Privatization in Bolivia


Bolivia has been seen for some years as one of the poorest countries in South America. This characterization, however, is no longer accurate. Bolivia is rapidly developing into an increasingly important country in the region. Among the reasons for this economic development are the privatization of public companies and the liberalization and growth of the energy market. This article analyzes the legal, economic and political background in which recent economic development in Bolivia has taken place and considers the major factors which will drive development and growth in the future.

Brief Political and Economic Background

Over the last few years, Bolivia has made significant economic advancements through its adoption of a series of free market policies. After the nationalization in the 1950s of its tin mines, one of the bases of the Bolivian economy for years, Bolivia's public sector swelled to an extent which exceeded the economy's ability to sustain it. By the 1980s, the economy had declined to an extent where it had become difficult to service external debt. By the mid-1980s, hyperinflation had made the local currency close to worthless. Whereas mining had dominated the economy from colonial times, the 1985 crash of the international tin market brought this situation to an end. Natural gas came to replace tin and other minerals among the country's leading exports. Since the collapse of the tin market, natural gas has since become the hub of the country's development strategy.

By the early 1980s, the public sector in Bolivia consisted of some 520 federal agencies, state-owned enterprises and financial institutions. The government controlled over 65% of all mineral production through Comibol, the Mining Corporation of Bolivia, and 80% of oil and natural gas production through YPFB, the Bolivian State Petroleum Company. Financially, the main sectors of the economy were subject to state control through CBF, the Bolivian Development Corporation, Bolivia's principal development bank. In 1985, the Bolivian government began the New Economic Policy (NPE), which sought to liberalize import policies, restructure the public sector, dismantle the CBF, privatize the Mining Corporation of Bolivia, and generally deregulate the economy. These steps made Bolivia the first democracy in South America to implement economic "shock therapy," and later served as the model for other countries in the region.

Gonzalo Sanchez de Losada, who was planning minister in the previous administration and the main architect of NPE, occupied the presidency of Bolivia from 1993 to 1997. During this term, Bolivia pursued a privatization and reform program designed to turn the country into a modern market economy. This reform program redefined the functioning of the public sector in two main ways:

  • The capitalization and privatization of public enterprises transferred to the private sector the responsibility for all investment. State-owned companies previously possessed this responsibility. This transfer allowed public investment to focus on social spending and infrastructure improvements.
  • The Sistema de Regulacisn Sectorial (SIRESI), an independent regulatory system, was created and given the task of overseeing relations among the private sector, consumers, and the state, in sectors that were previously controlled by state entities. A related financial regulatory framework was also established, the Sistema de Regulacisn Financiero (SIREFI), and given the specific responsibility for overseeing the financial sector.

The reform program resulted in the following:

  • the capitalization of major state enterprises through privatization;
  • social security reform through the introduction of a new pension system;
  • an education reform program; and
  • popular participation and administrative decentralization, together with the devolution of responsibility for the management and delivery of social services to the municipalities.

Former General Hugo Banzer won the democratic election for the Bolivian presidency and succeeded Sanchez in August 1997. Since his election, Banzer has maintained an economic program consistent with the earlier reform process. This program emphasizes policies aimed at increasing international trade, reducing poverty, eliminating coca and cocaine traffic, increasing access to productive credit for individuals and small businesses, intensifying public investment in social programs, combating corruption, reforming the judicial system, modernizing public administration, and reducing bureaucracy.

One of the major differences of the new administration's policies is the modification of the pre-existing regulatory and pension systems. Through the popular credit program or Programa de Cridito Popular, the government has promoted the development of a stock market and insurance industry and the attraction of private investment into public infrastructure concessions.

As what many consider a testament to the reforms, current official projections show the rate of inflation decreasing to 6% in 1999 and 5.5% in 2000. In concert with this reduction in inflation, Bolivia's gross domestic product has increased between 4% and 5% in the last few years and, according to the International Monetary Fund, Bolivia's government is expected to elevate this rate to 5.5%-6% by the year 2000. Some of the main contributors to this growth are the mining, construction and hydrocarbons sectors.

Bolivia's economic development has been promoted by its involvement in many free trade associations, such as its associate partnering with Mercosur and its membership in the Andean Pact, which includes (apart from Bolivia) Colombia, Ecuador, Venezuela and Peru. Among other things, Bolivia's new natural gas pipelines, facilitated by cooperation with these trade groups, have seen Bolivia become an important transport hub within South America.

This economic growth has influenced the international financial community to reduce the amount of Bolivia's international debt. Indeed, the Paris Club considerably reduced the Bolivian public debt. This reduction was subsequently supported by the World Bank/IMF Highly Indebted Poor Countries Program. The IMF has also granted Bolivia a $138 million loan to promote the reforms of its capital markets and its capitalization program.

Recent Privatization History


The main improvements in Bolivia's economic development have been made possible through the government's "capitalization" program. This has been seen as an original and innovative system of privatizing key national industries. Through this program, private investors, selected through a public competitive bidding process, become strategic partners with the government and agree to invest money and management skills in Bolivian entities. Broadly, these partners acquire, in return for their investment, a 50% ownership interest in the Bolivian entity as well as administrative and operating control. The remaining 50% is placed into private pension funds managed by international trustees.

This innovative system was introduced by the Capitalization Law passed in March 1994 to privatize Bolivia's six major state-owned companies. As of December 1998, the scheme had raised over $1.6 billion for the Bolivian government. This law provided for the partial privatization of six national industries: YPFB (oil and gas), ENDE (electricity), ENTEL (telecommunications), LAB (airlines), ENFE (railroads) and EMV (tin/antimony).


In 1994, the Bolivian electricity law divided the assets of ENDE (the Bolivian electricity company) into its three component functions: generation, transmission and distribution. Between 1995 and 1997, the four Bolivian generating companies (Cobee, Guaracachi, Corani and Valle Hermoso) were sold to US companies. In 1997, the electric transmission company Transportadora de Electricidad (TDE) was sold to the Spanish company Union Fenosa, while the distribution company was awarded to five different partner firms. As a condition to their purchase, each of these companies agreed to carry out a certain amount of capital investment. If the committed investments are not fulfilled, the Bolivian government has the right to withdraw operating licenses.


Electricity and telecommunications were the first sectors in which the state-owned companies were capitalized. On September 28, 1995, the Bolivian Ministry of Capitalization made its choice of the best offer for 50% of the assets of ENTEL, the Bolivian telecommunications company. The Italian telecommunications company, STET International, was selected out of the three final bids. Its offer of US$ 610 million won out over the offers of MCI and Spain's Telefonica. This capitalization has been viewed as highly successful, as the sector registered 8.7% growth in 1996. Moreover, STET International fulfilled its investment pledges faster than expected, while it increased generating capacity and made it possible for fibre optic cables and cellular phones to become available. In addition, STET International has announced plans to double the current telephone density by the year 2000.


One of the biggest drawbacks to Bolivia's development is the lack of modern infrastructure, in particular, a poor transportation system. The capitalization of the state-owned companies in this sector began in aviation. In October 1995, a strategic partner was chosen by the government for Lloyd Aereo Boliviano (LAB), the Bolivian airline. The government accepted the offer of the Brazilian aircraft company, VASP. The new structure of the company was to provide the Bolivian national airline with the resources to consolidate its position in the regional market and to achieve a better position in the global market. This capitalization, however, has not been viewed as successful. Concerns exist regarding safety and maintenance standards and facility and equipment failures.

Beyond the aviation sector, the Bolivian government has also pursued capitalization of the railway sector. In December 1995, the Bolivian government concluded the disposal of a 50% interest in the shares of the Bolivian railway company, ENFE, which was previously divided into two separate companies, one covering the Andean network and the other covering the eastern-country network. From the eight offers made, an offer made by the Chilean company, Cruz Blanca, was selected for both networks.

Oil & Gas

Traditionally, the Bolivian oil and gas industry had been controlled by the state-owned company YPFB, but a number of measures have changed this sector into one privately owned while simultaneously creating a key role for hydrocarbons in Bolivia's development process. These measures included the Hydrocarbons Code of 1991, together with the Hydrocarbons Law of May 1996, the capitalization in 1997 of YPFB and the launch in the same year of the Bolivia-Brazil pipeline.

The capitalization of YPFB, similar to prior capitalizations, linked the sale of the company's shares to the creation of private pension funds. The sale of the pension fund shares, in turn, also contributed to the emergence of a domestic stock market. YPFB was said to have been organized like a ministry and the preliminary steps towards capitalization included the creation of a balance sheet, a new corporate entity, and a new legal identity. For the purposes of the capitalization, the company was restructured through the creation of two exploration and production companies and a pipeline unit.

The exploration and production companies were Andina and Chaco and the pipeline unit was Transportadora Boliviana de Hidrocarburos. The capitalized interests in each were subsequently sold. An Argentinean/Spanish consortium (YPF/Perez/Pluspetrol) purchased Andina, Amoco bought Chaco, and Enron (US) and Shell (UK/Netherlands) purchased Transportadora Boliviana de Hidrocarburos.

Following this capitalization, the Bolivian government sought to further increase domestic oil and gas production. Thus, it continued with a further capitalization of YPFB. In September 1998, the government granted six licenses to explore for oil and gas in low-output fields in the southeast of Bolivia. These licenses were granted to five different oil companies and the joint venture contracts were signed with YPFB by the end of 1998.

In addition, the construction of the Bolivia-Brazil natural gas pipeline was completed at the beginning of this year. Exports of natural gas to Brazil were scheduled to begin by late spring/early summer 1999. The consortium which built the pipeline was comprised of the Brazilian state-owned company, Petrobras, together with its private-sector partners El Paso Energy International, BHP and British Gas International.

Future Development

1999 has seen renewed interest in Bolivia's privatization program. The privatization of the Bolivian Vinto metallurgical company (EMV) is to be organized by the French bank Paribas. This was announced in July 1998 by the Bolivian government after considering the offers presented by a number of banks. This will constitute the sale of the last of the six major state-owned companies to be tendered and will mean the conclusion of the program which was originally intended to be implemented by the end of 1998.

As the capitalization program has moved forward, the government has made some modifications to it. The most controversial ones were changes in the financial regulatory system (SIREFI) and a new Stock Markets Law. Controversy arose for a number of reasons, including the extent of control of the government over privatized firms and the extent of their disclosure of commercial information.

It is envisaged that the government will extend the capitalization program to other sectors. For example, a privatization of the country's roads, spurred by the Concession and Public Works Law (Ley de Concesiones y Obras Pzblicas) passed in June 1998, is under consideration. The government is expected to award long-term concessions to private-sector investors and there is a provision contained in the law for the levying of tolls. It also appears likely that the domestic airports are to be capitalized using a similar system.

There are also plans for privatization of the water sector with some seven Spanish companies showing interest in the privatization of the Semepa and Miscuni concessions.

One of the major goals of the Bolivian capitalization process was the Bolivia-Brazil gas pipeline and natural gas deliveries along the pipeline were intended to start in April 1999. According to economic analysts, Bolivian gas reserves are forecast to cover domestic and export needs for many years and Bolivian producers are looking to export natural gas to nearby countries. The prospects in this sector are not only in relation to new sales of natural gas but also for transportation services with the prospect of other pipeline projects such as those relating to Peru's Camisea field and Chile's Arica field, making deliveries to Brazil via Bolivia. Also the potential exists for Argentina to use the Bolivia-Brazil pipeline to deliver its own gas to Brazil. *

* Angela Cobbina, a legal assistant in Cadwalader's London office, assisted in the research of this article.