Earlier this week, the manifesto
of the British Labour Party was leaked,
and it contained some eye-popping revelations, among them, the pledge by its
leader Jeremy Corbyn to renationalize British Mail, the railroads and the
electric distribution and transmission companies.
In their early years, newly
privatized railroad companies in the UK did have customer and maintenance problems. But to imagine that public sector status is
the panacea takes one’s breath away when there are such glaring examples to the
contrary.
Across the Channel, Areva, the
French government-controlled nuclear reactor builder, went almost bankrupt and
had to be rescued by the state and EDF.
EDF itself, because of government-mandated electricity pricing policies,
saw its debts balloon and needed a large capital increase.
But the most graphic
demonstration of the damage government meddling brings to national champions is
Brazilian giant oil and gas producer, Petrobras. Until 2005, it was a company famous for its
technological excellence in deep water drilling and its ability to navigate the
Brazilian political and commercial waters with ease.
All that changed when global oil
prices soared, Petrobras made huge offshore discoveries and President Lula decided
that the company’ riches should accrue exclusively to Brazil and bankroll his
political movement.
In 2010, a $70 billion
capital increase[1] and a new Hydrocarbon Law gave
the government a very tight hold over the company. That control pushed Petrobras to the brink:
its debts ballooned from $21 billion in 2006 to $132 billion by the end of 2014 through a combination of
excessive investments, “diworsification” and corruption[2]. Meanwhile, the company systematically missed
its production targets.
The steep fall in oil prices,
the discovery of the vast corruption scheme and a change in government forced
Petrobras and the state into a hard restructuring. The results have come quickly for a company
of this size, and have left many analysts incredulous; this was evident in the quarterly conference
call this morning.
The company has already shed $13
billion worth of assets, cut its workforce by 17%, and reduced its annual capex
by close to $10 billion. Crucially,
while its capex used to far exceed its operating cash flows, Petrobras is now
looking to generate free cash flows of over $14 billion this year and next.
In France, Emmanuel Macron
has been less sanguine about nuclear energy than his opponent François Fillon, but
it is fair to expect that he will not want to pony up billions into Areva and EDF.
Mr. Corbyn’s manisfesto is unlikely
to come to fruition, but it is amazing that the lure of nationalization remains
so strong for educated people who should know better. But when a politician wants to change society
rather than making it better (whatever this means), sound economics rarely
stand in the way.
[1] Actually the exercise was not as successful
as the government expected as the Brazilian state did not win a 2/3 majority as
a result. While minority investors
contributed cash, the state contributed rights to produce deep offshore oil. In itself, this capitalization was a model of
bad governance.
[2] The cumulative amount of the bribes was not
in itself life threatening, but the massive cost overruns and uneconomic
projects that corruption allowed clearly was.
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