profits are more likely to beunderstated in an effort to avoid taxes. During this period some itemsproduced by private firms were subject to government price controls(pharmaceuticals, for example) and also benefitted from high protectivetariffs.

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Table III 8: PERU - PROFIT MARGINS AND RETURNS TO NET EQUITY OF SAMPLE OFSTATE-OWNED ENTERPRISES AND PUBLICLY-TRADED PRIVATE COMPANIES 1/

Profit:Sales Profit:Net Equity1976 1977 1978 1979 1980 1976 1977 1978 1979 1980

State-Owned Prod.Companies Neg. Neg 4.4 5.3 0.9 Neg. Neg. 7.0 10.8 1.6

A. CEMENTOS YURA 19.0 16.6 9.2 2.6 Neg. 9.3 4.6 2.9 0.1 Neg.CENTROMIN 3.6 6.5 12.1 14.4 9.5 8.6 12.8 23.7 33.8 24.2EMDEPALMA Neg. Neg. Neg. Neg. Neg. Neg. Neg. Neg. Neg. Neg.QUIMPAC 6.0 7.8 8.7 9.5 8.0 3.3. 3.9 5.3 10.4 5.3PARAMONGA 12.5 7.4 13.3 0.0 5.1 14.8 6.0 8.6 0.0 4.7FERTISA - 9.5 13.4 0.5 2.2 12.8 12.2 22.3 0.7 3.6TASA 1.0 Neg. 2.0 15.0 11.4 2.5 Neg. 4.8 30.4 20.9

B. DAASA 0.0 Neg. Neg. Neg. Neg. Neg. Neg. Neg. Neg. Neg.MINEROPERU - 7.3 Neg. Neg. Neg. - 1.0 Neg. Neg. Neg.

PETROPERU 2.0 0.4 0.5 0.7 2.0 6.8 1.6 2.4 5.1 5.9SIDERPERU Neg. Neg. 3.9 1.0 Neg. Neg. Neg. 3.8 1.1 Neg.PESCAPERU Neg. Neg. 12.5 7.5 Neg. Neg. Neg. 23.2 11.4. Neg.PEPESCA - Neg. Neg. Neg. Neg. - Neg. Neg. Neg. Neg.

State-Owned ServiceEnterprises Neg. Neg. 7.2 7.6 Neg. Neg. Neg. 2.5 3.6 Neg.

AEROPERU Neg. Neg. 0.0 Neg. Neg. Neg. Neg. 1.2 Neg. Neg.CPV 11.0 5.8 4.1 4.0 12.0 10.4 4.5 5.6 8.3 29.8ELECTROPERU Neg. Neg. 28.0 21.4 Neg. Neg. Neg. 2.7 3.6 Neg.ENAPU Neg. 3.6 6.0 11.6 Neg. Neg. 1.1 1.9 4.3 Neg.ENCI 5.4 1.5 3.6 6.4 7.0 80.6 16.3 57.4 72.9 20.1ENTEL 7.2 8.9 2.4 2.6 Neg. 9.0 9.0 2.9 3.6 Neg.SEDAPAL Neg. Neg. Neg. Neg. 1.6 - Neg. Neg. Neg. 0.0

Publicly-TradedCompanies 2/

Industrial 9.7 9.6 11.4 11.2 11.5 15.6 12.2 14.4 14.7 16.1Mining 8.5 12.8 18.1 21.7 13.4 11.0 13.6 20.6 31.6 13.6

1/ Includes current transfers.2/ Approximately 36 industrial and 13 mining companies traded on the Lima Stock

Exchange.

Source: Financial statements of publicly-owned enterprises, Lima Stock Exchange andINVERSIONES COFIDE

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incentives to earn profits or minimize costs, contributed to lower efficiencythan their private counterparts. Many of the problems contributing to thelower profits of these firms are explored in more detail below.

73. Among the state-owned production companies, the most consistentprofit makers are the ones with the greatest autonomy (Group A in TableIII.8). Two of this group recorded temporary losses in 1980. EMDEPALMAbecause it is not fully operative and Cementos Yura because electricityshortages force it to operate at half capacity.6 / Many of the other firms inthis group are operating at close to full capacity and have programs toreduce costs through detailed weekly cost accounting and research anddevelopment. Even these enterprises earn below the average returns ofprivate firms, however (see Table III.8).

74. The companies in Group B have had to function with frequentmanagement changes, direct intervention in their operations, loss of staffbecause of low pay, as well as price controls and red tape. As mentioned,many of these firms have expanded rapidly and confront large interestpayments and in some cases idle capacity as a result. Added to this, someconfront serious operational imbalances or irregularities. (PEPESCA, forexample, is trying to process sardines with equipment designed for tuna.)The less autonomous firms are also used more often to serve some social goalto the detriment of financial profits. These firms consistently earn low orno profits.

75. The profits of the service companies are also affected by extensivegovernment intervention plus rates that generally have not kept pace withrising costs. Nevertheless, three of these, CPV, ENCI and theTelecommunications Enterprise, ENTEL, are consistent profitmakers. ENCI'sprofits result in part from Government subsidies which cover its losses onsubsidized foodstuffs. The shipping line, CPV, operates in a morecompetitive environment than the other service enterprises, although undervery favorable circumstances. All government agencies are supposed to shipon CPV but it can seldom meet this demand and it passes part of this businesson to its competitors. Both ENTEL and CPV benefit from selling part of theirservices in international markets. These companies use their foreignexchange earnings to offset losses in domestic sales.

76. Returns to net worth vary more erratically, reflecting the fact thatsome public companies are highly leveraged. As a result the Government onoccasions earns a much higher return than the private investor, although onaverage the profit:equity figures are lower. Increases in equity in most ofthese firms primarily result from the yearly revaluation of fixed assets fcrinflation and the occasional capitalization of their debts by the CentralGovernment.

77. The ratio of profits to assets is similarly low (see Table 1II.9).Here again the Group A companies show a better performance than the rest ofthe parastatal companies in the sample, but below private companies. Theoverall return on the Government's investment in these companies has improvedsomewhat in recent years but is still well below the returns earned byprivate investors.

6/ Cementos Yura's expansion was designed to coincide with a plannedexpansion of Arequipa's electricity company, SEAL. SEAL, however,delayed part of its expansion program and also underestimated the growthin Arequipa's demand for electricity. Severe drought also contributed tothe power shortage.

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Table III.9: PERU - RETURNS TO ASSETS OF A SAMPLE OF STATE-OWNEDENTERPRISES AND PUBLICLY-TRADED PRIVATE COMPANIES

(Percentages)

Profit:Total Assets1976 1977 1978 1979 1980

State-Owned Enterprises -0.4 -0.3 1.4 2.4 0.4

Production -0.6 -0.4 1.3 2.6 0.5Group A 4.5 4.5 6.7 6.7 5.9Group B -1.5 -1.2 0.2 1.1 -3.0

Service 0.1 -0.0 1.6 1.8 0.2

Private

Manufacturing 7.4 5.7 8.2 8.9 10.1

Mining 7.3 9.1 14.6 20.3 8.9

Source: Individual companies' financial statements, Lima Stock Exchange andINVERSIONES COFIDE

78. The performance of the publicly-owned corporations, like Peru'sprivate companies, has been affected by recent changes in the Government'smacroeconomic policy. Four of the sample enterprises have had their pricecontrols lifted or will confront decontrolled prices in 1982 (Cementos Yura,TASA, Paramonga and QUIMPAC). In a number of cases, the Government tradedthe freedom to set prices for the elimination of import prohibitions and adrop in tariffs on competitive imports. The resulting reduction of tariffsexposed many of the production enterprises to greater competition fromimports, with varying effects. For example, the prohibition of tractorimports was eliminated and the tariff reduced from 60 percent to 25 percent,the tariff on the imported tractor pack assembled by TASA fell from 10 to 5percent and tractor prices were freed. TASA has successfully coped with thischange so far by purchasing lower cost assembly packs from Brazil andexporting part of its output to Venezuela to take advantage of Peru's exportsubsidy. In another instance, Paramonga lost half of the local market forPVC when tariffs were dropped. Imported PVC is selling below Paramonga'scosts and the firm is considering processing PVC into other products (such asplastic bags).

79. In the long run, if tariffs are lowered further, more of these firmsmay be unable to compete. The adaptability of the state-owned companies maybe less than many private firms. State control has made for more rigidmanagement and the Government's inability to invest new equity capital inthese firms reduces their options.

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80. Debt and Liquidity. In general public firms show higher indebtednessand lower liquidity ratios than private companies. Since their debt andincome is often guaranteed by the State, they can affford to be lessconservative than private firms which must show sound financial ratios inorder to borrow. The situation is somewhat similar in Peru. On average thestate-owned production companies in the sample are more heavily indebted thantheir private counterparts (see Table III.10). These figures are distorted,however, by the inclusion of PETROPERU's large debt. If PETROPERU wereexcluded, the State production firms' average debt:equity ratio would be55:45 for 1976-1980, compared to 40:60 for private industrial companies.The service enterprises show a surprisingly low debt:equity ratio in partbecause the Treasury assumed a large part of ELECTROPERU's debt in 1978 and1980 and AEROPERU's debt in 1977. The figures vary greatly from company tocompany and over time (see Table 6 of the Statistical Appendix). Some of theheaviest borrowers are large loss-makers, such as MINEROPERU, AEROPERU, andPEPESCA.

Table III.10: PERU - COMPARISION OF DEBT AND LIQUIDITY RATIOS FOR ASAMPLE OF STATE-OWNED ENTERPRISES AND PUBLICLY-TRADED PRIVATE COMPANIES

1976 1977 1978 1979 1980

DEBT:EQUITY RATIO a/

Sample Enterprises

Production 79:21 80:20 81:19 76:24 65:35(excl. PETROPERU) (63:37) (61:39) (60:40) (51:59) (53.47)

Service 55:45 50:50 33:67 35:65 27:73

Private Enterprises b/

Industrial 52:48 54:46 43:57 40:60 37:63Mining 34:66 33:67 30:70 36:64 34:66

CURRENT RATIO c/

Sample Enterprises

Production 0.9 0.9 0.9 1.0 1.0

Service 1.1 1.3 1.3 1.4 1.5

Private Enterprise

Industrial 1.4 1.3 1.3 1.4 1.7Mining 2.2 2.0 2.0 1.8 1.5

a/ Total liabilities/equity.b/ Publically-traded private companies.c/ Current assets/current liabilities.

Source: Statistical Appendix Table 6

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81. The decline in the debt:equity ratios reflects in part the CentralGovernment assumptions of enterprises' debts. In addition, some companies --for example, PESCAPERU -- sold fixed assets to reduce their debt. Moreimportantly, the debt:equity ratio of both private and public companies hasbeen steadily eroded by inflation. The exceptions are firms with primarilyforeign debts, such as MINEROPERU, AEROPERU, CPV, ENTEL and ELECTROPERU.For a company like ELECTROPERU this foreign exposure represents aconsiderable exchange risk since its revenues are principally in soles.

82. The bulk of the debt of production enterprises is short-term,reflecting their large working capital needs. Long-term borrowing averagedonly about 37 percent of their total liabilities.7 / The opposite is true ofthe service enterprises which have two-thirds of their liabilities inlong-term debt. Some observers asserted to the mission that publicenterprises use short-term debt to finance fixed equity investments. Sincelong-term borrowing is strictly controlled by COFIDE, S.A., some publiccompanies may resort to short-term borrowing to avoid this control. Mostshort-term borrowing in soles is from the Banco de la Nacion which will rollover short-term credits automatically. This assertion requires moreinvestigation. Nonetheless, it does not seem to be borne out by the sampledata. Only two of the companies show a large real increase in their fixedassets coupled with an increase in short-term borrowing and, in particular,in bank overdrafts.

83. Many managers complained that their companies were undercapitalized,asserting that the State would burden them with debt rather than investingequity. Certainly some of the public enterprises have been saddled withheavy debts for sometimes ill-conceived investment projects. The moststriking example is PEPESCA which borrowed to purchase a fishing fleetcapable of handling a catch of 25,000 tons of tuna a year. The actual catchhas never exceeded 4,000 tons a year because of lack of fish, technicalproblems with the boats and the fact that two of the ships were kits whichhave never been assembled. Tuna has never been plentiful in Peruvian watersand PEPESCA is now catching and processing sardines, although its equipmentis not well adapted for this. In 1980 PEPESCA's sales totaled S/5.3 billionversus interest payments of S/. 3.8 billion; its debt:equity ratio was about80:20. Other examples are MINEROPERU, which had a debt:equity ratio ofabout 70:30 in 1980 and AEROPERU, which had a debt:equity ratio of almost90:10. Nevertheless, the State has capitalized some of the largest borrowersby occasionally assuming their debts.

84. Judging from the current ratio, the liquidity of the state-ownedcompanies is improving, although still not on a par with privatecompanies. 8/ The quick ratio (current assets excluding inventories/current

7/ The figures can be misleading, however. For example, the bulk of theshort-term debt on PEPESCA's balance sheet is in fact long-term credits,which have fallen due and are being paid by the guarantors.provisions for bad debts.

8/ The current and quick ratios of public firms are not strictly comparableto those of private firms. Some public firms show subsidies owned by theGovernment as current assets. Also many appear to make inadequateprovisions for bad debts.

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liabilities) is a more significant indicator of liquidity for companies whichcarry large inventories. Here too the state-owned production companiesappear to be less liquid than private firms in Peru. The quick ratio forstate-owned production companies was 0.52 in 1980 compared to 0.77 fortraded private manufacturing firms. Service companies had a higher quickratio of 1.0 in 1980. The service companies' current assets may be inflatedby large accounts receivable. Their 1980 accounts receivable amounted to 77days of sales compared to 43 for state-owned production firms in the sample.The service firms appear to have cronic collection problems (see below).

Summary

85. The performances of the sample enterprises vary widely but there arecertain similarities. The enterprises able to operate with more autonomy andin an atmosphere closer to a competitive market environment are generallyprofitable, with debt:equity ratios similar to private firms in Peru. Withsome exceptions the production of Group A companies grew at moderate rates ornot at all over the 1976-1980 period. Generally, the companies used theirretained earnings to finance replacement and moderate levels of net newinvestment and chose not to undertake more ambitious investment programs thatwould have had to be financed by debt. As a result the equipment and plantsof many of these companies appeared to be outmoded and many faced pressingneeds to diversify in order to adapt to Peru's changed economic conditions.

86. In contrast, most of the less autonomous companies are losing moneyor are marginally profitable. Their prices are regulated and, with someexceptions, have not kept pace with their costs. Some have undertaken major,sometimes ill-advised, investments and the firms which have generallyconfront high debt:equity ratios. Less autonomous firms are also more likelyto be required to pursue costly social objectives. These companies areusually asset rich and management poor.

87. Both groups of state-owned companies appear to earn a lower returnthan their private counterparts. This results in part from the sacrifice ofprofits to social goals. It also reflects the lower operating efficiency inthe parastatal sector stemming from costly government intervention and a lackof incentives to maximize profits.

MAIN PROBLEMS OF STATE-OWNED ENTERPRISES

88. On the basis of this performance record and interviews with companymanagers and others, the mission analyzed some of the principal problems ofthe state-owned enterprises. These problems fall into three categories: (1)problems related to the Central Government and the control apparatus forpublic enterprises; (2) problems between public enterprises; and (3)firm-specific problems.

89. Judging from the sample enterprises, the problems of state-ownedfirms which have experienced low levels of government interference differfrom those of companies subjected to extensive State involvement. Except forsporadic intervention, some companies have been able to function more likeprivate firms. Such companies avoided some of the problems common to theother public enterprises since they were often set up by their former ownerswith sound administration procedures and have been free to adapt to thelatest commercial practices.

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90. Nevertheless, there are several ways in which the Governmentsystematically encroached on the freedom of these companies: (1) throughlaws, such as the bidding law, applicable in theory to all state-ownedenterprises; (2) through yearly audits and investigations by the Controller;(3) through foreign debt control; (4) through price controls (most of whichare now being eliminated); and (5) by being forced to deal with other publicenterprises.

91. Except for these areas, most of the discussion which follows concernsthe problems of state-owned companies which have been subjected to extensivegovernment involvement. The problems of such companies are of specialinterest since these are the firms the Government is most likely to retainunder public management.

Issues Related to State Control

92. There are a number of problems related to State efforts to controlthe enterprises stemming from the lack of clearly defined objectives,a multilayered apparatus for control and a confused system for monitoringperformance, laws which may hamper efficient operations, sometimes excessivecontrol by the Controller General, the administration of price controls andsubsidies, and the system for debt control.

93. Lack of Clearly-Defined Objectives. There has been no system inPeru to develop general objectives for the parastatal sector, to assure thatthe demands made on the companies were reasonable and consistent, or tomonitor their performance and evaluate the outcome. Most ministers simplyincorporated the investment programs drawn up by the enterprises into asectoral plan which was then aggregated into a national plan. Governmentobjectives were usually imposed by direct intervention in operations.

94. All the parastatal enterprises have suffered from poorly definedobjectives and priorities and the lack of a coordinated approach to thestate-owned sector. It appears that in the case of many of the commercialenterprises, the Government's aim was simply to own shares in certain keysectors or to prevent bankruptcies, and not to use the firms to pursue somesocial goal or to transfer resources to the Treasury. On occasion, however,the State did use these firms for some social purpose, usually in anunplanned and frequently ill-advised fashion.

95. For enterprises subjected to more extensive State involvement thelack of a coherent strategy was even more detrimental. Companies wereexpected to pursue multiple objectives with no clear priorities and thedemands on the firms were not coordinated with other government actions.Public companies were called on to operate efficiently, earn profits, sell atprices that did not always cover operating costs, expand employment andmake politically-motivated new investments. A number of companies sufferedbecause their initial goals were unrealistic and improperly implemented. Forexample, MINEROPERU was called upon to explore, study, initiate and operatelarge mining projects. The company, which operates a copper mine andrefinery and just completed a zinc refinery, was also expected to develop andexecute a large inventory of new projects. MINEROPERU never had the staff orresources to achieve these goals but it did not trim its program in order toadvance substantially a few projects. Instead, it made little progress on alarge number of projects.

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96. PETROPERU is another example of a company confronting multiple andconflicting goals. It was set up to handle all State operations inpetroleum, including marketing and petrochemical production, maintain Peru'sself-sufficiency in petroleum and expand its exportable surplus, increase thecountry's oil and gas reserves and operate profitably in a competitivefashion. At the same time the firm was called upon to sell petroleum locallyat highly subsidized prices as well as pay the taxes and royalities owed byforeign contractors to the Treasury. Transfers from the Central Governmentto cover the subsidy were late and insufficient and PETROPERU's financialsituation deteriorated. Under these circumstances the company had littleincentive to improve its efficiency.

97. Since the late 1970s, the Government has acted to rationalize theobjectives of many companies, including MINEROPERU and PETROPERU. MINEROPERUis being transformed into a holding company which will promote joint ventureswith private mining companies in a reduced portfolio of new investmentprojects. This will remove much of the burden of operating mines.PETROPERU's prices are being steadily raised and it is permitted to keep partof the payments owed for the contractors' taxes. The company is currentlystudying ways to improve its structure and operations with the help ofoutside experts.

98. While such measures have improved the situation of some individualfirms, as yet there is no coherent strategy for the parastatal sector as awhole. Enterprises continue to confront multiple, uncoordinated andconflicting demands from state authorities. Some of the pressing areas forimprovement are monitoring and control systems, pricing and subsidies anddebt control.

99. Control. As the preceeding discussion shows, there has been nocentral mechanism capable of assuring that parastatal enterprises act inaccordance with national objectives, or to note and act on major enterpriseproblems. Rather, a number of different bodies with overlapping functionswere given responsibility for controlling the state-owned sector with littleeffective coordination. The system of administration resulted in conflictingsignals, delays and excessive interference in the enterprises' dailyoperations, yet it afforded the Government little effective control overperformance since the lines of authority were unclear and the feedback onresults was inadequate.

100. Recent legislation governing state business activity (in particular,laws 206 and 216) attempt to create a more effective system for control.9 /According to this legislation ex ante control will be theresponsibility of the Interministerial Commission of Economic and FinancialAffairs (CIAEF), which will "coordinate, consolidate and evaluate" the plansfor state business activity. (The CIAEF consists of all Peru's cabinetmembers involved in economic or financial matters.) These plans will beincorporated as a special chapter in the national plan drawn up by theNational Planning Institute (INP) and will form the basis for the operativeplans of the enterprises. CONADE is designated the technical secretariat ofthe CIAEF and given "custody" of all state shares. CONADE will also developan investment and reinvestment policy for nonfinancial enterprises to besubmitted to CIAEF for approval. Law 216 charges CONADE to exercise ex postcontrol of the enterprises by monitoring and evaluating their performance,

9/ Both laws were passed in July 1981.

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without interfering in their normal operations. CONADE must then communicatethe results of this management control to the sectoral ministries as well asprepare an annual report to the CIAEF evaluating performance and recommendingany necessary changes in legislation. In addition, the Controller Generalwill also continue to exercise ex post control through annual audits andinvestigations.

101. It is too early to judge how this system will fare when it is fullyoperational, but it is possible to foresee potential problems stemming fromthe lack of a clear delineation of authority. Although CONADE is given"custody" of all the state shares and responsibility for "managementcontrol," the ministries and other agencies still control the shares andhence appoint the stockholders' boards. The system for administering sharesshown in Table 2 of the Statistical Appendix is thus left intact. As notedearlier, the lines of authority between these shareholding agents and theenterprises are complex and overlaping and the relationship between thevarious shareholding agents is unclear. Some observers told the mission thatcontrol of all shares may be transferred to CONADE to be administered by itsoperative arm, ICSA, as the public holding company, but others questionedwhether this might happen. In any event the ministries are still deeplyinvolved in running those enterprises that were directly under their sway,even when these firms have been made limited liability corporations. CONADEis supposed to report to the ministries on the results of its control but itis not specified what the follow-up will be or how CONADE's role will becoordinated witi the ministries.

102. Nor is it clear how CONADE's role in developing parastatal investmentpolicy will be coordinated with that of the INP. INP hasresponsibility for all public investment plans and for reviewing andapproving all investment projects. In the past INP has been a bottleneck inapproving investment projects. For example, a purchase of two ships by theCPV was held up five years awaiting INP approval. There is a need for areview system that can effectively eliminate poorly designed, low priorityinvestment projects without causing excessive delays.

103. Problems may also arise in coordinating the monitoring of publicenterprises. The ministries, Central Bank, national statistical office,planning office, COFIDE and others all request information from thestate-owned enterprises. One director claimed to have accumulated 33government questionnaires during a six month period in 1978 which are stillunanswered (a response is required by law). The information collected when,and if, the enterprise does reply is incomplete and inadequate. Thequestionnaires respond to the need of each central unit but do not provideinformation that might allow the Government or the enterprise to evaluate andimprove performance.

104. Another control problem arises from laws which may seriously hamperefficient operations. The most blatant example is the bidding law. Bids arerequired for any procurement over US$300,000 by the Central Government andall companies with state majority ownership. The procedure is cumbersome,requiring 90 days and extensive preparation work. With such a low ceiling,this law creates a huge bottleneck for a company of any size and obviouslycarries a high opportunity cost. To give an extreme case, the State shippingline, CPV, is supposed to follow the procedures to purchase fuel or undertakemajor repairs, even when docked in a foreign port. The law also leads to a

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buildup of large inventories. In addition, the bid with the lowest evaluatedcost cannot be selected. The law requires that an average be taken of allbids plus the base price and all bids 10 percent above or below this averageare eliminated. The average of the remaining bids plus the base price mustthen be calculated and the bid below and closest to the average is selected.No consideration of other factors -- proposed construction methods,compatibility of equipment, etc. -- is allowed. It would be unrealistic toexpect a public manager to minimize costs while following this biddingprocedure.

105. The newly-issued statutes of some public enterprises (CPV amongthem) provide for exceptions to the bidding law in cases of emergency,for routine purchases and for any increase, repair or maintenance of existinginstallations which does not involve any major technological changes. Thelegality of these provisions, however, is currently being reviewed. Somemanagers are ignoring the law under the mistaken impression that it appliesonly to construction works.

106. Controller General. The Controller General's office represents aspecial problem for most state-owned enterprises. The Controller is supposedto assure that Peruvian government officials are held accountable for theiruse of public resources. To this end all publicly-owned enterprises arerequired to have a yearly audit by an external auditor chosen from a list ofthree selected by the Controller's office. The Controller also investigatescomplaints of irregularities and can impose criminal penalties for misuse ofthe public trust. The Controller's office has expanded recently; in 1981 itsstaff grew from 260 to 480 and its budget tripled.

107. Many managers complained to the mission of overzealous action on thepart of the Controller leading to criminal penalties for simple businessmistakes. Managers felt that the Controller's investigations sometimesresponded to politically motivated complaints and were unnecessarilyprolonged, tying up the enterprises' own personnel and damaging morale. Theresult was said to be an atmosphere of uncertainty that leads to timidmanagement and over-extended reviews of major investment decisions by theboards of directors, driving more dynamic managers out of the public sectorand reducing the enterprises' flexibility. (For example, Paramonga'smanagers proposed to diversify production in response to changed marketconditions but its Board has been reviewing the decision for several years.)This situation, if true, may be linked to the existence of some laws thatmanagers felt they must disobey to operate.

108. In addition, almost all managers consulted by the mission complainedthat the list of external auditors selected by the Controller were not of acaliber to do an adequate audit. Most of the larger, prestigious auditingfirms do not take part in the Controller's bidding for the yearly audits.

109. Pricing and Subsidies. The price control system for publicly-ownedenterprises consists of prices and rates that are supposedly set and adjustedto cover costs and allow some profit, as well as some prices at below costbut that are offset by transfers. In most cases the firms develop priceproposals which are then submitted to a complex process of approval thatusually takes at least two months. Even longer delays can occur (AEROPERUhad to wait a year for its last price hike) and the final price may be heldbelow the enterprises' cost estimates for political reasons. The enterprises

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have to absorb losses due to inflation during the decision making period. Inthe end, as Table III.7 shows, prices were often not raised sufficiently tokeep pace with costs. Further, the Government is habitually slow intransferring subsidies. For example, unpaid fertilizer subsidies toFERTIPERU, a company which was merged with ENCI in 1974, were not paid as ofSeptember 1981 -- seven years later.

110. This situation has eased considerably with the recent elimination ofmany price controls. Furthermore, the Government has tried to raise pricesand rates regularly on the basis of a technical study of costs, althoughinterference and delays can still occur.

111. Debt Control. Problems can also arise out of the effort to controlpublic foreign indebtedness. In the past the Government was often unable toeffectively control parastatal debt despite a multilayered procedure forapproval of foreign borrowing. Frequently, control efforts would delayinvestment proposals, but not eliminate many low priority or poorly conceivedprojects. Recent legislation has strengthened government control by makingCOFIDE, S.A. sole financial agent for all medium- and long-term foreignborrowing (more than one year maturity) by majority state-owned enterprises.Projects which require foreign credits must first be approved by the ministerand studied by the planning office (INP). The investment is then submittedto a committee made up of representatives of the Ministry of Finance, theBanco de la Nacion and COFIDE, S.A. If approved, the project goes to COFIDE,S.A. which negotiates the financing. This procedure has enhanced debtcontrol but may also delay investments. COFIDE must reassess an approvedproject even though the enterprise has already studied the project in detailand in some cases begun to negotiate the financing. Furthermore, COFIDE,S.A. enters the picture late, after the project is well advanced, making itharder and more costly to adjust project design to suit better the availablefinancing.

Relations Between State-Owned Enterprises

112. The relations between state-owned enterprises in Peru can createproblems for the companies involved. These relate to cross-subsidization,late payments and public monopolies.

113. Cross-Subsidization and Late Payments. There are numerous instancesof cross-subsidization between public enterprises that do not follow anydiscernable policy. These subsidies can take various forms. For example,CPV is required to purchase new ships from the Government-run shipyardsrather than buy used ships on the world market as its local competitors do.This amounts to an additional cost to CPV of about US$20 million per ship.In another instance, ENCI subsidizes PETROPERU's urea plant by paying it aprice to cover its costs which is 40 percent above world market prices. Athird example is found in the lower rates charged by the State port andshipping line on products marketed by ENCI. Finally, publicly-ownedenterprises must use State banks and other monopolies (see below) which offerservices at higher cost than their private competitors. All of these hiddensubsidies distort the performance of the enterprises and make it difficult toevaluate the cost of public enterprises to the Government.

114. Late payments also distort performance. Several firms, in particularthe public utilities, told the mission that other public enterprises wereamong their major debtors. For example, one third of ELECTROPERU's 1980current assets consisted of accounts receivable and close to half of these

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were owed by state-owned enterprises. SEDAPAL's executives estimated thatSI. 11 million of the companies' S/. 13 million in non-recoverable claims wasowed by now defunct public enterprises. These unpaid bills are especiallycostly in an era of 60 percent inflation. The current practice shifts thefinancial burden from one firm to the next, leading to poor financialperformance for all public enterprises in the service sectors.

115. Public Monopolies. State-owned enterprises have been required todeal with certain public monopolies, including the State shipping line, theState insurance companies, the Banco de la Nacion and the state mineralstrading company, MINPECO. Some of these monopolies have been lifted, and themore autonomous enterprises have also been able to avoid some of them.Nevertheless, managers complained that the remaining monopolies curtailedtheir independence and increased public sector inefficiency. In particular,managers faulted the Banco de la Nacion as being slow and costly to theircompanies. Public enterprises are supposed to keep their deposits with and-- until recently -- do all short-term borrowing in soles through the Bancode la Nacion. The Bank offers no interest on deposits and does not condactoperations by phone or telex. Nor does it have enough branch offices to meetthe needs of all the parastatal sector. The BN's lack of liquidity forcescompanies to withdraw cash slowly over a period of weeks to meet theirpayrolls and the Bank will not provide facilities to pay workers directly ascommercial banks will in Peru. A number of executives told the mission thatforcing state-owned firms to use the Banco de la Nacion hampers theintroduction of modern financidl management.

Problems of Firms

116. Finally, at the level of the firm the mission encountered a number ofproblems starting with top management and continuing with some commonmanagerial problems and labor problems.

117. Top Management. Many of the state-owned firms, including some of themore autonomous ones, have suffered from a lack of continuity In their boardsof directors. The terms of dircctors vary but many are only for one year.Actual tenure may be even less since new ministers tend to appoint newdirectors, sometimes as a political reward. The problems this causes areexacerbated by the tendency to appoint persons without any technicalqualifications or knowledge of the enterprise's sector. As a result,managers complained of spending a lot of time educating boards to theoperations of the enterprise only to see the directors replaced, This addsto the pressures on management to be overly cautious in operatingpublicly-owned enterprises. Managers cited cases where the expansion ordiversification of an enterprise's activities was blocked because the boardwas unable to make a decision of any importance.

118. A high rate of turnover of top and mid-level managers is also asevere problem for the less autonomous public enterprises. Each newminister tends to replace the top executives of the public enterprises underhis sway, while these in turn often introduce new individuals as their ownmanagement team. Added to this, salaries in enterprises operating underpublic law have been restricted by the Government to levels preventing themfrom retaining competent executives. This constraint was removed when mostof the companies were shifted to private law in 1981, but many public

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enterprises are still under political pressures not to raise salaries. Onoccasion, ministers have refused to allow salary increases recommended by theboard of directors. As a result salaries in many of the less autonomouspublic enterprises are still not competitive.

119. General Management Problems. Because of overregulation, lack ofcompetitive pressures and the absence of incentives to reduce costs, the lessautonomous public enterprises in the sample lack some of the administrativeskills that could improve their efficiency. Recent measures to correct thesedeficiencies have improved the situation considerably, but further efortswill likely be needed. The main areas for improvement are: (1) financialmanagement; (2) marketing; (3) production; (4) subsidiaries; and (5) planningand investment.

120. First, in the area of financial management, accounting systems aregenerally poor and few of the enterprises have detailed cost accountingsystems. Basic sales data and inventory accounts are also deficient.Billing control is often inadequate, contributing to a large buildup ofoverdue accounts, and firms make insufficient provision for doubtfulaccounts.

121. Second, because these companies often enjoyed virtual monopolies,marketing skills are in short supply and market surveys are generally notavailable. Quality control is sometimes lax and the companies have littlecapacity to develop new products. Procurement skills are equally limited.

122. Third, production problems arise in some firms because theiroperations are unbalanced or unnecessarily complex. For example, not onlydoes SIDERPERU have excess rolling capacity, it produces steel using threedifferent techniques in a plant that is small by world standards. The plantuses both open hearth and electric arc furnaces to produce steel and is nowintroducing a direct reduction process to produce sponge iron for theelectric arc furnaces.

123. Fourth, some of these companies are also straddled with unrelatedoperations or subsidiaries that further complicate management. PEPESCA, forexample, owns a hotel. CPV, unlike its competition, maintains a navy yard,warehouses and repair facilities. In the past the Government would acquirean asset through nationalization or bankruptcy of a private firm and attachit seemingly at random as a subsidiary to a parastatal firm.

124. Finally, companies are also weak in long-term planning and inplanning and evaluating investment projects. Some of the firms have noplanning department, or do no long-term planning, because their scope ofaction used to be so circumscribed. Judging from some past investments, manyfirms, as well as ministries, were unable either to evaluate investmentproposals properly or to resist political pressures. The mission encountereda number of instances where investments were apparently made without adequatestudy of the costs, the market, the supply of raw materials, the balance ofproduction lines, the rate of return, and so forth.

125. Labor Problems. As mentioned, excess staff was cited as a problem inmany state-owned firms. Because of Peru's Labor Stability Law, firing excessstaff is almost impossible for both private and public firms. This hascreated especially severe problems for public companies subject to politicalpressures to expand employment. Some companies have reduced their workforce

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by offering staff bonuses to resign. Public firms may also have anotheroption that private firms do not. Some public enterprises have transferredexcess staff to the National Public Administration Institute (INAP). Thestaff members remain on the enterprise's payroll while INAP attempts to placethem elsewhere in the Government.

126. Another difficulty arises because the parastatal sector grew throughnationalizations, reorganizations and mergers. As a result workers in thesame sector, and at times in the same firms, fall under a variety of laws.The norms for wages and salaries, bonuses, holidays and pensions varyaccording to whether the person was hired under civil service statutes, lawsfor fixed term contracts or laws pertaining to private companies. The lackof uniformity forces companies to maintain large personnel departments andexpend great effort to try to maintain wages, salaries and benefits at thelevel of the greatest common denominator.

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IV - RECOMMENDATIONS FOR IMPROVED MANAGEMENT

127. There are 60 to 70 state-owned enterprises that the Government ofPeru will likely retain under public ownership. These include 16 financialenterprises, 10 mining or hydrocarbon companies, the State electricity,transport, water, communications, tourism and trading enterprises, the steelmill (SIDERPERU) and the companies run by the military. Some of thecommercial parastatal companies being considered for sale may also be underpublic management for some time (see Chapter V).

128. The Government is trying to improve the management of state-ownedenterprises by, among other things, increasing their autonomy. Increasingthe autonomy of public enterprises, however, will not assure that theyefficiently achieve the State's objectives. Greater autonomy has enhancedthe profitability of some of the production companies, but in many cases theState had no other objectives for these firms beyond earning a profit. Incontrast, many of the enterprises to be retained by the State have importantsocial objectives that may not be compatible with profitability or aremonopolies that are not subject to the discipline of the market place. Theachievement of social goals and efficient operations will require continuedgovernment direction, although not the extensive involvement of the past.Instead a system of management by objectives should be established to allowparastatal enterprises sufficient autonomy to actflexibly and efficiently,while creating a monitoring and incentives system to assure that theGovernment's goals are being met.

Management by Objectives

129. Under a system of management by objectives, the Government's centraland sectoral planning units would establish general objectives and broadguidelines for the public enterprises. Within that framework the stateagencies controlling the enterprises would meet with managers to work outspecific performance objectives. These would incorporate efficiency goals,such as cost minimization or labor productivity, as well as social goals andtake into account circumstances affecting performance. The enterprise wouldperiodically provide one set of standardized, detailed information to amonitoring agency on its results. Managers would be held accountable forresults and an appropriate system of incentives would reward or penalizemanagers according to their achievements.

130. As the previous discussion shows, few of the components of such asystem exist in Peru at present. Management of state-owned companies ischaracterized by too much interference in some cases and too little inothers. While the State may intervene extensively in daily operations, theenterprise may also plan or make investment decisions with little effectiveGovernment control. Because objectives and lines of authority are notclearly defined, it is difficult to evaluate performance or assignaccountability. Consequently, extensive government control of processeswithin an enterprise is combined with little control over results.

131. The framework for managing the parastatal sector created in the July1981 legislation could form the basis for a management by objectivessystem, as shown in Figure 1. Under this scheme, one entity -- theInterministerial Commission on Economic Affairs -- would be given theresponsibility and staff to translate the Government's economic and sector

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FIGURE 1

PER[: MANAGEMENT BY OBJECTIVES SYSTEM FOR STATE-OWNED ENTERPRISES

CAEF MINISTRIES CONADE ICSA ENTERPRISES

- Provide central coordination - Provide sectoral expertise - Coordinate management - Manage State's portfolio - Do strategic and operationalof publicly-owned of companies. planning on basisenterprises. - Act as secretariat to objectives.

CONADE. - Implement plans.- Monitor enterprises, act

as clearinghouse forinformation.

- Provide technical assistance,troubleshooting.

NATIONAL~~~~ ~ ~~~~~~~~~~~~~~~~~~ PARASTATALALECTORCT

|INPUTS ON, l l|INUSO ||IPTSN|ENTERPRISECODNTO NEPIEETRRSOBJECTIVESOEETVSOJCIS

…---------- SPECIFIC ENTERPRISE OBJECTIVES. -)PERFORMANCE CRITERIA----)INCENTIVES

IMPLEMENTATION

a | ~~~~~~~~ ~ ~ ~ ~~~~~MONITOR 4l l lPeriodic Informationj

Periodic reports on performanceon results

Feedback…----Feedback----Feedbak---------------I----------------- ----_________----------- ----- Fedak~~~

|SPECIAL TECHI ICAL ASSISTANCE >

---------- | YEARLY REPORT ON PERFORMANCE WITH COMMENTS OF ENTERPRISESFeedback--

- 41 -

policy into general objectives and programs to achieve these goals. Usingthe sectoral expertise of the ministries, the national policy would then bedeveloped into sectoral objectives which would be used as guidelines forformulating general objectives for the parastatal sector by CONADE andsubmitted for approval to the CIAEF.

132. Next, through a process of negotiation between the enterprises, theministries and ICSA, a set of specific performance objectives would bederived for each company in line with the general guidelines. The outcome ofthese negotiations would involve a commitment, both on the part of theenterprise to meet certain targets, and of the Government to providefinancing, price increases or the like. These objectives might include -- inaddition to covering demand for the product or service at least cost:

- planned expansion coupled with a financing plan specifying agreedlevel of self financing, Government financing and debt;

- system for periodic increases in rates or prices; and

- agreed proportion of earnings to be paid as dividend payments.

CONADE would appear to be the appropriate entity to oversee and coordinatethese negotiations with ICSA acting as technical coordinator. To accomplishthis both entities would need to be strengthened. CIAEF would act as finalaribitrator of disputes.

133. Performance criteria could then be set for those objectives which canbe quantified. Although this system should be adapted to Peru'scircumstances, one possible prototype for signaling performance is thatdeveloped by Leroy Jones of Boston University.1/ Jones uses "public profit"as a composite indicator of performance. "Public profit" attempts to measuresocial benefits and social costs. It excludes components of private profitwhich are not relevant benefits to the public sector. (For example, publicmanagers are not rewarded or penalized for reducing taxes or interestarbitrage.) To take account of price controls and distortions, theenterprises' performance would be evaluated on the basis of trends in thelevel of public profit in constant prices. This can be seen as a crude proxyfor using shadow prices to reflect economic scarcity. The evaluation ofmanagement's performance would also take into account factors beyond thecontrol of public managers which reduce profits such as prices or thequanitity and quality of capital available. Complementary, sector specificindicators of performance (such as capacity utilization, labor productivity)could supplement the profit indicator.

134. Noncommercial objectives can be taken into account during thenegotiations between the enterprise and the Government by means of "socialadjustment accounting". Under this system, firms pursue commercialobjectives unless specifically instructed to the contrary by the Government.The incremental cost of each noncommercial objective is then calculated andthe enterprise is compensated by this amount. Care must be taken inestimating these costs. If past costs are used, the managershave no incentive to minimize expenses. If the estimated cost is too high,then inefficient performance is rewarded. Since the enterprise is likely tooverestimate its costs, the final determination of compensation will have to

1/ See "Towards a Performance Evaluation Methodology for PublicEnterprises: With Special Reference to Pakistan," presented tothe International Symposium on Economic Performance of PublicEnterprises (November 24-28, 1981).

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result from negotiations between ICSA, the ministries and the enterprises.This system allows the achievement of commercial objectives to be evaluatedon the basis of public profits while the achievement of noncommercialobjectives is evaluated separately. It has the added advantage of makingthese costs explicit so that policymakers can weigh costs against thenonquantifiable benefits.

135. The enterprise would then be given the freedom to plan its course ofaction and act to achieve its objectives without interference. Managerswould be held accountable for results and a system of appropriate incentiveswould be developed to reward or penalize managers for their performance. Theincentives would also be negotiated and could include profit sharing,bonuses, greater autonomy and other rewards.

136. Enterprise performance would be monitored through a centralinformation system. The enterprises would periodically provide standardizedindicators needed to evaluate performance. Such indicators could includefinancial accounts and production and sales quantities, as well asinformation on the condition of the capital stock, maintenance, inventoryturnover, capacity utilization and similar data. In addition all otherinformation required by the public sector would have to be processed throughthis channel to avoid duplicating demands on the enterprises.

137. INVERSIONES COFIDE would seem like the appropriate institution tohouse this monitoring system. As part of this effort ICSA should bestrengthened through technical assistance, staff training and additionalstaff. In particular, ICSA would have to be reorganized and provided with15-20 staff members with the expertise to liaise with the ministries andenterprises and interpret the performance measures. It would also need theappropriate hardware and software to develop the information system, processthe data and produce the performance indicators. Some enterprises would a,lsoneed to be assisted to improve their internal information systems so they canprovide the necessary data.

138. INVERSIONES COFIDE would then prepare an evaluation of theperformance of the enterprises in consultation with the ministries. Theevaluation should be circulated to the enterprises for their comments orrebuttals. CONADE would coordinate this process and prepare a final reportto the CIAEF for feedback into the planning system. The evaluation wouldalso determine the final distribution of incentives. ICSA should also beequipped to provide trouble shooting assistance to enterprises at theirrequest. A hypothetical example of how this system would operate for anelectricity company is shown in Figure 2.

139. For the system to function the set-up for administering shares ofpublic enterprises would probably have to be streamlined. It would likely beimpossible to conduct negotiations with all the different agencies which nowadminister the shares of publicly-owned companies. At the very least, toavoid conflicting signals, no more than one agency should hold the shares ofa public enterprise and appoint its board. As mentioned, the Government isconsidering shifting control of all shares to ICSA which would operate as apublic holding company and appoint the shareholders' boards. It does notseem feasible to expect a single holding company to manage all state-ownedshares including those of enterprises requiring specialized attention, suchas public utilities, or highly technical firms, such as PETROPERU.Nevertheless, it would seem advisable to consolidate the shares of all the

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FIGURE 2

PERU: HYPOTHETICAL EXAMPLE OF A MANAGEMENT BY OBJECTIVES SYSTEM FOR A STATE-OWNED POWER COMPANY

MINISTRY OF ENERGY ELECTRICITYCIAEF AND MINES CONADE ICSA ENTERPRISES

9 -) GENERAL OBJECTIVES FORPARASTATAL ELECTRICITY

NATIONAL OBJECTIVES SECTORAL OBJECTIVES COMPANIES

Provide basic services Provide electricity Cost minimization; %efficiently; expand as efficiently as coverage of demand;coverage of basic possible; expand conservation throughneeds of poor; coverage to urban pricing policy and metering;rational exploitation and rural poor self-financing of XX all newof Peru's energy families; expand investment; improvedresources. exploitation of Peru's maintenance programs.

hydro resources;promote conservationof energy.

INPUTS ON COODIATONINPUTS ON INPUTS ONENTERPRISE ENTERPRISE ENTERPRISEOBJECTIVES OBJECTIVES OBJECTIVES

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SPECIFIC ENTERPRISE PERFORMANCE CRITERIA INCENTIVESOBJECTIVES

Enterprise Agrees: Government Agrees: Profit-sharing;l - Provide electricity to - X% improvement in - Pricing at long-run enhanced

existing clients as public profitability marginal cost (LRMC). autonomy;efficiently as possible at constant prices. - LRMC adjusted for bonus programswhile promoting its (Supplemental indicators: cross-subsidizationconservation. capacity utilization; consumers plus

- Expand coverage to X maintenance budget and additional subsidyrural and X urban decline in breakdowns, payments of $X.poor families. brownouts; new meter - $X in debt authorized

- Expand production installations.) with presentationhydroelectricity. - X additional house fully justified

connections. prject; XY profits- $X new investment at available for

sites X, Y, Z (with $X reinvestment, Xfinanced by debt, $X capital transfers.self-financed, $X fromGovernment) to generateX additional Kwh inyear 1.

IMPLEMENTATION

Periodic InformationPeriodic reports on performance

EVALUATION | < ~~~on resultsXEVLATION---------------------- P----------FeedbackP----------------- a|-------______________ -------------------------- Feedback---------

SPECIAL TECHNICAL ASSISTANCE

YEARLY REPORT ON PERFORMANCE WITH COMMENTS OF ENTERPRISES Peedback I_N _ __ _ _ __ ___

- 44 -

indirectly-administered enterprises in fewer hands and to transfer the sharesof enterprises slated for sale to the selling agent, i.e., ICSA. ICSA couldprobably function as an effective holding company for many of the enterprisesnow run indirectly by the State if it is strengthened and a parastatalmanagement system is implemented. Authority would need to be clearlydelineated and coordination mechanisms would have to be spelled out.

140. As part of this streamlining, the responsibilities of shareholders'boards versus boards of directors, and the length of their terms, should bestandardized for all enterprises. Public limited liability corporationsshould have a similar general form and level of autonomy except whereexceptions are clearly justified. Interference in the operations ofenterprises outside the management system would have to be strictlyprohibited.

Measures to Improve the Environment for Parastal Enterprisesl

141. A number of issues would have to be resolved for management byobjectives to function effectively in Peru. Enterprises which have operatedwith considerable autonomy in the past will be most able to adapt to thissystem. Some of these companies have been subjected to sporadic governmentintervention with very detrimental effects on profits. This sort ofintervention, which complicates the effort to control and evaluate the firm,should be carefully evaluated and, wherever possible, eliminated. When oneof these enterprises is used for some social goal, the cost to the companyshould be made explicit and preferably subsidized by the State, or else takeninto account in the performance criteria.

142. The bulk of the enterprises to be retained in state ownership arecompanies which have social or strategic purposes and have been subjected toconsiderable State interference in the past. Such enterprises present agreater management challenge. Several measures could help improve theparastatal environment and allow these companies to perform more effectivelyand to adapt to greater autonomy.

143. Legal Framework. The need to streamline the administration andstandardize the structures of parastatal corporations has already beenmentioned. An effort should also be made to eliminate legal duplication andconflicts and to simplify the legal framework for operations. An appropriateremedy could be for INVERSIONES COFIDE to retain a team of lawyers to reviewthe legislation dealing with state-owned companies and suggest reforms. tnparticular, enterprises should be exempted from the bidding law and allowedto follow more cost effective procurement procedures.

144. Controller. All countries have problems assuring that state managersdo not violate the public trust without meddling excessively in theiractivities. Once the legal framework is streamlined some of the problemswith the Controller's office should disappear. The improved information andmonitoring systems should also make the Controller's job easier and may thusreduce the need for investigations. Training could upgrade the Controller'sstaff's ability to conduct expeditious investigations. Nevertheless, therole of the Controller's office should be reviewed to assess if in fact ithas overstepped its legitimate areas of control. If public managers are toact with greater autonomy and responsibilities, they should be fired ratherthan jailed for serious errors of judgement -- as opposed to criminal acts --and they should not be hounded by investigations inspired by politicians ordisgruntled employees.

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145. Another, less important, source of friction could be eliminated byallowing enterprises to choose their own auditors from among firms certifiedby the Controller's. Not only would this be congruent with more autonomouspublic management, but enterprises which choose to could benefit from thecomprehensive business advice available as part of modern audits. Largerfirms, which offer comprehensive audits, do not particpate in the presentsystem of bidding.

146. Debt Control. If investment capability is improved, the debt controlbottleneck could be remedied by involving COFIDE, S.A. from the very earlystages of project preparation. COFIDE, S.A. would then have an input as theproject evolves and negotiations for suitable financing could begin early.Once the system for management by objectives is in place and investmentproposals are being properly appraised, COFIDE's participation in negotiatingforeign financing could be made voluntary or required only for loans with agovernment guarantee.

147. Dividends. The Government should consider enforcing the requirementthat public enterprises pay part of their profits in dividends. If thedividend requirement is combined with a rigorous evaluation of investmentprojects, it could reduce misallocation of resources. It would also increasethe Government's control over the expansion of the public sector. Dividendswould be waived only for properly evaluated, high priority investmentprojects. ICSA could keep track of the use of these dividends and prepare aregular report for CONADE to present to CIAEF. The dividend requirementshould also be combined with a system of profit sharing to offset anydisincentive to earn profits.

148. Strengthening the Competitive and Commercial Environment. Plannedadditional reductions in tariffs (to an average of 25 percent by 1984) andprice controls will increase both the pressures and incentives for moreefficient operation of the publicly-owned enterprises. The Government'smoves to reduce public monopolies and its plans to eliminate state monopolycontrol over certain sectors of the economy by selling public enterprisescould further increase competitive pressures if the Government also acts toassure that public enterprises have no unfair competitive advantage. Inaddition, the Authorities should consider ending the practice of forcingpublicly-owned enterprises to use state banks, trading and insurancecompanies, the shipping line and other public firms. This practice not onlycurbs competition, it denies public executives the discretion afforded totheir private counterparts and can penalize the company financially and inother ways. In particular, enterprises should be able to shift theirdeposits to banks which offer the best service as part of the effort toencourage better financial management in public firms. By the same tokenautomatic financing of enterprises' credit needs, including working capital,by the State banks would end. Enterprises would have to show good financialperformance (adjusted for the costs of state mandated social goals) andpresent financially justified projects to obtain credits.

149. The cross-subsidies, delays in the payment of transfers, and latepayments of bills by other public enterprises also distort the performance ofPeru's public enterprises. In order to judge a public company on itsresults, all of these irregularities would have to be eliminated. Latepayments could be reduced if state-owned enterprises were seriously penalizedfor failing to pay their bills. The Central Government would have to imposea similar fiscal discipline on itself. Cross-subsidies are an even more

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severe problem since they make monitoring enterprises extremely complex. TheGovernment should consider eliminating cross-subsidies and replacing them, asneeded, by direct transfers. If this is combined with a properly enforceddividend policy there should be a net gain in revenues to the Treasury. Ineffect, profitable companies would help finance these subsidies throughdividend payments to the Treasury. This has the advantage of bringing thesesubsidies into the open so their costs can be weighed against benefits. Theelimination of the remaining price controls and setting rates to cover longrun marginal costs would reduce the number of subsidies, as well as remove alarge fiscal and administrative burden.

Measures to Improve the Operations of State-Owned Companies

150. The ability of the state-owned firms to operate efficiently withgreater autonomy varies widely. Many of the enterprises would likely n,eedspecial assistance to function effectively under the proposed system. ICSAcould be given the capability of providing some troubleshooting assistance.ICSA already places accountants in some of the problem enterprises in itsportfolio to upgrade their financial management. It could also retain a teamof lawyers, management consultants, and other experts to offer advice onshort-term problems and hire outside expertise for more indepth assistance.Some of the areas needing special attention are discussed below.

151. Planning. The state-owned companies will need to strengthen theirability to do short- and long-term planning. The new system of managementwould provide guidance only on ultimate objectives; the enterprises will haveresponsibility to determine how it will achieve these objectives.Enterprises may need technical assistance and training in corporateplanning. Longer-term planning involves (1) designing strategies to pursuelonger-term objectives; (2) developing investment programs; and (3) buclgetingthe allocation of financial and other resources. Short-term operationalplanning entails the development of action plans to meet the companies'more immediate goals, and covers such areas as financing, productionprocesses, personnel planning, marketing, procurement, and informationsystems, as well as feedback systems to monitor results, take correctiveactions, and reinforce behavior through incentives and training.

152. As part of this effort, particular attention should be paid toimproving the ability of many of the enterprises to plan, evaluate andprepare new investment projects through training and technical assistance.Parallel with this, the capacity of COFIDE, S.A. to evaluate investments forfinancing should also be upgraded. The cumbersome review process should bestudied and streamlined. Preferably one entity, such as INVERSIONES COFIDE,would have primary responsibility for evaluating investment proposals.Projects would have to be presented with proper justification and appraisal.

153. The justification for the project should include an analysis of:

(1) priority of project - the need for the project, consideration ofalternatives, market studies;

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(2) technical considerations - the scope, design and location of theproject; the types of processes and equipment to be used; theschedule for completion; the availability of factors of productionincluding technical staff; and an estimate of the costs of theproject including provisions for contingencies and price inflation;

(3) commercial aspects - arrangements for procurement of inputs,distribution channels;

(4) organization and management issues - how authority for supervisionwill be delegated, how implementation will be coordinated, thestaffing, organization, and budgeting and financing systems of theimplementing units, arrangements for new staff, training or externaladvice; and

(5) financial criteria - estimates of costs and benefits includingconsideration of the cost of funds based on the probable financingplan, calculation of the internal rate of return and net presentvalue using discounted cash flow, and sensitivity analysis based onan assessment of risks.

154. Management. Management by objectives presupposes a management teamcapable of forceful, independent and responsible leadership. Judging fromour sample, the present Government has managed to recruit such people to leadsome of its most problematic enterprises. To attract and retain suchexecutives the enterprise must offer salaries and incentives commensuratewith the managers' greater responsibilities and competitive with the privatesector. Although state-owned enterprises operatiang under private law arelegally free to set salaries, many have been constrained politically. Toassure the continuity of good quality management these constraints would haveto be removed. Further, the practice of replacing managers at the whim ofthe minister would have to end and managers removed only for cause.

155. In addition to recruiting highly qualified senior executives, upperand middle management should be upgraded through training programs andseminars. In particular managers should be encouraged to acquire skills inmarketing, financial management, investment planning and analysis and otherskills that were neglected when these enterprises were less autonomous.

156. The quality and continuity of boards of directors also needs to beimproved. Directors should be given longer terms and removed only forcause. An effort should be made to select businessmen with some generalknowledge of the sector, such as industrialists for the board of directors ofa manufacturing company. In some cases this may mean that directors'salaries will also have to be increased.

157. Undercapitalization. Some of the state-owned companies to beretained by the State may need an infusion of capital if they are to operateefficiently. This is a serious problem for a government strapped for cash.This problem will require further study to determine the extent of theproblem and identify possible solutions for individual firms. Such a studycould be part of the review of the retained companies by ICSA which issuggested below.

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158. Reorganization. Some firms may require an extensive reorganizationof their management and operations to function effectively, including assetstripping in some cases. When such companies are slated for sale this wouldprobably best be done by the purchaser or through a leasing arrangement (seeChapter V). For the companies to be retained, ICSA could hire a team ofindustry experts to review these enterprises quickly and pinpoint the mostproblematic cases. These companies should then receive more comprehensivetechnical assistance from industry experts, management consultants, andauditing firms.

159. This assistance could begin with a comprehensive survey to evaluateperformance and pinpoint problem areas. The survey would examine such areasas the firms' organizational structure, the allocation of human and financialresources, the use of inputs, the achievement of objectives, effectivenessand efficiency, marketing, production, finance, research and development andpersonnel. Based on the survey's results, further assistance would beprovided as needed in one or more of the following areas:

(1) General management -- recommending reorganization, changes inmanagement procedures, training;

(2) Financial management -- including capital management, least costoperating alternatives, accounting systems;

(3) Marketing -- advice on strategy, sales management, distributionchannels, packaging, promotion, penetration of new markets;

(4) Production --- including layout, flow of work, work methods, materialshandling, maintenance, performance standards, quality control,production planning, inventory control, work environment (safety, jobsatisfactioni and the like);

(5) Information systems and data processing; and

(6) Personnel management -- advice on personnel policy, wage and salarylevels, career planning and development, staff organization,performance evaluation, incentive systems, training programs.

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V. THE SALE OF STATE-OWNED ENTERPRISES

160. The Government of Peru has announced its intention to sell orotherwise transfer its equity in a number of the state-owned enterprises.Although a government commission and individual public officials have givensome thought to the issues and costs associated with divestiture, nosystematic analysis has been done. Before an appropriate strategy can bedesigned, the Government must define its objectives in selling these firmsand determine what it seeks in the way of price, timing and terms of thetransfer. There are also market and political constraints on theGovernment's action. The implications of the sale for future investment,allocation of resources, and income distribution should also be considered,as well as the desirable extent of foreign participation.

161. This chapter will first, explore the Government's objectives indivesting state-owned enterprises; second, estimate the magnitude of thesale; and third, examine some of the major issues related to the sale. Onthe basis of this analysis, it will attempt to suggest a selling strategydesigned to minimize the costs and maximize the benefits associated with thesale.

Objectives of the Government

162. The Government will first need to determine a clear, consistent setof objectives for the transfer of state-owned enterprises since the saleprocedures will vary according to its goals. A number of reasons were cited,some of which could conflict. The objectives that were heard most often werethe following:

163. 1. Fiscal Considerations: Some observers explained the sale as away to reduce the public sector deficit. This would be accomplished first,by reducing the drain of state-owned enterprises on the Treasury and secondthrough the revenues from the sale. As previously mentioned, however, mostof the parastatal sector's drain on the Treasury is caused by consumer pricesubsidies and the investment programs of state enterprises. The pricesubsidies will not be affected by the sale. Furthermore, the enterpriseswhich receive the bulk of the capital transfers for their investment programsare not slated for sale. The enterprises subject for sale do have a netoperating loss which amounted to about 9 percent of the 1980 Governmentdeficit. For these reasons some Government officials do not considerreducing the fiscal deficit a main goal of divestiture.

164. The proceeds from the sale could be an important source of fiscalrevenues if the enterprises can be sold quickly for cash. Selling quicklyfor cash or mostly cash would probably mean accepting a significant pricediscount, especially since Peru's economic circumstances are not favorablefor such a sale at present.

165. 2. Burden on Public Managers: Some observers suggested that thesale would help reduce the burden on Peru's top government officials whosescarce time and talents are occupied with the problems of the parastatalcompanies. Most of the likely candidates for sale, however, are relativelyautonomous companies. The main management headaches are the state-owned

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enterprises that are not slated for sale. Thus the sale will only partiallyreduce the management burden on the authorities. It is important to considerthis burden, since it implies selling the most problematical companies firstand could rule out any lengthy effort to upgrade the companies prior to sale.

166. 3. Injection of New Capital: Authorities who agree that the plabliccompanies are undercapitalized see the sale as a way to inject new equitycapital in these enterprises and put their operations on a sounder footing.This is likely to be a long-term solution; the private sector will probablynot be able to do this soon after a major secondary purchase of equity andunder current economic circumstances. Much will depend on the size of thecompany and the terms of the sale.

167. 4. Efficiency of Resource Allocation: Some observers support thesale because they are convinced that these businesses would operate moreefficiently as private companies. They believe that the discipline of acompetitive marketplace will insure better allocation of resources than eventhe best public sector management. (Here again, some of the worst culpritsare not for sale.) To achieve this objective the Government would also haveto assure that the newly privitized companies operate in a fully competitiveenvironment.

168. 5. Rationalizing the Role of Government. An ideological commitmentto what officials regard as a more rational role for government seems tounderlie many of the other goals. According to this view, the public sectorshould act only when the private sector cannot or will not act andenterprises that do not serve a specific social objective should be turnedover to private hands.

169. In the opinion of the mission, the market and political constraintsmay be so great that the Government may not be able to sell all of thecompanies it wants to sell at a fair price over the next several years. Atthe same time it may be politically difficult to sell the more profitablecompanies at a large discount or on very favorable terms, especially to asmall group of Peruvians. Rather, Peru's authorities may have to establishpriorities and think in terms of trade offs. The sales strategies coulddiffer according to the weights the Government assigns to its goals and itsassessment of the costs associated with the sale.1/ Figure 3 summarizessome of the possible strategic and other implications of the variousobjectives for the sale which are considered in more detail below.

Magnitude of the Sale

170. To evaluate the constraints on the sale it is important to know theapproximate total market value of the enterprises for sale. Two problems,however, make it impossible to determine the size of the sale with anyexactitude. First, it is not certain which enterprises will be sold. Second-- and more fundamentally -- it is virtually impossible to put a market valueon the companies at this point. These problems are considered in more detailbelow.

1/ A draft law proposes the State sell or otherwise transfer its equity in62 companies.

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FIGURE 3

PERU: STRATEGIC AND OTHER IMPLICATIONS OF VARIOUS OBJECTIVES FORTHE SALE OF STATE-OWNED ENTERPRISES

OBJECTIVE FOR SALE IMPLIED SALES STRATEGY POSSIBLE IMPLICATIONS1. Reduce fiscal deficit. Sell best companies quickly Lower prices.

for cash; sell loss-makersquickly at discount. Sale to large domestic business groups

which could lead to asset concentration,monopoly holdings, more skewed incomedistribution.

2. Reduce burden on a. Sell most problematic companies a. Lower prices for problem companies, no up-public managers. first, and/or grading of companies prior to sale.

b. Lease companies w/option to buy to b. Some immediate revenue loss; long-runprivate entrepreneurs to upgrade financial gain.for share of profits.

3. Inject new capital. Sell smaller uncapitalized Sale to large wealth holders at generouscompanies. terms with same possible implications as

for (1.) above.

4. More efficient resource Sell less efficient first, sell Less emphasis on terms or price or on quickallocation. enterprises potentially subject sale.

to domestic or internationalcompetition. Action to assure competitive environment for

privatized companies including sale tobuyers other than large Peruvian businessgroups and developing new institutions toreach smaller savers, further tariffreductions, regulations to ease new entry.

5. Rationalizing role of Sell enterprises not serving Less emphasis on terms, price and timing ofgovernment. specific social or strategic sale and more on reducing possible social

objectives. and economic costs associated with sale(similar implications as for (4.) above).

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171. Review of Enterprises Expected to be Sold. On the basis ofunofficial reports of which companies will probably not be sold, the missioncompiled a list of about 70 likely candidates for divestiture. Thisincludes the shares in the five cement plants, four chemical companies, sevensmaller mining companies, three pulp and paper plants, about fifteen fishing,agriculture and agro-industrial companies, six metalworking plants, fourmachinery and equipment producers, six financial institutions and a number ofmiscellaneous service, marketing, manufacturing, communication and transportenterprises, including shares in AEROPERU. The list encompasses almost allfirms in which the State holds less than 90 percent ownership as well asalmost 30 wholly public firms. Most of the companies are considerablysmaller than the ones being retained.

172. Financial data are available for about 70 percent of the companies onthe sale list. According to this information, 13 of these firms recordedlosses in 1980 versus 33 firms earning profits, but the losses (US$69million) far outweighed the profits (US$28 million). The losses largelyreflect the performance of only five companies: AEROPERU, PEPESCA, PESCAPERU,Moraveco (a refrigerator producer) and Cementos Yura. The first four andmost of the other loss-makers confront major problems that will not bequickly remedied. A few, however, are only temporarily losing money.Cementos Yura, for example, just completed a major expansion but is unable tooperate at full capacity because of electricity shortages. With theinstallation of its own diesel generator the plant should again be amoneymaker.

173. This preliminary list of likely candidates for sale is subject toconsiderable uncertainty. The Paramonga paper conglomerate, for example, hasbeen mentioned both as a firm that won't be sold and as the subject ofnegotiations with potential buyers. Since this is one of the largeststate-owned companies that might be on the market, its exclusion makes asignificant difference. In addition, there are a lot of assets that could bestripped from the retained enterprises to streamline their operations. Thevalue of these assets is unknown but could be considerable.

174. Market Value of the Sale. The mission made a rough assessment of thevalue of the companies on this list based on discounted book value andearnings capitalization. The results should be taken as only an indicationof the order of magnitude for the sale. The Government intends to doextensive engineering and accounting studies to establish the initial askingprice of each firm. Clearly the final price will also depend on the termsoffered, the economic conditions and whether the Government tries to sell alot of companies quickly.

175. Another problem in determining the size of the sale is the financialdata. COFIDE does not have data on 20 of the 70 odd firms that are lilkelycandidates for sale, including some larger companies. Furthermore, the datathat are available for 50 of the companies present serious difficulties.Some deficiencies of the accounting practices of these firms have alreadybeen mentioned. The accounting net worth is distorted by the failure tofully adjust assets for inflation.2 / Although Peruvian companies arerequired by law to revalue their fixed assets yearly to reflect inflation,the valuation index is usually less than the general price index.

2/ See Annex 1.

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Furthermore, land assets do not have to be revalued. Finally, some companiesare not required to revalue their assets fully. AEROPERU, for example,revalues its assets for the devaluation of the sol but not for full internalinflation. COFIDE staff estimated that full revaluation would raiseAEROPERU's net worth ten times. Other firms may intentionally understaterevaluation since taxes must be paid on their net worth. These distortionscan result in a significantly understated book value. For example, thetobacco company, ENATA, had a 1980 book value of S/. 541 million. Anextensive study by the Ministry of Industry estimated that ENATA's net worthusing full inflationary accounting and the current value of land would bethree to four times greater.

176. The Government's share of the accounting net worth of the 50companies was US$365 million at end-1980 (see Table 7 of the StatisticalAppendix). This does not include companies for which the mission has nodata, such as SOLGAS, and companies which may or may not be sold, such asParamonga (see Table 8 of the Statistical Appendix). These two firms aloneare estimated to raise the book net worth by over US$200 million. If weassume conservatively that the 20 companies for which we have no data plusthe assets that might be stripped from other companies are worth about US$100million, the total accounting net worth would be about US$700 million. Fullyrevalued for inflation, the book value could be close to US$1 billion.

177. The actual market value of the companies would probably be less.Equities often sell at significant discounts from their accounting networth. Since these public enterprises are generally less efficient thantheir private counterparts, they would likely sell for an even greaterdiscount.

178. To determine what this discount might be, the mission analyzed theratio of book value to share price for 15 manufacturing companies traded inPeru's stock exchange. The stock exchange is a poor indicator -- very smalland vulnerable to insider manipulation -- but it is the only sampleavailable. Over the last three years traded companies sold for an averageof 1.8 times their accounting net worth. 3/ To be conservative, a discountfor publicly-owned companies was arbitrarily set at less than half thepremium for private companies, or 0.80. Applying this discount to anaccounting net worth of US$700 million (unadjusted for underestimation due toinflation) yields a market value for the sale of US$500-US$600 million.

179. A similar exercise was done using an earnings capitalizationapproach. As mentioned earlier, earnings of public companies are verydifficult to evaluate. Profits may be temporarily low because of price andother controls and past managerial incompetence. Furthermore, a number ofpublicly-owned companies are currently showing losses but are known to beasset-rich. In addition, the profit and loss statements have not been fullyadjusted for inflation. Some companies with substantial fixed assets areleveraged to the point where the asset revaluation generates an increase innet equity well above the rate of inflation. This real gain on equity is notcaptured in an earnings capitalization approach, but could affect the pricefor a sophisticated buyer.

3/ The average was 1.3 times in 1978 and 1979 and 2.5 in 1980.The ratios may be so high because Peruvian investors arecompensating for undervaluation of accounting net worth in Peru.

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180. The average price:earnings ratio on the Peruvian stock market wassurprisingly high, about 12 over the last three years. It is unlikely thatsuch a high ratio would be applied to the state-owned companies. On theother hand, using a high ratio may cancel out the understatement ofearnings. Assuming that the P:E ratio for public companies is two-thirdsthat of private firms, or 8, would give a market value of US$220 million forthe profitable companies, plus another US$70 million for Paramonga. It seemsreasonable to assume that the loss making firms, the companies for whichthere is no data and the assets to be stripped from other firms have a valueof at least another US$100 million, yielding a lower "fair market value" ofabout US$400 million.

181. These various estimates indicate that the market value of thecompanies up for sale is in the range of US$400-600 million. The askingprice that results from the engineering and accounting assessments, however,will likely be much higher. 4/

Issues Related to the Sale

182. There are a number of issues likely to be associated with a sale ofthis magnitude. First, the size of the sale raises the question of marketconstraints. Second, the controversy already surrounding the sale suggeststhat there may be political constraints as well. Third, there could beeconomic and social costs associated with the sale.

183. Market Constraints. The Peruvian Government may well confront marketconstraints in trying to sell such a large volume of assets. The domesticfinancial market is small and highly segmented. Domestic private savings arelow, the banking system is shallow and the Government owns a relatively largepart of productive wealth. There is only a rudimentary mechanism fortransferring shares to the well-to-do, largely on a private placement basis.Instruments to tap the savings of the less affluent -- securities markets,mutual funds, investment trusts, pension funds, insurance schemes -- arestill embryonic. 5/ Much of the savings of wealthy Peruvians are heldabroad; foreign currency assets have been estimated at several billions ofdollars. Short of a major change in the domestic economic and politicalenvironment, however, these funds are unlikely to be available to purchasegovernment-owned companies.

4/ The draft law mentioned earlier excludes PARAMONGA and 8 smallercompanies. Based on this legislation, officials at INVERSIONES COFIDEestimate the value of the sale to be much less --- US$150-200 million.This figure (which also excludes assets that might be stripped from othercompanies) compares with the mission's lowest estimate of US$300 millionand implies a discount to book of 35-50 percent. Since the final pricewill clearly depend on market conditions and selling strategy, the valueof the sale could be this low, in which case some of the constraintsdescribed here might not apply.

5/ The stock market has grown but from a very small base. The volume oftraded shares was 114 million in 1980, twice as large as in 1978 butstill a very small amount. There were 38 new issues in 1980 and 68estimated for 1981.

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184. Foreign participation could ease the market constraint, but there areseveral barriers to foreign buyers. First, the Andean Pact Agreementprohibits the sale of state assets to investors outside the Andean Group.Second, foreign buyers may be wary of purchasing previously nationalizedcompanies. Finally, the Government is already under some political pressurenot to sell a large part of its assets to foreigners. Under thesecircumstances, large scale foreign participation seems unlikely.

185. Although at first glance, a sale of about US$500 million in assetsmight not seem large, it could prove to be very large relative to theabsorptive capacity of the Peruvian market. It is equivalent to only 3percent of Peru's GDP, so if the sale is spread over 3 years, which appearsto be the intention of the authorities, it would amount to only 1 percent ofGDP a year, compared to a net private savings rate of 12 percent. On theother hand, since the sale is a secondary transfer of existing assets, itshould not be equated too readily to domestic private savings andinvestment. Investment involves the creation of new productive goods, whilea secondary transfer rather requires an ajustment in the private sector'sexisting and future wealth portfolio -- an exchange of cash and other assetsfor equity.

186. Such a portfolio adjustment might be surprisingly difficult. In anyeconomy, the private sector has a preferred portfolio distribution. Theexperience of other countries is that these portfolio preferences change onlyslowly and that changes often require large changes in the relative returnsof the assets. In most economies, the value of equities are roughly onetenth of the private wealth portfolio and grow at the same rate as theportfolio as a whole. Most of the growth of the equity component resultsfrom price inflation and earnings retention. The private sector absorbs onlya small amount of new shares -- about 1 percent of GDP per year.

187. This does not mean that the Peruvian private sector can readilyabsorb a secondary transfer of shares from the Government equal to 1 percentof GDP for 3 years running. The private sector will likely want to continueto make investments in new equity as well. This will reduce the amountavailable for purchasing existing companies. Furthermore, as mentioned, thewealth portfolio of the Peruvian private sector is small by internationalstandards and the purchase of US$500 million in equity would require arelatively large restructuring of private financial holdings. For example,the equities the Government wishes to sell are equal to roughly one fourth ofprivate domestic quasi-money. Purchasing these shares would require a majorchange in the proportions (or total amount) of equities and quasi-monies heldby Peru's private sector.

188. Added to this, the current economic circumstances in Peru are not thebest for a large sale of public assets. Money is tight, inflation is stillhigh, and private demand for new investment credits has been stagnant. Thestock market, although a very imperfect barometer, also shows that demand forequities has fallen in recent months.

189. The possibility that market constraints may present a problem wasborne out by the mission's small informal survey of potential buyers. Thereare only a small number of wealthy groups in Peru that would be the obviousmarket for these equities. These groups confirmed that they would be willingto make cash purchases on the order of several million dollars a year but not

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tens of millions. They also cited current economic and politialuncertainties as reasons not to purchase large amounts of equity and wereparticularly wary of companies that had previously been nationalized.

190. One way to deal with the existing market constraints would be tooffer generous financing terms. If the Government sells the companies withlow down payments and long financing terms it can spread the transfer overmany years. If the interest rate is low enough so that much of the debtservice could be met by the profits or cash flow of the companies sold,demand would greatly expand. All of the groups consulted by the missionagreed that they could not buy the larger companies offered for sale withoutsuch extended financing terms, even if they acted in concert with othergroups. Liberal financing terms, however, would reduce the proceedsavailable to cover current fiscal deficits and could raise difficult socialand political issues (see below).

191. Political Constraints. Judging from the opposition already raised,the sale will occur in a highly charged political atmosphere that will likelyplace certain constraints on the Government's scope for action. First ofall, the Government will not be able to sell these companies for any price.Too low a price would be considered unfair even if that is all the marketwill bear. The "fair market price" estimated by the mission is substantiallybelow the book value of these companies and the book value is probably belowthe net worth that would result after a detailed and impartial assessment ofthe value of these firms applying full inflationary accounting.Nevertheless, it may be politically difficult to accept a large discount fromthis book value.

192. Secondly, given the market conditions just described, the Governmentwill likely have to concentrate much of its sale on a few large industrialgroups. It may prove politically difficult to transfer large amounts ofwealth to these groups and it may be even more difficult to provide thesegroups with the generous financing they need.

193. Finally, not only is the sale to foreigners prohibited by law, itcould be a sensitive political issue as well.

194. Economic and Social Costs. The sale of state-owned enterprisescould well entail certain economic and social costs which need to be weighedagainst the benefits. The sale could crowd out new productive investment tothe detriment of future growth. As mentioned, portfolio preferencesgenerally change very slowly and slightly. Peru's private sector may,therefore, only tolerate a limited increase in its equity portfolio. Thesale of state-owned enterprises may well sate its demand for equityinvestment and thus reduce the financing available for expansions or newventures.

195. Selling public companies to foreigners may also sate foreign demandfor direct investment in Peru. Foreign investors have country exposurelimits and buying an existing enterprise from the public sector maysubstitute for making a new investment in Peru. Since direct foreigninvestment often brings unique access to new technology and foreign markets,the productivity of investment and export performance could suffer.

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196. If the enterprises are sold to the small number of wealthy businessgroups prepared to buy at low prices or on generous terms, it could increaseownership concentration. If the sale results in concentration of economicpower in a single industry or subsector, it could promote monopolistic orologopolistic behaviour and have an adverse effect on resource allocation.The experience of Chile shows that if financial institutions are sold toindustrial groups, or industrial enterprises are sold to financial groups,strong linkages will be established between credit institutions andindustrial borrowers. Under such circumstances, financial institutions oftenallocate credit to their affiliated industrial firms even though they do notearn the highest returns, again resulting in a suboptimal allocation ofresources. Further, if the shares are transferred to a few wealthy groups atlow prices and therefore high returns, income distribution would also becomemore skewed.

197. Other Issues. The specific circumstances of some of the firms raisessome additional issues. Most of the possible sale candidates were allowed tooperate with far more autonomy than the rest of the parastatal sector.Nevertheless, even many of these were subject to price and other controls,only some of which have been removed. The fertilizer plants, for example,must still sell part of their production at a negotiated price to ENCI whileAEROPERU's rates and routes are still regulated. A few of the enterprisesalso hold public monopolies (the reinsurance company). Prospective buyerswill want some assurances about the future status of these companies and howany change in pricing and other policies may affect their returns.

Recommendations for Selling Strategy

198. The mission thinks that Peru's economic situation, the political andmarket constaints and the costs that could be associated with the sale, tendto favor a strategy of selling the smaller and/or least profitable companiesfirst. The sale of the loss-making companies will eliminate at least part ofthe fiscal and human resource drain of the parastatal sector and could thushave a material short run impact on the success of the current economicprogram. Loss-making companies can probably be sold at a deep discountwithout awakening strong political opposition. The sale of smaller,profitable companies will not overtax the market. These firms are thuslikely to command a good and politically acceptable price. Furthermore, thesale of smaller firms or of money loosers at a low price will probably notdepress new investment or contribute to the creation of monoplies. It wouldalso be reasonable to expect that private entrepreneurs would be able toinject needed new capital into these smaller firms.

199. This strategy would give the Government time to develop channels tosell shares in the larger, more profitable companies to a broader section ofPeruvians. Selling these enterprises through the narrow placement channelsthat now exist would tie up the cash flow of most potential buyers and makeit difficult to sell the problem companies. If these profitable companiescan be sold instead to a broader base of individuals, the Government couldsell more of the public enterprises on acceptable terms and also avoid someof the problems of increased asset concentration.

200. Because of the weakness of the domestic capital market, such abroader based sale would require building institutions, such as pension fundsor social security schemes, to tap additional sources of savings. ICSA could

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also take an active role in reaching small savers. Selling the bettercaliber companies in this fashion would make it politically feasible for theGovernment to offer these companies at lower prices and on favorablefinancial terms. Longer-term financing would permit the sale to be completedwithin the present presidential term, while spreading the actual resourcetransfer into the years beyond.

201. Classification of Enterprises. Different companies lend themselvesto different types of selling strategies. It might be useful, therefore, togroup the 70 odd companies according to their financial status and suitablemechanism for sale. Such a classification yields five categories ofenterprises.

202. 1. Not Economically Viable. Some of the publicly owned companieslisted for sale may never be economically viable and should be liquidated.The private sector might be able to sell the assets of these companies athigher prices with lower accompanying costs than the Government. Peru's lawof labor stability, however, makes it difficult to fire personnel and itheremay be strong political opposition to liquidating former state enterprises.Under the circumstances, potential buyers would be very wary and theGovernment would probably have to sell at less than net liquidation value.It may be more profitable and politically easier for the Government to layoff personnel and sell the assets of bankrupt companies itself.

203. Government liquidation of state-owned enterprises has someprecedents. Alambresa, a petroleum pipe company, was liquidated although itreemerged later as a new company when it was transferred to the assets ofanother firm. DAASA is currently shut down and in the process of laying offthe workforce.

204. 2. Economically Viable with Restructuring. Some of the companiesconsidered for sale have serious, but solvable, problems. For example, theoperations of ENATA, the tobacco company, have already been improved. Withsubstantial restructuring and the sale of some of its assets, AEROPERU couldbe a viable company. The fishing companies might also fall into thiscategory. Since the restructuring and partial liquidation of these companieswill require a great deal of industry expertise, as well as an able anddedicated management, this job could likely best be done by the privatesector. Furthermore, it is these sorts of companies which represent thelargest burden to the public managers, a burden that could be compounded ifthe Government were to take on the task of restructuring problem firms.

205. Because these enterprises show significant losses, it may bepolitically feasible to sell them through private placements at a largediscount from their stated net worth and with favorable financial terms. Ifthere is too much opposition to selling these firms at a price low enough toattract a buyer, the Government could keep the firms and lease them toentrepreneurs who would reorganize them for all or a part of prospectiveprofits. (This might be necessary in the case of AEROPERU, for example,where the Government is required by law to retain at least 35 percentownership.) The larger companies in this group might first require asophisticated analysis to determine in advance the general nature of therstructuring and to identify potential purchasers.

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206. 3. Immature Projects. A few of the sales candidates are viableprojects which are now showing losses or only marginal profits because theyare not yet mature. Some examples are the small forest products companies(FASA, Iquitos Plywood) and EMDEPALMA. These are typical development bankprojects and might best be sold at a later date when they might command ahigher price than they would at their present stage of development and lumpedwith the rest of the State enterprises. As venture capital companies orprivate development banks are established in Peru, these projects could besold to these institutions.

207. 4. Medium and Small Companies in Fairly Good Financial Shape. Manyof the enterprises are small or medium sized companies in fairly goodfinancial shape. Some of the metal manufacturing companies, the smaller pulpand paper plants, and the marketing and chemical firms, among others, fitthis category. For example, the paper company, Papelera Peruana, is a small,profitable firm with an old plant and equipment but good location andinfrastructure. New investment could make this plant into a much moreprofitable operation. In most cases these companies have a net worth on theorder of several million dollars and there are plenty of domesticenterpreneurs with the capital to buy them. These firms could be soldthrough private placement, primarily to Peruvian investors, although sharescould also be sold to a wider number of domestic investors as describedbelow.

208. 5. Large Profitable Enterprises. Most of the market value of thecompanies for sale is in large, profitable enterprises like Paramonga,Quimpac, the cement companies and the Buenaventura Mine (19 percentstate-owned). The shares of these companies could be transferred more widelythrough several channels. Part of the shares could be sold to existing localbusiness groups, part could be listed on the local stock exchange and partplaced as negotiable portfolio investments with contractual savingsinstitutions and sold to small savers through a marketing campaign organizedby ICSA. Although only a small fraction of these shares could be absorbed bythe local capital market at present, with some institution building thisabsorptive capacity could be significantly increased. Alternatively, some ofthe larger conglomerates might be divided and sold as separate smallercompanies to groups through private placement. The Government might alsosell only a part of the shares initially according to the market's absorptivecapacity, and divest itself of these larger companies gradually over the saleperiod.

Mechanics of the Sale

209. Private Placements. Some of the smaller profitable companies and thefirms to be restructured could be sold through private placement. Eventuallythe same could be true of the immature projects. Part of the state ownershipof the large firms in category five could also be sold this way. Althoughthe law mandates a public auction, the actual sale will require an activemarketing effort and negotiated placement and the Government will needcomplete descriptions and authoritative appraisals of most of the enterprisesslated for sale.

210. Negotiating acceptable prices and financing terms for most of thesecompanies will be complex and difficult. Large companies that will be placedamong many parties present the added problem of negotiating ownership sharesand management terms acceptable to all concerned. This phase of the sale may

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call for special advisors such as a foreign investment bank or domestic lawfirm. Sales agents should be matched to the companies slated for sale andtheir likely markets. Domestic banks and other local institutions know thedomestic market best. Foreign investment banks can be used to identifypotential foreign purchasers.

211. ICSA has been designated to manage the divestiture. Nevertheless,the various ministries and other authorities that own shares in enterprisesexpected to be sold have begun informal and uncoordinated discussions withprospective purchasers. For such a complex sale to be successful, oneinstitution with a clear mandate will have to be responsible for handling allphases of the placement. This might be accomplished by transferring theshares of the sale candidates to ICSA.

212. Selling such a large and heterogeneous set of companies under so manyconstraints will require considerable managerial effort on the part of ICSA.Its staffing and support will be critical, requiring a diverse set oftechnical skills, clear decision authority and managerial competence tocoordinate such a multifaceted program. At present ICSA's staff does nothave the depth or expertise to carry out such a task. For ICSA to assumethis role, its management and technical staff will have to be strengthenedand provided with the necessary outside expertise.

213. Selling Companies to a Broader Base of Investors. As mentioned,selling the part of the profitable companies to a broader base of Peruvianswould require some complementary institution building. In most developedcountries the bulk of all long-term financial assets are held by contractualsavings institutions, such as insurance companies or pension funds. One wayto distribute the state-held corporate shares more widely is through forcedsavings institutions, such as public social security funds and privatepension funds. Little would be gained, however, if the State enterprises aretransferred to a monolithic state-run savings regime. Although legally theworkers rather than the State may own the shares, operationally there islittle difference between a state-run social security system owning 100percent of its enterprises and the present parastatal sector. To get thefull benefits of divestiture, the savings regime would have to bedecentralized and be subject to market forces.

214. Contractual savings programs could be set up as private pension fundsat the company level or the union level. Individuals could set up pooledsavings plans. To decentralize the system further, the management of thefunds could be separated from the funds themselves; banks, insurancecompanies or specialized institutions could compete for the management of thefunds.

215. There would also have to be some secondary market liquidity to theassets. Only if the institutions involved could increase their returnis byinfluencing the management of the companies and changing the composition oftheir portfolios would the system have the characteristics of a privatemarket. To provide this flexibility part of the shares of each companytransferred to the savings funds should be sold on the local exchange.

216. It will take time for the existing securities market-to evolve to thepoint where it will be able to absorb sufficient new issues and function as asecondary market for this program. The market is especially depressed right

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now but should revive as economic conditions improve. The amount of growthin the market needed to lend sufficient flexibility to this scheme would belimited and could occur gradually as the savings institutions develop. Theexperience of other developing countries indicates that such modest growth isquite feasible if the right measures are taken. These measures could includea proper regulatory framework to protect the small investor, modest andstrictly limited tax incentives to encourage more participation and someinstitution building efforts.

217. INVERSIONES COFIDE could also be a mechanism for creating a widermarket for the shares of state-owned enterprises. It could as underwriterfor the shares it owns and organize a selling group of brokers, commercialbanks, and other financial institutions. This group would campaign activelyto reach small savers, offering small blocks of shares at an attractiveprice. ICSA could also trade on the Lima securities market to help build thesecondary market for these shares.

218. These selling schemes will require additional study. In addition,once the design is clear, ICSA or some other body will need expert advice insetting up the system. Although it may delay the transfer of some of theshares of the parastatal sector, this strategy would reduce the risks ofownership concentration or of diverting funds from new investments andencourage the growth of savings and capital markets in Peru.

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PERU:

THE MANAGEMENT AND

SALE OF STATE-OWNED ENTERPRISES

STATISTICAL APPENDIX

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LIST OF TABLES

1. Partial Inventory of State-Owned Enterprises

2. System for Administration of Shares of Public Enterprises,December, 1981

3. Foreign Debt Outstanding and Disbursed of State-Owned Enterprisesto June 30, 1980 (Millions of US$)

4. Employment and Production of a Sample of State-Owned Enterprises

5. Prices and Sales of a Sample of State-Owned Enterprises

6. Debt:Equity and Current Ratios of Sample Enterprises, 1976-1980

7. Financial Data on some State-Owned Enterprises Considered LikelyCandidates for Sale (Million Soles)

8. State-Owned Enterprises which are Possible Candidates for Saleand for Which no Summary Financial Information was Available

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Page 1 of 3

Table 1: PARTIAL INVENTORY OF STATE-OWNED ENTERPRISES

State ShareTitle Acronym (Z) Principal Product

A. PRODUCTION

1. Agriculture, Agroindustry and Wood

Deshidratadora de Alimentos de Arequipa, S.A. DAASA 100 Freeze dried vegetablesEmpresa Ganadera de Amazonas, S.A. EGASA 100 LivestockEmpresa para el Desarrollo y Explotacion de la EMDEPALMA 100 Palm oilPalma Aceitera, S.A.

Empresa del Alcohol Industrial, S.A. 100 Denatured alcoholEmpresa Nacional de la Coca ENACO 100 CocaEmpresa Nacional del Tabaco ENATA 100 TobaccoEmpresa de la Sal EMSAL 100 SaltIquitos Plywood, S.A. IPSA 70 WoodForestales Amazonas, S.A. FASA 17 WoodIndustria Maderera de Oriente, S.A. IMOSA 14 woodPlanta Pasteurizadora Wilmington * Dairy

2. Fishing and Fishmeal

Empresa Nacional Pesquera PESCAPERU 100 Fish processingEmpresa Peruano de Servicios Pesqueros EPSEP 100 FishingEmpresa Publica de Certificaciones Pesqueras CERPER 100 Quality control

del PeruPeruana de Pesca, S.A. PEPESCA 100 Fish processingREGASA (ex-Consorcio Pesquero del Peru) 99 Fish procssingPesquera San Jose 58 Fish processingCia. Pesquera del Peru COPES 51 Fish processingPlanta de Harina del Pescado (California) * Fish processing

3. Mining

Empresa Minera del Centro del Peru CENTROMIN 100 Copper, lead, zinc, silverCentromin Inc. Ltd. 100Cia. Minera San Juan de Lucanas 100 SilverEmpresa Estatal Minero Asociada Tintaya, S.A. EMATINSA 100 CopperEmpresa Minera Los Montes 100 Copper, lead, silverEmpresa Minera del Hierro del Peru HIERROPERU 100 Iron and steelEmpresa Minera del Peru MINEROPERU 100 Copper and zincEmpresa Promotora Bayovar PROBAYOVAR 100 PhosphatesEmpresa Promotora del Carbon PROCARBON 100 CoalReactivos Nacionales, S.A. RENASA 100 XanthateConsultora Minero Metalurgica 93Sociedad Minera Pesares, S.A. 67Empresa Minera Especial ANTAMINA ANTAMINA 51 Copper, silver, molybdeniumMina Aguila, S.A. 40 CopperCia. Minera Magistral 20 CopperCia. Minera Buenaventura, S.A. 19 Copper, lead, silver, zinc

4. Oil and Gas

Petroleos del Peru PETROPERU 100 PetroleumSOLGAS SOLGAS 85 Gas

5. Pulp and Paper

Cia. Celulosica y Papelera del Norte 100La Papelera Peruana 100Papeles Peruanos de Pucalipa, S.A. 100Sociedad Paramonga 100

- 65 -

Page 2 of 3

Table 1: PARTIAL INVENTORY OF STATE-OWNED ENTERPRISES

State ShareTitle Acronym (M) Principal Product

6. Cement

Cementos Sur 100Cementos Yura CYSA 100Cementos Lima 49Cementos Norte Pacasmayo 49Cemento Andino 42

7. Chemicals

Empresa Industria Cachimayo INCA 100 FertilizersFertilizantes Sinteticos, S.A. FERTISA 100 FertilizersLaboratorios Unidos, S.A. LUSA 100Quimica del Pacifico, S.A. QUIIMPAC 100

8. Steel, Metalwork and Related Industries

Compresores Andinas COMPASA 100 CompressorsEmpresa Siderurgica del Peru SIDERPERU 100 SteelMoraveco, S.A. 85 RefrigeratorsMotores Diesel Andinos, S.A. MODASA 52 Diesel motorsMaquinas y Herramientas Andinas, S.A. MHASA * 51 Machinery and equipmentTractores Andinos, S.A. TASA 51 TractorsHelicoidales y Tubos Cia. Anonima HELITUBCA 20 Steel pipesIndustria Peruana del Alambre ALAMBRESA 20 WireProductos del Alambre y Derivados, S.A. PROLANSA 12 WireAceros del Sur, S.A. ADESUR 10 Steel ball bearingsFundacion Andina del Peru, S.A. FUNAPER 8 Iron pipe fittings

9. Other Manufacturing

Manufacturas Nylon, S.A. 94 NylonFabrica de Equipos de Telefonia FETSA 40 TelephonesBayer Industrial, S.A. BAYINSA 30 Acrylic fiberRefractorios Peruanos 10 Glass lenses

B. FINANCE

1. Banking and Investment

Banco Agrario del Peru 100Banco Continental 100Banco de Desarrollo Amazonico 100Banco Industrial 100Banco Internacional INTERBANC 100Banco de los Materiales 100Banco Minero 100Banco de la Nacion 100Banco Popular 100Banco de la Vivienda 100Caja Municipal de Credito Popular de Lima 100Corporacion Nacional de Desarrollo CONADE 100Corporacion Financiera de Desarrollo, S.A. COFIDE, S.A. 100Financiera San Pedro 100INVERSIONES COFIDE, S.A. ICSA 100Inversiones Continental 100Financiera Peruana INTERFIP 96Banco de los Andes 95Banco Nor-Peru 95Peruinvest 86Banco Central Hipotecario del Peru 74Banco Peruano de los Constructores BANPECO 57Banco Exterior de Espana EXTEBANDES 10Banco Arabe Latinoamericano ARLABANK 5Nuevas Inversiones, S.A. NISA 5Banco Eurolatinoamericano 4Banco Latinoamericano de Exportacion BLADEX 2Banco Comercial del Peru *Banco de la Industria de la Construccion *

2. Insurance and Reinsurance

Popular y Porvenir Cia. de Seguros 99Cia. Reaseguradora Peruana 91

- 66 -Page 3 of 3

Table 1: PARTIAL INVENTORY OP STATE-OWNED ENTERPRISES

State ShareTitle Acronym (%) Principal Product

C. SERVICES

1. Marketing and Related Services

Administracion y Gerencia de EPSA AGEPSA 100 Foodstuffs marketingEmpresa de Comercializacion de Productos Mineros MINPECO 100 Mineral marketingEmpresa de Comercializacion de Productoe EMCOPESA 100 Fisb marketing

Pecuarios, S.A.Empresa Comercializadora del Arroz, S.A. ECASA 100 Rice marketingEmpresa de Mercados Mayoristas, S.A. EMMSA 100 Wholesale marketingEmpresa Nacional de Comercializacion de Insumos ENCI 100 basic foods, etc. marketingSupermercados, S.A. 100 Retail marketingTiendas Affiliadas, S.A. 100 Retail marketing

2. Electricity

Cia. de Servicios Electricos, S.A. COSERELEC 100ELECTROLIMA, S.A. 100Empresa Electrica del Peru ELECTROPERU 100Empresa de Energia de Piura, S.A. 100Empresa de Energia de Chimbote, S.A. 97Sociedad Electrica de Arequipa, S.A. SEAL 95Energia Hidroelectrica Andina, S.A. HIDROANDINA 94Empresa de Energia de Huancayo, S.A. 72

3. Water and Sewerage

Servicio de Agua Potable y Alcantarillado SEDAPAR 100de Arequipa

Servicio de Agua Potable y Alcantarillado SEDAPAL 100de Lima

Servicio de Agua Potable y Alcantarillado SEDAPAT 100de Trujillo

Servicio Nacional de Abastecimiento de SENAPA 100Agua Potable y Alcantarillado

4. Transportation

Compania Peruana de Vapores CPV 100 ShippingCorporacion Peruana de Aeropuertos y Aviacion CORPAC 100 Aviation

ComercialEmpresa Nacional de Ferrocarriles ENAFER 100 RailroadEmpresa Nacional de Puertos ENAPU 100 PortsEmpresa Nacional de Transporte Urbano ENATRU 100 Urban transportEmpresa de Transporte Aereo del Peru AEROPERU 100 Airline

5. Communication

Agencia Peruana de Noticias y Publicidad ANDINA 100 News agencyDiario LA Cronica 100 NewspaperEmpresa Editora Peru EDITORA PERU 100 PublishingEmpresa Nacional de Telecomunicaciones del Peru ENTELPERU 100 TelecommunicationsRadio Television Peruana RTP 100 Radio and televisionCompania Per uana de Telefonos CPT 45 TelephoneRadio Panamericano 12 Radio

D. MISCELLANEOUS

1. Military

Empresa Publica de la Industria Aeronautica INDEAR PERU 100Industrias Militares del Peru INDUMIL 100Servicio Industrial de la Marina SIMA 100

2. Other

Artesanias del Peru, S.A. 100 MandicraftsEmpresa Nacional de Edificaciones ENACE 100 ConstructionEmpresa Nacional del Turismo del Peru ENTURPERU 100 TourismEmpresa de Servicios Municipales de Limpieza 100 Municipal services

de LimaPisca Astilleros 100 ShipyardAgente Naviero San Nicolas 80 Shipping agentMuelle Centenario, S.A. 75 WharfsIndustrias Navales, S.A. 69Petrolera Transoceanica 25 ShippingSindicato de Inversiones y Administrativo, S.A. SIA 4 Consulting

* Less than one percent.

Source: COFIDE

- 67 -

Table 2: PEU - SYSTEII riR ADMINISTRATION OF SHARNE OF PUdLIC ENTERPRISdS. DRCB11ZR. 1981

R_Sran Ittditsu..t.e

Sec-or Mii-Snyy Rue Directly 100 Siate-Oned 50-1001 State Shares 20-50X State Shares Less rhai 20X State Shares

Ford Predoeri-o and AEriruliure ENCI ECAbSiotheelug 1AGESA EGASA

EMCOPESA ESDAPALMA 1)EHNSA

ENACSEprr-tados, S.A.Tiades Affiliadr-. S.A.

Industry DIfens- INDAER [ab. quipe Teleeonia <InDumlr (40%)SEIMA2ERU

Fi-asre Eco.o.y Ptiy.anre Banco Ar rribarero resatrolir Atwsznioorlance dt Ia areou Slaner Cottiressal |asro de los Andes (95%) AR8. Earl (5%)

Sauce Oserraeiaeal |Eacre Nat Pets (95%) E Bates Latiseam. de Ia. Eipro. (28)Saner Fopulat Fisaseiera Persona 19881Z Bat Es iireiatreeiea.o (4Z)rinarriero San Padre REASEUR5ADO A (912) TEYANDBi (IOX)lver. C_ni_estol PERUINVEST (868) ean Inds. de 1a Construeion (0.1Y)

[yopular y Prore-ir eseca Cewerrial (0.1%)Bsn de.la Virie-d- I Central Sipeteeatie (748)

Irdu.s-y B-nco de la Irduosri Ontesaias Oel Pets IrMnuf. de Nylos (94X)Pinea ssiliersI, 1.A.

dining BSurer Sinter to. Mnara . J. dt

Miniog erergy 4 Mires INEROPERU- P ROBAYOVAR I/MINPBCOCENTROMIN PER CENTROIS. i/ . Reatina Nan. (95%) Cia. Sir agiatral (20%) BueoAsen-trn (195)

B=po Mir- Los Ms Boc Mint-s PSau .rs (678 )

EIEEAOPERU ~~~~~PROCARdON L/ AXBNTArINA vI/ (51 1)

nlocirictly ELECTROPEE ELiCT0OL.A (99%)H=p S Aua .raE S ep. Chisb-e (998)

Lmp Fiuta, S.A EIDRANDINA (948)

__________________________________Ce (95%)Oil and Gas PETROFEEU RU.0 (85%) Peitr Trae..

(25X)

tishing -nd Fiah Filherlee FESCAFERU I 7FS COPES (510) - - | Pianta B. Pe-ead CT. 2/Prures-in

1CERPER Indus. analea (6SX) Parese-izadera 2/FPSEP utile Cereesrie (75X)

Mialth Lairbar-riss ultih LUSA

loesersee br retain0

.B de IvsI. rerieltsENACE

Weter Suyply SERAPA SEDAPAEEDAPARi FDAPAT

Ird-etry Irduoney 6 Torriss A-lcbol Idu-rriol et.ra-neriis Pasaceticr (108)tMSAL

INCASIDEEPERU

Toutis- ENTURPEEU

Tr..sport Truesper. and CPVCr_useirorioss CORPAC

iNAFERySAPUFSATRLPRL

Telrrurslrcations CNTELPeRU [CPT (458)

Sne-Ssioiateiol haenv

Irdus-tIy CONAQE | COPIDE, S. S Iquit Ply7ood (70)t A (17)bgtotodustrr LMObl81O (17%)

Cetent I CeeunrG Se- Ce.euros Ahdine (422)Ce-e-to Yura Ceettos Litta (498)

Cemesee Nete-.40%)

Sortalflructissrr . COMPASA 000010 (528) HELITUSCA (78(9 ADESIG (10%)

Moruner- 1/ 010A (51X) ALAM6RESA (20%) PDNAPAE (8%)TASh (51%) P11O1.NSA (14%)

Mining ails Aguil (40%)Paper Paptler- del Neree Se.I ParsEgo (998)

Popelete Ftseeun

Fopretla P-raliPaChesItal FEETISA Sayer (30%) 1/

QUIhPACmi-relloee..s

Troespore AEROFERU

Fin..riil In-erslines COFIDE [iSdirase de Isneesissas y Adsi. (51)

ssnues unversisnes (88)

Cotse,nieaeions lorcinuso Nacioral Ordaro

de Cos"ieaeierS-iel Edis-ra Para

Diatio 1o Crurico

RTP Badi,1 Psm, et ns

UObhe Se.nires Lis -renieial B=p Ser. nutyolesCouncil

Finance C. a Kt-icipaD

I/ Shares held by sore th-n one pbli c e-iey.2/ NSe nailhble.3/ Store os-eralip giles in pareshesis.

- 68 -

Table 3: PERU - FOREIGN DEBT OUTSTANDING AND DISBURSED OFSTATE-OWNED ENTERPRISES TO JUNE 30, 1980

(Millions of US$)

Enterprise Debt

PETROPERU 1,117.9ELECTROPERU 193.9MINEROPERU 170.8Banco de la Vivienda 82.3COFIDE 80.1ENTELPERU 57.8Banco Agrario 53.9INDUPERU 39.7Banco Industrial 39.4SIMAPERU 23.2CPV 18.8SEDAPAL 18.6PESCAPERU 7.9SIDERPERU 7.0ENAPU 4.3Ind. Cachimayo 0.9ESEP 0.8Banco Minero 0.7

Total 1,918,0

Financial Enterprises 256.3Nonfinancial Enterprises 1,661.7

Source: Ministry of Economy, Finance and Commerce

Table 4: PERU - EMPLOYMENT AND PRODUCTION OF A SAMPLE OF STATE-OWNED ENTERPRISES

Volume of Production 1980No. of Employees Ave. Ann. Index of

Ave. Ann. 1980 Index Increase 1980 Index Real Output1976 1980 Inc. (%) (1976=100) 1976-1980(x) (1976-100) Per Worker

Production Enterprises 57,416 42,903 b/ -7.1 b/

A. CEMENTOS YURA 329 a/ 320 -0.9 97.3 f/ 5.8 125.1 128.6CENTROMIN 15,922 16,905 1.5 106.2 1.8 107.5 101.2EMDEPALMA - 849 - - 13.7 167.3 -FERTISA 408 a/ 410 0.2 100.4 f/ 2.7 113.3 112.8PARAMONGA - 3,702 - - 9.6 125.1 -QUIMPAC 196 260 9.9 132.7 28.0 256.6 193.4TASA 119 a/ 153 9.2 128.6 f/ 2.4 109.9 85.5

B. DAASA 116 a/ 99 -5.4 85.3 f/ -20.3 40.3 47.2MINEROPERU 2,519 2,665 1.4 105.8 19.0 200.4 189.4PEPESCA 1,300 a/ 1,600 7.2 123.1 f/ 15.5 178.0 144.6PESCAPERU 23,329 7,000 -25.9 30.0 -20.3 32.0 106.7PETROPERU 8,048 8,682 1.9 107.9 1 6.7 129.5 120.0SIDERPERU 5,149 4,809 1.7 93.4 1.3 105.4 112.8

Service Enterprises 19,949 24,734 5.5

AEROPERU 1,379 1,527 2.6 110.7 7.2 e/ 132.2 119.4CPV 1,730 1,588 2.1 92.0 -3.0 91.7 d/ 99.7ELECTROPERU 4,774 5,612 4.2 117.6 14.0 168.8 143.5ENAPU 4,896 4,328 -3.0 88.4 -7.0 74.9 84.7ENCI 630 1,226 18.2 194.6 - - -

ENTEL 3,867 7,093 16.4 183.4 8.6 c/ 139.3 75.0SEDAPAL 2,673 3,360 5.9 125.7 2.8 111.6 88.8

a/ 1977.b/ Excludes EMDEPALMA and PARAMONGA.ci No. telephones.di 1979.ei Passengers.f/ 1977=100.

Source: Individual enterprises and mission estimates

- 70 -

a/Table 5: PERU - PRICES AND SALES OF A SAMPLE OF STATE-OWNED ENTERPRISES

Increase in Sales inPrice Indices Constant 1976 Prices Annual

1976 1977 1978 1979 1980 1977 1978 1979 1980 Average(1976=100) (Percentages) 1976-1980

Production Enterprises -8.5 3.3 23.4 -12.7 0.8

A. CEMENTOS YURA 100 163 281 479 538 -17.1 9.6 21.6 44.8 11.1CENTROMIN 100 171 345 837 1607 -7.7 -14.1 9.9 -13.8 -7.4EMDEPALMA 100 104 190 382 520 - 34.7 0.0 23.3 18.4 b/FERTISA - 100 166 316 473 n.a. 42.1 -9.5 16.6 13.5 bIPARAMONGA 100 147 281 480 789 -9.4 2.9 27.3 7.0 6.2QUIMPAC 100 130 210 384 528 30.5 4.4 13.7 -1.1 11.3TASA 100 136 281 499 593 -26.8 -22.7 1.2 35.4 -1.5

B. DAASA 100 93 204 456 840 -12.7 3.4 -25.6 -14.0 -12.7MINEROPERU 100 142 285 534 834 9.6 116.6 9.9 -0.5 27.0PEPESCA 100 180 309 428 825 n.a.108.0 44.2 -12.6 16.0 b/PESCAPERU 100 180 304 404 771 -12.9 1.2 29.5 -56.9 -16.2PETROPERU 100 169 288 693 969 -0.2 -1.1 30.9 3.7 7.4SIDERPERU 100 171 398 609 606 11.2 -12.5 21.8 -11.3 1.3

Service Enterprises -6.5 7.3 9.7 20.2 8.9

AEROPERU 100 147 308 565 779 -19.0 23.9 6.1 6.6 3.1CPV 100 144 267 451 n.a. -5.0 2.4 -1.1 n.a. -4.9 c/ELECTROPERU 100 130 274 391 532 17.7 8.8 15.5 13.1 13.7ENAPU 100 267 289 624 1134 -44.5 43.6 -9.5 -5.5 -9.2ENTEL 100 159 264 373 508 8.9 -16.4 37.7 61.6 19.2SEDAPAL 100 152 202 349 595 6.0 19.9 17.4 15.0 14.5

Memo Item

Wholesale PriceIndex 100 147 258 439 673

- For Imports 100 161 321 552 804

a/ Excludes ENCI.b/ 1977-1980.c/ 1976-1979.

Source: Individual enterprises, Ministry of Industry and mission estimates. Priceindices based on weighted indices of unit prices of major products.

Table 6: PERU - DEBT:EQUITY AND CURRENT RATIOS OF SAMPLE ENTERPRISES, 1976-1980

Debt:Equity Ratio Current Ratio1976 1977 1978 1979 1980 1976 1977 1978 1979 1980

(Current Assets/Current Liabilities)

Production Enterprises 79:21 80:20 81:19 76:24 65:35 0.9 0.9 0.9 1.0 1.0

A. CEMENTOS YURA 18:82 48:52 55:45 39:61 36:64 4.6 1.0 0.5 1.0 0.4CENTROMIN 54:46 51:49 51:49 62:38 61:39 1.7 0.9 1.5 1.6 1.3EMDEPALMA 79:21 78:22 60:40 33:67 36:64 0.4 0.4 0.5 1.0 0.6FERTISA n.a. 41:59 36:64 26:74 22:78 n.a. 2.2 2.4 2.8 3.2PARAMONGA 40:60 27:73 48:52 40:60 32:68 2.0 1.9 1.2 1.7 2.4QUIMPAC 22:78 15:85 17:83 19:81 48:52 1.2 1.7 1.9 2.7 2.9TASA 67:33 64:36 32:68 47:53 44:56 1.1 0.9 0.9 1.2 1.6

B. DAASA 35:65 25:75 31:69 30:70 19:81 1.5 0.7 0.9 1.4 0.5MINEROPERU n.a. 66:34 80:20 78:22 70:30 n.a. 0.4 0.8 0.5 0.5PEPESCA n.a. neg. 25:95 56:44 79:21 n.a. 0.2 0.2 1.4 0.3PESCAPERU 90:10 85:15 66:34 42:58 41:59 0.5 1.0 1.2 1.2 1.1PETROPERU 83:17 91:09 93:07 92:08 79:21 a/ 0.8 0.9 0.8 0.9 1.0SIDERPERU 44:56 46:54 49:51 64:35 38:62 1.3 1.1 1.2 0.5 1.4

Service Enterprises 55:45 50:50 33:67 35:65 27:73 1.2 1.3 1.3 1.4 1.5

AEROPERU neg. 38:62 b/ 57:43 78:22 89:11 0.5 1.5 1.6 1.4 1.4CPV 31:69 27:73 48:52 57:43 65:35 4.4 5.6 2.1 1.8 1.7ELECTROPERU 54:46 62:38 25:75 c/ 33:67 22:78 d/ 0.9 0.8 1.1 1.4 1.2ENAPU 14:86 10:90 10:90 10:90 8:92 3.0 3.0 3.2 2.4 5.8ENCI 91.09 86:14 94:06 12:88 4:96 1.1 1.1 1.0 1.1 1.2ENTEL 71:29 72:28 72:28 68:32 66:34 1.2 0.9 0.9 1.1 1.2SEDAPAL n.a. 17:83 21:79 16:84 13:87 n.a. 1.2 2.3 2.2 2.2

a/ S/ 20 billion debt cancelled by Treasury.b/ S/ 2.9 billion debt assumed by Treasury.c/ S/ 23 billion debt assumed by Treasury._/ S/ 19 billion debt assumed by Treasury.

Source: Individual enterprises and mission estimates

- 72 -

Table 7: PERU - FINANCIAL DATA ON SiME STATE-OWNED ENTERPRISES CONSIDERED LIKELY CANDIDATES FOR SALE

(million Soles)

Percent 1980 1979Public Public Share of Public Share of

Company Nama Sector Ounership Equity Profits Equity Profits

Etpreta do Mercedos Mayori.ta S.A. (SMIkA) hioSeaal. MEarketing 100.00 17 8 1. IaEmpreso do Comecciali-acios de Productos Pecusrios SA. (EeCOPESA) Nsrketing 100.00 704 210 7T 7TEmpress Poblics do Cortific.cione. Psqueros del Peru (CEiRPER) Fish Quality Control 100.00 429 184 303 86Compre.oros Andinos SA. (COMPASA) Mettl Mlnufacttring 100.00 302 38 159 5Ce.entos Sur S.A. Cent 100.00 1,610 39 1,225 SlCelolooaSe y Papolera del Norte Pulp and Paper 100.00 307 151 93 78Papeloe. Percan PoIp cod Paper 100.00 469 61 324 55Fertiliesute. Sioteticos S.A. (PeKTISA) Chemical Industries 100.00 2,563 490 1,209 233Qoiosic del Pacifico S.A. (QUEMPAC) Chemical lnduatries 100.00 4,507 320 2,970 280Empress do Is Sa1 (EMSAL) Agroinduttry 1O0.00 1,457 26 823 306Alcohol Indust1al Agrsindustry 100.00 194 11 159 22

100 00 24 1 /b /bTiend.s Affiliads. S.A. Merketiog 100.00 1,820 514 1,002 12L.borstorios Unido. S.A. (LU.SA) Cbeficals 100.00 861 7 /b /bEmpress Gsnader. Amacocas (ESANk) Livestock 1OO. 3,499 227 1,868 87Fabrics de Equipos de Telefosi. S.A. leitrosic. 40.00 176 146 139 163Enpre.s Nacis..l Pe.qoera del Peru (PESCAPERS) Arolodsstry (fiabery) 100.00 35,044 (5,049) 22,239 4,110Empress lod.stris1 Cachisyo (INCA) Chemical Industry 100.00 3,815 (262) 2,718 27Mororco DIesel Asdi.ot S.A. (ADDASA) Machinery aod Equipment 52.00 1,946 575 794 101Tractoren Andino. S.A. (TASA) Mschioery sod Equipment 51.00 760 159 424 135I!sqoinos y herralientsa S.A. (MEASA) Kachinery sod Equipment 51.00 llie 1 78 1BNsco Intersacional Benking 99.90 5,090 549 2,297 167lqoitos Plywood S.A. Wood Induatry 70.20 480 82 354 (74)Cosponis do Segaros Popslar y Porvenir Is..rssce 98.50 5,930 978 6,288 609Cee-toso Lims Cetest 49.00 7,023 325 4,603 554Cesento Andios Ce ent 42.00 2,955 49 1,900 280Esyoc Industrial Chemicals 30.14 1,837 202 1,090 97Indastri.l Modorera del Orient. 8.A. (2990A) Wood Industry 14.12 148 27 83 13Prodoctora do Alabres y Deri-ads S.A. (PROLAhSA) Mietal Industries 11.23 320 61 250 28Indostris Perus.s do Alabre S.A. (ALAI(RESA) Metal Industries 20.00 84 124 (4) (31)Pu-diciss AedEos del Peru S.A. (PDUNPER) Metal Industries 8.14 74 2 30 (16)e.prees do Transporte Aero del Peru (AEROPERD) Transpert 100.00 1,157 (3,496) 1,917 (282)

Cesestos Yrs S.A. (CYSA) Cement 100.00 12,628 (1,981) 8,468 (373)Empress parc el Desarollo y Explotaciom de Is Palm- Aceitera S.A. (tMEPALHA) Agroindostry 100.00 5,940 (578) 3,417 (461)Empress iacio.al del Tbacs (Et2ATA) Tobacco 100.00 541 (182) 394 (41)leshidrstadors do Alirentos de Arequipa S.k. (DAASA) AkroSnd.stry 100.00 437 (167) 340 (4)PFpelo Perasnos do Pucallpa Pulp and Paper 100.00 821 (146) 641 (116)Mor-v-or,S.A. Msufsctsrisg 84.80 1,824 (1,657) 1,275 (2,190)Fin nciers Pera.s S.A. Pissociog 96.00 724 251 382 47Coeppsia Miners .uesaventsrs Mising 19.00 1,774 710 937 422Aceros del Fsr S.A. (ADSUR) Metal Industries 10.00 30 (6) /s IaForestsl S -.os. S.A. (YASA) Porestry 17.00 41 (1) 71 7TP.elioidales y Tbuos Co-psai. AO.nyma (HELITUICA) Sacbioery sod Equipment 21.59 75 lb Th 7TMi.s Apuila S.A. Mining 40.03 916 7h )76 75Per-ass do Pesc S .A. (P<PESCA) Agroindastry (fishery) 100,00 4,433 (7,041) 8,557 (2 ,707Cesescos Norte Pac. s*ys S.A. Cemet 49.00 4,991 (2) 1,171 12

P.evos Iversio.es S.A. Servce 4.64 82 0 13 0Siodicato de Is yersiones y Adsinistracio S.A. (SIA) service 4.33 10 0 66 1Compasic Rea.egursdsrs Peruas I.nsurasco 91.00 3,598 1,115 -Easce de 1s I.dustric y da 1 C s.tuccisn BEskieg 0.07 0 0 0 BasCO Comerci-l del Peru Backing O.06 0 0 0 0

Handicraft 1O0.00 173 6 127 6Ser-ice 100.00 3,725 182 1,998 58

Sub-totals Enterprises showing losses 71,702 (20,569) 25,389 (5,995)Enterprises showing profits 52,859 7.842 56,382 7.973

7T0`AL 124,561 (12,727) 30,993 1,998

a/ Did sot operateb/ Infortation sot available.

Source COFIDE and sissies estisates

- 73 -

Table 8: PERU - STATE-OWNED ENTERPRISES WHICH ARE POSSIBLECANDIDATES FOR SALE AND FOR WHICH NO SUMMARY FINANCIAL

INFORMATION WAS AVAILABLE

PercentCompany Name State Ownership

Banco de Desarrollo Amazonico 100

Compania Minera Magistral, S.A. 20

Compania Minera San Juan de Lucanas 100

Consorcio Pesquero Inc. (COPES) 51

Consultora Minero Metalurgica, S.A. 93

Diario "La Cronica" 100

Industrias Navales 69

Manufacturas de Nylon, S.A. 94

Muelle Centenario, S.A. 75

Pesquera San Jose 58

Pisca Astilleros, S.A. 100

Planta de Harina de Pescado California a/

Planta Pasteurizada Wilmington a/

Radio Panamericana 12

Reactivos Nacionales (RENASA) 93

Refractorios Peruanos 10

Regsa (ex Consorcio Pesquero del Peru) 99

Sociedad Minera Pesares, S.A. 67

Solgas 85

Supermercados, S.A. 100

a/ Less than 1 percent.

Source: Mission estimates

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PERU:

THE MANAGEMENT AND

SALE OF STATE-OWNED ENTERPRISES

ANNEX I

EFFECTS OF INFLATION ON FINANCIAL ACCOUNTS

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ANNEX 1

EFFECTS OF INFLATION ON FINANCIAL ACCOUNTS

1. Financial statements can change dramatically when adjusted forinflation, even at inflation rates well below those experienced by Peru inrecent years. There is some controversy over how best to adjust accountsfor inflation. The method shown in Table A adjusts all items to theircurrent costs. (Alternatively, accounts can be adjusted to reflectreplacement costs or inflated by a general price index to reflect currentpurchasing power.)

2. The example in Table A is a Canadian aluminum can company. Thecompany's balance sheet and income statements have been adjusted to yearend 1980 prices (the increase in the 1980 U.S. consumer price index was12.5 percent). Inventories and fixed assets have been revalued at theircurrent costs by adjusting each item according to the increase in its pricesince the date of acquisition. This gain is offset by an increase inowner's equity. Monetary items in the balance sheet are not adjusted sincethey are already in year-end 1980 prices.

3. In the income statement, all revenue and expense itemsare adjusted to year-end prices. In addition, the costs of sales areincreased to reflect the current costs of inventory items. Depreciationcharges are also higher since they are calculated over revalued assets.

4. Adjustments can also be made for items not considered part ofrealized income: monetary gains and holding gains. The monetary gain (orloss) represents the purchasing power gain (or loss) on net monetaryassets. This item is often seen as offsetting high nominal interestrates. In other words, since interest rates are high to take into accountinflation, firms should also record as a gain the declining real value oftheir debts and other monetary liabilities (minus the decline in monetaryassets). The holding gain (or loss) represents the amount by which theincrease in the current cost of inventories, plant, property and equipmentwas in excess of (or below) general inflation.

5. In the example, adjusted income is 45 percent less than reportedincome. Since equity is also higher, return on equity drops from almost 20to less than 8 percent.

6. The effects of full inflation accounting on the financialstatement of a Peruvian company would likely be even more significant.Peru's inflation rate has averaged over 60 percent a year for the lastthree years (see Table B).

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Table A: PERU - EXAMPLE OF THE EFFECTS OF CURRENT COST INFLATIONARYACCOUNTING

19801980 Current a/

Historical Cost Difference

Balance Sheet:

Assets

Current assets excl. inventories 1,267 1,267Inventories 1,436 1,538 102Net fixed assets 2,767 4,636 1,869

5,470 7,441 1,971

Liabilities

Current liabilities 1,823 1,823Long-term debt 910 910Equity 2,737 4,708 1,971

5,470 7,441 1,971

Income Statement:

Sales and operating income 5,215 5,461 246Cost of sales 3,682 3,976 294Depreciation 162 370 208Other expenses 829 901 72Income from continuing operations 542 214 (328)

Monetary gain - 145 145

Net adjusted income 542 359 (183)

Return on equity (%) 19.8 7.6

a/ At current cost in year end 1980 prices.

Source: Harvard Business School Case Study

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Table B: PERU - AVERAGE ANNUAL INCREASE IN THE CONSUMER PRICEINDEX, 1975-80

(1975=100)

Percent Change

1976 33.51977 38.11978 57.81979 66.71980 59.2

Source: International Monetary Fund

7. In Peru the plant and equipment of most firms are revalued by anindex set by law, which is usually somewhat less than the consumer priceindex, and then depreciated. Land and inventories are not revalued. As aresult, net worth, operating costs and depreciation are understated.Assets and liabilities in foreign currency are adjusted for changes in theexchange rate and the net gain (or loss) is included in the incomestatement. Monetary and holding gains are not computed.

8. The effect of adjustments for inflation clearly depends upon thecircumstances of each firm. For example, the earnings of a company that ishighly leveraged in soles and making large nominal interest payments areunderstated since they do not reflect its significant monetary gains.Similarly, full revaluation of inventories and fixed assets would reduce afirms's earnings by increasing operating costs and depreciation, but mightalso reveal significant holding gains. The net change in earnings willalso be affected by income taxes. The final result will thus depend on thesize of inventories, the rate of turnover and the form of inventoryaccounting used (LIFO, last in first out, accounting would likely mean asmaller adjustment to current costs than FIFO, first in first out); theimportance of the firm's undervalued fixed assets; and how heavily theenterprise is leveraged in soles or in dollars.