State ownership in Latin America’s Oiland Mining: Politics, Reform, Agency

Jojo Nem Singh| Workshop on Resource politics| Kyoto, 11 Oct 2019

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1Outline
1. The Puzzle
2. Argument
3. Chile’s Codelco (mining)
4. Brazil’s Petrobras (oil)5. Tentative Conclusions

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The main puzzle• Why do SOEs persist despite neoliberal reforms
to privatize state assets?
• What developmental roles can SOEs play, butmore specifically, how can they facilitate
industrialization?

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Analytical Argument

Why maintain SOEs?
• Path dependence• Continuing strategic
importance of SOEs
• Economic
performance of SOEs

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How do states alter
SOEs?
• Corporate governancereforms/restructuring• Assigning new roles –value creation andsectoral coordination• Socialization of risks
and rewards

Reform Outcomes• Different
ownership/management
structures• Multiple roles of SOEs
• Mutual dependence
between domestic
capital and SOEs
• Foreign capital as part of‘triple alliance’

4Why Brazil and Chile?
• Two cases showing different pathways of state ownership• Embedded neoliberalism (Private sectordriven)• Codelco as vehicle for profit revenue
maximization• Control over high quality copper ore as its
comparative advantage

SOEs with direct state
control (Coldeco)• State developmentalism (Tradition ofindustrial policy and state control)• Petrobras as vehicle for industrial policy• Technological development throughPetrobras as its advantage

SOEs with indirect state
control (Petrobras)

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What do we know about SOEs?

Discover the world at Leiden University6Traditional understanding of SOEs
•Soft budget constraints (inherently inefficient?)•No mechanism for disciplining the agent•Non-commercial goals à not always efficient

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SOEs and national innovation
1.
Value creation• Build sectoral linkages across industries to generate spill over andlearning effects• Fiscal maximization to generate revenues for the state
2. Coordination or direction-giving role
• SOEs as lead users of technology adoption and diffusion in supplychain
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Towards a ‘Mission-oriented’ state• States as investors that actively create and shape markets rather
than resolving market failures (Mazzucato 2016)- Innovation as inherently disruptive and requires long-term
commitment- Private firms: risk-averse, short-term orientation- Example: Development banks that can socialize risks andrewards (BNDES in Brazil, KfW in Germany)

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9Case Study 1: Chile’s Codelco (mining)% Sector Share of Country Exports in Chile,
2000-2017
70. 0

60.0

60.0

50.0

50.0
40.0
40.0
30.0
30.0
20.0
20.0
10.0

10.0
0.0

0.015206Total Mining

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1220020390200020020• Copper or ‘red gold’(nearly 60%export)• Centre-leftgovernment goal
was to maintainsome form ofcontrol over theindustry without
marginalizing
private firms.

Copper10

Mining and innovation• Innovation as
private-sector
driven (mostly FDI)SHARE OF MINING FDI UNDER DL600

61.1

53.2

% Mining to Total FDI• The role of Codelco
was fiscal
maximization, notnecessarily
innovation.

45.9
39.8
35.3
32.8

30.9

22.5

20.4

18.9
15.1

1974-2005

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2006

20072008

2009

2010

2011

2012

2013

2014

2015

11

Structure of Mining Industry
Share of Public and Private Copper Production, 1990-2017
4,500.0
KmT Copper Content

4,000.03,500.0
3,000.02,500.0
Codelco-Chile
Private Sector

2,000.0
1,500.0
1,000.0
500.0
0.0
1720

14
20

11
20

08
2005
20

02
20

99
1996
1993
1990
19

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“There is an argument around why the state did not do the mining itself. I
think there are two reasons. One, the state simply had no money to do it, toinvest. If the government invests in mining, you cannot invest in education,
healthcare and other things. On the other hand, the role of the state inChile is to regulate, promote and take care of the poorest section of society,and not to do the business by themselves. The role in Chile... is subsidiary.
The state is not going to conduct business where the private sector can doit.”
Marco Fluckiger,
Head of Foreign Investment Department,
Comisión Chileno del Cobre (COCHILCO), October 2009
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Codelco’s role over time…
ØAs a source of rentseeking for the military;

Ø A political buffer
between states andprivate capital.

70,000.0

60,000.0

50,000.0

US$ Million

Ø Fiscal maximization
due to commodity
dependence; andFiscal Share of SOEs to National Income, 1990-2017

40,000.0

30,000.0

20,000.0

10,000.0

0.0
1720

1420

112008
2005
2002
2099
1996
1993
1990
19

Total Fiscal Revenue

Public enterprises contribution

Note: Codelco: Income Taxes (corporate, 40% additional for State-owned companies, and specific mining tax), taxes payable under Law 13,196 and dividends reported by Codelco; not included other taxes(Customs and other duties). Codelco’s contribution for 2011 was downwardly revised by US$948.6 million in consideration of income taxes paid at year-end, in line with tax revenues reported in 2012 byDIPRES, the Government Budget Office. Excluded from Codelco contributions in 2012 are US$114.7 million in income tax paid by related companies.

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CONTENTS

2015
SUSTAINABILITYREPORT

Corporate governance structure
Message from our CEO• Corporate structureis highly
Sustainability-related
politicized – no commitmentschange inownership structure of theMateriality processcompany• Key functionsContext
ofandtherelevantBoard
facts

Codelco’s Board
Oscar Landerretche

Dante Contreras

Juan Enrique Morales

Blas Tomic

Chairman of the Board
Business Engineer,
University of Chile.
From May 11th, 2014 to
May 10th, 2018.

Business Engineer,
University of Chile.
From May 11th, 2014 to
May 10th, 2018.

Mining Civil Engineer,
University of Chile.
From May 11th, 2015 to
May 10th, 2019.

Industrial Civil Engineer,
University of Chile.
From May 11th, 2013 to
May 10th, 2017.

FESUC-ANSCO
representative
To be Appointed.
From May 11th, 2015 to
May 10th, 2019

- Submit annual budget to the Ministry
Our companyof Finance- Transfer profits to the state

Corporate governance- Make decisions over joint ventures,divestments andWorkinvestments
performance- Appoint and remove the CEO
Environment- Approve acquisition of loans(internal and external)
with therelations
approval of the Community
Finance
Ministry

Laura Albornoz
Lawyer,University of Chile.
From May 11th, 2014 toMay 10th, 2018.

Gerardo Jofré

Isidoro Palma

Raimundo Espinoza

Business Engineer, PontificalCatholic University of Chile.
From May 11th, 2013 to May
10th, 2017.

Business Engineer, PontificalCatholic University of Chile.
From May 11th, 2015 to May
10th, 2019.

Electrical Technician,with studies of Mining
Engineering, Technical
University of Antofagasta
From May 11th, 2012 to May
10th, 2016.

1 director- Approve structuralprojects
and long
Verification
letterterm expansion
ICMM- Discuss and approvemechanisms ofcapitalization and financing for thecorporation
GRI Index- Approve the business plan

1 director
3 directors

Directly appointed by the Presidentof the Republic.

4 directors

Appointed from a 5-candidate list presented
by the Senior Public Service Council.

Selected from a5-candidate list
presented by theCopper Workers
Federation (FTC).

Selected from a5-candidate list
presented by theCopper Supervisors
Federation (FESUC)
and the National
Association of
Copper Supervisors(ANSCO).

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15
34

CODELCO Sustainability ReportImplications for Autonomy and Developmental role ofCodelco
Codelco remains tied to thehands of the Chilean state• Investment decisions not justbased on commercial pressures• Inevitable tensions over theappropriate role of the state indevelopment• Codelco’s capacity to promote
innovation depends on
government in power

Discover the world at Leiden University16Case Study 2: Brazils’ Petrobras (oil)• Brazil has a tradition of desenvolvimentismo – statedevelopmentalism – which effectively translates into a history ofindustrial policy-making.
• SOEs account for around 30% of Brazilian GDP• Petrobras (1952) as a solution to avoid ‘backdoor dealings’ withforeign oil companies – oil as 1 of 3 pillars of industrialization

33.70%

28%

29.70%

30%

China

Brazil26%20%

13.10%

2%

Indonesia

14%3%

MexicoIndia

Turke yRuss ia

Thailand

PolandVietnam

Source: Mussachio & Lazzarini (2014), Leviathan in Business, p. 7

Discover the world at Leiden University17Enter 2007: The ‘Petroleum Cycle’ inBrazil• Offshore reserves 2,000 metres
below sea level – high investment
risk• Lula government introduced“production sharing agreement”
in the context of low risks tostrengthen Petrobras role in
upstream sector• Capitalization Law: Petrobras
required to have 30% minimum
participation share

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10 Largest Oilfields discovery, 2001-2010• Key to the success of oil
and gas development isPetrobras.
- Culture of innovation- Autonomy fromgovernment and close
ties with military- Control over the paceand scope of oilexploration andproduction

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Return of industrial policy in Brazil,
2000-2014• Two key components• Context of industrial policy:- Heavy state investment
infrastructure in oil and related
sectors to generate domestic
demandØInvestments in pre-salt reserves
would only be viable as long as oil
prices remained HIGH and- Increase local content
requirements to speed up theinvestment of IOCs into thesectorØPetrobras can maintain the paceand scope of its large-scale
investment (assumption: corporateautonomy)

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Petrobras as a lead firm for innovation• Petrobras was a highly adaptable SOE:
Ø Shifted role from seeking oil (19521960s) to domestic market creation(1970s-1980s)
Ø Developed technology to address very
specific problems to Brazil (e.g. heavy
oil in sensor zones with highpermeability, deepwater drillingtechnology, etc)
Ø Developed local supply chain forgoods and services
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Petrobras as an international energy firmØMarket reforms in oil sector
highly contentiousØMake IOCs invest in thesector without giving up
control over oilØPetrobras remains thedominant market playerØState objective: To make oil
industry sufficientlycompetitive.
ØNB: Local content
requirement remained,
mixed ownership structure

Petroleum and Natural Gas Production in Brazil byOperator, 2015
Petroleum (inBarrels)
TOTAL

Natural Gas (inCubic millitres)

889667381

35126447

Petrobras

822,051,381.5

92%33115158.6

Statoil Brasil

26,459,293.4

3%36773.1

Shell Brasil

23,460,667.4

3%265679.3

Chevron Frade

8,500,306.9

1%92041.3

OGX

4,900,627.0

1%

15407

Others4,295,104.8

0%1601387.7

94%
0%1%
0%
0%
5%

Source: ANP 2016: 82 (Adapted).

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Corporate governance reforms in Petrobras
Voting Capital - Common Stock• Introduction of international
shareholders in its non-voting capitalshares à internationalization ofPetrobras• Separation of ownership andmanagement (Nem Singh & Chen 2018)• However, state remains in tight controlof Petrobras à appointment of CEO
remains a presidential prerogative

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Foreigninvestors
5%

Otherindividuals
or legal
entities
8%

FMP FGTSPETROBRAS
3%

Level 3ADRs20%Non-Voting Capital - Preferred Stock

Otherindividuals
or legal
entities,31.60%

Federalgovernment, 28%Federalgovernment
64%
Foreigninvestors,
14%

Level 3ADRs,26.40%

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Petrobras and the ‘Lava Jato’ Scandal• Lava Jato (Car Wash)
operation:ØExtensive corruption
involving private and publicactorsØPolitical corruption financing
campaigns

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24Politicization of Petrobras a constantDiscover the world at Leiden University

25Comparative Insights from the casesØSOEs function differently depending on their political economy
context – especially their historical antecedents.
ØAt the minimum, SOEs can take a fiscal role for the state tomaximise rents and capture windfall profits, which
taxation policy cannot immediately provide. At best, SOEs canbecome vehicles of industrial policy and structuraltransformation.
ØA central feature of SOE governance is their autonomy.
ØCorporate governance reforms especially aimed at separatingstate ownership and control have limitations because of the
intrinsically political nature of SOEs.
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Multiple Pathways in maintaining control• Embedded neoliberalism (Private sector-driven)• Codelco as vehicle for profit revenue maximization• Control over high quality copper ore as its
comparative advantage• State developmentalism (Tradition of industrialpolicy and state control)• Petrobras as vehicle for industrial policy• Technological development through Petrobras asits advantage

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SOEs with direct state control(Coldeco)

SOEs with indirect state control(Brazil)

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Tentative Conclusions• SOEs increasingly play a vital role in industrialization - especiallyin building national innovation systems (though we know moreabout China and East Asia…).
• SOEs face inherent operational and political problems àcorporate reforms central to address them.
• Mixed results – SOEs embedded in domestic politics• Need to examine historical/long-term role of SOEs rather thancyclical nature of politics.

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Thank you!
J.nem.singh@fsw.leidenuniv.nl

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