When the Vásquez family’s phone line was installed in mid-1990, they threw a party. After all, they’d paid $1,000 and waited seven years, and the installation put them in a privileged group in their low-income Lima neighborhood. Some people languished on the waiting list for 15 or 20 years.
Four years later, the notoriously inefficient Empresa Nacional de Telecomunicaciones (ENTEL) and Companía Peruana de Teléfonos (CPT) were swallowed up by Spain’s Telefónica. Soon a phone line could be installed in two or three days for about $100. The number of main lines increased from 26 per 1,000 inhabitants in 1990 to 67 in 2000, and phone booths popped up like mushrooms. In 1993, there had been barely one pay phone for every 2,000 people—and only 67 percent of them worked.
Despite the improvements, Telefónica has become the company Peruvians love to hate. In a September survey by the University of Lima, 65 percent of respondents said they thought the sale of the telephone companies had not been favorable for Peru. The case underscores both the good and the bad of the privatization frenzy that struck Peru in the 1990s under then-President Alberto Fujimori (1990-2000).
“I don’t think there’s any doubt that it was necessary to privatize most of the state-run businesses, not only because they were operating at a loss, but because in many cases it didn’t make sense for the government to be running them,” says economist Ismael Muñoz, a former adviser to the minister of transportation and communications under the current administration of President Alejandro Toledo. “What people object to is the abuse and the arrogance of some of these companies.”
The sense that ordinary citizens have seen no benefits from privatization erupted between last June, when demonstrators took to the streets in the southern highland city of Arequipa to protest the privatization of two electric utility companies located there, EGASA and EGESUR. As the protests turned into riots, the government considered sending in troops, but finally opted for dialogue. By the time the dust had settled, the government had backpedaled on the $167.4 million sale to Belgium’s Tractebel, and both Interior Minister Fernando Rospigliosi and Ricardo Vega Llona, head of ProInversión, the government agency responsible for privatizations, had resigned.
The Arequipa demonstrations were largely the result of a tactical blunder by Toledo, who had promised during his campaign that he would consult with local constituents before privatizing the two utilities. Peru’s Constitutional Tribunal had not yet ruled on the case in January when Tractebel said it had decided not to continue with the deal.
If privatization has become a dirty word in Peru, it is less because of ideology than practicality. The Fujimori administration privatized more than 220 state-run companies for a total of $9.2 billion, according to a report issued in June by the congressional commission that investigated irregularities in the sales. After expenses of the sale were subtracted, there was only $7 billion, and only $4.4 billion made it into the government’s coffers.
As much as $5 billion may have fled the country, according to economist Oscar Ugarteche, who worked on the congressional investigation. Since the Fujimori government collapsed in November 2000 amid a corruption scandal, investigators have found more than $340 million in foreign bank accounts—an amount they say is only the tip of an iceberg whose true dimensions may never be known.
In the privatization process, “there was corruption on both sides—by those who were selling and those who were buying,” Muñoz says. Some of the graft is related to the use of the proceeds from the sales. More than $1 billion went for the purchase of military equipment, much of which was overpriced or defective. A handful of military officers are in prison on charges related to bribery and kickbacks.
The congressional commission found irregularities ranging from collusion and favoritism to undervaluing of properties, modification of contracts, excessive tax breaks and insider dealing. A group of Chinese companies favored in the bidding process has been linked to former cabinet chief Víctor Joy Way.
The result, Ugarteche says, was a mixed blessing. The injection of cash into the economy— even if much of it was kickback money being legitimized for later transfer to accounts in Switzerland or the Cayman Islands—represented between 2 percent and 3 percent of GDP per year in the mid-90s. Peru’s economy grew by 5.7 percent in 1993, 13.6 percent in 1994 and 8.6 percent in 1995. On the other hand, Ugarteche says, “They stole the country’s reserves.”
Most Peruvians didn’t see the benefits of the economic growth. Today 54 percent of the population lives in poverty, including 24 percent in extreme poverty. Because the government lacked a long-term development strategy, income from the sale of state-run enterprises was used to patch holes in the budget. By the end of the 1990s, the balance from privatization was negative—only interest earned on the money put the net figure in the black, according to the congressional commission.
The financial cost of privatization was high. Many state-run companies were so inefficient that the government had to invest in them to make them attractive to bidders. Several decades of unregulated dumping of mine waste had left the Andes littered with tailings piles that were polluting rivers and streams—a liability that purchasers of state-run mining installations were unwilling to assume.
The social cost was also considerable. One of the things that had made state-run enterprises in Peru inefficient was an evidently bloated payroll. By 1999, according to official figures, 120 thousand employees of state-run companies had been laid off. The theory was that the market would take care of them, but in fact only 36 percent of them found jobs with other companies. The rest remained unemployed or ended up earning a subsistence living in the informal economy.
The breath of democratic air that followed the fall of the authoritarian Fujimori regime brought former state employees into the streets to clamor for reinstatement. While the courts have upheld the case of a small group of former phone company employees—Telefónica has reinstated only a fraction of them—and the government has set up a commission to review other claims, labor officials say that most of the state layoffs were technically legal. While many employees were pressured to resign, as the state pared down to prepare for the sales, they did receive severance packages.
At the local level, much of the privatization did nothing for employment—or, worse yet, had a negative effect. Of the 3,456 employees of the state-run fishing company Pesca Perú, only 172 are still working in fisheries. In 1992, the Chinese mining consortium Shougang paid $120 million for the state-run Hierro Perú, which had been valued—undervalued, critics say—at about one-sixth that amount. The $150 million that Shougang pledged to invest after the purchase never materialized, and the company finally decided it would be cheaper to pay the $12 million fine for non-compliance.
According to the congressional commission’s report, the non-compliance “has caused serious social problems” in Marcona, on Peru’s southern coast. The company’s work force has fallen from 4,800 in 1992 to 1,300 now, and Shougang has been plagued by ongoing labor disputes. More dramatically, Marcona’s population has dropped from 22,000 to 12,900 over the past decade.
“There’s no evidence that these companies invested,” Ugarteche says. “They bought state-run companies and reorganized them, but there’s no evidence that they put money into them.”
Privatization will soon run its course in Peru. Only a handful of state-run companies remain to be sold, let in concession or reorganized under joint operating agreements. This year, the government expects to receive about $400 million from privatizations—a far cry from the $1 billion to $3 billion a year reported between 1994 and 1996. And while there is more talk of concessions and joint ventures, rather than outright sales, no major political party is suggesting an about-face on free-market economics.
The new regional governments, like the one in Arequipa, will be players in this next round of privatizations, however. The governments were elected in November and took office on January 1. Those whose jurisdictions include state-run companies are sure to demand a voice in—and local investment from—any deals that are negotiated.
One problem, Muñoz says, is that the central government has never defined which enterprises should be considered national property and which could be considered regional or local properties—a key point in the Arequipa debate. Authorities will also have to work to convince people that privatization can bring local benefits.
The government must address the legacy of corruption left by the privatizations of the 1990s. Those responsible, Ugarteche says, “must be punished in such a way that everyone realizes that it doesn’t matter how powerful you are, if you commit a crime like that, you’ll end up in prison. I don’t see that happening.”
The congressional commission also recommended doing away with a mechanism that allowed government purchases to be made by secret decree—a straightforward step that the Toledo government has failed to take. Ugarteche adds that the Controller’s Office should be reorganized to work more efficiently. Finally, he says, “Peru needs an alert society that will point out when things are going wrong.”
Ugarteche believes Peruvians are more vigilant now, although he concedes that some feel that the only crime committed by the defendants in corruption cases was that of being caught. He adds, “There’s still a lot of work to be done to restore our values.
ABOUT THE AUTHOR
Barbara J. Fraser,, is a former associate editor of Latinamerica Press now working as a freelance writer based in Peru.
