Privatization: Private Life

How privatization is helping to revive Peru

The wind in Atico, Peru, is filled with the smell of salt and the sound of metal halyards slapping against their boat masts. At the end of the work day, the lagoon is so full of fishing boats that the entire center of town seems to rise and fall with the tides. On the shore, the docks are covered below with barnacles and above with scales and freezers to hold the day's catch.

Fishing is not new to Atico. For millennia, early Peruvians used the small lagoon in the middle of the village as a base for fishing. Near here, anthropologists have found bone fishhooks and remnants of nets made of animal innards that could be more than 2,500 years old. Many families here have included fishermen for longer than can be traced.

"I've got salt water in my veins," said 67-year-old Germán Herrera, a barrel-chested man whose calloused hands learned to throw fishing nets to the sea at age 8. "My father used to say that if our family couldn't fish, we couldn't live."

Unfortunately for Herrera, he was forced to prove his father's axiom wrong in a story repeated too often in Peru. Twenty-five years ago, Herrera's town was a thriving pillar of an industry that nationally provided a fourth of the world's fishmeal. But the lives of the fishermen and the town were permanently altered when private companies in Atico--like their counterparts elsewhere in the country--were nationalized during the military government of the early 1970s and placed under a state bureaucracy called PescaPerú.

Within 10 years, Peru's fishmeal production was reduced to a fifth of its former highs, while PescaPerú had grown from nothing to the recipient of subsidies worth nearly 1 percent of the budget of the increasingly impoverished nation. The fishing industry was ruined in the process. In Atico, as in more than two dozen Peruvian towns where the sea had provided more than three jobs in four, boats literally rotted in the harbors and former fishermen abandoned their homes and fled to Lima's growing slums, desperate for work.

Herrera was able to keep his home, thanks only to money he had put away in hopes of buying a bigger boat. But he had to take work as a house painter and on government crews building roads a couple of hours away in the mountains. His fishing, he recalls sadly, was limited to about five days a month.

But two years ago, says Herrera, life started returning to this small town 350 miles southeast of Lima. Two of his three brothers who had been forced to leave half a generation earlier returned. At first there were a few new jobs, then a few more. Herrara is again earning enough to live from fishing, and the town is about as productive as it was 40 years ago, but still less productive than in the heyday just before nationalization.

"The new jobs came when they sold the businesses," the white-haired Herrera says simply. "I don't know anything about politics, but I know about jobs. There were no good jobs before and now there are plenty. For that, I give my thanks."

The main offices of Copri, the committee charged with privatizing some 240 state-run companies, are in a small, rectangular building that literally spends most of the day in the dark shadow of the massive headquarters of the Ministry of Energy and Mines in Lima. As center stage in an aggressive privatization program initiated under President Alberto Fujimori's administration, Copri is an increasingly busy place.

Copri planned the sale of the public companies that ran Atico's fishing industry. Because of the poor condition of the industry in Atico, Copri reports that selling the rights to the area to an international consortium brought the government a modest return, about $650,000. But most agree with Herrera that the most important result was the creation of more than 150 new jobs, breathing life into the crippled town.

The building that houses Copri once served as the Ministry of Energy and Mines's bank, but the privatizations have allowed it to consolidate in the main structure. "It's kind of funny, but this building used to be for handing out money every payday," says Copri operations director Manuel Llosa, who supervises the day-to-day activities of the staff of about 40. "Now, it's used for bringing money in."

Copri has brought plenty of money in. Since its founding in 1992, the committee has sold more than 75 companies for nearly $4 billion, including the national telephone company, a passenger airline service, two major banks, eight hotel chains, and factories producing everything from cement and bricks to tomato paste and breakfast cereal. But the most encouraging and long-lasting part of the equation, according to many observers, is what has happened to the companies since being sold.

"Almost without exception, privatization in Peru has meant higher production, more efficiency, and better income for the employees," said Lima political scientist Gerard Máton. "It's amazing what happens when people are forced to look at the bottom line."

The noted Italian philosopher and naturalist Antonio Raymondi wrote that Peru was like "a beggar sitting on a bench made of gold." Peru's poverty often overshadows the fact that the country is hugely blessed with natural resources.

Even now, with its unlikely mix of state companies and fledgling private firms, Peru ranks among the world's top eight producers of six major metals, including silver and gold. The fishing industry is again among the top six in the world and rising, and Peruvian farms lead or are second in South America in the production of five fruits or vegetables. The piecemeal privatization of the state oil company PetroPerú has so far attracted nine buyers from seven countries, including the United States, Russia, and Taiwan. Peru's expansive portion of the Amazon jungle has unknown potential for exploration, and the national tourist trade, which many experts refer to as virtually unlimited, is just starting to take off.

Yet the country remains among the poorest in the world. Nationalization was part of the problem: In 1960 Peru was second in Latin America in per capita income from agriculture, but with the nationalizations in place 30 years later, it was second to last, ahead of only Haiti. Even now, despite half a decade of reforms and improvements, per capita income is pegged at $2,800 a year, according to only the most generous estimates. That's a figure that Fujimori is intent on changing.

When he became president in 1990, Fujimori announced a three-part plan to attract the foreign capital necessary to raise the national standard of living. The first part was to stem the country's hyperinflation, in which prices were 20,000 times higher in 1993 than five years earlier. He's succeeded with an economic shock program that drastically cut public expenditures, immediately eliminated many state subsidies, and froze the printing of money. As a result, the inflation rate that reached a high of nearly 8,000 percent in 1992 has slowed to about 10.5 percent in 1995.

Part two was to eliminate the terrorist threat that had plagued the country since 1980. Fujimori's nearly done that too, as Shining Path leader Abimael Guzmán was captured in 1992 and violence--especially near the capital--has shrunk to a fraction of its former levels.

The third--and least publicized--part is the privatization process. The process was developed in large part by economist Javier Silva, who ironically produced the plan in 1989 for the presidential campaign of Fujimori's rival, novelist Mario Vargas Llosa. But Fujimori knew a good thing when he saw it, and the plan Silva developed, which called for privatizations in strict stages, was adopted as his own. The privatizations are scheduled over an eight-year period ending in 1999, theoretically ensuring that no industry is hit too hard by change.

The actual process is straightforward. As the date for a sale approaches, a team from Copri aided by the World Bank or another objective organization studies the company and produces what is called a "fair value assessment." From there, a minimum price is set, potential buyers are screened, and a sealed-envelope auction is held.

Companies and consortia representing more than 20 foreign countries--plus many domestic groups--have won rights to parts of Peru's former state-run industries. The pattern for success in most instances involves scaled-back administration expenses and aggressive marketing, often overseas. Nine in 10 of the new owners turn a profit within two years.

The plan offers both technical and social benefits. The money from the sale is used to reduce the state's fiscal deficit, and from then on the companies provide tax revenues instead of draining state coffers. But the plan also calls for between 10 percent and 50 percent of each privatized company to be placed in the hands of the workers over a period of years in a form of profit sharing.

Fujimori, of course, is no libertarian. In 1992, he suspended the Congress and ruled by decree for nearly a year, and he is still known for strong-handed tactics and civil liberties abuses. But many see the privatization process as a libertarian reform experiment in real life.

"It used to be that during the 1970s, I spent a lot of time explaining classical liberal theory to my students from dusty old textbooks," said Matón, a part-time professor at Lima's University of the Pacific. "Now, I can just say `open today's [newspaper].' It's a rare chance to see a pure theory in practice."

In places like Atico, that practice is brought to life. No political scientist is necessary to see the change in the attitude of the town. "My wife, she used to call me `viejo' [old man]," the dark-skinned Germán Herrera says with a smile. "Now, it's just plain Germán….I'm not any younger, but I'm doing what I love, and that's what makes me feel like I'm a whole generation younger."

Herrera pulls two of the best fish from the day's catch and wraps them in newspaper--"The family feast," he says--and then puts the heavy vine baskets on the scales. With the catch weighed, he goes to collect bids from the handful of buyers he trusts and settles on a price. The sun is going down as he excuses himself about halfway through the walk home, saying he wants to jog the rest of the way to work the stiffness from his knees.

"I'm talking about it but I don't complain about the sore muscles, because it's a soreness from a good day's work, and that's all an honest man needs," he says. "I'm fishing again. I'm a happy man."

Eric J. Lyman ([e-mail]) is a freelance writer based in Lima, Peru.