Will it Fly?
A deep dive into Milei's privatization plans for Argentina's public companies and their feasibility
Welcome Avatar! You have probably seen the ¡AFUERA! video where Milei is eagerly throwing out ministries in order to downsize the Argentine government. He plans to apply a similar strategy for publicly owned companies, but how feasible are these plans, and more importantly: is it a wise move at this point? The answer is: it depends on the company. Let’s dig in.
¡Privatízese! - an Overview
Argentina has a turbulent history of privatizations and (re)nationalizations. During both terms of Carlos Menem in the 1990s, many public companies and assets were auctioned off to the highest bidder, or, the lowest bidders with the best connections to the political elite.
Some were sold off way below market price and redistributed amongst friends in backdoor deals.
A prime example was the 1991 sale of the La Rural premises in Palermo, prime real estate in one of the most expensive areas of the city which was sold for pennies on the dollar while having a much higher market value.
The grounds were sold for 30 million pesos-dollars (at the time the peso was pegged to the dollar), while the real value was closer to 130 million dollars. A nice 76% discount for family and friends.
Former president Carlos Menem and former Minister of Economy Domingo Cavallo were both sentenced to 3+ years in prison for this sale in 2019, and barred from holding public office for life.
Did they do time, you wonder? Of course not, this is Argentina.
Sales like these are the nightmare material of most of the leftwing and Peronist supporters who lean more towards the opposite direction and would gladly nationalize most important companies. They fear another wave of privatizations in Russian oligarch style, and apart from their tingling urges for expropriation, in the case of some of the privatizations you can’t deny they have a point.
Many of the privatizations in the 1990s did not move the needle too much in terms of the sales price replenishing public coffers, but did end up in the hands of a few lucky cronies laughing their way to the bank.
The fear of living through a replay of this scenario is not unsubstantiated, simply because this danger is always present in business deals throughout Latin American history.
However, when you look at some of the current publicly owned companies, it suddenly becomes clear why Argentina has the inflation levels it does.
Some of these companies are absolute black holes contributing to fiscal deficits, with little to no benefit to the general population. Other companies are running at a surplus, are more strategic and can play an important role in Argentina’s energy independence.
The Current Shortlist
Milei's statements were decisive about the privatization of the public media conglomerate, including Tv Pública, Radio Nacional and Télam.
In Milei’s view these are basically propaganda machines for the State pushing a certain agenda, and up to a certain extent he has a point.
As you can see from the still above, the main companies on the list are: Aerolíneas Argentinas, AYSA (Water), Trenes Argentinos, ENARSA, YPF, ARSAT, TV Pública, Radio Nacional, Télam and Correo Argentino.
What can a Milei administration effectively privatize, and what would move the needle? Let’s discuss three prime examples that encapsulate previous privatization and renationalization processes in Argentina: Aerolíneas Argentinas, Correo Argentino and YPF.
Aerolíneas Argentinas come into being in 1950 by a decree of President Juan Domingo Perón, by merging four airlines (Aeroposta, A.L.F.A., FAMA and Z.O.N.D.A.).
If you recognize that president’s name, you can probably guess why Peronist governments were so keen on nationalizing Aerolíneas Argentinas for nostalgic reasons.
Throughout most of the 20th century the airline remained a State company, until, once again, Carlos Menem came along. The company was sold to the Spanish state-owned Iberia (which acquired 85% of the company for its future privatization).
Iberia maintained control of Aerolíneas Argentina until 2008, when Argentina was undergoing a new wave of expropiations and nationalizations under the administration led by Cristina Fernández de Kirchner.
Billions Shot into the Sky
Due to the crisis experienced by Aerolíneas Argentinas and Austral Líneas Aéreas in that same year —which in a sense lasts up until today—, the Argentine State decided to expropriate all the companies of the Aerolíneas Argentinas Group to guarantee service and prevent the loss of 9,000 jobs.
From that moment on, besides getting fined because most jurisdictions do not take expropriations lightly, Aerolíneas has been a black deficit hole that needs constant funding, up to the tune of several millions of dollars per day:
The total amount of public funds spent on Aerolíneas runs well into the billions, -$8.4 billion dollars to be exact. As a frame of reference: Argentina’s Central Bank (BCRA) currently has -$15 billion in liquid reserves. Not spending those $8.4 billion would have made an impact.
The employee per aircraft ratio of Aerolíneas is off the charts at 147.1, with 81 aircraft in service. If you compare that to Flybondi for example, a company that provides low-cost services, it’s only 96 employees per plane.
Another example of a private enterprise is the Latam group, which is a huge business unit with a total of 47,000 employees and 335 aircraft (140 per plane), operating in 29 countries. The bulk of Aerolíneas employees work within in Argentina.
To prevent an eventual privatization of the Aerodeficit Argentinas, deputy Máximo Kirchner presented a bill to add Senate majorities for an eventual privatization of the company during the next administration. As we will see below, a similar law is already in place for YPF.
As of now this bill has not passed, but that could still happen in the near future.
To avoid any confusion around this potential bill, Javier Milei announced that he will implement the "open skies" policy to generate competition between aviation companies.
The idea is to hand the company over to the employees, so they can clean up the company themselves and begin to compete in an open skies policy.
In response, the social movements grouped in different airline unions called to "avoid the destruction of the State proposed by Milei" and announced that they will not allow the new attempted privatization of public companies.
Technically Milei would not be privatizing Aerolíneas in this scenario, but rather gifting it to its workers: a Marxist dream come true.
But much to everyone’s surprise the prospect of having to run the company without regular subsidies to tap the deficit spending was highly undesired according to the airline’s union leaders, lol.
Handing it to the workers is a perfect solution since it avoids “muh privatization” complaints while at the same time forcing the Airline to be competitive and not depend on State subsidies.
This is a strange attitude to say the least, given the fact that 2023 has been one of the better years for Aerolíneas and some months it actually ran at a profit, not needing additional State funds. What employee would refuse to take it over in that scenario?
Now everything fine and well, but this Mara will probably miss the confort of the good old subsidized State airliner, since service improved a lot over time.
But it makes no sense to have local tax payers foot the bill to sustain a flying deficit —most of whom will never fly in their lifetime— just because of a feeling of national pride.
If you’re the kind of person who doesn’t value his time, one highly recommended activity is to send a package at the local Correo Argentino office. During peak hours, this is the general vibe:
The national postal service has had its ups and down in privatization land, and it’s impossible to leave the Correogate out of the equation. This juicy political scandal of epic proportions has former president Mauricio Macri and part of his cabinet on the side of the accused.
For this case, ex-president Menem enters the scene once again: he decided to privatize Correo by decree and it was sold to one of Mauricio Macri’s companies in 1997, making Argentina one of the first countries to privatizing its postal service.
The Macri group under Macri senior was in control of Correo for 6 years up until 2003, when the newly elected government of Néstor Kirchner indicated that the company only complied with its payment obligations during the first year of the concession.
This meant that Correo’s debt to the State in respect of fees amounted to $296 million dollars in 2001.
Since this debt was denominated in pesos (which was when the peso was pegged to the dollar), it made sense for Macri senior not to pay the concession fees since a big devaluation was in the air at the time, and in 2002 the peso devalued 1:3, cutting the debt owed in dollars by two thirds.
As we’ve seen before in Different Types of Condors, the Macri family has a habit of making sure the State cancels its debts. It’s hard to imagine a better position to take care of that than the presidency itself.
When Mauricio Macri was elected president in 2015, his father Franco still had this annoying Correo Argentino trial lingering around from a debt from 2001.
A pact signed in June 2016 by the government of Mauricio Macri and the postal company that belongs to his own business group, liquidated its multimillion-dollar debt with the State by 98.87 percent. Getting rid of debt is always easier when you’re in charge.
The case was closed in 2018, but reopened again in 2022 because the 2016-18 agreement was deemed abusive to the State.
One thing is clear: with all these back and forths, the biggest loser in this story is the tax payer.
Among the companies that Milei promised to privatize, the oil and gas company YPF is definitely the crown jewel — with a very rich history, to put it mildly.
If you’re not familiar with the shenanigans around the privatization and partial renationalization, I’ve discussed that at length in YPF: the Laundromat of the Century so here we will look at the current possibilities for privatization.
There are several aspects to consider when analyzing the financial situation of this energy company.
On the one hand, Argentina faces a judicial process in the United States Supreme Court for the expropriation of the oil company, for which the Government paid $5 billion dollars in bonds to Repsol in 2012.
The southern district of Manhattan issued a ruling against Argentina and the country to pay $16 billion crispy USD to the investment fund Burford Capital, although there are still instances of appeal.
After Milei was elected president, the market capitalization of YPF soured with increases of 40% daily, worthy of a true illiquid pump and dump in the crypto realm. With these recent increases YPF now capitalizes close to $20B, barely enough to make up for the adverse ruling (which will come from the State coffers, not the company).
YPF’s financial results stand out: during the third quarter of 2023, YPF's adjusted EBITDA reduced 8% compared to the previous quarter, but remained at a healthy level, reaching 926 million Dollars.
The company has invested more than $4.2 billion dollars in the first nine months of the year, an increase of more than 50% in dollars compared to the same period in 2022. Furthermore YPF reaffirmed its intention to complete its investment plan for the entire year and estimates this will exceed $5 billion dollars. Looks like Argentina is still on track for the energy surplus in 2024.
Apart from the question if it is desirable to privatize YPF at this moment in time, Milei’s hands are tied in terms of being able to do so anyways.
The requirement for privatizing the public YPF shares was established in Article 10 of Law 26.741, which prohibits the transfer of public shares without a two thirds majority vote in Congress.
That vote is impossible with the current seat distribution, unless some Kirchnerists suddenly become in favor of selling off State assets:
This is a blessing and a curse: tax reforms have to go through Congress, but other items such as privatizing YPF as well. YPF is a special case with a specific law around it as a strategic company, the other public companies do not have this type of protection and are easier to privatize.
During a radio interview, Milei indicated that the oil company with state participation YPF must "recompose" itself in the first instance and then "use it as a readjustment bridge for the energy system."
This sounds promising, and indicated that full-blown privatization are off the table for now. The difficulty around privatization of YPF is also very likely a factor in Milei holding off on privatizing the company for now.
From the examples above there’s a clear distinction between what makes sense and what doesn’t.
In the case of Aerolíneas Argentinas there is not a doubt about whether getting rid of it is the right thing to do. Even though it is a pleasant company to fly with in my experience, that doesn’t justify funding it into oblivion. Argentina doesn’t have the luxury to do so, nor is it in the interest of the majority of its residents.
An increase in private initiative in the airline sector will actually enable more low cost options, opening up the skies for tax payers who could not afford to fly during the singular monopoly of the current State airline.
For Correo Argentino privatization also makes sense. As long as the arrangements made during the privatization do not turn out to be abusive like we have seen in the case of the Macri group. Many attempts at competing as a public company in the private sector have failed in the past, simply due to lack of incentives.
For YPF, the story is a bit different. The corruption around the YPF nationalization process, Grupo Petersen and the fact that officials seem to use YPF’s planes as private air taxis aside, I do not think that privitization of the 51% State shares should be on top of Milei’s list.
Reasons are many: YPF is a strategic company running at a profit and with many new projects in the pipeline that can eventually somewhere in 2024 get Argentina to complete energy independence.
There are more important things to fix in Argentina than selling the public part of this profitable company (potentially for scraps compared to future revenues) to the highest bidder.
For most of the other companies on the list above: ¡privatízese!
See you in the Jungle, anon!
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