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A tale of two cities

“How does a government keep a company that is important to its national infrastructure alive while keeping in line with market logic?”

Were I Charles Dickens, perhaps I might write: “It was the best of times, it was the worst of times…” But Charles Dickens I am not. The time is 2003 not 1775; and the places I speak of are Brazil and France, not France and England as described in the author’s great English classic.

Although it can hardly be said that Brazil is seeing “the best of times” the outcome of the ongoing AES/BDNES saga is good news for Brazil. Last month (September) the Brazilian government and AES, the US energy company, agreed to restructure the debt of Eletropaulo, the power distributor owned by AES. There was a possibility that the government would re-take control of Eletropaulo after the distributor had run into problems during the aftermath of power rationing in Brazil. Subsequently, Eletropaulo defaulted on $1.2 billion it owes BDNES, the state development bank.

Under the debt-restructuring deal, AES will maintain control over Eletropaulo. In exchange for a debt reduction of $600 million, BDNES gains a 49.9 per cent stake and voting rights in a holding company provisionally called Novacom. AES will pay off $515 million of the remaining debt over 10 to 12 years and will contribute $85 million to Novacom for a 50.1 per cent ownership.

The deal was welcomed by industry observers. One energy analyst based in Sàƒ£o Paulo was reported as saying: “The deal shows that the government tends to prefer market logic over nationalisation.” From an international perspective, the deal at least sends a positive signal that Brazil is a country which continues to encourage foreign investment.

Yet keeping it in perspective, the government had little choice. The alternative of selling its shares in Eletropaulo would have raised just $300 million of the $1.2 billion it was owed. And looking at the broader picture, the AES default may have been just a small step in its attempt to attract the billions of dollars it needs from the private sector to boost its electricity sector.

But any step in the right direction is the right step. As another analyst at a Sàƒ£o Paulo brokerage noted: “It is a compromise that is good news for the market.”

Yet one man’s ‘compromise’ is another’s ‘anti-competitive dealings’. The approach of the Brazilian government to state aid in the Eletropaulo case has similarities to that of France and its troubled engineering giant Alstom. True, the cases are somewhat different but the issue at the heart of the matter is the same: how does a government keep a company that is important to its national infrastructure alive while keeping in line with market logic?

For France ‘it is the worst of times’. Its government is attempting to provide Alstom with a K600 million ($670 m) emergency rescue package. But the manner in which France is attempting provide the money presents an immediate problem for Mario Monti, Europe’s competition minister. Alstom claims it needs the money before the end of September and France is aiming to extend the money in the form of shares in the company and loans.

As we went to press, the Commission was about to launch a formal investigation into a total of about a 3.1 billion in alleged government subsidies for Alstom which the Commission fears could distort the European Union’s single market. Monti is keen to stop France handing out the emergency money in an “irreversible manner” (i.e shares in Alstom) which renders its post-investigation verdict on the bail-out as academic. He is therefore threatening to seek an injunction to stop the payment.

France has since softened its stance saying it would accept an option to extend Alstom the money through a convertible bond. This is similar to what the Brazilian government did with AES. But it still flies in the face of the Commission’s regime to reduce state aid to corporations, and in particular what would amount to long term aid.

The pressure is on Mr Monti, who has essentially been granted the power to decide the fate of Alstom, and his decision will test the credibility of the European Commission. As Mr Monti faces one of his toughest battles there are those who would have him consider more than his sole duty to ensure fair competition. It may not be Dickens but is this not also ‘the age of compassion’?

If Alstom fails there could be a loss of 110 000 jobs. One analyst said: “The collapse of Alstom would have catastrophic social, financial and industrial repurcussions…” But other observers note: “The French banking system is strong enough to withstand Alstom going into bankruptcy, and bits of Alstom are strong enough to preserve the jobs of many of its 110 000 employees”.

If Dickens were here he might go on: “…It was the age of wisdom, it was the age of foolishness…” We will soon all have our own opinions on which ‘age’ Mr Monti lives in and whether we remember him as Mario Monti or Monty Python.

Junior Isles, Managing Editor & Associate Publisher

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