Argentina Sells State Companies

ARGENTINA'S national flag carrier, Aerolineas Argentinas, is due to be sold this Friday to the highest bidder, following hard on the heels of last week's sale of ENTel, the state phone company that launched President Carlos Sa'ul Menem's privatization drive. ENTel, divided into two geographic regions, was sold to Bell Atlantic, in a consortium with Manufacturers Hanover Trust, and to the Spanish national telephone operator, Telefonica, in league with another New York bank, Citicorp. Between them they paid $214 million cash and offered more than $5 billion in Argentine foreign debt paper in a debt for equity swap that was key to the deal.

Signing the privatization decree last week, President Menem called the sale ``a triumph'' which had strengthened his ``firm determination to continue with the privatization process''.

That process, aimed at selling off nearly 40 companies from Argentina's bloated public sector, is at the heart of the Peronist government's plan to pull the country out of its worst ever economic crisis. The ENTel sale, as one European diplomat puts it, ``is clearly an extremely favorable political event'' for Menem.

State in bankruptcy

Although Menem talks of his policy in terms reminiscent of British Prime Minister Margaret Thatcher, promising ``popular capitalism,'' he is in fact doing little to put shares in newly privatized companies in the hands of the general public. The real reason that the government is selling off its enterprises, officials explain, is that the Argentine state is bankrupt and can no longer afford to cover its losses.

ENTel is due to officially change hands on Oct. 8, when Telefonica and Bell Atlantic will take responsibility for operations. In the meantime, the government is anxious to move forward with other sales. Aerolineas Argentinas has attracted interest from a number of potential purchasers. Although American Airlines withdrew from the bidding two weeks ago, arguing that the sale was being rushed, the Brazilian airline Varig, the Dutch firm KLM, Alitalia, and Iberia are still in the running.

Alitalia and Iberia are negotiating to form a consortium with Citicorp while Varig and KLM have allied with Chase Manhattan Bank in order to raise the necessary Argentine foreign debt. The tender document has set a base price of $530 million cash and a minimum $1.5 billion in debt. As with the ENTel sale, the consortium that offers to swap most debt will win the bidding.

Beside these two cases, however, the government does not foresee using the debt equity swap mechanism in further privatizations, says Mario Guaragna, deputy minister of public works and head of the government committee overseeing the public sector sell-offs. Oil fields opening

Meanwhile, the government has also embarked on a program to partially deregulate the Argentine oil industry, opening it more broadly to foreign firms. Later this month the state oil company, YPF, will sell 43 small oil fields. It will invite bids from the world's largest oil companies to jointly exploit four of the country's biggest fields. The government hopes to raise more than $1 billion from the bidding.

Aside from ENTel, the government has sold only two television stations and two power stations. Authorities also have assigned concessions to private firms to operate 40 percent of the Argentine road network on a toll basis.

``We've got a lot to do still,'' acknowledges Mr. Guaragna, who says he will be turning his attention next to the ports, natural gas, and the electric utility.

These will not be so easily sold as the telephone company or the national airline, both relatively easy to turn around with a capital injection, according to foreign analysts. At the head of the list of ``hard cases'' stands the railway network. It was once the jewel in Argentina's public sector crown, but is now a sorry sprawl of inefficient, underfunded lines that lost over $1 million a day last year.

The government is currently drawing up with the World Bank a three-year plan likely to radically cut passenger services and close a number of lines, Guaragna says. The rail unions are fighting that prospect tooth and nail.

The privatization drive enjoys the support of an overwhelming 83 percent of Argentines, according to a recent opinion poll. Ironically the strongest opposition has come from inside the ruling Peronist party, says one top government official.