Doing business with state-owned firms

Partnerships with state-owned enterprises are like marriages: relatively easy to get into but very expensive to get out of, warns Jerry Haar, professor of international business at Florida International University.

by Latin Business Chronicle
Last Updated: 23 Jul 2013

Multinationals must distinguish between the rhetoric of Latin America's new left wing governments, and the reality of past and present performance. Haar identifies four countries where the rules of the game are liable to change without prior notice: Venezuela, Ecuador, Bolivia and Argentina.

The state may change ownership, operating control, asset and equity evaluation, employment rules and rules governing repatriation of profits and dividends. This means a higher risk premium to doing business in these countries, let alone going into partnership in 'sensitive' sectors ie oil, gas, electricity, telecoms and other 'strategic' sectors.

The multinational's bargaining position will depend on the nature of the investment, i.e. is it export oriented; the level of technical know-how, and the skilled personnel that it brings to the operation. Also, if the investment is in line with national development goals a mutually beneficial partnership between state and multinational is more likely.

Cesar Gutierrez, president of the board of state-owned Petroperu says that there has been a shift toward nationalisation in strategic sectors over the last four years in Latin America, Africa and Russia. High oil, gas and derivative prices are one reason, with governments experiencing problems raising tax revenue seeking to tap into these windfalls, and to lessen the impact of rising energy prices for the population by sharing the gains.

Gutierrez said a model that reconciles state interests and private sector earnings expectations was desirable, to avoid the pendulum swing from private to state sector seen over previous decades. All this requires skilled negotiation, so the state benefits from royalties and taxes, and both parties assume responsibility for affected groups. The Petroperu minister points to his country as an example of where such a model has been effective.

Rui da Costa, managing director for Latin America and the Caribbean at Hewlett Packard, says a partnership works where each side brings something to it that the other needs. In the technology sector, the government can offer stronger knowledge of the local market, the ability to bypass bureaucratic delays and to provide local contacts that the multinational needs. In turn, the private company brings a more global business perspective, and technological and financial resources that the government partner may lack.

HP has partnerships with local private companies as well as state ones. These result in lower costs of production, shipping and marketing. In the end the consumer and local economy benefits, says Rui. HP is also involved in CSR activities, which are good both for corporate image and for improving the quality of life of people in the region.

"Infrastructure development will be the theme and efficient project structures will be the tone for securing Latin America's much-need development. The private sector will play a key role in funding and operating these projects," says Nicolas Mariscal Servitje, executive director at Grupo Marhos in Mexico. "Nevertheless, local culture, relationships and knowledge of market conditions need to be addressed through partners in each country to ensure the success of demanding projects."

Doing Business with State Owned Firms?
Latin Business Chronicle

Review by Joe Gill

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