Brazil Asks: Is Mine Sale A Sell Off - Or Sell Out?

Latin America has seen scores of privatizations in recent years, but none compare with the size and controversy of Brazil's Companhia Vale do Rio Doce (CVRD). Early next year, President Fernando Henrique Cardoso plans to sell off the colossus. The state mine - worth about $11 billion - will be sold at three public auctions in what could be the region's biggest privatization.

Yet nationalist sentiment against the sale is mounting and threatens Mr. Cardoso's free-market reforms and chances for reelection, analysts say.

Many economists insist Brazil needs more privatizations to help balance its burgeoning $35- billion deficit. The state hopes to get $5 billion for its 51 percent of CVRD stock.

"If Brazil doesn't privatize Vale, it could be reclassified as a bigger risk for foreign investment," says Walder De Ges, head of the Institute for Brazilian Political Studies in Brasilia. "The sale is now the crucial question regarding international ... confidence in Brazil."

"The privatization of Vale and other state companies is fundamental in resolving the nation's financial problems," agrees Brasilia-based economist Raul Veloso. "There is no other way."

But early this month, the government postponed the first auction, which had been scheduled for February. Officials say they want to give buyers more time to study CVRD's books, but some observers suggest it's the government that needs time to counter congressmen who have linked the sale with Cardoso's reelection bid in 1998. Since the Constitution prohibits consecutive terms, Congress is expected to vote on an amendment next year to permit him to run for a second term.

But Cardoso insists CVRD won't become a bargaining chip. "If they think I am going to bargain for my reelection, they can bring their horses in out of the rain right now," he recently told reporters, using a popular expression.

Privatization's foes range from leftist Workers' Party leader Luiz Incio Lula da Silva to former Presidents Jos Sarney and Itamar Franco. All three are potential presidential candidates in 1998.

"If they think they're going to buy Vale and that Brazil has no social conflict, then they're going to lose money," Joo Pedro Stdile of the Landless Rural Worker's Movement told reporters, threatening to invade lands belonging to Vale in 1997 to protest the privatization.

Mining colossus

With 1995 net sales of $3.5 billion, CVRD is one of the top 10 publicly traded companies in Latin America, according to Latin Trade magazine. Early this year, the firm discovered Latin America's biggest gold mine. It also owns a shipping line, two railroads, and two ports. But the jewel in the corporate crown is the Carajs mine in Par, which produces 25 percent of the world's iron ore.

Critics say such a valuable firm must not be sold. "They tell us dinosaurs that the privatization of Vale would be a great signal to the world that Brazil is open for business," wrote Verissimo, an editorial columnist for the daily Jornal do Brasil. "But the signal it would send is more like those big pointed hats in the Middle Ages that identified the village idiots."

Few would claim that CVRD fits the profile of the typically inefficient and overstaffed Latin American state-owned companies privatized during the 1980s and '90s. The UN Economic Commission for Latin America and the Caribbean says from 1990 to 95, 644 state companies were privatized.

The case for privatization

Critics say privatization has contributed to record levels of unemployment and helped widen Latin America's income gap, the world's worst. But advocates say former state companies are now more efficient and profitable.

"State companies always make more money after privatization," says Alexandre Barros, director of Brasilia's Early Warning, Government Relations & Risk Management. "Vale's returns will also greatly increase after it's sold."

Cardoso is lobbying hard for public support. Recently, he dodged a political bullet when a Senate commission rejected a bill that would have allowed Congress to veto or alter privatizations.

Most observers believe that Cardoso will ultimately be able to sell off CVRD and win support to pass a reelection amendment. But they say he will be forced to make concessions.

"The opposition ... [is] trying to extract a high price in exchange for their vote," says Mr. Barros.

Cardoso will likely promise the nine states that stand to lose a major source of revenue with CVRD's sale ample compensation.

"As two and two are four, Vale will be privatized," Mr. De Ges says. "What nobody knows is what the political conditions will be."