Speakers:

William F. Gorin
Partner
Cleary, Gottlieb, Steen & Hamilton
Topic: Privatization in Latin America

Christopher R. Kelly
Principal
Morgan Stanley & Co., Incorporated
Topic: Latin American High Yield and Equity Offerings

Everett J. Santos
Managing Director
Emerging Markets Partnership, LP
Topic: Infrastructure Investments in Latin America

James F. Penrose
Assistant General Counsel
Standard & Poor's
Topic: Latin American Project Finance

Host:

Sydney M. Cone, III
C.V. Starr Professor of Law and Director,
Center for International Law

MR. WELLINGTON: Good afternoon, ladies and gentlemen. I'm Harry Wellington, and I'm the Dean of the New York Law School, and it is a great pleasure to welcome you here this afternoon. This is the fourth symposium of our new Center for International Law, and if it lives up to its predecessors, and I am sure it will, it will be an extremely informative, educational experience for everyone, even those who know a great deal about this subject. The person who has been responsible for these symposia, and this current symposium, is our new Professor C.V. Starr, Professor of the Law of International Trade and Finance, Sydney M. Cone, III. He is our host. Terry, as many of you know, is a long-time partner at Cleary, Gottlieb, and had vast experience in the area of International Finance. He is also a very old friend of mine. I met him when we both started at the Yale Law School back in 1956. He's done remarkable things in his life, and he continues to do them here at the New York Law School. We have really been pleased, those of us who have watched from the sidelines with encouragement and whatever support we can bring, to the growing development of the International Law Center. Terry has had a lot of help in putting together the symposium from our students and from Lene, his assistant. It has been a remarkable achievement, and these are not easy to put together. Let me assure you having had experience in trying to do so. And so, Terry, won't you come up and receive the applause of the assembled and introduce the panel. 

MR. CONE: Thank you. I would like to immediately make a point of clarification. Although Harry and I started at Yale Law School at the same time, he started as a professor, and I started as a student. We are quite happy to have such a strong panel with us today to talk about Latin American financing. Latin American financing is a very topical topic, and it seems to become more so with every passing year. In the 1980s, Latin American financing generally connoted debt rescheduling, or restructuring, the restructuring of sovereign debt, the restructuring of private debt. In the 1990's, Latin American financing has increasingly connoted securities offerings, project finance, structured finance, privatizations. It has been associated with capital investment, investment of local capital in Latin American, foreign capital investment in Latin America. It has been associated with the offering and listing of securities, both locally in Latin America and by Latin American offerors or issuers in global capital markets.

There was, of course, the Mexican economic crisis, that began in December of 1994. Viewed from April of 1997, what seems to be most remarkable about that crisis is the fact that recovery was relatively quick, and seems to be across the board very strong.

The Mexican economic crisis of 1994, began in December of 1994, seems already to be a matter of history, and the Latin American economy seemed to be quite strong. In any event, there is, without question, enormous amount of financing activity in Latin America. Qualified financial institutions are extremely active in Latin America. They seem to be competing with each other for Latin American business. Qualified law firms are extremely busy in connection with this financing activity. This is the general setting of this afternoon's symposium.

Let me mention that the symposium is being transcribed, and that the proceedings will be published in the law school's Journal of International and Comparative Law. I believe that a page is in your program that will enable you to purchase the published proceedings, if you are interested in doing so. The four speakers that we are extremely happy to have here today, and I will announce them in the order in which they are from my right, Bill Gorin, a partner in Cleary, Gottlieb, Steen & Hamilton; Sam Santos of the Emerging Markets Partnership; Chris Kelly of Morgan Stanley; and Jim Penrose of Standard & Poors. They will be speaking to us in that order.

Over lunch, we decided that the best way to proceed was for all of the speeches to be given, or all of the talks to be given, sequentially, one after the other, and then to have questions, and not to pause for intermission. There will be, as you can see, refreshments available; but we decided that the best way to proceed was to wait until after the talks, and after the questions and answers before we repaired to refreshments.

The first speaker is Bill Gorin, of the law firm of Cleary, Gottlieb, Steen & Hamilton. This law firm has, in the 1980s and 1990's, developed a major Latin American practice, particularly a financing practice. Bill has been in the forefront of this practice. I can think of no one better able to talk to us about this subject of privatization. I am delighted, particularly since he and I have been partners for so long, to introduce to you Bill Gorin. Thank you.

MR. GORIN: I seek the same clarification that you did, which is that you were the teacher and I was the student, similar to you and Dean Wellington. As someone who has been closely involved in a number of privatization transactions in various countries, I am sometimes asked to comment on this subject, and I generally respond to privatization, with a capital P, is not a subject which I, or really anyone, should be eager to generalize. There are at least two reasons for that. First, I am quite certain that I am not smart enough to master all that the world has classified under the rubric of privatization, since Mrs. Thatcher and the IMF made that term a buy word; and, second, I, from time to time, try to be prudent, and I know enough, from my own experience, to know that what is important is the details.

From one country to another, from one enterprise to another, there is a great deal of variety, the reason, the circumstances, the methods and the results that the scope for generalization is quite limited. One really needs to be skeptical of experts, and one should be particularly skeptical of experts on privatization. I want to use the first part of these remarks to try to justify my skepticism by highlighting the heterogeneity of privatization throughout the world.

I then want to speculate on why privatization, nevertheless, has the power it does as a slogan, and to identify some pitfalls of taking too seriously the proposition that there is a general globally desirable phenomenon of privatization.

In the second part of these remarks, I will, however, try to gather my courage and make several general observations about Privatization, with a capital P, that may be useful in examining the structure of successful Privatizations. I should admit, by way of background, that my perspective is that of a business lawyer and what business lawyers do in Privatizations is devise and document the sale process. My own experience personally has been in advising governments and enterprises undergoing Privatization, and has focused on very sizable transactions, especially in Latin America.

My firm's experience extends more broadly in Latin America, western and eastern Europe, and Asia, and has also been largely, although not exclusively, in advising governments and privatizing entities, as well as investment bankers. As a result, I have a certain professional sympathy for the situation of a government establishing a privatization program, and for a series of problems that recur when the process of selling a business, with all of its legal, contractual and marketing mechanisms, intersects with the public policy objectives of a government.

It is that uniquely political perspective that distinguishes the privatization process from what is otherwise just another merger and acquisition or capital markets exercise. In light of the focus of others at this conference on global offerings generally, or at least one other, my remarks will focus on the why and how of privatizations, whether or not they involve a public offering of securities. I would like to begin by asking why the state or a government should sell a particular enterprise. There are a number of possible reasons which often overlap and intersect, and which sometimes have contradictory implications. Perhaps the broadest motive is a historical trauma, broad because it may sweep away many of the finer considerations I will mention later on.

I think, for example, that the Eastern European privatizations should be viewed in a different light from programs elsewhere in the world, because they arose from the total collapse of the state, and in a setting from which most of the infrastructure of a market economy was wholly absent. As a Polish minister is reported to have said, the privatization of Eastern Europe means selling property that belongs to no one, and has no known value to people who have no money. There was no intelligent alternative to privatization, and mass privatization virtually imposed itself as a method. Another very different historical transformation accounts at least in part for privatization in Hong Kong, following the agreement to transfer the colony to Chinese administration which will take place in just a couple of months. A recent scholarly paper makes the interesting argument that a significant component in the cycle of nationalization and privatization in many countries is change in the balance of power between groups, especially ethic groups that compete for control of the state, and control of enterprises.

To the extent that historical trauma lies behind privatization, it greatly weakens the likelihood of drawing useful lessons from one country for the process in another. Some governments have privatized to raise money, or by accepting public debt in payment to reduce debt directly. Without wishing to tread into the gardens of the experts in public finance, I think one can be skeptical of the significance of the amounts that are raised. They are, at best, a shot in arm; although, one that could be very useful. The Mexican government used privatization proceeds to establish a special fund to stabilize commodity price risk on exports and interest rate risk on foreign debt. Other governments have tried to use privatization proceeds to improve the budget balance in a particular year, often with electoral strategy in mind. At worst, however, raising money through privatization is like adding water to a leaking bucket. The cases of Brazil and Italy come to mind. The proceeds of privatization, a nonrecurring gain, will not do much to repair structural problems in public finances.

Of course, one of the world's most dramatically successful privatization programs of over 10,000 enterprises in the former East Germany was an enormous drain on German public finances. It was, among other things, a complex and highly original subsidy program to preserve employment and productive infrastructure, while beginning the transition to a market economy. A broader reason to privatize, of course, is part of a program of structural reforms of public finance. In short, fix the holes in the bucket. This was the driving element in many of the successful Latin American privatization programs. The Chilean case is the most clearly successful, but notwithstanding some exchange rate driven hiccups in Mexico. In Argentina a couple of years, the reform of public bands in those countries associated with privatization efforts can be argued to be quite successful as well.

The place of privatization in such program of reforms, however, is complex. Many other measures are also required, and they are much more difficult politically and practically. Economic stabilization, tax reform, debt reduction, reductions in other areas of government expenditure, and so on. Privatization cannot do the job alone.

More importantly, privatization is only viable if the buyers can hope for a reasonable return on their investment, and it will only replace public investment if it establishes conditions that attract and reward new private investment. If the business is going to be profitable, though, why not keep it in state hands and make the same changes? In banking, for example, privatization in some countries has involved what Americans like to call the good bank/bad bank strategy, separate the doubtful assets for the state to keep, and sell the rest.

A graphic illustration is the sometimes vexing case of the French bank Credit Lionnais (phonetic); a more complicated would be the bailout of the so-called thrift institutions in the United States. The French have applied analogous strategies in their steel and computer industries. Whatever else they are, though, these transactions are not immediately good for the public finances. Often the underlying assumption that a particular endeavor can be profitable in private hands, but not in state hands. This might be because the private sector is in a position to be more efficient, or to bring more managerial or technical experience to bear.

But often it is because the privatized entity will be able to charge higher prices, where the state-owned enterprise simply could not. This is often true of infrastructure facilities, telecommunications and utilities. A highway, for example, has, in theory, a level of tolls that maximizes revenues, and it may be high enough to provide a return on the investment required to build or improve the road. But, in many countries, that toll is just too high for a governmental agency to charge, as a political matter. That could mean that there is a case for private development of the road. That could be so even if, as is likely, the cost of financing is higher for private parties than it would be for the government. I would argue that that case is political as much as it is financial.

That brings me to the most basic reason of which I believe there is for privatization, which is a general change in philosophy about the proper role of a state in the economy. I don't propose to try your patience with a mere lawyer reciting the virtues for which private ownership is said to stand or the costs it may impose. I am, after all, an outsider to the technical futures of the empirical arguments. But I do think that the empirical case for private ownership is highly specific to the circumstances, and that it depends on the country, the industry, and the method of privatization. I also believe it rests on probability, and that the same benefits can, in principle, be achieved through other means, while maintaining state ownership. It is just less likely to work. And I suspect in any specific case, the empirical arguments are not conclusive. The best they can do is identify likely benefits, and if they are honest costs, all of them to be realized over a long-term, and affected by many other factors. Reasonable people will differ on their relative weights.

I, therefore, think that the belief in a reduced role for the state is as much a matter of ideology as of science, which is not to say that it is wrong, and even less to say that I disagree. Indeed, the most striking thing about the idea of a reduced state role in the economy is the breadth of its appeal. When the Mayor of New York says that the City is in many businesses, but there's no reason for it to be in the radio business, I believe he commanded broad agreement. Another interesting example is telecommunications, where the issues and the alternatives are perceived as strikingly similar from country to country, and the trend toward privatization is virtually universal. But we must be modest about the durability of such changes in philosophy. A poignant example is the tight cycle of nationalization and privatization in France, where the very enterprises that were nationalized in 1982 began to be privatized in 1986.

Another example is the banking industry in Mexico. It was nationalized in 1982, privatized often to the same hands from which they had been taken in 1992 and 1993. And one of the most discouraging consequences of the situation in Mexico in 1995 and 1996, following the crisis that Terry referred to, was that some of the banks ended up back in government hands, where they will have to be cleaned up. It is happening now, and being sold off once again.

Now, up until now, I have mentioned some of the more immediate reasons for undertaking privatization in different countries. There are a number of less direct reasons that have taken on varying degrees of importance in different countries. These include simulating domestic capital markets, broadening the base of property investments, improving management, and attracting technical expertise, especially from abroad.

There are also a number of exogenous forces for privatization, including pressure from other governments, from international financial institutions, and from regional organizations. To this picture of the complex goals of privatization, we should add that the diversity of the particular circumstances in which privatizable state enterprises find themselves. Some lose money, some make money. Some compete in a part of a global market, like the many steel makers or cement makers that have been privatized, or like mining and petroleum extraction companies. Others have been protected from competition in the domestic market, like airlines, telephone companies, and many manufacturers. Almost all have difficult labor situations, but the nature of the problems vary widely. Some desperately need foreign expertise. Some are in corporate form, and have publicly-traded shares, and high standards of reporting and record keeping. Others have been run as government agencies and lack intelligible financial statements. There are, in short, dozens of different reasons for privatization, and I think it is worth pausing for a moment on the durability of privatization as a banner or slogan. There could be no doubt of its power as a political matter, to help sell to the public significant changes in economic organization, on grounds that are appealing to people disillusioned with the state. Mrs. Thatcher used it to great effect, but more striking in the way is the success of Latin America governments in creating a consensus for privatization programs that were far broader in their effects. When Mexico privatized its telephone company, President Salinas went on the road in Mexico to convince his citizens, apparently successfully, that the higher rates to be paid by the lucky few with phone service were the price for ultimately making telephone service better and more widely available. In view of the complexity of the economic issues, the appeal of the slogan is very valuable. Similarly, I have been struck by the enthusiasm for privatization on the part of management of state-owned enterprises, which I believe is partly a matter of self-interest, but also very much a matter of conviction, partaking of the same political appeal.

Of course, one constituency that believes fervently in privatization are the managers of international portfolio capital. They have wrung to its pillars throughout the emerging markets for a number of years now, in spite the recent fluctuations in the value of emerging market investments. I believe they can be expected to do so again, particularly with the recent successes of the Venezuelan and Peruvian telephone company offerings, and with such large scale privatization as the Brazilian mining giant, CVRD looming on the horizon. Privatization goes hand in hand with lower tariffs and stable monitoring policies as a sign that all is well.

One particularly important sub class of international investor in many countries is flight capital for which privatization is an important signal to return. A sign of this can be seen in the Brazilian stock markets. The Brazilian government has been arguing, partly in public, with itself over whether and how to privatize the telephone company, Telobrous (phonetic), the mining company CVRD and the principal electrical distribution companies. Every negative rumor on privatization makes prices fall, and every encouraging rumor makes them rise, not only for the companies involved, but for the whole (indiscernible) market. 

All this enthusiasm is fine, even appropriate. As long as one does not lose sight of the underlying complexity of the issues There is a risk of falling pray to easy analogies where the realities of each country and each industry may be critically different. Privatization can also come to see an end in itself. When a privatization goes wrong, it makes matters much worse. 

The airlines of Latin America provide a strong cautionary tale. Those that lost money in public hands have continued to lose money in private hands. Enchantment with privatization can also mask the degree to which it is used to concentrate economic power in the hands of an existing elite. One can argue that this happened throughout Latin America, and I think one can also argue that this was a reasonable strategy, or at least an acceptable outcome, to further economic stability. 

In France, the composition of the core group of stable shareholders, so-called noy oi deur (phonetic) ostensibly to provide stable ownership and breathing space for management has been attached as a maneuver to preserve the political affiliations of privatized companies. The recent debate over privatization in Italy has also focused attention on the role of the merchant banking elite in taking control of prospective privatizations. Having spoken for a few minutes generally about the why of privatization with a capital P, now let me turn more to the how of the privatization process. From a business lawyer's perspective, the common feature of privatization, outside of eastern Europe where the absence of a market economy has made for a very different process, is that in a context of complex policy goals and political sensitivities, they used the ordinary tools of business transactions. What makes them an unusual, and, therefore, interesting genre, however, is that they are often designed by people whose grasp of the policy goals, and especially the political issues, outstrips their familiarity with the prosaic tools. Let's start with who is usually in charge. 

As in any sale of a business, someone has to speak to the seller, take responsibility for the big decisions and coordinate the efforts of others. This function has to be centralized and it has to report directly to that part of the government that has made privatization its agenda. This is a problem in every privatization with which I have been involved, because the issues are so complicated, and because the commitment to privatization typically does not have any institutional infrastructure behind it. Often those parts of the government that have the infrastructure have different agendas of their own. Approaches have varied widely. In Brazil, the national development bank, the NDS, was for time charged with managing privatization. In Germany an enormous ad hoc independent government agency was established. In many countries, such as Mexico, a smaller independent unit had been established within the ministry of finance. The agency can, of course, differ for different privatizations. But however it is handled, the privatization function has to be temporary. This argues for making it a special high-level function with a lien staff.

Because the job is so vast, a small privatization agency must rely for much of the work on the privatizing entity itself, and on the other ministries involved, especially in a regulated industry. It will also have to rely heavily on outside advisors, in effect privatizing the very process of privatization. This bring me to my next point, the role of the advisor. There are two very different kinds of assistance a privatizing government needs to hire from the outside because they are hard to find or develop within the government or the state-owned enterprises themselves.

One is what I would call advisory work, which includes some of the following: Valuation work; legal work, of course; technical regulatory issues, such as developing a workable telephone concession; advice on financing practices, typically, for example, in project finance; helping to design the process, especially to make it responsive to the expectations of perspective investors; organizing and conducting manpower intensive aspects of the transaction, such as preparing a disclosure document; and conducting negotiations with perspective buyers. After all, entrusting negotiations to an agent is not only efficient, it also can sometimes have important tactical advantages. Advisory work can be done, depending on the category, by bankers, consultants, academics, lawyers, and others. But the key feature in selection is the skill of a small team of people who will be directly and intensively involved. The other category of assistance I would call marketing, which includes finding perspective buyers, and interesting them in a transaction, trying to foster consortia to bid together, advising on disclosure, and conducting an offering of the shares. These are functions for bankers, and unlike advisory work, they require the strength of a whole institution with a network of resources. One of particular features of share offerings, for example, is that the seller often meets the people who will actually sell the shares at the very end of the process, if at all. Using advisors effectively is not only a matter of picking good ones, and knowing how to listen to them. It also means structuring their roles so as to be sure of their loyalties, and devising compensation arrangements that do not contain perverse incentives. Fees based on success or the amount of the proceeds, for example, are often appropriate or unavailable for marketing assignments, but they may not be for advisory assignments. When dealing with international investment banks, too, it should be borne in mind that some of them may stand to make far more money out of a share offering on subsequent trading than out of any advisory assignment.

Turning from the people involved in the process to the patient itself, privatization is almost never a sale of a going business as is. Instead, it begins with a transformation of the enterprise, and its specific competitive and regulatory environment. This can involve technical issues, such as adopting ordinary corporate form, and generally accepted accounting principles. It also frequently involves revising the boundaries of the enterprise to carve off activities that just will not work in private hands for one reason or another.

In regulated industries, it involves establishing a regulatory structure that will, to a great extent, determine the prospects of the enterprise. The problem here is that the political costs of miscalculation can be enormous. In regulated industries, profitability may be politically acceptable if it involves increased prices when it leads to increased investment and perceptively better service. But when the benefits are slow or hard to see, or when the cash starts to pile up, the politics can change. A dramatic example occurred in England just a couple of years ago. A takeover fight involving the privatized regional electric company Northern Electric highlighted Northern's profitability and led the electricity regulator to announce a review of pricing to the electrical sector as a whole. Unfortunately, the announcement came less than one day after the privatization of states and two generating firms for roughly four billion pounds, deeply embarrassing the government.

Some of the most difficult problems in every country involve the work force. Privatization might be good for employment in general, but, in any particular enterprise, it is unlikely to be consistent with existing staffing levels, work rules and job security. The distribution of shares to employees, a common feature of privatization, can only go so far to weaken resistance to structural changes. There are some things that work, and telecommunication privatizations in emerging markets, governments have been able to secure the cooperation of powerful unions by establishing a trade off. Your jobs will be protected, but you will have to accept thorough changes in job categories and work rules. The promise of job security means buyers will pay less, but, in that particular sector, the enterprise can expect to grow out of the overstaffing situation. Telemex, for example, increased lines and service by 12 percent per year in each of the four years after its privatization, while keeping its head count strictly unchanged.

In many of the western European privatizations, unions have extracted varying trade-offs of their own. This issue was significant in the recent privatization of Deutsche Telecom, and it will be interesting to see what takes place with respect to France Telecom in light of the very serious strikes that plagued France during 1996. In other cases, the government has either undertaken the thankless task of work force restructuring itself, which results in a higher price, or given buyers a green light to do it themselves, which may produce a more efficient result.

In terms of process, transparency is a buy word of privatization everywhere, partly to distance the process from the aroma of corruption, and partly to build political consensus behind the process. But privatization does not really lend itself to being conducted in public. It is far too complicated and much of it involves negotiations that require confidentiality.

Auctions, in particular, are often adopted in an effort to insure transparency. The government sets up the enterprise to be sold, offers specific contractual terms, takes bids, and then awards the enterprise on the basis of price. The problem can be that this process is terribly rigid. The give and take of negotiation provides crucial information about what buyers value, and what they are willing to pay for, and it is not a zero sum gain. That's why, in ordinary private sector sales of businesses, sellers that set up auctions often stop the auction at some point and negotiate. In addition, governments usually want the flexibility to consider elements other than price, such as the suitability of investors and their plans for the enterprise. It is very hard to incorporate those judgments into an auction. In the privatization of the Mexican steel industry, we worked with other advisors to the government to devise a complex formula to weigh various non-price elements of competing bids for loss-making enterprises. In the privatization of Telemex, the prequalifying stage was used to help assemble viable consortia of competing bidders. Each included a Mexican component, where voting control would ultimately rest and a technologically sophisticated component, one or more international telecommunications groups, to provide the necessary expertise to upgrade the system after privatization. The concession, which was commented on, and to some degree negotiated, with the various consortia in advance of the auction, contains the requirements for that system's upgrade in terms of increased lines, rate of call success, etcetera, which was the driving force behind the privatization in the first place. Now these efforts to make the auction process more flexible, and to achieve something more than the appearance of selecting a winner on the objective basis of best price, are, I believe, relatively unusual. In any case, the public contracting experience suggests a bidding process is no guaranty that there will not be corruption.

It might be more fruitful to take a broader view of transparency. Broad objectives and general rules of procedure should be the subject of open debate and consensus building. Rules should be clear, consistently applied and established in advance. That may sound banal, but changing the rules, or making them at the last minute, has been one of the great problems, especially for foreign investors in many Latin American privatizations.

Foreign investors cannot guess at the political background to changing rules, or call on friends and connections for guidance, and the real decisions makers in the head office are usually looking at the situation through many layers, and, perhaps, in translation. They crave clarity and consistency.

On the other hand, the rules themselves can recognize the importance of confidentiality and the need to exercise complex judgments, as long as the privatizers are accountable politically for the results. On that score, an open and constructive public relations policy can go a long way. Another aspect of the privatization process on which government's focus, with mixed success, is obtaining long-term commitments from buyers. Unfortunately, outside the regulated industry, such as telecommunications, it can be very difficult to hold buyers to long-term commitments by means of contractual undertakings in privatizations. 

The idea most often arises in privatizing loss making enterprises where buyers will be expected to make significant investments. But such promises can be hard to enforce down the road. The privatizing agency will not usually have the capacity to monitor compliance, and it may not have much leverage when the time comes. More importantly, they will have very little desire to admit that the process has failed by seeking a remedy. A recent world bank report urged that the most important measure of success of a privatization program is the aura of success, which is not surprising when one considers the political context in which privatization occurs. 

As in any sale of a business enterprise, a key element is the amount of information regarding the enterprise, that can be forwarded to perspective buyers, particularly foreigners. Governments, however, are generally unwilling to provide extensive contractual warranties of information about the enterprise to be privatized, and they often just don't have very much information themselves. Investors who are looking to control an enterprise and improve its performance need to investigate it in depth, and they will not be satisfied with only historical data and with the information that the government and the enterprise itself may deem relevant. Outsiders who have no opportunity to investigate are sure to apply a discount for uncertainty, and to stand at a disadvantage compared to insiders, and may be unwilling to bid at all.

To avoid or minimize these problems, governments have allowed extensive due diligence investigations by perspective buyers, often setting up so-called data rooms for the review of documents, and making management available for interviews. This may require prequalification of bidders to somewhat reduce the burden this may impose, but, in any event, it will make the process much more demanding and time consuming for the government. Although privatizations often involve a sale to a strategic buyer, at least as a first step, the really large privatizations invariably involve a global public offering. Thus, it is possible only from the most attractive and best prepared companies, and it takes a relatively long time, but for many emerging markets a major international privatization offering has provided the impetus for an opening of domestic markets generally for foreign capital.

Nevertheless, it can be a tricky proposition in several respects. The most obvious example is, as recent developments in Mexico illustrate, investors that have been herded into a country can also be stampeded out. The long-term benefits of attracting them can only be sustained by remaining over the long-term a comparatively attractive place to invest.

A subtler issue in international offerings is that it can be very difficult for the seller to control the price and the placement process. The chief executive of one of our clients once compared the process to taking part in the running of the bulls at Pamplona. In the privatization of British Telecom, YPF, the Argentine oil and gas company, governments have tried, with some success, to monitor price formation and the selection of investors as closely as possible. But the international marketing process is a huge process with its own momentum, and only a limited degree of control is really possible.

Another issue in opening ownership to international investors can be concern over maintaining local or some degree of governmental control, particularly for industries such as telecommunications that are viewed as essential. The UK, Israeli, and certain other privatization, for example, have utilized the so-called golden share, which is retained by the government and provides it with control over fundamental changes to the enterprise.

In Telemex, to cite another example, the capital structure was revised prior to privatization to include the so-called L share, which has dividend and liquidation rights equal to those of the other classes of shares in the capital structure, but voting rights that are very limited and only limited to a few fundamental corporate matters. This change, coupled with a trust arrangement that allowed the Mexican member of the strategic buying consortium to control the shares sold to the consortium enabled the Mexican government to raise well over $2 billion for its stake in Telemex, while leaving a Mexican company in control. 

Now, in closing, I guess I would just like to say that it bears repeating that the benefits associated with privatization also involve a number of changes in the general business environment. Just to pick one example, one of the special features of a success of privatization in Chile has been the establishment of a system of private pension funds, that not only channels domestic savings into the stock market, but also provides a counterweight to the power of the big industrial groups. A partial list of some of these changes would include changes in labor regulation and the regulation of competition, in accounting practices and auditing standards, in currency policy and monetary policy, in domestic capital formation, in taxation, in foreign investment legislation, in stock market regulation, and in management accountability. The list gives some measure of the challenges of the privatization undertaking, and also the breadth of positive changes that it can, if well managed, entail. Thank you very much. 

MR. CONE: Bill, thank you very, very much. Our next speaker is Sam Santos. His biography is in the program. It is a very impressive biography. In one respect, the program is much too laconic. It says, Everett J. Santos is Chief Executive Officer of the Latin American group of Emerging Markets Partnership and Managing Director of the Principal Advisor of Latin American Infrastructure Fund of American International Group and General Electric Capital Corporation. The fund has approximately U.S. $1 billion in assets under management. That is misleading. Of the billion dollars, 150 million was put up by American International Group, 150 million was put on by General Electric Capital Corporation, and 700 million was raised from other sources by Sam Santos. I am really honored to be able to present Mr. Santos. 

MR. SANTOS: Thank you very much. And to show you how well, Terry, you organized this seminar, the previous speaker spoke about transparency, and transparency as being a very important component to privatization, and I have a whole slew of transparencies as a consequence. While he is setting it up, let me say a couple of words. There is a lot of arguments as to why privatization should or shouldn't be done. I think probably the best reason for doing privatization is exemplified by a little placard, which wasn't so little, actually, it was a big banner, in an East German factory in which it said: "Workers of the world, forgive me." Karl Marx. The other is probably something that was glibly said by most people in eastern Europe, in most command economies, that government expected workers to work, and workers made believed they worked, and governments made believed they paid. So that's really one of the reasons that privatization is absolutely necessary.

Let me say a couple of words while we get together on putting the transparencies up about the AIGG Capital American Latin America Infrastructure Fund, which Terry mentioned. It is a billion dollars. It is actually $1 billion 13 million as of right now. The fund has been organized basically to invest in infrastructure throughout Latin America. That's everything south of the Rio Grande down to Cape Horn. It is investing, or will be investing, in all areas of infrastructure. By infrastructure, we mean the areas of power, telecommunication, transport. We also have expanded the definition of infrastructure, since the dictionary is fairly undefined as to what infrastructure means, and we have extended it actually to areas such as mining, petrochemical, oil and gas, and similar areas. 

Well, let me tell you a little story about Bill Clinton, since I am from Washington D.C. As you know, his daughter is going off to college, and he said, well, you know, one good thing and bad thing about that is, one is that we are going to have our daughter off to college and we will be alone, and the good thing, of course, is I have an extra bedroom. All right. I think we are all set up. It was worthwhile. Just in case some of you don't know where Latin America is, the purple area is where we expect about 80 percent of the investments in infrastructure to take place. That is not happenstance. It is not necessarily because these countries are more aggressive in their privatization than others. It is really more a function of GDP. That's about where 80 percent of Latin America's GDP is concentrated. So it is in the countries of Mexico, Brazil, Argentina, Chile, Peru and Columbia. 

As you probably know, Latin American's annual GDP growth, during 1990 to 1994, is about 3.7, which is not particularly stellar, since in '70s, before the debt crisis, it was growing at about 7 percent, and, in fact, was the fastest growing region of the world at one point in time, much faster than the tigers were growing at that time. 

There was, and is, actually, a slower growth during 1995, still a little bit of a hangover from the Mexican debt crisis. I would say that, in that context, that had it not been for the very, very quick action and rather profound action on the part of the IMF and the world bank and the Clinton administration, probably what happened in Mexico could have deteriorated into some something much more serious and would have probably dragged down a lot of Latin America with it. The fact that they are already experiencing growth is an indication that their actions were well taken. The World Bank is now starting to expect the regions to grow at about 6 percent, that was our projections, obviously. I think, in fact, all the structural reforms that have been taken justify that projection. Latin America has really gone through a major macroeconomic reforms. As you probably don't know, unless you've read my resume in that book, I was working with the World Bank, with IFC. I was heading up Latin America and the Caribbean as director, actually during a good part of the debt crisis, and then subsequently took over, actually created the infrastructure department in the International Finance Corporation, and ran that department which had worldwide responsibility for infrastructure. The real point, in terms of Latin America, is how significantly it has changed in terms not only of its own fiscal reforms, how it's gotten inflation under control, but, also, its political and structural reforms across the board. As you all know probably, Latin America had one of the more extraordinary inflation period ever, and it almost tied the Weimar Republic at one point in time in some of the countries. Now you have some countries that are actually running inflation in very, very low, single digits. Argentina's actually run now for three years and inflation rate lower than that of the United States. That's a country that had four-digit inflation not too long ago. Those sorts of structural reforms, the reduction of fiscal deficits, almost nonexistence in many countries, makes many of the countries of Latin America actually meet the Masonic Treaty (phonetic) requirements for the union participation. Something a lot of the European countries do not do. So it shows you the change that has occurred in terms of Latin America. 

The government themselves, by seven, eight years ago, you could have counted on one hand the number of governments that were actually elected. Today there is but one exception, that being the country of my parents origin, Cuba, that does not have an elected government. All the other countries have, to a greater or lesser extent in some cases, elected governments. 

If we can have the next one. As you can see there, the fiscal deficit fell from 9 percent in '83, an extraordinary amount of fiscal deficit, it is now running 3 percent in 1994. Actually it is lower now. And if you took Brazil out of the equation, it actually would be even lower than that. Brazil is the one country that is still performing a little bit more aggressively on the fiscal deficit side than it should be. 

The legal and structural reforms are massive. Privatization is requiring a lot of that, regulatory reforms are being undertaken. Also, if you look at Latin America, it is really trying to impose regulatory reform that promote competition. That is, where possible, they try to get the market to respond to producing the appropriate economic environment for those services provided. A good indication, I guess, is in the electricity sector, where power generation has been put basically on a competitive mode in Chile, in Argentina, and is now being talked about doing the same thing in Brazil, and a lot of other countries. That is way ahead of that of the United States. It is probably way ahead of a good portion of Europe, that is now just talking about bringing competition to the production of electricity. 

During the 1980s, one shouldn't be surprised that infrastructure was very badly hit. It was running at about 3 percent of GDP in terms of investments. That is a massive disinvestment in terms of the needs of the country. If you look at most countries, and the reality is that you should be investing a much larger portion, if you are still in the development stage. I think the United States is one of those exceptions, because it has invested so much over time in its infrastructure, even though, when one comes to New York, one wonders whether or not it shouldn't be investing a little bit more in infrastructure. But it is still, in terms of overall needs of a portion of GDP, a relatively small amount in most OECD countries. But the expanding economies, East Asia, those countries are investing 7 percent. The government of Singapore, in many instances, has invested as much as 10 percent of GDP. That's one of the reasons why it has grown as rapidly. 

The reality is that infrastructure is the driving force for sustaining economic development and allowing countries to become competitive on an international basis. Without infrastructure investment, it can't be done. 

What do we expect to be invested in infrastructure over the next 10 years on an annual basis? Well, if you look there, that is what the World Bank expects to be invested in the various sectors of infrastructure, $60 billion a year. That's a rather extraordinary amount, and it would be enough to keep everybody fairly active. Power requirements are $24 billion, transport $14 billion, telecom $10 billion, water and sanitation $12 billion, and I believe that these are remarkably understated. They should be expanded rather dramatically. That's about 4.5 percent of GDP. 

During the 1970's, Latin America was investing a little bit more than that in its GDP. What it really should be investing is about 7 percent. And if these countries allow infrastructure to operate in a purely market economy, you would see a lot more investments in infrastructure. There's no doubt that the economies could sustain it, the economic returns are there for infrastructure, the economic value to justify the investments is there, and the countries could well afford the investments. Just to give you an indication, one of our investors is Archer, Daniel, Midlands, and, obviously, is very interested in agricultural and agricultural development. The comparison that they make in terms of an American farmer getting his crops to market, as opposed to a Latin American farmer, shows you the importance of infrastructure. Basically, they say that it takes a Latin American farmer five to ten times as much in terms of costs to get his products to market.

Now, that can be captured in terms of allowing someone to pay reasonable charges for transportation, railroad, port terminals, and the like. If you look at the per capita investment in Latin America, it is about $1,050 per capita. If you look at it in terms of where it is compared to the OECD countries, that would make between a half a trillion to $1.5 trillion deficit to get it up to the levels of the OECD countries. So there is a massive deficiency that has to be made up over time. You don't expect that to be made up overnight, or over the next five or ten years, but clearly, if these countries are going to reach the stage of development that we went through about 20 to 30 years ago, maybe even 50 years ago, they need those sorts of investments.

Brazil's infrastructure, is a total catastrophe in terms of what its needs are. Its investments per capita are about 910, which makes it even lower than the average of Latin America. The value, in terms of OECD level, and this is a number that I think is fairly relevant, the poorest of the OECD countries, and Mexico is an OECD country, but we don't include Mexico in that, is basically $4,000. So it about -- per capita. 

That's about where Portugal is and Greece, in terms of per capita investment in infrastructure. The United States investment in infrastructure is about $10,000 per capita. That's about where Germany is and Japan is, etcetera. You can make certain calculations. That's how you come up with that deficit of about a half trillion to 1.5 trillion. To get Latin America up to the levels of the poorest, it would take a half a trillion to get it up to U.S. levels. It would take it up to about 1.5 trillion. What does Brazil expect over the next five years? And these are from government figures. They expect to invest $72 billion over the next four or five years for infrastructure projects. They have in the federal budget about 7.3 billion allocated. That leaves a gap of about 7 to 11 billion per year. So assuming they invest between 14 and 17, that is a very large, just for Brazil alone. Next chart. Let me tell you in a couple of words where all that money is coming from. One of the major sources, obviously, are funds, such as the fund that we were able to create at AIG&G Capital. It is a -- going to be a player. It is not the major player, obviously, it is only part of the overall capital markets that has to be mobilized. The largest of the large, power companies, telecommunication companies, and transport companies, and the like, will be putting in substantial amounts of money into these projects to fund the investment. 

A lot of it has to come, obviously, from local sources, as well. And one of the benefits actually of infrastructure development is that it is, in fact, intertwined in a very strong way, it creates a mesh of sustaining economic development, with infrastructure being on one side, the recipient of the funds that come from the capital markets development. You can't have a capital markets developed unless you have infrastructures to invest in. They are the natural recipients of long-term money that is provided by investors. You can't have pension funds. You can't have insurance companies, unless they are able to invest in the economy. And a good part of the economy, especially in the developing world, is, in fact, infrastructure. 

A good exercise is to look at the United States, and you look at what was on the Dow Jones list of companies in the year 1900. And if you look at that list, you probably find just about two or three companies that are still on there. The reality is that it is totally changed. What used to be considered the important parts of the economy has changed because, in fact, the U.S. has changed. It has moved away from all those infrastructure-type projects that actually composed the Dow Jones into much more industrial projects, the software, and all of the rest of the operations. So it's really changed. In any case, those are the equity sources where we tapped a good portion of the money that we had to for our funds. We expect a lot of those investors will also be providing investments to infrastructure projects generally.

One thing that I think we must focus on is how different the capital flows are today from what it was not too long ago. The fund looks at what was happening in the 1970's, and in the 1980s. The private flows were very, very small, and the public flow was rather substantial. That is basically you had the bilateral assistance, multilateral support, or even government flows internally. Now what you are seeing is enormous increase in private flows, and I will show you how that translates in terms of numbers, if we can go onto the next line. I am not certain if it is the next one, but it will be there eventually. 

Okay. A little help and assistance. Public flows to emerging markets over the recent years reached a peak in 1991 at $62 billion. That was when there was a peak of federal funds that went into Latin America. That was a growth from $5.3 billion in the 1970s, and now the level is about $54 billion If you compare that -- the next one slide. 

Don't worry, I will speak to whatever you put up there. Private versus public flows have grown. The private flows have grown, they are very large, at a very rapid pace. And, in fact, the private flows have gone from $5.7 billion in 1970 to 240 billion in 1996, and the estimate for this year is about $250 billion from private sources. 

This, basically, dwarfs all public monies that are going out. Total net capital flows, increase has been significant. $11 billion in the '70s, to '86, '82, to 284 in 1996. That makes it basically about $46 billion from public sources, since $240 billion was from private sources. The 1995 and 1996, basically the same theme. The private flows have continued to grow. East Asia, in fact, continues to be a very large recipient of money. Latin America is getting a substantial part, about a quarter of it, but East Asia is getting a much larger amount. That should be expected actually. The region of East Asia has a much larger population base; it is much further behind in terms of infrastructure If you look at the thousand dollars per capita that exists in Latin America, I think if the number comes up to $250 per capita in Asia, I would be very, very surprised. Bond placement is one of the things that is growing. There is an increase, and you are going to get Standard & Poors to talk to you, in a couple of minutes, if I get off the stage, about the rating agencies, etcetera. Clearly, the rating of bonds is going to be a very important part of making possible bond offerings. There is still a lot of things that have to be done in terms of improving the globalization of markets. There is still a lot in terms of deficiencies, in terms of regulatory reforms, and even with structure, that have to be done. 

I think that most countries are recognizing that they cannot depend on themselves to finance all their needs, and they must, in fact, as a consequence, tap the international markets. They have a need for regulatory reforms in the United States, to allow the issuance of these bonds, continuing, of course, the necessity of making certain that the bonds meet the quality and the disclosure requirements that are necessary to make an informed judgment. But, nonetheless, you know, there's still a lot of things that have to be done. 

Let me just say a couple of words about that last item. It is fairly important to see how different the world is today. If you look at pension fund hiring of international experience, over the last five years, it moved from one out of every twenty hired, with some sort of international experience for pension funds, and now it is one out of every five. The pension funds are starting to realize, and, in fact, they need international experience in order to handle their portfolios. I am certain that this is also true, even though I couldn't get the numbers, but I am certain that the law firms are also looking for more and more people with international experience. 

I want to say some things about pension fund reforms in Latin America generally. The reality is that Chile was the first country really to move away from a very bankrupt system in terms of its Social Security into a privatized system in which, basically, 10 percent of their income has to be put aside into a private pension system. This has transformed, basically, Chile. Chile, about a week ago, adopted rules and regulations which allow the Chilean pension funds to invest outside of Chile. One of the reasons is that they have so much money in the system that the reality is that they don't feel very comfortable with just dedicating the funds within a very, very small economy. It is now enough that it really represents three times its per capita income. So it is an extraordinary transition. It's taken a system that was totally bankrupt, I mean bankrupt. I mean the United States always cries about its Social Security system. It would never have been transformed if Chile had the same Social Security system that United States has, because it wasn't in the same category. It just didn't have any money to payout anybody, and, clearly, it was totally lost. That might exist in the United States in the year 2050, but hopefully we won't get there. 

In Chile, it was very, very clear that they had to do something about pension fund reform. The result of those reforms, though, is, in fact, it has seeped out from Chile. It is now being adopted in Argentina, in Brazil, in Columbia, in Mexico, in Peru, in Venezuela. All of the countries are considering pension fund reforms. That's going to have a very significant impact in terms of capital market developments in Latin America. 

At the present time, if you look at Latin America's total capitalization of its stock exchanges, it represents about a half a trillion dollars, $500 billion is a total capitalization of Latin America. If the pension funds continue to grow at the rate that Chile grew in the past 10 years, that capitalization, just from the amount that is coming into the pension funds, clearly double that amount, and maybe even do more than double. 

So, natural growth, plus pension fund reforms, you could have a capital market that could be in the trillion plus range in terms of Latin America. That changes your capital markets. It changes how people relate to their economy. I would say, also, that there are other things that happened with the pension fund It may seem it is totally irrelevant to the infrastructure development, but it is not. The reality is that the first thing that pension funds start to invest in after they buy government bonds is infrastructure projects. They must have the local utility, local electric company, local railroad, local water company, local whatever. Those are the natural investments. 

So infrastructure investments today, when they're still not enough pension funds to absorb the needs of those countries, in terms of infrastructure, should, in fact, make it possible for a fund like ours to invest today, and, then, basically divest itself from investments that it made to the pension fund system that will have a natural need for those securities into their portfolios. Here is a chart which helps you sort of appreciate the movement of external financing to a major emerging market. This comes from the International Institute of Finance. You can see the top blue segment being the official creditors, and you can see what percentage it represented during the early years. You can barely see, if you can see at all, the years, but those are years down there. In 1990, the blue part there, you can see how much of a significant part the official creditors represented, and that is all the multi-laterals, all the export agencies, all the aid programs, all the other lending programs that are around.

The equity component was significant, but relatively small. Banks had disappeared. This is right after the debt crisis, so banks were almost nonexistent, and the nonbank creditors were carrying some portion. But, clearly, the momentum of investment was being driven by official creditor agencies. I had the pleasure, of course, of working with one of them, and knew how important these flows were to those economies. Basically, the next one is the same thing. The equity there is your blue part, which is just putting the official creditors on the bottom, and you can see, it just illustrates how much more important the equity components are, and how important the banks and the nonbank creditors are compared to the official sources. The official sources, basically, have disappeared. 

I think that this is the appropriate scenario. It should be, in fact, private sources. One of the reasons there was a debt crisis to begin with is not that the official creditors were there, but that it was just too much dependence on providing money to governments that were not investing those funds in a way that was consistent with providing the economic rates of return to justify the borrowing. So, when it came time to pay off those loans, there wasn't enough in the coffers, and they weren't producing enough to pay those loans off, and the result was the debt crisis. Not surprising. 

I am almost at the end. Just I thought I'd put out there the players in a normal infrastructure project. You have government, you have the regulators, you have the promoters of the project, you have the equity, you have the operating company, you have the contractors, and you have lenders, multilateral agencies, export agencies, etcetera. 

The next one, I call this lawyers heaven. I know I am speaking at a law school, so it is important to see conceptually what this means, even in the simplest of transactions. I can't imagine anything simpler in terms of being able to do a deal that involved an infrastructure project. It can't be any simpler than that, and that's complicated enough. That's enough to make everybody in this room pretty wealthy.

If you were to layer over, and make it complex, you probably wouldn't be able to see the players from all the lines. It is just a massive amount of legal work and regulatory and other aspects in terms of legal expenditures that are necessary. 

So, to summarize this whole thing, I think Latin America has clearly gone through a transition. I think infrastructure is going to be a very important area for development in the private sector, and it is going to provide a lot of investment bankers with a lot of work. And, hopefully, that chart will have some other lines all over the place to make people a lot wealthier. Thank you. 

MR. CONE: Chris, I can't improve on Sam's introduction of you as a good investment banker and a good lawyer, probably these days in that order. Chris Kelly is from Morgan Stanley. He is going to talk to us about equity offerings and high-yield offerings by Latin American issuers. 

MR. KELLY: Thank you very much, Terry, for the introduction, and, Sam, for the introduction. It is a pleasure to be here today. I would like to talk a little bit today about just an overview of the current trends in the Latin American debt and equity markets, again from the perspective of an investment banker, and a defrocked lawyer, who has been working in the region now for many years. Let me just tell you a little bit about what I do for a living to put this in context. I spend 100 percent of my time working on transactions as a banker in Latin America, and I'd say I spend about 90 percent of that time working on public or quasi-public debt and equity offerings, large scale, either SEC registered offerings or Rule 144(a) offerings.

I think Bill in describing what a banker does in privatizations gave a very good summary of what the role is, in general, on any of these transactions. It's really to advise clients on structuring, timing and sizing these transactions, which are critical, I think for any issuer. But for Latin American issuers, it is very often the first time they'll be doing a large public debt or equity offering. And the advising as to the time and size is very important. Secondly, we work with the lawyers and the accountants and the other parties that come together in putting one of these transactions together. Finally, we work on marketing the transaction and developing, not only the marketing thesis in the disclosure document, which has legal aspect, but, also, we work on putting that together with a working team, and then enlisting the sales force in the company, take them out on a road show to market the transaction to institutional investors. 

I guess the last part of it is something that Bill touched on is probably the least obvious. But in some ways, the most challenging part is mobilizing the resources of the whole institution. The institution that I am affiliated with is a very large institution, and on transactions that we work on, there tend to be many bank institutions lined up. So a big part of the challenge, a big part of my job, is being sort of the orchestra conductor to bring all of the different pieces of one institutions, a series of different institutions together, to get a successful execution of a transaction. 

I would like to very briefly give a little bit of an overview of the economic environment for Latin American issuers, and then briefly touch on current trends, some historical trends, and sort of where the markets are today for issuers of debt and equity in Latin America. I just want to overview and put things in context. Sam provided a map. I also wanted to give a sense of the relative size of these economies. People talk about Latin America, but in at least for our institution, and I think this is true generally for investment banks, there really is a big three of Brazil, Mexico and Argentina.

This next chart shows total market capitalization, which gives some proxy for the depth of the local financial system in each of the countries. The lineup is pretty much the same with one notable exception which is the Chile, although much smaller in terms of its GDP, comes in third place in terms of market capitalization, which is kind of a surprising result. But, again, to follow up on a theme that Sam mentioned, I think there are a number of reasons for that, but I think at the very top of the list has to be pension reform. I think liberalization in the Chilean economy, in general, but the pension reforms have created a liquid local market for issuers of equity and of debt. That has created a much, much deeper market than you would normally expect to find, given the size of the Chilean economy. 

And if you look on the equity side, companies that have their American depository receipts, which is the form that most foreign companies list their equity in the United States, Chile has a disproportionate number listed in New York, a somewhat surprising and counter intuitive result. As Sam also mentioned, these economies, obviously, are all growing. Morgan Stanley's estimates over 4 percent for the 1997 GDP growth rate, including, in the case of Mexico, which is, obviously, still pulling out from what was. I think people forget how deep and painful the recession that Mexico went through. All of these countries continue to be back on track and growing. These are large economies that are growing at a clip certainly faster than the OECD countries. That creates a very positive environment for investment and for equity investment, in particular. 

The final chart on the macroeconomic sector shows inflation rates in each of these countries, which is obviously one of the main investment risks for anyone in the region. Obviously, in the case of Argentina, there was no inflation at all last year, and this year the inflation rate is under 3 percent. Brazil is a country that obviously, until quite recently, was hyperinflationary. That's also been brought down to single digit numbers. 

Mexico is somewhat the unusual case. Huge spike in inflation, although still double digit inflation, which by historical Latin American standards is not too bad. That's come down; although, it is still obviously the highest of any of the three big economies in the region. This shows the historical 10-year U.S. treasury yield, going back quite a long way, back to 1973. And I think the point here is just to put in context the issuances. Whether debt or equity, I think we need to take a step back and look at the debt and equity markets, in general, over a long-term perspective, and what you will see is despite in very recent weeks an uptake in interest rates, on a very long-term historical rates, we are operating, and have been operating for a while, in a very benign interest rate environment. This is an environment where the cost of money is at relatively low levels, and that's been part of the impetus for some of the issuance on the debt side.

This similar chart shows what is called the spread over U.S. treasuries, which is the incremental amount that corporate borrowers have to pay over to the U.S. Government borrowing costs for a 30-year instrument, based on different degrees of rating for investment-grade credits. The bottom line is for triple A credits, so the very, very best corporate credits, and you will see that those spreads have tightened to where now the very, very best credits can borrow at about 50 basis points, or half a percentage point in terms of interest higher than what the U.S. Government borrows at. Again, very favorable interest rate environment, which also carries over into the Latin American context. This one is, for those of you who are fortunate enough to have invested in the U.S. stock market for the last couple of years, is rely quite a remarkable, probably the most remarkable fact that I am going to review today. But, again, one that has direct impact on what is going on in Latin America. It's the increase over about the last 12 years in the Dow Jones Industrial Average, and obviously a tremendous run-up, particularly the last two years. It is something as an investment banker in Latin America, trying to bring issuers to market is something we have to contend with constantly, convincing investors, whether they're equity investors or debt investors, to make an investment. At the end of the day it is a volatile and risky asset class when returns like this are available in more developed markets. Now, whether, as we speak today, putting fresh money into the Dow Jones index, or into the Mexican index is a riskier investment is something everyone can make a decision about. I would like to say a little more about that little later on. 

But this is a salient fact that we face every day, whether we're out trying to pitch new business, or whether we're taking a company out on a road show. In terms of general -- I would like to shift now and say a little bit about debt, what is going on in the debt capital markets, then I will shift to the equity capital markets. As Sam mentioned, issuance hit a record high in 1996, it was a banner year for Latin American public debt issuances at $53 billion. Argentina, Mexico, Brazil, were not surprisingly the main issuers here. These number are from Securities Data Corporation. They're a little different from Sam's. One of the things about working in this region is that you take data cum grana solice (phonetic), you take the best data you can. Data on this region rarely agrees from two different sources, but I think that the trends that we will see are pretty much consistent. 

The profile of issuers continues to change. Sovereigns continue to be the most important issuers, particularly the sovereigns and sovereign-related entities from Mexico and Argentina. But what you will see is an increase of corporates, and I think that is one of the most important developments over the last two years. It is not only the amount of the debt that is coming from Latin corporate issuers, but the way investors are looking at corporate debt from Latin America. Euro bonds continue to be the main bread and butter of the business, but U.S. public and global transactions, which would be the kind that I would typically get involved in, are increasing in importance. Registered so-called Yankee deals in the United States, and 144(a) high yield transactions are going to be increasingly common. I guess the most striking increase, even though more striking than the huge increase in the size of issuance in 1996, has been what's happened to the maturity profile, which has increased, I believe, three fold from year end 1995.

Finally, just the very, very recent events, obviously there's a fair amount of turmoil in the interest rate environment here, obviously that will have an affect on the Latin markets. But I think that the trends that are going on in Latin America are a bit longer-term trends, so there can be a little bit of a decoupling between what is going on in U.S. interest rate environment and what it means for a Latin issuer.

The next shows the trend over the last few years in issuance from -- for all forms of debt from Latin America. It shows nice steady growth, but the 1995 to 1996 shows a really quite dramatic increase. Part of that is due to the general recovery, I think, of the environment for Latin issuers. Part of it has to do with the fact that interest rates have been so favorable, and part, I think, has to do with the fact that now that companies are able to and governments are able to go further out on a maturity curve, they are taking advantage of that in more and larger transactions. 

This pie chart is actually not new issuances, which was the last graph, but this is total outstandings, and so this, I think, is a number compiled by Morgan Stanley Research. This is a very fuzzy number, I think, because it was quite hard to know what the total outstanding debt from Latin America is. But, it gives you a rough idea of how it breaks out. 

Starting at the top, you have a bank debt, which if you combine with leverage bank debt, which is the more risky bank borrowers, is about a quarter of the market. If you group together Brady bonds and the Euro bond and the Yankees, you have maybe another quarter of the market Another quarter is the local currency market, which is something we don't get too involved in, so you tend to forget it, but, obviously, there are local banks, and there are in countries like Brazil and Chile, Argentina, local opportunities to issue in the local capital markets.

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