Petrobras As An Example of Successful State Capitalism

Canadian Association of Latin American and Caribbean Studies
TURNING PRIVATIZATION UPSIDE DOWN: PETROBRAS AS AN EXAMPLE OF SUCCESSFUL

STATE CAPITALISM
Author(s): ANIL HIRA and PIERRE-OLIVER PINEAU
Source: Canadian Journal of Latin American and Caribbean Studies / Revue canadienne des
tudes latino-amricaines et carabes, Vol. 35, No. 69, Special Issue: Landscapes of Latin
American Health, 1870-1970 Paysages de la sant en Amrique latine, 1870-1970 (2010), pp.
231-258
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TURNING PRIVATIZATION UPSIDE
DOWN: PETROBRAS AS AN EXAMPLE
OF SUCCESSFUL STATE CAPITALISM
ANIL HIRA
Simon Fraser University

PIERRE-OLIVER PINEAU
HEC Montral
Abstract. For more than the last three decades, conventional economic wisdom,
the dominant policy advice, and lending have been based on a growing eco-
nomic literature that seeks to demonstrate that liberalization and privatization
lead to superior outcomes, including higher levels of investment, accountability,
and technology development. However, a new wave of Latin American leaders
in countries such as Venezuela, Ecuador, Bolivia, and Brazil, among others,
have begun to reverse the movement toward foreign and private investors and
reassert national control. Using the example of Petrobras, this article demon-
strates that a "state capitalist" system offers the possibility for a new balance
between efficiency and broader development goals.
Resumen. Por ms de tres dcadas, el saber convencional en economa, las ideas
dominantes en poltica y las finanzas se han basado en una literatura de cre-
cimiento econmico que busca demostrar que la liberalizacin y la privatiza-
cin llevan a resultados superiores, incluyendo ms altos niveles de inversin,
transparencia y desarrollo tecnolgico. Sin embargo, una nueva ola de lderes
en Amrica Latina, en pases como Venezuela, Ecuador, Bolivia y Brasil, entre
otros, han comenzado a revertir el movimiento hacia inversiones extranjeras y
privadas, y reafirman el control nacional. Utilizando el ejemplo de Petrobras,
este artculo demuestra que el sistema de "capitalismo de Estado" ofrece la posi-
bilidad de un nuevo equilibrio entre eficiencia y metas de desarrollo ms amplias.
Canadian Journal of Latin American and Caribbean Studies , Vol. 35, No. 69 (2010): 231-258
231
232 CJLACS / RCELAC 35/69 2010
Introduction
The rise of "white elephants" in the form of poorly run state-owned

companies that are used as patronage machines in Latin America has
a long history. From the collapse of national airlines and telecom
companies in the region, the move in the past three decades has
seemed inevitably toward greater privatization as part of the embrace
of free markets. In this article, we examine why the privatization pre-
scription failed. We argue that although there may have been some
soundness to the diagnosis, the solution was full of analytical gaps
and limitations. The blind spots of a purely economic analysis with
a hidden agenda meant that privatization as a dogmatic response
was bound to fail, ignoring the context of a developing setting with
all its constraints, externalities, and need for collective goods. In-
deed, private companies have shown themselves to be subject to the
same "capture games" as the state-owned enterprises they replaced
(Schamis 2002). The downfall of privatization does not lead to de-
spair; rather, we suggest a better prescription through the example of
Petrobras that offers a new model capable of balancing efficiency and
public development goals.
The Rise and Fall of Privatization as a Panacea
The leading institutions that offer developing countries policy ad-

vice, including the International Monetary Fund (IMF), the World
Bank, and the large regional lending banks (e.g., the Inter-American
Development Bank or IDB) all place privatization at the centre of
neoliberal policy reforms that need to be accomplished to ensure
economic growth. Privatization is considered a logical step forward
from the first wave neoliberal macroeconomic and trade liberaliza-
tion programs that have been carried out throughout the developing
world since the 1980s. In the reforms of the 1980s, SOEs (state-
owned enterprises) were characterized as being inappropriate in their
respective economic sector (World Bank 1996). This conclusion was
based on the observation that investment was low or absent and that
infrastructure was in poor condition (Bates 1981; Waterbury 1993).
New investment from the private sector and abroad would remedy
these problems, while being monitored by the discipline of com-
Hira & Pineau / Petrobras as an Example of Successful State Capitalism 233
petitive markets. In addition, the growing number of free trade and

investment agreements generally limit the involvement of the state,
including its power to regulate the market, ownership of enterprises,
and its general role in economic activities.
For example, the World Bank has set up a website promoting
privatization (http://rru.worldbank.org/PapersLinks/Privatization-
Strategy/), where they state, "Through privatization, governments
seek to become more efficient in running enterprises, both in terms
of cost and quality of services. They achieve this by better allocating
risk and absorbing untapped sources of private capital, technology,
and know-how." The World Bank website offers a "privatization tool
kit" for governments. The International Finance Corporation, a wing
of the World Bank, has a major focus on privatization as a solution
for development. In line with this, the World Bank lists corruption
and weak public institutions and contract enforcement as among the
primary obstacles to growth. The 2005 World Development Report,
the World Bank's annual comprehensive report, contained the fol-
lowing introduction by Senior Vice President and Chief Economist
Francois Bourgignon:
A good investment climate is central to growth and poverty

reduction. A vibrant private sector creates jobs, provides the
goods and services needed to improve living standards, and
contributes taxes necessary for public investment in health,
education, and other services. But too often governments stunt
the size of those contributions by creating unjustified risks,
costs, and barriers to competition, (p. 000)
In short, we can summarize the World Bank's approach, like those of

other international financial institutions, as being strongly pro-private
and anti-public sector in its approach.
If anything, the IMF's approach is even more pro-privatization,
as it is able to strongly promote privatization through its conditional-
ly agreements. The IMF's lending weighs in for far more than the
actual amount, as it serves as a signal for international private sector
lenders as well. The IMF Survey of 3 September 2001 reported that
participants of a joint IMF-World Bank seminar on the topic "saw pri-
vatization as clearly beneficial" (Davis, Lane, Lankes, and Ossowski,
p. 285). Similarly, the IDB has supp

otherwise. For example, a 2004 cou
privatization as a "fruit" of reforms
the early 1990s (p. 1). A key docum
ness: A Strategy Document (2003),
"leading role" in the privatization
region. There can be no question, t
support privatization. While all in
policy reports, the de facto policy is
promotion of privatization. This con
economic literature about privatiz
In a broad-ranging survey of em
across sectors and countries, Meg
that privatization is demonstrably su
case, and that there is little that c
enterprises (see 133-135 for Lati
Chong and Lpez-de-Silanes back t
prehensive empirical studies (2005
studies claim that privatization act
and poverty, along with efficiency
Schargrodsky (2002) state that wa
mortality in Argentina, and McK
that privatization adversely affect
ees, though acknowledging "sever
If markets are always superior,
utilities been questioned? For exam
reversed privatization in celebrat
Cochabamba? The energy sector ha
vituperative popular debate about
energy affects key aspects of pro
crises in California (US), Ontari
have brought energy privatization
of public policy concerns. These
uncertainty and lack of knowledge a
vatization and deregulation of the
economists' consensus that privatiz
by the public in Latin America, a ph
Development Bank (2002) calls "t
Explaining the Privatization Paradox

Problems in Concepts and Methods
Privatization has been used to mean any movement to substitute pri-

vate for public assets and activity (Manzetti 1999). For instance, the
World Bank's privatization website on proceeds from privatization
states,
Proceeds are defined to include all monetary receipts to the

government resulting from transactions involving partial and
full divestitures, concessions, management contracts, and
leases. Thus only those transactions that generated revenue for
the government from privatization or private sector participa-
tion in an existing state-owned enterprise or other government
assets (such as wireless license sales) are included.
This evidently covers a vast range of potential activities, with many

different combinations of state and private ownership/participation/
regulation. Havrylyshyn and McGettigan (1999) state:
[Not] all privatizations produce equal efficiency gains. Al-

though it is early to reach a definite conclusion, the empirical
analysis and quantitative assessments of experience so far do
suggest that the form of privatization does matter, as do the
pressures of competition and market environment. ... In ad-
dition, the method of privatization appears to matter a great
deal in a way not foreseen earlier: some forms of insider-
dominated privatization may generate oligopolistic vested
interests that will work against the establishment of an open,
competitive environment, and against providing a level play-
ing field for start-up entrepreneurial activity. With government
privileges added (most commonly so far in the form of tax
exemptions), the result is a continuation of a soft budget and
a distorted allocation of resources toward the less efficient and
the politically favored.
In short, it is paradoxical that while a few policy-oriented economists

recognize that there are potentially vast differences in outcomes in the
methods and types of privatizatio

policy recognition of these differe
vatization are being made on an a
There are, as well, serious probl
of the literature that evaluates th
metrics approaches have limits be
tualization. As acknowledged by
leads to greater efficiency remains
is privatization per se or a change i
For example, Barberis, Boyko,
their study of Russian privatizat
is a key performance factor. Com
temporal data are severely limite
therefore based more on "ideolog
sound reasoning and data (Jamasb
Case studies are the other majo
proach in electricity studies (N
and von der Fehr 2003), yet by th
general conclusions. The limited n
region, the wide variety of conte
historical structural economic ch
all suggest that a large n study is i
point out that a full-blown histo
of the lack of data for the early
America. As Yarrow (1999) point
and governance aspects of state-o
and therefore the results of privat
over, Shirley (1999) notes that ow
from competitive conditions, that
cannot act as private "corporatize
contradicts the reality that man
arm's-length arrangement with the
In an exhaustive survey, Estach
summarize well the limitations of
Most papers focus on a single o

rely on country-specific data .
is generally driven as much by data availability as it is by

economic principles. (143)
In general the impression is that privatization has been asso-
ciated with efficiency but only with or through other reforms.
Bagdadioglu et al. ... show that some public operators have
scores equivalent (in technical and scale efficiency) to those
observed for private operators. Yunos and Hawdon find that
ownership change is only useful to improved efficiency with
increases in competition. Estache and Rossi ... (in a study of
distribution companies in Latin America) show that privatiza-
tion is not the important variable but regulation is. They also
observe that productivity increases with the degree of incen-
tives built into the regulatory system, but that privatized firms
under rate of return regulation have similar labor productivi-
ties to public firms. (146)
For utilities, it seems that in general ownership often does
not matters as much as sometimes argued. Most cross-country
papers on utilities find no statistically significant difference in
efficiency scores between public and private providers. As for
the country-specific papers, some do find differences in per-
formance over time but these differences tend to matter much
less than a number of other variables. ... (These) include the
degree of competition, the design of regulation, the quality of
institutions, and the degree of corruption. A second lesson is
that incentives work . . . (A third is to push regulators) towards
a more systematic reliance on yardstick competition in a sec-
tor in which residual monopoly powers tend to be common.
(156)
Estache et al. (2006) go on to say that there are severe data prob-
lems in the measurement of capital; the difficulty of modelling the
size of employment, particularly given outsourcing in the sector; and
the poor accounting standards in many developing countries. All of
these have serious impacts on the possibilities for effective regulation
(156-157).
There are other important gaps in the literature. For instance,
the effects of types of ownership may vary according to regulation
and ownership. Some Latin American systems continue to be solely
state-owned, some are complete

Moreover, different subsectors
and distribution - may have dif
firms may have different result
sults measured in the literature
particular firm management, rath
proposal by mainstream econom
always optimal flies in the face
a large number of different mark
the predominant econometric ap
ignores. It also ignores basic pol
Differences in Objectives
Through the course of much of th

Latin America was increasingly
the state. After the initial impe
panies early in the century, gov
1950s and 1960s through natio
with the objective of enabling l
energy sources to fuel quickly i
tion (Energy Information Admin
literature detailing the particular
economic development (Gersch
involvement in the energy secto
national security and independen
ergy sector literally fuels all eco
thermore, as many subsectors in
monopoly (or have in the past),
took the form of a state monop
used not only for economic deve
services needed to set the right
(Ugaz and Price 2003). For exa
SOEs have been involved in sub
consumer groups or regions (Hi
However, starting in the 1980s,
have been implemented in many
shifts represent sensitive issues
ognize the key role of regulation
conditions for economic development (Dutt, Kim, and Singh 1994),

the market and the private sector have become the favoured options
for leadership in national development. Some see the role of the state
as important to support institutions and social conditions that are
critical conditions to sustained progress (North 1990; Putnam 1993),
but not as an economic leader. In other words, the debate about pri-
vatization goes well beyond the "optimality" standard used by most
economic studies - it goes to the heart of what are the goals, objec-
tives, and means of development in terms of the role of the state.
In the current literature, the differences in the objectives of state-
owned vs. private firms (such as electrification, reliability, or univer-
sal access) are not taken into consideration in the statistical analysis.
The econometrics-based analysis of firms that dominates the literature
has focused exclusively on basic financial ratios and, sometimes, tax
payments (e.g., Chong and Lpez-de-Silanes 2005b). In other words,
private firms are compared to SOEs, but without acknowledging their
difference in nature - one profit-seeking, the other not. Moreover,
specific macroeconomic events are not accounted for, which limits the
scope of relevance as other possibly significant variables and struc-
tural breaks in the environment and performance data are not ruled
out. For instance, Steiner (2000) does not include coal, oil, and gas
prices for electricity generation in her analysis of the 1986-1996 pri-
vatization and liberalization, because of insufficient time series (1 8), a
common but overlooked problem for periods of state ownership. Sur-
prisingly, there is almost no discussion or analysis of mixed systems,
in which both state-owned enterprises and private ones work, a very
common situation internationally. Nor does the literature look at the
actual organizational structure and processes that allow an industry to
perform well. Cultural and social variables, such as degree of access
to qualified workers, the degree of corruption, or other productivity
drags, seem to be absent.
Real Constraints of a Developing Setting Are Ignored
The gaps we have noted in the literature underpin the need to move
toward a more comprehensive framework for evaluating electricity
generation companies in national sustainable development, one that
moves well beyond ownership considerations. To move from purely
economic and financial performance criteria, ownership, and market
structure to considerations of n
additional consideration of four
the companies; (b) the macroe
qualified and reliable human res
vironment and capacity of the p
(a) Objectives of the compani
as training, technology acquisiti
tional infant industries, are ofte
company, whose unique goal is t
rate of return, to a SOE that has
not valid. The goal here is not to
SOEs or to avoid questioning them
by definition SOEs will not oper
yield the same financial return
objectives are not similar. This
justification for privatizing SOEs
rity of supply and long-term inv
privatized systems (Hira 2003).
moving forward to a more com
of privatization vs. state owners
(b) The macroeconomic environ
two macroeconomic elements in Latin America in the 1980s affected
their economies in a way that was catastrophic for SOEs: currency
devaluation and high interest rates. In the case of Argentina, for ex-
ample, the current financial crisis has pushed a number of privatized
electricity firms to request tariff relief from the government. Macr-
oeconomics affects the stability of price mechanisms, the costs of
imported inputs (including technical equipment and advisors), the
ability to invest in new lines and equipment, the ability of consum-
ers to pay set tariffs, borrowing costs, and a host of other factors that
affect utility performance. Most large contracts in Latin America are
tied to US dollars, thus any form of instability, such as a devaluation,
has a profound effect throughout the economy.
(c) Access to qualified and reliable human resources. Human
resource and management problems are another source of poor per-
formance for state-owned enterprises (World Bank 1996). The limited
democratic culture, the weakness of institutions, including judicial
and accountability arms, and the importance of explosive social prob-
lems in Latin America create an environment where corruption and

short-term-oriented behaviours are arguably more likely. These could
lead, in any type of firm, to higher occurrences of favoritism in hiring,
lower productivity, and lack of motivation. If private firms may some-
times be in a position to react more rapidly to these problems, they
are never exempted from them, as seen in the wide variety of recent
financial scandals and meltdowns by private companies, including
Enron and MCI, and rapid gains in private profits are associated with
rapid lay-offs of qualified personnel rather than operating efficiency.
Conversely, SOEs may develop an adequate organizational culture
to reduce these problems. The key third issue, therefore, is whether
SOEs can operate as efficiently as privatized firms if given appropri-
ate incentives, and how governance structures can lead to transpar-
ency, accountability, and responsiveness in the sector, regardless of
ownership.
(d) Institutional environment and capacity. With privatization,
Latin American states are being asked to take on a task of consider-
ably greater complexity than direct provision of the service (Willig
1999), namely regulating a competitive sector while ensuring ad-
equate but not exploitative prices and adequate long-term investment.
Regulation also has to guide private sector actions toward quality
provision of social objectives, such as environmental protection,
consideration of isolated and poorer consumers, and employment
creation, that under SOEs could be directed by mandate. The private
sector, too, has to learn overnight how to run a crucial infrastructure
business without disrupting its vital contribution to other parts of
the economy; this, in addition to the financial costs, usually means a
foreign, rather than national, company will run the infrastructure grid,
something unseen in the North. All of this goes against the prevailing
wisdom that privatization la Jeffrey Sachs's "shock treatment" plan
for Poland and Russia must be swift and decisive in order to avoid
political blockage. What we see instead is that Latin American states
have neither the plan nor the expertise to adequately regulate markets
post-privatization. It is not surprising that privatization results have
thus led to unsatisfying results in the region. Manzetti (1999, 325)
notes that "consumers invariably experienced price increases in pub-
lic services transferred to the private sector. Yet such increases have
not always resulted in improvements for the service provided. . . . The
impact of privatization on incom

in the short-run they were nec
were overstaffed (and shed jo
was, as admitted by Cavallo him
their jobs through privatization
thereafter" (Manzetti 1999, 325
As Estache, a World Bank supp
there are strong incentives for c
tized companies (2002, 25). As a
reason, been related to corruptio
the nation to foreign imperial in
tization sales are to political or
payoffs. Transparency in privati
1999, 326). These sensibilities ar
torical experience of colonizatio
economies by foreign companies
can intellectuals, Mario Vargas L
With the type of privatization t

the principal benefits of (econ
a very small elite. This is a big m
will have a contrary reaction aga
tization. Populism will again fi
America . . . everything is reve
underprivileged population will n
instrument of progress, (quote
Political Resistance to Privatizat
In Latin America, a series of pol

opposition to privatization that
fore, reflecting the Latin America
ering subsoil rights to energy re
example is the election of Evo M
in 2005. Morales campaigned spe
privatization of the energy secto
tests that pushed out his predec
stance is not unique to Bolivia.
was elected on a platform that pro
oil sector. In Brazil, protests against privatization played a major role

in limiting a once-proposed privatization of the electricity generation
sector. In Uruguay, plebiscites have consistently defeated propos-
als for privatization of energy. The skepticism toward privatization
within a limited portion of the literature seems justified by strong and
consistent evidence that privatization is unpopular in Latin America.
The Latinobarometro poll (The Economist 2001), which is the only
consistent source of region-wide survey data, found that, in almost
every country, at least half the population disagreed with the statement
"the privatization of state companies has been beneficial," and that
the net percentage ("agree" minus "disagree") of those agreeing with
the statement decreased steadily from 1998 to 2003. For example,
in Argentina net support went from approximately -10% to close to
-75%; in Brazil from +10% to -25%; in Chile from +10% to -50%;
in Mexico from -10% to -40%; and in Peru from -5% to -50%.
While mainstream economists acknowledge the paradox, they
are often dismissive of it in private conversations, attributing it to
ignorance of economics by the public or as susceptibility to pop-
ulism. Nellis's more thoughtful 2007 study of the issue concludes that
privatization delivers positive results on the whole, both in terms of
efficiency and overall public benefits. He attributes the paradox to a
basic collective action problem - dispersal of benefits vs. concentra-
tion of costs. This would explain opposition until privatization and
immediately after, but not over the long-term trends noted above.
Nellis acknowledges toward the end of his essay that, contradictorily,
low-income countries have particular problems because of the poor
state of the businesses and the susceptibility to state capture because
of corruption of the state.
Privatization may have ridden the neoliberal wave of ideas, but
it never really had a solid political base in Latin America. We argue
here that the moves toward privatization have much more to do with
macroeconomic crisis rather than with the superiority of privatization
outcomes (Yarrow 1999; Birch and Haar 2000, 1) - not unlike the
timing of the UK's electricity privatization. Thus, macroeconomic and
microeconomic conditions, including ownership, cannot be separated
(Glade 1989). Two macroeconomic elements in Latin America in the
1980s affected their economies in a way that was catastrophic for
SOEs: currency devaluation and high interest rates. There are a wide
variety of factors involved in t

mies, including the OPEC oil pr
sudden hike of interest rates, and
vastly increased external debt p
sively dollar-denominated (Hira
and frequent devaluations of cur
debt, thus spurring government
process of privatization. Further
regulated and could not be easil
financial cost of debt service, de
was constrained, while demand f
crease. Foreign revenues in com
also declined in the 1980s, puttin
Abetter question would then be h
son with SOEs, cope with the cr
within and between private and
case of Argentina, for example, th
a number of privatized electricit
the government, and has led to a
and regulation of the sector. Thus
have in the market as a leader of
of the public, but rather is seen
crisis strikes.
Table 1 demonstrates that macroeconomic conditions deteriorated
immediately preceding the privatization of the electricity system.
Only in the late 1970s, with the example of Chile, does privatization
enter the lexicon of policy advice. In other words, though there were
serious exchange crises in the past in Latin America, the neoliberal
alternative had not yet been articulated. Neoliberal economists made
the case that Latin America's development problems were related to
state leadership, including state ownership, and had some success
in convincing leaders. That case was backed up by poor service and
corruption experienced in a number of Latin American countries.
However, the (continuing) claim of market optimality and state dys-
function in all cases was a necessary but insufficient condition for the
wave of privatization. In fact, we see a pattern in Table 1 that, with the
exception of Bolivia, privatization occurs in a period of political vola-
tility, following a political regime or change in leadership promising
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a new direction in the country.

year or two of the new leader t
liberal reform, following the fi
rates, monetary tightening, and li
This pattern further undersco
Bank approach to analysis, nam
gether in their analyses. Thus, the
was adopted under duress and as
ing the flame of the deep, long-
anti-imperialism (Hira 2010).
The reversal of privatization in
a number of countries, based on
it with the capture of rents fo
benefits. This reflects the long
subsoil resources as the patrimony
worsening inequality in Latin A
Therefore, Venezuela's Chavez
Correa were all elected in the last
energy assets, explicitly to bette
butional needs. At the same time
to run energy sectors has led to a
are being squandered for short-ter
in Venezuela, including rolling b
ity in manufacturing, and renegot
investment in petroleum are wi
state-owned Pemex is also widely
fered from an inability to develop
budget is highly politicized, wit
finance government spending. T
having rejected privatization as
and/or an elite recapture of coll
ward with the confidence that a s
not lead to similarly particularis
Reconceptualizing Ownership in the Energy Sector:

The Case of Petrobras
The Rise of Public-Private Partnerships in the North
In response to the perceived failures of privatization, there has been

a move worldwide to make adjustments without returning to state
ownership. For example, the recent bailouts of the financial and auto
sector by the US Government were of a temporary nature, mainly to
restore liquidity with the express intent of non-interference in opera-
tions and of selling ownership shares as soon as possible.
Outside of crisis situations, a new understanding has taken place,
one that embraces "public-private partnerships" (PPPs) such as the
World Bank's Program for Public-Private Partnerships in Infrastruc-
ture. These programs develop out of the same premise as the priva-
tization agenda, namely that the state sector is inherently inferior;
therefore, even where state financing is required or optimal, such
as in building new infrastructure (e.g., airports), the private sector
should be brought in as a subcontractor or operator. Such programs
are an adjustment of the privatization agenda, rather than a reckoning
with its fundamental flaws. As Murphy (2008) notes, PPPs require
a high level of government capacity, including the ability to assess
appropriate risk allocation, contract management, and high levels of
transparency and accountability to avoid private sector capture. While
governments may reduce financial outlays and transfer costs, they
also lose flexibility (such as changing the nature, end use, or cost or
revenue aspects of the project), the positive externalities for the public
sector workers, and oftentimes the ability to borrow on better terms.
Vining and Boardman (2008), in one of the few empirical studies of
PPPs (a relatively new international phenomenon), strongly caution
about the exceptional conditions under which PPPs might make sense
vs. public management. They note that the possibilities for opportun-
ism through high contracting costs are high, and the willingness of
the private sector to take on projects where revenues are uncertain is
low, where there is a significant degree of uncertainty in the project.
They conclude, "In infrastructure projects, it rarely makes sense to
transfer large amounts of risk to the private sector" (9).
PPPs therefore simply extend problems of private oligopolies
and monopolies to regulatory capture through often corrupt contract
bidding processes in a developing

structure that benefits a paying (w
rather than the common good, such
aimed at tourists in Mexico, where
PPPs are also renowned for contra
agent problem, whereby a contract
and then once in the middle of it cla
ditional injections of capital. More
to cope with the multiple social
developing setting.
State Capitalism as an Alternative
The idea of state capitalism, or an

networks in productive sectors, is ha
tor in particular is rife with example
least a century. However, a great
analysis of such enterprises, whic
agents of rent capture with dubiou
countability, or efficiency due to
positions (Evans 1982).
The rise of China as the second
over the last decade belies the my
market, including privatization.
the financial sector and the comm
amidst its great success in econom
liberal diagnosis of the inevitable f
out untrue (Hira 2007). Chinese
of ownership throughout the deve
a form of "state capitalism" could
market-based systems. The North
nave at best, ignoring the very in
that were its immediate response
in 2009, and the historically deep
tional champions, from current m
support of US automakers durin
development of new analyses that
politicizing market operations an
demonstrates a biased view of the
Hir & Pineau / Petrobras as an Example of Successful State Capitalism 249
latest wave of state capitalism. Such views underestimate both the

long-term potential of the new ownership structures as well as the
ability to apply simple remedies, such as demanding market access
and "selling" the value of free markets to the emerging economies
(Bremmer 2009).
In fact, state capitalism involves state ownership but at arm's
length, so that an SOE under state capitalism still must compete in the
global market and turn a profit, but can maintain a large percentage
of its profits for reinvestment. In turn, the state capitalist company
should provide external benefits to overcome development obstacles,
not only providing part of the profits to the state, but also focusing
on the need to gain financial and manufacturing economies of scale,
engage in active learning and technology transfer, negotiate from a
position of state interest with multinationals, and utilize the full re-
sources of the state to promote exports.
Petrobras
Petrobras is a perfect example of this new form of ownership and pro-

vides the outlines for what could be accomplished in Latin America
by following its lead. Petrobras stands in strong contrast to both the
dominant SOEs that are failing, such as Pedevesa (Venezuela) and
Pemex (Mexico) as well as the failure of privatized firms to develop,
such as YPF, a former SOE that was bought out by Repsol, but with
great unhappiness in Argentina. All three have much deeper historical
roots than Petrobras. Pedevesa's output has declined by 30% since
1999, and Pemex 's has fallen by an annual average of more than
10% per year, while Petrobras has increased output by 9% per year
since 1980 (Bryce 2008, 80). Both Pedevesa and Pemex have prof-
fered great resources for socioeconomic distribution over the years,
but both are in severe crisis in terms of operating capacity for future
development of resources and have been politicized and rife with cor-
ruption (Karl 1997; Stojanovski 2008). In fact, Petrobras bought the
major Argentine energy company Perez Companc in 2002.
ORIGINS
Petrobras was created in 1952 with a decree that declared petroleum

was a part of national security. As a major oil importer, Petrobras
activities expanded from domestic exploration and drilling to refin
ing and petrochemicals. Petrob

oil activities except oil imports, t
1993, 10, 14). Petrobras was co
and control national resources,
be abundant. The Brazilian priva
managed, and financed and so in
er, early studies failed to deliver
preface, 189).
For most of its history, Petrobra
American oil SOEs, and enjoyed t
saurus." Petrobras was highly politi
by well-organized workers. There
owing to political pressures. The
meant that Petrobras was a net
despite its monopoly status in th
hydrocarbons (distribution at the
Petrobras was an integral part of
ess, and part of its mandate was t
possible. In 1988, for example,
at high cost (Randall 1993, 224).
One key occurrence owing to the
was the creation of Braspetro in
However, ventures in Colombia,
nationalist sentiments in those c
Despite these failures, Petrobra
for privatization due to political
Vargas committed suicide in 195
international oil companies, as hi
1993, 35). This incident exemplif
bras took on in Brazilian politics.
ernments of the 1970s and 1980s
vital to Brazilian national securit
dependence on oil imports, which
and balance of payments crises fo
and 1979. Nonetheless, amidst th
took root under President Card
up domestic oil exploration to for
Petrobras' equity to private inves
Hira & Pineau / Petrobras as an Example of Successful State Capitalism 25 1
$4.3 billion IPO at the New York Stock Exchange on 9 August 2000
(Goldstein 2010).
The lack of onshore reserves and failures abroad led to a slow
development of Petrobras into the world leader in offshore oil tech-
nology and the proliferation of new offshore finds. Petrobras used a
gradual process of developing local expertise through joint ventures
to get to the leading edge of current technology in the 1980s (Furtado
and Freitas 2000). This has allowed Brazil to succeed in new joint
ventures with overseas partners, such as recent agreements with Si-
nopec, the Chinese national oil company.
HOW PETROBRAS IS LIKE A PRIVATE COMPANY
Petrobras has an independent management board that runs

operations. Two thirds of its equity is owned privately, and t
pany is publicly traded on the New York Stock Exchange. Thi
Petrobras to reveal its financial records in the same way as any p
company and to gain the efficiencies of the profit incentive.
tion, Petrobras operates in a competitive environment both in
as a global company and, since 1997, in competition with
companies in Brazil.
WHY PETROBRAS IS UNLIKE PRIVATE COMPANIES
Petrobras' success can not be separated from Brazilian gover

support. Even with the latest offshore finds, BNDES (the N
Development Bank) is a crucial source of financing (Trade Fi
2009). There are two types of stocks: preferred and common
the latter having voting privileges. The government still own
common shares and thus has a veto over strategic direction
2009, 11). The government has used this and other forms of
to keep pressure on Petrobras to continue to serve larger de
ment goals for the nation. Petrobras has been charged with ad
national interest activities, such as developing ethanol and
fertilizer industry; and offering subsidies and aid to national
goods industries (Randall 1993, 234-236). Petrobras runs t
gas pipelines for natural gas in the country and thus has a do
presence in both transportation and thermo-electric power, leadi
way for the development of the importation of natural gas f
livia. Petrobras also played a key role in developing Brazil's
sector, despite the fact that bio

sector (Hira and de Oliveira 200
There are undoubtedly local ad
for Petrobras in the Brazilian m
entered the market since its ope
tivity has been in the form of joi
in turn, has foregone price incr
gas, and diesel oil at economicall
despite this mutually beneficial
exercised regulatory oversight o
the ANP (National Petroleum A
Brazilian Senate launched an inv
Petrobras has invested massive
well as advanced training, relat
technologies to exploit offshore
research centre, CENPES (Cen
Leopoldo A. Miguez de Mello),
cation and training (Hester and
Petrobras and the Brazilian gover
in seeking state-of-the-art train
cluding sponsoring graduate tra
CURRENT ISSUES
Petrobras' announcement in 2006 of a major new find of oil offs

of Rio de Janeiro state has led to further discussion about incre
national control and the government's share of revenues from
new find, creating a wellspring of national pride at moving fro
energy mendicant to self-sufficiency, with exportation on the
zon. Such discussions are likely to favour Petrobras, particular
Dilma Rousseff, President Lula's handpicked successor, wins the
presidential election in October 2010. Rousseff is the Chairman
the Board of Petrobras, and is well known for her insistence on
local content policies to increase Brazilian inputs in order to inc
local multiplier effects and jobs. In fact, local content has incr
through pro-active policies to the point where in 2007 the mas
offshore P-52 platform had 76% domestic content (Puccini 2009
Petrobras has contributed heavily to Lula initiatives, such as off
R$303 million toward his Zero Hunger campaign in 2003.
Conclusion
We now understand the privatization paradox. First, macroeconomic

crisis explains policy shifts toward or away from privatization. Sec-
ond, changes in ownership may or may not improve the nationa
energy system because many other key variables affect outcomes.
From a functional perspective, the problems of energy systems in
Latin America centre around the lack of long-term capacity invest-
ment and inadequate attention to equity and the environment. While
the privatized systems were able to create, in some cases, short-term
price decreases, they also meant greater price swings, leading to
systematic crises in Chile and Argentina (Hira 2003). They have not
solved the problems of access to reasonably priced supplies by the
poor or long-term investment. Yet, a return to a wholly state-run sys-
tem with political patronage and inefficiency problems, albeit with
more equity and employment, also comes short of solving the problem
and is likely financial infeasible.
Not surprisingly, the result is a large number of experiments in
different types and levels of state and private ownership and partici-
pation, what Kurtz and Brooks (2008) have labelled as "embedded
neoliberalism." Mexico has moved to a mixed system in which private
companies can add capacity through IPPs (independent power pro-
ducers). Argentina has moved toward greater state regulation in term
of prices to the poor and in setting up a new state company that will
compete with the private sector in providing natural gas. Therefore,
we argue that there is not a dichotomy of ownership nor of regulation,
but rather a spectrum of conditions only partly captured by the catego-
ries of private and state ownership. Mixed systems can run the gamut
from systems with both SOEs and private systems competing (as is
the present case), to the state owning partial shares or supporting an
enterprise in a myriad of other ways, such as financing or protection in
return for certain behaviours. Every system effectively has both state
and private participation; it is more a question of what type and degree
of each is appropriate, and then finding the right mix of ownership,
regulations, and incentives to solve a particular system's problems.
The example of Petrobras shows a winning balancing point be-
tween the benefits of market orientation and overall development
goals and can serve as a prototype for other experiments. As Petrobras
continues to rack up private sector

forget that its progress and ben
state. It is not just a private but a
further suggests that it may be
as competitiveness, transparenc
rather than ownership that leads t
However, the criteria for evalua
and should include social, enviro
of electricity companies, as well
capacity. As Jamasb (2006) poin
the role of the state for the local
state. It is hoped that this articl
different sectors in developing co
of ownership and regulation in
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Petrobras As An Example of Successful State Capitalism

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Canadian Association of Latin American and Caribbean Studies

TURNING PRIVATIZATION UPSIDE DOWN: PETROBRAS AS AN EXAMPLE OF SUCCESSFUL

Simon Fraser University

The rise of "white elephants" in the form of poorly run state-owned

The Rise and Fall of Privatization as a Panacea

The leading institutions that offer developing countries policy ad-

petitive markets. In addition, the growing number of free trade and

A good investment climate is central to growth and poverty

In short, we can summarize the World Bank's approach, like those of

p. 285). Similarly, the IDB has supp

Explaining the Privatization Paradox

Privatization has been used to mean any movement to substitute pri-

Proceeds are defined to include all monetary receipts to the

This evidently covers a vast range of potential activities, with many

[Not] all privatizations produce equal efficiency gains. Al-

In short, it is paradoxical that while a few policy-oriented economists

methods and types of privatizatio

Most papers focus on a single o

is generally driven as much by data availability as it is by

state-owned, some are complete

Through the course of much of th

conditions for economic development (Dutt, Kim, and Singh 1994),

Real Constraints of a Developing Setting Are Ignored

lems in Latin America create an environment where corruption and

impact of privatization on incom

With the type of privatization t

Political Resistance to Privatizat

In Latin America, a series of pol

oil sector. In Brazil, protests against privatization played a major role

variety of factors involved in t

a new direction in the country.

Reconceptualizing Ownership in the Energy Sector:

The Rise of Public-Private Partnerships in the North

In response to the perceived failures of privatization, there has been

bidding processes in a developing

State Capitalism as an Alternative

The idea of state capitalism, or an

latest wave of state capitalism. Such views underestimate both the

Petrobras is a perfect example of this new form of ownership and pro-

Petrobras was created in 1952 with a decree that declared petroleum

ing and petrochemicals. Petrob

HOW PETROBRAS IS LIKE A PRIVATE COMPANY

Petrobras has an independent management board that runs

WHY PETROBRAS IS UNLIKE PRIVATE COMPANIES

Petrobras' success can not be separated from Brazilian gover

sector, despite the fact that bio

Petrobras' announcement in 2006 of a major new find of oil offs

We now understand the privatization paradox. First, macroeconomic

continues to rack up private sector

Barberis, N., M. Boycko, A. Shleifer, and N. Tsukanova. 1996. How does

and reality, 349-406. Washington, DC: Inter-Am

Davis, J.M., Timothy Lane, Hans Lankes, and Rola

ment of Energy, <http://www.eia.doe.gov/iea>

developing economies: Evidence from a survey

Goldstein, Andrea. 2010. The emergence of Multilatinas: The Petrobras experi-

Burlington, VT: Ashgate.

Latin American history. Journal of Bioeconom

veloped its ethanol industry. Energy Policy 37

sector reforms: A survey of practice and evide

Vining, Aidan R., and Anthony E. Boardman. 2008. Public-private partnerships

International Bank For Reconstruction And D

Yarrow, George. 1999. A theory of privatization, or

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