Privatization by Capitalization : The Case of Bolivia - A Popular Participation Recipe for Cash-Starved SOEs

Abstract

While campaigning for the 1993 presidential election, Gonzalo Sanchez de Lozada proposed the unique Bolivian model of capitalization -- "Plan de Todos" (Plan for everyone)--for six large state enterprises in key sectors. The enterprises would be offered for sale by international tender. The successful bidder would pay the agreed price not to the government, but into the company itself. The cash would be used for investment in the sector. Initially the investor and the government would hold equal, 50 percent stakes in the new company. The government would immediately give its share in equal parts to all adult Bolivians by endowing "pension accounts" set up for each adult citizen. A 50 percent stake in a company is usually enough to ensure management control. However, to avoid any uncertainty and the risk of a negative impact on the selling price, the capitalization law proposes that a management contract be given to the strategic investor for a fixed period of time. After that time, the investors would be able to buy shares in open markets to increase the shareholding beyond 50 percent. Sanchez de Lozada won the election in July 1993. With the help of World Bank advisors, he has been working to make this capitalization concept a reality. However, it has run into many of the thorny issues associated with traditional privatization schemes. This Note describes the key capitalization issues during the process.