How Green Was My Vale

The sale of state-owned Vale do Rio Doce to the private sector was celebrated with French champagne by the victorious bidders, but vehemently condemned in the streets by some sectors of the population. Opposition to privatization is nothing new. The novelty was the scope of those protesting this time: among others, the church, leaders from the right and the left, the Brazilian Press Association and two former presidents.

Marta Alvim

Amid loud protests, a flood of lawsuits and court injunctions, the saga of state-owned Companhia Vale do Rio Doce (CVRD) finally came to an end on May 6, as the hammer went down on Latin America's largest privatization deal. The bid winner, Valepar, an international consortium led by Brazilian steel maker Companhia Siderúrgica Nacional (CSN), paid $3.3 billion for 43.73% of the mining giant's voting stock—a 19.99% agio over the minimum bidding price.

As the winning group celebrated the victory with liberal quantities of Moet & Chandon at a private office in São Paulo, the scene outside Rio de Janeiro's stock exchange, where the auction took place, resembled a battle field. In the confrontation that followed between some 5,000 protesters and a force of 600 men from the military police, 33 people were wounded by the exchange of blows, stone throwing, and tear gas. Similar manifestations had been occurring in several Brazilian cities weeks before the auction took place.

In the meantime, another injunction, this time seeking to annul the auction's outcome and to block payment and share transfer to the consortium, was being filed.

Demonstrations of nationalistic and ideological natures are not unusual in the history of Brazil's privatization process. In 1991 and 1992, when steel makers Usiminas and Companhia Siderúrgica Nacional were privatized, the government decision was met with strikes, protests and even a bomb explosion during the sell-off of the latter. What makes the public outcry against Vale's deal distinct from other anti-privatization efforts is the scope of the sectors involved. The church. The Brazilian Lawyers Association. Former presidents José Sarney and Itamar Franco. The Brazilian Press Association. Right and left-wing politicians. Labor Unions. The scientific and academic communities. Civilians from all walks of life.

In anticipation of the strong reaction, the government spent $4.8 million in a massive institutional campaign that included radio and TV ads—the latter starring popular actor Raul Cortez; paid newspapers' articles, plus the public relations effort of Minister of Planning Antônio Kandir. In the government sponsored radio program, Voz do Brasil, Kandir regularly addressed the public's concerns about CVRD's deal by answering thousands of letters that poured in from all over the country.

While most Brazilians approve of less government influence over the economy, Vale's privatization has been questioned based on the company's lucrative performance over the years and the strategic importance of its mineral reserves for the country.

THE CROWN JEWEL

As a result of nationalistic pressures on President Getúlio Vargas, CVRD was founded in 1942 when the control of the Itabira Iron Company, together with the Vitória-Minas Railroad, was transferred from American and English ownership to the Brazilian government.

Fifty-five years later CVRD—the "crown jewel," as it is affectionately called by Brazilians—has become the world's largest producer of iron ore and Latin America's largest producer of gold. Its mineral reserves include bauxite, manganese, copper, kaolin, potassium, nickel and zinc, with mining production guaranteed for the next 400 years. The company operates 1800 km of modern railroads, its own marine terminals, and the world's largest bulk-carrier fleet. CVRD is also in the pulp and paper fields, and it extracts 400 thousand tons/year of raw material from 580 thousand hectares of replanted commercial forests.

The magnitude of Vale's operations is impressive. The company employs approximately 15.5 thousand people, and is present in over 200 cities all over Brazil. The cities in turn receive 8% of Vale's net profit in the form of social and economic improvements in areas such as public health, sanitation, education, vocational programs for young adults and preservation of the historical patrimony. Translated into numbers, the company has invested $169 million in 237 Brazilian cities in the last 16 years, $26 million last year alone. Furthermore, CVRD regularly invests relevant resources in the scientific and technological fields. According to the National Bank of Economic and Social Development (BNDES), which coordinated Vale's auction, the new owners will have to honor any social projects approved prior to the sell-off.

THE OPPOSITION

Yet, BNDES's assurance was not enough to appease the opponents of Vale's privatization. Apart from the usual nationalistic claims that the government is surrendering the country's sovereignty to foreign interests, the whole deal has been under suspicion from the very start. A research commissioned to scientists from Universidade Federal do Rio de Janeiro (UFRJ) by Câmara dos Deputados (Brazilian Lower House) revealed that CVRD's patrimony was significantly undervalued to begin with. After meticulous analysis of Vale's documentation and on-site inspections of its mineral reserves, the group of 22 specialists detected major discrepancies in the numbers presented by the consortium of financial consultants hired by the government and led by US investment bank Merryl Lynch. The difference in price between the two evaluations reached $2.05 billion, which was not included in the minimum bidding price.

To make matters worse, lawmakers claimed there was a conflict of interest in Merryl Lynch's appointment as an official consultant to Vale's privatization. In November 1995, the American company bought South African brokerage Smith Borkham Hare, which in turn acts as sponsoring broker in Johannesburg to Anglo American Corp., one of the prospective bidders in CVRD's auction. Merryl Lynch denied the allegations that it would have passed privileged information to Anglo American.

Another point of contention is how the government intends to spend the receipts brought in from the auction. Half of the $3.3 billion will be used to help reduce the federal debt, which is around $132.1 billion. The other half will be used by BNDES to subsidize loans to private businesses at lower interest rates than those offered by the National Treasury—a debatable decision and a waste of money in the eyes of the anti-privatization faction. For one, the debt is so huge that $1.6 billion is negligible in the big scheme of things. Secondly, the government's paternalistic role towards the private enterprise is contradictory and inconsistent with its own privatization drive.

Last but not least, why sell a company that has few debts and hasn't received any money from the government since 1991? CVRD doesn't contribute to the increase of the public deficit. Its annual revenue is around $5.5 billion, and last year Vale made profits of $596 million, nearly 76% higher than in 1995.

THE SUPPORTERS

The Union's lack of financial resources to invest in the company. Need of more entrepreneurial freedom for Vale, which by being stated-owned, is restricted to reinvesting only 40% of its net profit in the expansion of its activities. Low financial return for the State. Those were the three major arguments given by Minister of Planning, Antônio Kandir, in favor of CVRD's privatization.

President Fernando Henrique Cardoso (FHC), at first opposed to Vale's sell-off, goes even further and questions the alleged strategic importance of CVRD. The newspaper Folha de São Paulo quotes the president as saying: "Strategically, what does Vale do? It gets rocks from, let's say, Carajás, puts them in the train, takes them to the port, and sends them abroad. That's what the exploration of iron ore is all about. There's no important technology involved."

Others add that, once rid of the government bureaucratic structures, Vale can be even more profitable and competitive, and can generate more jobs. Besides, it would be better if CVRD paid more taxes, like any other private company, instead of investing 8% of its net profit in social projects. In 1995, for instance, Vale spent $8 million on such projects in the state of Minas Gerais, but some private companies pay up to $400 million in taxes annually.

As for CVRD's strategic potential to Brazil's development and sovereignty, the supporters of Vale's privatization believe that what's really important for the country in today's reality is education, public health, justice and safety. Those should be the government's main concerns, while the management of mammoths like Vale and other state-owned companies should be left to private parties.

THE FUTURE

As the controlling stake in CVRD changed hands, no immediate major changes had been planned by the new owners. Of all things, there is only one certainty, that it may take a number of years to clear up all the legal challenges to Vale's sale, although the outcome of the auction is very unlikely to be reversed.

Besides CSN, the winning consortium also includes four local pension funds, Banco Bradesco, US NationsBank and Opportunity Asset Management's offshore investment fund, which has Citicorp and megabusinessman George Soros as investors. Directly or indirectly Valepar will control around 80% of Brazil's steel production.

Meanwhile FHC celebrated victory while boosting his credibility among the international community. During a visit to the United States last year, President Clinton urged FHC to speed up the slow-paced privatization process. Vale's sell-off showed the world the Brazilian president's commitment to a new era of economic liberalization. Next in line are two power generation plants-Furnas and Electrosul-which are expected to be privatized later this year. Already in full motion is the privatization of the telecommunications industry and its cellular-phone markets. Eventually the government will also sell telephone holding company Telebrás and the nation's long-distance carrier, Embratel.

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MINERAL RESERVES

..........................Minerals Reserves (estimated tons)

Iron Ore .............41.5 billion

Bauxite ...............678.0 million

Manganese .........72.0 million

Gold ...................563.0

Copper ...............994.0 million

Kaolin .................67.0 million

Potash ................122.0 million

Nickel .................70.0 million

Zinc .....................9.0 million

Uranium ..............1.8 million

Titanium ..............1.0 million

Tungsten ..............510.0 thousand

Niobium ................60.0 thousand