Regulatory gaps undermine corporate governance in Brazil’s privatised steel industry

In 1988 Brazil embarked on a huge privatisation programme. The privatisation of the steel sector began in the same year. This proved to be successful in terms of improving financial and productive efficiency in the steel industry. But has privatisation led to better corporate governance and a smaller role for the state?

A book from the Centre on Regulation and Competition at the University of Manchester, UK, examines the impact of regulation on the development of poorer countries. This includes a chapter looking at the role of regulation in the privatisation of the steel sector in Brazil. It assesses the impact of privatisation on patterns of ownership, corporate governance and the role of the state.

Privatisation has been a popular policy with many governments since the late 1980s. The main aims usually include improving the efficiency of state-owned enterprises and raising money for public finances. For the Brazilian government, privatisation was also a symbol of the country’s commitment to a broader set of radical economic reforms.

The privatisation of Brazil’s steel industry involved two main phases: 1988-92 when the smaller companies were sold off, and 1991-93 when the six big steel companies (Usiminas, CST, Acesita, CSN, Cosipa and Açominas) were privatised.

The authors find that the privatisation of Brazil’s steel sector was much more complex than might be expected. The government failed to introduce necessary regulatory changes – such as rights for minority shareholders – or plan for how the industry might best be organised post-privatisation.

As a result there are very confused ownership relations among companies and investors. Minority shareholders did not invest, so companies in the steel sector have had to forego equity finance (shares) and instead look to public sector banks for financing (because interest rates in private capital markets are too high).

The key research findings include:

• During privatisation, the main investors were domestic banks, state-owned enterprises (SOEs) and pension funds (mostly related to SOEs). Foreign participation was very low.
• Privatisation failed to attract minority shareholders.
• Post-privatisation, the industry’s ownership structure is very complex and opaque (including complicated cross-ownership relations).
• Post-privatisation, the industry’s ownership structure is also characterised by instability, in that it is prone to frequent changes among the largest shareholders.
• Privatisation has not led to improved corporate governance standards in Brazil’s steel industry.
• The state continues to be an important source of finance for the steel sector, both as an indirect investor and as a lender.

Weak corporate governance arising from regulatory deficiencies has prevented the steel industry from developing to its full potential. Brazilian firms, including those in the steel sector, will need access to equity finance to support future investment and growth.

The authors conclude that:

• Better corporate governance standards, which encourage minority shareholders to invest, will be needed.
• This depends upon the introduction of effective regulation.
• The new corporate law (Lei das SA) framework which came into force in 2003 will increase minority shareholder rights and so may help to improve corporate governance in the Brazilian steel industry.

Source(s):
‘Corporate Governance, Regulation and the Lingering Role of the State in the Post-Privatized Brazilian Steel Industry’, by Edmund Amann, João Carlos Ferraz and Germano Mendes de Paula, in ‘Regulating Development: Evidence from Africa and Latin America’ pages 153-176, Edward Elgar: Cheltenham, edited by Edmund Amann, 2006
‘Ownership structure in the post-privatized Brazilian steel industry: complexity, instability and the lingering role of the state’, Centre on Regulation and Competition Working Paper No. 75, Institute for Development Policy and Management, University of Manchester, by Edmund Amann and João Carlos Ferraz, 2004 (PDF) Full document.
Further details about this research project ‘Centre for research on Regulation and Competition in Developing Countries’ Full document.

Funded by: UK Department of International Development (DFID), Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq), the Fundação de Amparo à Pesquisa do Rio de Janeiro (FEPERJ)

id21 Research Highlight: 27 July 2007

Further Information:
Edmund Amann
Economics
School of Social Sciences
University of Manchester
Manchester M13 9PL
UK

Tel: +44 (0)161 2754277
Contact the contributor: edmund.amann@manchester.ac.uk

Centre on Regulation and Competition, IDPM, University of Manchester, UK

João Carlos Ferraz
Division of Production, Productivity and Management (DPPM)
Economic Commission for Latin America and the Caribbean
PO BOX 179 D
Santiago de Chile

Tel: +56 2 2102651
Fax: +56 2 2102590
Contact the contributor: jcferraz@eclac.cl

Economic Commission for Latin America and the Caribbean

Germano Mendes de Paula
Instituto de Economia
Universidade Federal de Uberlândia
Núcleo de Economia Aplicada
Campus Santa Mônica, Bloco J
38 400-902 Uberlândia, MG
Brazil

Tel: +55 34 32394157
Fax: +55 34 32394205
Contact the contributor: germano@ufu.br

Universidade Federal de Uberlândia, Brazil