Public Disclosure Authorized
STUDIES IN DOMESTIC FINANCE NO. 60
AN ANALYSIS IN DEVELOPMENT PERSPECTIVE
OF BOLIVIA'S LARGEST PUBLIC ENTERPRISES: Public Disclosure Authorized COMIBOL, YPFB AND ENAF
by Public Disclosure Authorized Jacob Meerman
Public and Private Finance Division Developmeut Economics Department April 1980
Public Disclosure Authorized This paper was completed in June 1979, and revised in April 1980. Tt is based on data available up to March 1979. TABLE OF CONTENTS
page Introduction iv
Sumary V
The Mineral Sector and Bolivia'å Development
Foreign Exchange and the Enclave Economy
Fiscal Aspects 4
Development Strategy and the Mineral Sector 9
Goals of the Public Enterprises
The Government's Perception of Goals for the Public Enterprises 13
Financial Surplus as the Objective for the Big Three 22
Implementation of the Goal of Financial Surplus 27
ENAF 27 COMIBOL 29
Controls and Goals
Control Mechanisms 37
Effectiveness of Controls 43
Investments 43 Control of Operations 46 page
The Question of Labor
Union Power 51
Production and Labor Data 54
Labor Problems and Prescriptions 60
A Labor Recomendation 62
Appendices
The Mineral Sector and the Supply of Foreign Exchange 67
World Bank Support for Minerals Development 71
Description of the Minerals' Section 75
Mining 75 Hydrocarbons 81 Metallurgy 86
List of References 88 LIST OF TABLES
Page
1: SHARES IN TOTAL EXPORTS OF GOODS AND SERVICES'BY COMMODITY AND MAJOR PUBLIC ENTERPRISES, 1976 - 1977 3
2: PERCENT SHARES IN CENTRAL GOVERNMENT TAXES BY TRADE, MINERALS, YPFB AND COMIBOL,1974 - 1978; 6
3: GDP, CENTRAL GOVERNMENT TAXES DISTRIBUTED BY MINERAL AND TRADE SECTORS, DEPARTMENTAL TAXES PAID BY YPFB AND COMIBOL, 1974 - 1978 7
4: FINANCIAL PERFORMANCE OF COMIBOL ENTERPRISES, ACTUAL 1977, PROJECTED 1979 31
5: TIN PRICES IN BOLIVIAN PESOS AND US DOLLARS, 1970 - 1978 32
6: YPFB, PRODUCTION AND LABOR DATA, 1972 - 1978 55
7: ENAF, PRODUCTION AND LABOR DATA, 1973 - 1978 56
8: COMIBOL, LABOR COSTS, 1970, 1973 - 1977 57
9: VALUE OF PRINCIPAL MINERAL EXPORTS, 1971 - 1978 64
10: DISTRIBUTION OF PRINCIPAL MINERAL EXPORTS BY EXPORTER, 1975 - 1978 65
11: DISTRIBUTION OF SALES OF TIN TO ENAF AND ABROAD BY SUBSECTOR, 1971 - 1978 66
12: FOREIGN EXCHANGE AND EXCHANGE RATES, WITH AND WITHOUT MINERAL PRODUCTION 68
13: CAPSULE DESCRIPTION, WORLD BANK ASSISTANCE TO MINERAL SECTOR 74 -iv-
Introduction
This report is concerned primarily with the performance of Bolivia's three main public enterprises in mining and petroleum. Together these three produce more than half of government taxes and more than three quarters of foreign exchange. They are basic to the Bolivian economy. The Bank has become involved in Bolivia's mineral sector. It is possible that some of these enterprises may receive loans in the future. The three enterprises are, therefore, not only of interest to the Bank because of their effect on
Bolivia's general economic prospects but in their character as possible loan recipients.
The Big Three have what might be called the classical problems of public enterprises: The problem of multifarious and competing objectives; the problem of how they relate to and are controlled by the central government; and the problem of labor. The report addresses each of these.
The report can also be seen as a contribution to the discussion within the Bank as to what the Bank's basic approach to public enterprises and their problems should be.
The central argument in the paper is that Bolivian growth and welfare would be best served if the Big Three maximized their financial surplus. To this end redefining government controls over the Big Three is desirable, and labor policy needs to become more output oriented. Such an approach is very -v -
remote from current thinking and practice in Bolivia. Consequently the re-
port looks to the long run, and foresees an on-going dialogue between Bank
officers and Bolivian officials.
In the last five years, the financial-performance of the Big Three
has been very good in comparison with the decade of 1963-1973. This is because
of a combination of unusually high prices for their outputs and unusually
effective policies of the central government which have forced the Three to
meet their tax liabilities. At present, June 1979, these very favorable output
prices persist. Both hydrocarbon and tin prices are at record levels. However,
the orientation of the government toward generation of financial surplus may
not persist. Much of the potential surplus which this extraordinary situation
. could call forth may not come about, unless the measures suggested in this
paper, or something akin to them, are carried out.
Summary
As noted the Big Three consisting of COMIBOL (Bolivian Mining
Corporation), YPFB (Bolivian Petroleum Company) and ENAF (National Smelting
Corporation) account for most taxes and foreipn exchanee. They alsc account
for"nearly all activity in the petroleuM sector and about three quarters of
all value added in mining. Yet their share of total employment is very low.
In fact the mineral sector in total - mining,smelting,petroleum production
and petroleum distribution - employtless than 5% of the labor force.Their -vi-
share in value added to GDP was about 11% in 1977. Further develop- ment of the mineral sector, including a possible. future petrochemical industry, will not change this picture. The sector will continue to have weak internal linkages with very limited employment. Minerals' production, however, is also
extremely profitable Economic rent from such production is generally a multiple of costs. Rents from mineral exploitation are obviously prime targets for mineral taxation.
These considerations, namely the enclave quality of mineral pro- duction and the associated high rents, suggest that the sector's logical role in Bolivia's development strategy is one of producing a surplus to permit investment in other sectors - agriculture and education for example - with more substantial potential for development. Development is seen here as a process of structural change, involving reduction of dualism in Bolivia and eventual movement of the entire population into a more productive modern economy.
Consequently, the basic objective of the Big Three should be maximization of financial surplus to provide resources for the development program. Consideration of other basic goals for the Big Three as reflected in Bolivian practice does not alter this conclusion. To some degree this basic goal of maximizing financial surplus needs to consider idiosyncratic characteristics of each of the Big Three. -vii-
The problem of price distortions which means substantial divergence between allocative efficiency or what might be called efficiency in use of re- sources,and financial efficiency is a minor one with respect to these export- oriented enterprises. Prices received for production are given so that maximization of surplus resolves to a large degree into a problem of minimizing costs.
Acceptance of financial surplus as the basic enterprise objective has important implications for central government controls over the Big
Three. The basic argument here -is that if management performance is evaluated and rewarded primarily according to the surplus criterion, some of the existing controls by ministries and other central authorities will noi be needed. Such controls are designed to assure that managements will act in ways consistent with public goals. They are useful to the degree that there is divergence between the goals of managers and those of the community. If, however, the rewards to management are largely in proportion to feasible surplus targets any such divergence will be greatly reduced.
COMIBOL has sixteen separate enterprises. At present these enter- prises are centrally controlled. A more effective arrangement be de- centralization of COMIBOL coupled with financial surplus goals for each enterprise.
The quality of recent investment by the Big Three has been controversial. Pro- bably closer central government guidance in developing the investment programs of the Big Three is needed. But this will not solve the problem. Because of the - viii -
shortage of technical knowledge and because of the political dynamics of
Bolivia, there is a tendency toward undesirable investments. It might be wise to have independent expert consultants contracted by the Ministry of
Finances review major investment proposals at an early stage.
Labor is a serious problem in achieving financial efficiency. The unions of the Big Three are strong, militant and capable of catastrophic strikes. A strike by YPFB's union can paralyze most market activity as all motor vehicles literally run out of gas. Strike by the unions of COMIBOL would result in a foreign exchange crisis within several weeks.
If financial surplus is the goal, then labor costs are excessive.
In the case of YPFB they have risen rapidly since 1973. In the case of
COMIBOL they are about a third of value of sales, compared with about 20% of value of sales for the private mining sector. Acceptance of financial surplus as the goal for the Big Three would imply substantial changes in government policy and practice with respect to their labor force. Develop- ment of a basic labor policy for the Big Thee (and other public enterprises) is needed in general and in particular if the Government accepts financial surplus as the basic objective of the Big Three. A study of what such a policy might be is needed. It would need to focus not only on the impli- cations of financial surplus as the basic goal for labor policy, but also what would be politically feasible in Bolivia. The Mineral Sector and Bolivia's Development
Foreign Exchange and the Enclave Econcmy
As indicated in Table 1, three quarters of Bolivian
foreign exchange was earned by the mineral sector (mining plus hydro- l/ carbons) in the years 1976-77. Agricultural exports accounted for the
small remainder. Foreign exchange earnings not only depend overwhelmingly
on the mineral sector, but also on the three major public enterprises within the sector, CONIBOL, the national mining corporation, YPFB, the 2/ national oil company, and ENAF, the national smelter corporation. Table
1 also shows that the Big Three generated over half of Bolivian foreign
exchange in the same two years. (The table includes the imputed value of foreign exchange saved by ENAF.)
In many mineral economies the mineral sector also generates most of GNP so that the ratio of exports to GNP is very high. Bolivia is not part of this group but is rather a moderately open economy. Value added
in the minerals sector has varied from 10* to 11* over the last decade.
For 1976-78 merchandise exports averaged 20% of GNP. Many economies with-
1/ As indicated in the table only Bolivian sources of foreign exchange are included. Foreign sources, above all loans to the central govern- ment and to public etterprises, generated $280 million and $439 million in 1976 and 1977. (These are gross.) See IMF (1979) p. 77. Since loans are usually repaid - and . account for most of Bolivian capital flow - in the long run most of the foreign sources balance out to zero. Public debt service in 1978 substantially exceeded incoming foreign capital.
2/ Corporacion Minera de Bolivia; Yacimientos Petroliferos Fiscales Bolivianos; Empresa Nacional de Fundiciones. ENAF is still relatively unimportant but it is growing very rapidly. -2
out mineral production and about the same population as Bolivia are far more
open, that is brave a larger share of GNP entering into international trade.
Nevertheless the failure of other sectors to produce more exports,
suggest's that the development of the minerals sector has, as an inevitable
byproduct, reduced the development of alternative exports. This
is particularly true of agriculture, which after minerals has the
greatest comparative advantage in export-production. In brief, were Bolivia not a
mineral exporterno doubt the exchange rate would be considerably more favor-
ful for exports with a greater production of agricultural exports the conse- 1/ quence. Of course overall resource use in the economy would probably also be less productive. Such an outcome, however, is not of necessity. It may be that the development of an agricultural export sector, including process- ing industry and other linkages as well as induced investment, could have resulted in a current Bolivian economy as productive or even more productive per capita than the mineral-oriented economy which now exists. One .reason why this outcome is possible is that Bolivia has far above average agricul- tural potential, and the agricultural counterfactual would be one in which a far larger share of the population would be involved in export production than is currently the case. The entire mineral sector of Bolivia employs less than 5% of the labor force. In addition because of a less favorable exchange rate, the possibilities for import substituting industrialization would hive been better than is actually the case.
1/ See Appendix 1 for an illustrative estimation of the effects on the foreign exchange market of the disappearance of the mineral sector. -3-
Table 1: SHARES IN TOTAL EXPORTS OF GOODS AND SERVICES BY COMODITY AND MAJOR- PUBLIC ENTERPRISES, 1976 - 1977
1976 1977
Metals-1 48.3 59.5 Hydrocarbons 26.4 18.6 Agriculture 12.2 9.8 Timber 1.6 1.7 Services 11.5 10.6 100.0 100.2
COMIBOL 22.7 33.6 YPFB 26.4 18.6 ENAF- 1.4 2.0 Combined 50.5 54.2
Total value C$US 000,000) 634.8 725.1
1/ Reduced by realization costs (freight, refining, and smelting). Includes non-monetary gold.
2/ Difference between value of sales and costs of concentrates pur- chased.
Source: Balance of payments data, IMF (1979) pp. 77-79; World Bank, Bolivia (1978) p. 59. Enterprise data derived from enterprise balance sheets. -4-
The most basic point to be made here is that reliance on mineral-- production as the principle vehicle of modernization has brought the develop- ment of an enclave economy which is integrated to a far greater degree with overseas production than it is in Boliva. Employment in the sector is very low (5% of the labor force), and cannot be expected to rise much. One might sum up this state of affairs .by stating that a large minerals sector 1/ provides a great deal of resources, but it provides little development.
Fiscal Aspects
Table 2 shows that Bolivia is also extreme in its dependence on the mineral sector for public revenues. Over the five years 1974-78, 62% of total central government taxes have been levied on mineral production.
If the perspective is the long run or general equilibrium, then the data in lable 2 somewhat exaggerate the dependence of the fiscal autho- rity on mineral,s. If there were no mineral sector, the Bolivian exchange
1/ Nankani (1978). Thus far what little linkage there has been has also been very capital intensive; e.g. YPFB refineries, and ENAF smelters. The recently completed expansion in tin smelting by ENAF was not necessarily the best use of the resources so Jnvested. The world- wide glut of tin refinery capacity - now that Indonesia, Thailand, and Malaysia have all completed their smelters - means that refinery costs are very low. It is not completely clear that the of millions of dollars used to develop the Vinto Tin Refinery for the most easily re- fined tin ores in the country would not have netted a higher rate of return in further development of agricultural exports with greater impact on employment a further consequence.
...... -5-
rate would depreciate, thus favoring exports of goods and services. Pro-
duction in agriculture for export would greatly increase. As in-
dicated in Appendix 1, the drop in foreign exchange earnings rather than being
three quarters might be about a half, with an exchange rate depreciation of
possibly over a third ($b 31 to the dollar). With no mineral sector in the
picture, therefore, the total value of import duties might be somewhat higher
per dollar of imports. A reduction in total imports duties of say 40% might be a reasonable assumption. This long run comparison, however, still implies
that the mineral sector accounts for about half of total central government taxes-
in general equilibrium perspective-as indicated in the fifth row of Table 2.
Notwithstanding the heavy taxation of minerals, the overall tax to
GDP ratio for the central government is less than 11%. For a country with
Bolivia's level of income per head and structure, this is extremely low. A normal ratio would lie between 14% and 18%. The mean for a sample of 47
developing countries for 1972-76 was 16.1%. In the "tax effort" comparison from the same study, Bolivia ranked 38 of the 47 countries. This was quite
a movement upward from its position in a similar earlier comparison. For
1969-71, Bolivia ranked 46 of 47.1/
1/ Tait (1979), p. 8. Tax effort studies use regressions in which the tax to GDP ratio is the dependent variable and the independent variables measure taxable capacity. The R2 in such work rarely exceed .45. The residual can be ascribed to effort. Tait et al (1979) agree that this is too much to ascribe to effort. A host of factors beyond government control and possibly not readily grasped in statistical formulations probably account for much of the unexplained variance. -6-
Table 2: PERCENT SHARES IN CENTRAL GOVERNE1NT TAXES BY TRADE, MINERALS, YPFB AND COMIBOL 1974 - 1978
Mean 1974 1975 1976 1977 1978 1974-78
International Trade 55 54 48 52 55 53
Mineral Sector- 70 62 61 56 61 62
COMIBOL and YPFB= 56 53 53 48 48 52
Total Central Goverment 100 100 100 100 100 100
Mineral Sector (long term). 62 51 51 46 51 52
Tax/GDP (%) 10.8 10.9 10.8 10.1
1/ Includes taxes on imports paid for by the foreign exchange earned by the corresponding exports.
2/ Includes taxes on imports paid for by the foreign exchange earned by COMIBOL and YPFB.
3/ Assumes disappearance of mineral sector with a 50% reduction in imports, and a 40% reduction in import taxes as result.
Source: Derived from Table 3. 7-
Table 3: GDP, CENTRAL GOVERNMENT TAXES DISTRIBUTED BY MINERAL AND TRADE SECTORS, DEPARTMENTAL TAXES PAID BY YPFB-AND COMIBOL, 19744978. (millions of Bolivian pesos)
1974 1975 1976 1.977 1978
GDP 44,343 50,188 58,949 71,282
Central Government Taxes 4,807 5,481 6,393 7,215 9310
Mineral Sector 2,510 1,961 2,536 2,434 3,715 YPFB 1,255 1,152 1,608 1,178 1,348 COMIBOL~ 748 522 607 881 1,566 Private Mines 507 287 321 375 801
Taxes on Imports 1,146 1,894 1,833 2,149 2,656 Import Duties 968 1,650 1,578 1,837 2,280 Tax on Foreign Exchange Sales 178 244 255 312 376 Other Taxes 1,151 1,626 2,024 2,632 2,939 Import Taxes Attributable to Minerals 860 1,421 1,375 1,612 1,992
Total Taxes .Attributable to Minerals 3,370 33,82 3,911 4,046 5,707
Total Taxes on Foreign Trade 2,623 2,949 3,082 3,770 5,152
Devartmental Taxes YPFB/COMIBOL 753 540 639 688 790
YPFB 547 460 560 478 520 COMIBOL 206 80 80 110 270
Sources and Explanation
Social security contributions are excluded from taxes. Total tax data are from IMF (1979) Table 29. This total was related to mineral taxation by en- tity derived from IMF (1979) Table 32 (YPFB), Table 33 (COMIBOL) and Table 29 (private mines). The rather small amount of indirect taxes paid by COMIBOL and YPFB are included in their tax totals. That part of COMIBOL's tax-liability to the central goverrnent which was retained by COMIBOL as a "tax-expenditure" for services rendered on behalf of the central government has not been included as COMIBOL taxes and therefore is not in the total tax amount. Beginning in 1975 part of COMIBOL's regalias paid to the central government have been retained by ENAF. Because information on the retention is inadequate the resulting small error has been carried forward in the calculation in the form of a failure to increase the total tax by the amount of this tax-expenditure or subsity to ENAF. Sources and Explanation (Cont'd)
Import taxes are as given in IMF (1979) Table 29. The share of total import- taxes accounted for by the mineral sector is simply taken as :.equal to the mineral sector share of total foreign exchange (75% in 1976) as given in Table 1. The row "total taxes on foreign trade" is also from IMF (1979) Table 29. A substantial share of mineral taxation is levied on domestic consumption of petroleum products ($b. 877.4 million in 1978). GDP are from World Bank, 1978) p. 52. -9-
Development Strategy and the Mineral Sector
Bolivia's extreme dependence on mineral exports for both foreign exchange and fiscal resources will persist for the forseeable future. This implies that some attention to the long run optimal development of the minerals' sector is in order. Among other things this means determining the degree
to which natural gas exports can replace petroleum exports. It also means attention
to mining and whether new technology will make mining Bolivia's low grade ores could re- more profitable, or whether substantial expenditure on exploration
sult in a substantial increase in average metal content of ores.
There is also the strategic question of how far to develop smelting 1/ and refining:
ENAF's investment plans raise issues related to their magnitude in the light of competing claims on funds for priority projects in other sectors and more generally, the viability of establishing on a substan- tial scale a capital intensive, technically advanced metallurgical in- dustry in Bolivia within a relatively short period... there is as yet no comprehensive analysis of the feasibility of an extensive metallurgical industry in Bolivia within the Bolivian economy nor a consistent policy for such industry. On the project level, hardly any rate of return nor market analysis have been made so far, over and above preliminary tech- nical studies on some projects. Consequently, costs and benefits to the economy of expanding smelting and refining are not yet clearly established. The feasibility of smelting and refining projects generally depends on energy costs, plant size and its effects on operating and investment costs market prospects, long-term supply of concentrates, and avail- ability of skilled manpower. The balance of these elements in recent years appears to have shifted somewhat in favor of countries like Bolivia with a cheap energy base, although investment costs since the early 1970's have increased significantly more than metal prices, thus :reducing operating margins. _While it is evident that a shift to ex- porting refined metals instead of concentrates would reduce transport raf1-m,m zfingce.ots-ah4road--andthus, -incr-easa-nt-xpoart--earnings-f--- -_____ viable mining operations would normally offer higher returns than smelting/ refining. Therefore, any gains from expanded refining have to be weighted against the foregone benefits from a correspondingly higher in- vestment in mining which at any rate, is bound to remain the more im- portant seement of Bolivia's corbined mining and 1"etallurgical sector.
1/ World Bank (1976), p. 44. - 10 -
What might also prove useful is a projection of foreign exchange
earnings (and demand) over the next ten years under plausible scenarios
about major mineral investments (particularly as concerns natural gas) and
foreign exchange rates. One reason why such an exercise would be helpful is
that it would have strong implications - depending on what the likely long
run exchange rate would be - for the financial viability of COMIBOL. (An
enormous increase in natural gas exports could mean an exchange rate not too
far from the current one with - serious financial pressure on CONIBOL a likely
consequence). The implications of such projection for possible growth of
other exports would also be of value.
But in longer term and more basic perspective it is clear that
Bolivian growth requires export diversification. In small countries, deve-
lopment of exports is necessarily the leading sector or "engine of growth."
In Bolivia this has always been minerals. However even a rapidly expanding
mineral sector cannot be expected to absorb more than five percent or so of
the labor force. Nor will a petrochemical or metallurgical industry based
on mineral extraction change this picture. These are highly capital intensive
industries whose labor requirements are small and for the highly sklled, that is
types of labor in which Bolivia does not have a cooperative advantage. "As
an illustration, ENAF estimates that it will need in the next five years about 180 university-educated engineers and business administrators, 290 1/ medium-level technicians and 700 skilled workers." This is an insignificant
1/ World Bank (1976) p. 45. . - 11 -
share of the labor force. The country needs to look to other sotirce of growth.
Here the most obvious candidate is agriculture, with its many linkages on both 1/ the input and on the processing sides:-
The future of Bolivia's industrial sector will, to a large extent, depend on the development of export-oriented activities. Import substi- tution offers limited possibilities for Bolivia because of the narrowly circumscribed domestic market. A promising approach to Bolivian in- dustrialization could be the development of a diversified manufacturing sector based on the transformation of the country's natural resources... One area warranting particular attention is further development of agro- industries linked to an export-oriented development policy. The indus- trial groups to be considered include: processing of juices and citrus concentrates, tropical fruits and nuts, palm hearts, fats, lard, dis- tilled liquors and beer, cotton yarn and progressively finished tex- tile goods, hard and soft wood derivatives, fine leather goods and foot- wear, cocoa products, alcohol, herbicides, fungicides and insecticides, nitrogen fertilizers and milk and meat processing tied with the develop- ment of the livestock industry. The sugarcane industry, in addition to continuing to producesugar and molasses as its primary product, could give rise to sugar refining, ethyl alcohol and other fermentation products plus their chemical derivatives, fabrication of board/panels and pulp paper from bagasse..
This view in turn implies that more so than in other countries, whose development can be seen as a natural process, Bolivian development must rely strongly on government investment as its impetus for diversification as a sort of counterweight to mineral activity. Important sectors for such investment are obviously not only agriculture but also education. (Less than half the popu- lation of elementary school-age is attending school.) But a danger in Bolivia is, as it has been in the past, that the government will use a very large share of fiscal resources to maximize employment in the public sector with little regard to the productivity of that employment. In the most general terms, rather than support investment, there is a strong tendency for the govern- ment to end by using those resources over which it has some control, overwhelmiggly
1/ World Bank (1978) p. 27. - 12 -
for consumption. Part of this outcome is due to the prevailing social ethic
in Bolivia with its strong emphasis on equity in consumption and on welfare in
general. In part it is due to the inherent political instability of the country, which results in a large share of government activity and public financial re-
sources being used not to foster development but to mitigate social conflict.
In addition when public investments have been made, as typically occurs during
export booms, their quality has not always been good.
It is unfortunate that precisely Bolivia,with its highly factional political structure and lack of ideological consensus, needs to rely more strongly than most developing countries on public decision-making,on the visible hand of the state, to foster development. - 13 -
Goals of the Public Enterprises
The Government's Perception of Goals for Public Enterprises
In Bolivia--as nearly everywhere--it is true that the goals, that what is
expected, of public enterprises, are not well defined. This is the con- clusion on reviewing a large sample of recent publications of the Bolivian public entities. In none of the relevant documents such as the reports and memoria of the Big Three was there much discussion of such goals. One could assert as a general preposition that the goals of public enterprises are so well known and so widely accepted that there is no need to make them explicit. This is not the case.Armine Choksi carried out a general study of public enterprises inter alia, with respect to the reasons for their creation. He compiled the following "partial list of the objectives 1/ of public enterprises:"
I/ Choksi (1978) p. 8. - 14 -
control monopolies control commanding heights
provide public services earn profits for investment
utilize resources efficiently prevent business failure
offset externalities increase employment
raise output reduce income inequality
stabilize prices promote regional development
set "modernization" example subsidize necessary commodities
earn/save foreign exchange promote primary exports
achieve socialism increase national self-sufficiency
enhance national prestige implement government policy
offset multinationals promote national security
train skilled managers and technicians
.provide entrepeneurial support/substitution
counterbalance power of domestic capitalists
The National Development Plan for 1976-80 gives little emphasis to
the problem of the public enterprises per se, and little attention to
the goals which they should be pursuing qua public enterprises. There is
also very limited attention given to public enterprise performance, and
the many problems associated with performance. In the Plan, the substantial
section on the public sector is general, historical, and descriptive, cover-
ing essentially the sources of funds, and their uses with emphasis on measure-
ment of current account surplus, and aggregate investment. The public enterprise recent contribution to gross investment is measured as well as their current - 1.5 -
exSndItures--but not their net investment or losses,
In reviewing the section on goals, objectives, and policies of
the Operational Plan for 1977, the basic objectives for that year are couched
in terms of the traditional concern with achieving targets for growth, in-
vestment, savings and exports. There is substantial detail on subsidiary
goals as well, involving financial intermediation, improvements in taxation,
incentives for import substitution, private sector development, rationalization
of public expenditure, and so forth. But there is no mention in
this general overall section of public enterprise goals or problems.
On turning to the plans for the operational sectors we have a similar
picture. There is no emphasis on public enterprises , and consequently no dis-
cussion of what they should achieve. The chapter on mining, for example, does not mention COMIBOL. The basic objectives given for the sector are diversifi-
cation of production, increase in productivity, and improvement of market penetration. The nearest to any statement of immediate application to the public enterprises is that a means to increase their productivity is to "in- crease the efficiency of the enterprises of the sector in a way which will promote the development of the country." Bolivia (1976) p. 48.
Malcolm Gillis has looked at the question of goals and means for the mining sector per se, and has reproduced his conclusions in detail in chapter one of his book. Gillis described his output as "apparent govern- ment objectives and policies: mining sector," and stresses that this is his
...... - 16 -
"interpretation of prevailing government policy objectives for the mining
sector, distilled from... government documents and from discussion with government officials." As one of the "proximate objectives" of government policy he lists: "higher productivity and efficiency, especially in nationalized mines." He follows this by a list of the government's pre- ferred instruments: a) rationalization of public investment decisions in the mining sector...; b) policies.... to promote higher recovery of metalic content in mining, beneficiation, and smelting; c) research and development activities...; d) tax reform; e) strengthening of accounting, marketing, 1/ and management methods..." Again, neither COMIBOL nor ENAF, nor public enterprises per se receive attention.
There is, however, one very important document which indicates substantial high level concern with public enterprise performance. And that is the famous Presidential Directive No. 2 of September 1977, "Prescriptions for Direction of the Decentralized Public Sector." The Directive is basic to the analysis in this report as concerns both public enterprise goals and government controls. Hence some discussion concerning its genesis, content, and impact is in order.
In Bolivia, the mid 1970s were in many ways years of substantial improvement in public administration. Increasing attention was directed to the public enterprises which were seen by many in the central government as continuing to be "out of control," pursuing their own rather than the national
1/ Gillis et al (1978), pp. 18 and 20. - 17 -
interest. Some of the specific - and frequent complains - were the poor
controls over public enterprise investments (and the poor investments which resulted) the mis-use of public monies and other resources, the poor
quality of management in most enterprises and the extensive expansion in
enterprise,"current expenditure," that is in costs. With the exception of the mis-use of public monies, all of these complaints are chronicled in
Presidential Directive Number 2.
Presidential Directive 2 was issued to deal with these problems.
It contains very comprehensive and very detailed prescriptions for their cure, In the most general terms, the prescriptions took the form of
developing procedures and guidelines through which the central govern- ment would exercise substantial control over the activities of the various decentralized entities.
One of the weakest aspects of Directive 2 is the fact that the prescriptions cover the entire decentralized public sector without distinction as to the character of the various entities: All "199 institutions" are subject to the same regulations, be they municipalities, COMIBOL, public works committees, YPF4 or agricultural customs stations. The Directive does this in spite of the fact that in its diagnostic section it points out as a shortcoming the failure of the central government to clearly distinguish between entities which produce primarily for markets and those that do not.
Coordination and control needs to be very different depending upon which category is involved. -18 -
This combining of market with non-market entities may be one reason why the guidelines and control-procedures appear to make sense for non- market entities, but are questionable in the case of the necessarily market oriented public enterprises. For example there is an enormous amount of attention denoted to the design, development and execution of pro- jects within a social benefit cost framework, and to controls by the Ministries of Planning and Finance. In addition a great deal of atten- tion is devoted to the requirements for developing centrally approved expenditure budgets as well as reporting requirements; e.g., quarterly exercution reports.
In contrast cost accounting - a matter of great importance to public enter- prises - receives zero attention.
The steering group to guide implementation of these prescriptions is to be the Council for Technical Direction of the Public Enterprises, des- cribed in the Directive as the "maxima entidad tecnica del sector empresarial publico." The Cquncil is to consist of five highly qualified professionals plus the ministers of planning and finance. The Council would have very broad powers and considerable resources. It could for example engage consultants. Its secretariate to provide technical support is to consist of employees of the Ministry of Planning. Some of its major responsibilities would include development of
"parameters" for measuring the efficiency of public enterprises. The Councilis also to establish "basic norms to supervise the operation of the public enterprises with respect to their administrative, economic, financial, technical and social aspects, and then apply them." In addition the Council is to review the annual budget of each public enterprise, and to control their investments by detailed review, with veto power, at the planning stage. - 19 -
The task of developing efficiency norms for public enterprises is, however, not left entirely to the Council. The Directive itself contains a limited discussion of what the public enterprises are supposed to achieve:
5. Criteria for measuring management efficiency
In order to measure the efficiency of the public enterprises from both management and national perspectives the following guidelines are to be adopted:
(a) (concerns the requirement that all public institutions enould sub- mit quarterly progress reports on programs and finances.) (b) In the future, the efficiency of public enterprises should be measured by means of technical, economic, financial and institutional indices as approved by the Council for Technical Direction of the Public Enterprises, and once the law of Public Eatarprises is approved, by the organism which said law should determine.
Without prejudice to the above the following criteria are to be emphasized:
1. Public enterprises should have minimal profitability, both financial and social, with respect to their assets, their patrimony,.and their sales..... In establishing these norms for the enterprises the techni- cal organisms which advise the Council for Technical Direction of the - Public Enterprises will take into consideration inter alia the following:
1) Government policy for the prices of the inputs and products of the enterprises. 2) Tax policy as it concerns the enterprises. 3) The technical, economic, and institutional character of the sector and of the activity to which each enterprise belongs. 4) Characteristics peculiar to each enterprise with respect to the realization of activities of social character and which might take precedence over the enterprises's own productive functions.
A draft of the law of Public Enterprises referred to in the quota- tion has been put forward by the Ministry of Planning and Coordination. It recapitulates much of the material in Presidential
Directive 2. If anything the various central mechanisms and reporting require- -20-
ments which it forsees imply an even greater degree of central government
control than the Directive. Unlike the Directive there is no reference
to a requirement for "minimal profitability."
As concerns basic goals in the draft"General Law of Public Enter-
prises,"we have the following:
The basic objective of the public enterprise is the efficient production and provision of goods and services so as to contribute to the country's economic and social development. Consequently, the utilization of re- sources, be they natural, human, zaterial, technical, financial or of any other type, should be subjected to national policy and strategy as established in the national development plans and the economic and financial regimen of the nation..... The economic activity of the State in the productive sectors for goods and services shall be limited by the principles which determine its role as an agent of change (empresarial). This consists, fundamentally, of the necessity to realize structural change in the economy of the country, to carry out investments and to develop the strategic sectors as well as activities of public necessity.
Putting this material, together what we have, as far as basic goals
are concerned, is a weak prescription toward financial profitability, as well
as social profitability. Neither concept is defined. Profitability as a
goal is however heavily qualified in the Presidential Directive - by the con-
cern with other issues such as pricing policy for inputs and outputs, tax
policy, peculiar characteristics of the sector and finally the possibility
of completely overriding, "activities of social character." It is clear that what is being offered here is not a strong prescription for financial viability.
In the draft law for public enterprises the profitability r,riterion dis- appears. In contrast the draft law stipulates that efficient production is the basic objective for public enterprises so as to promote development.
But what efficiency means is never spelled out. -21 -
Certain conclusions arise out of this review of goals:
(a) Apparently there is insufficient awareness of the basic differences between public enterprises and other public entities and, consequently, for the implications of these differences. Presidential Directive 2 with its emphasis on annual budgets, and control of "current expenditures," supports this conclusion.
(b) Although Presidential Directive 2 indicates substantial concern with public enterprise performance, there may not be sufficient awareness of the importance of stating and then applying clear performance criteria to manage- ment as a means of improving that performance.
(c) The connection between performance norms and central control and supervision of public enterprises may not be appreciated. Many of the controls suggested 'in Directive 2 as well as the draft law of public enterprises would be unnecessary, even disfunctional, were a consistent system of public enter- prise goals clearly spelled out and for which management would be accountable.
(d) There may be insufficient appreciation of the desirability of financial surplus (including tax revenues) of the public enterprises for
Bolivian economic development. The verb used above is "may be" since there is no doubt that one of the impulses for Presidential Directive 2 and its aftermath has been the Ministry of Finance's constant need for more revenues on the one hand and its need to reduce demands on those revenues on the other. - 22 -
Financial Surplus as the Objective for the Big Three
The desirability of financial surplus as a goal for the Big Three
becomes clear on consideration of Bolivia's development strategy. Emphasis
on an expanding mineral sector is desirable primarily because of the result-
ing generation of foreign exchange and fiscal resources,which are necessary elements
in fostering economic growth. Such generations are among the most basic objectives
of the Plan for 1976-1980. A glance at the other basic goals listed in the
Plan suggests that a policy of mineral expansion - with its weak employment
and linkage effects - is a poor means to ahieving those goals: National in-
tegration, more compact income distribution, increasingly productive employ-
ment, complete self-sufficiency with respect to food, export diversification,
and import substitution. All of these are all listed as Plan objectives.
And they are all poorly served by an expanding mineral sector per se. This
conclusion echoes the earlier discussion of the necessity for Bolivia's
structural transformation to involve a relative decrease in mineral production as a share of value added. Mineral production - in long run perspective and
somewhat paradoxically - should be clearly a means to achieving an economy in which minerals production plays a very limited role. Emphasis on mineral exploitation comes close to a necessary evil primarily justified because it is the most offective use of resources, by far, to generate both foreign exchange and fiscal resources. But because of its very limited employment and linkage effects, in the long runother activities must replace it. -23-
The above discussion has moved to the conclusion that emphasis on financial rate of return or financial surplus is badly needed as concerns
Bolivia's three mineral public enterprises. In fact, as the discussion below indicates, a financial surplus target should be a major public enterprise goal and achievement of such targets should bea major measure of performance for the managements of public enterprises.
Such exhortion may at first glance appear questionable because in many situations financial viability of the public enterprise is a poor gauge of public welfare. This is obviously the case where there is substantial dis- tortion of input and output prices of the public enterprises away from their scarcity value. Such distortion is often the result of the government's use of public enterprises to pursue policies which are often necessarily detrimental to their financial viability. For example in many countries the enterprises are used to promote the development of poor regions which results in high costs and reduced effective demand for output. A few industries are charactorized by declining long run marginal costs so that pricing according to economic value necessarily implies losses. Elsewhere the infant industry argument applies or the enterprise may become means to "affirmative action," in the US meaning of using employment and outputs as a way to foster development of disadvantaged minorities.
In Bolivia's mineral sector such special policies do not apply -24-
with the exception of the infant industry argument to ENAF. In addition price distortions, such as taxes and labor costs take on a new meaning where economic rent is so substantial, as is the case for YPFB and COMIBOL. In such situations economic costs of output cannot readily be equated to sales price, and unusually high taxes rather than being distort- ing can be a means of siphoning off economic rent.
In-addition to these considerations,as noted earlier, the weak
A linkages and employment effects of the mineral sector make its raison d'etre primarily that of producing development resources, both fiscal funds and foreign exchange. Far more than other sectors it is means rather than end in itself. All of this suggests that financial returns are in general a good indication of social profitability or economic welfare in the mineral sector.
In Bolivia, there does remain, however, a very important and complex set of goals directly competitive with that of maximizing financial surplus, namely increasing the welfare of employees. It is perhaps not too much to assert that the "social institution" concept of the enterprise is prevelant among Bolivian leaders and senior civil servants. This concept sets the objectives for enterprise - and above all the public enterprise - as maximiz- ing employment and worker welfare subject to the constraint of covering costs.
Gillis expounds in detail on COMIBOL as a good illustration of this "tradition":
1/ Gillis et al (1978), p. 58. - 25 -
There has been a tradition within COMIBOL of viewing the organization as a major social institution, as well as the major economic institu- tion in the country. Much of this tradition survives today, and top management of the enterprise tends to stress COMIBOL's substantial so- cial responsibilities in the fields of employment, education, nutrition and hospital care. Indeed, if the fulfillment of these responsibil- ities is viewed by a consensus of Bolivian society as matching public preferences for essentially public (or quasi public) goods, and if COMIBOL can perform these functions at lower social costs than the respon- sible government entities, a strong case could be made for continued adherence to the tradition noted above.
On the other hand, if the "social responsibility" of COMIBOL is defined as that of making optimum use of scarce mineral endowments for the bene- fit of Bolivian society as a whole, and if this requires COMIBOL to make the maximum possible contribution to public savings consistent with its fulfillment of this function, then the government (as the only shareholder in CONIBOL) might wish the enterprise to place a higher pre- mium upon more effective cost control and higher before-tax profits, leaving to the government proper the tasks of satisfying public wants for education, health and social development, with the greater fiscal resources that might be generated by a differently oriented CONIBOL.
A similar thought was expressed in the World Bank Report on
Bolivia's mining sector:
COMIBOL has been running an expensive program of fringe benefits and social services such as profit sharing, company stores and free hous- ing in addition to free education, health and recreation facilities which have imposed on COMIBOL a substantial financial burden and blunted a commercial approach to operations.
(It should be pointed out that COMIBOL receives a certain amount of compen- sation. from the central government for these services.)
As the quotation suggests, Gillis also probably would accept the argument made earlier that mineral production makes most sense as a means of generating resources for development. Applying this to past COMIBOL labor
1/ World Bank(1976) p. 14. - 26 -
policy in particular, the argument would be that the resources consumed by
COHIBOL because of excess workers and perhaps excessive benefits for workers
could be used far more beneficially to say increase primary education, deve-
lop agriculture or reduce contagious disease. This set of issues is also dis-
cussed later in the section on labor problems.
It is also useful to clarify the relation between'finaiicial surplus, central
government taxation and rate of return to capital. At the beginning of the paper the very considerable recent contribution of the Big Three to fiscal resources was
discussed. In recent years they have accounted for well over half of central government tax revenues. This experience reflects both the fact that Bolivia experienced an export boom in the mid 1970's, and the strong fiscal pressure of the Banzer Government on the public enterprises. With the exception of ENAF from 1974 through 1978, apparently the Big Three largely met their fiscal liabilities. It has been argued that full payment of taxes while covering costs is an adequate financial goal for the public enterprises because of their social responsibilities and other goals. The discussion above re- jects social responsibilities as an ultimate goal of the Big Three. This leaves primarily maximizing fiscal resources and foreign exchange as goals for mineral enterprise. The corollary to such goals is that financial surplus should be maximized.
From the perspective of alternative costs, the government should generate a larger surplus through investment in the Big Three than would be possible were - 27 -
it to invest equivalent resources in other activities. In general the capital
invested in the Big Three should earn the scarcity value of capital in Bolivia.
It is difficult to determine scarcity value because of the large but variable amount of economic rent attendant on production of minerals. To determine a benchmark for the scarcity rate of return, is therefore, a complex undertaking.
Commercial banks in 1979 lend at 19 percent annually for "general industrial
credit." Presumably the nominal rate of return of the borrowers which is to
say the scarcity value of capital, exceeds 19 percent. Part of the 19 percent
covers inflation. So the implied resource return is less.
To sum up the discussion thus far, the Big Three should have as their
long term ideal, three increasingly stringent financial objectives:
1) They should cover costs (including a reliable estimate of de- precation).
2) They should fully meet their fiscal liabilities.
3) They should earn a net rate of return about equal to the going rate of return to capital in Bolivia.
We can sum this all up by stating that the basic objective of the
Big Threeshould be maximum financial surplus. Notwithstanding this tripartite
idreal, circumstances peculiar to ENAF and COMIBOL may preclude its attainment
even if managements are reasonably efficient in these two enterprises. In all
cases, however, the underlying goal of maximum financial surplus (or minimum
financial loss) remains the basic objective.
Implementation of the Goal'of Financial Surplus
ENAF Thus far the central government has required ENAF to smelt its ores -
exclusively tin and antimony - at prices competitive with posted prices of
overseas smelters. This in effect gives ENAF an infant industry subsidy - 28 -
equivalent to the total costs of transport, and insurance. Fuel oil, an 2/ Costs important local input, is purchased far below world market prices. of labor should also be low.* However ENAF's competition is set by the world market prices of smelting tin and antimony. The most basic question is whether
ENAF can be competitive with its costs of production, at the exist- ing rate of exchange. The fact that Bolivian exports account for about a fifth of GNP and that some agricultural outputs are exported in competition with those of other countries, suggests - along with the other data above - that the exchange rate does not preclude financial profitability for ENAF. Never-
theless, because of the exchange rate filter and the dearth of similar activity in Bolivia, it is not clear what ENAF's expected financial performance should be assuming reasonable management efficiency. Some attention to Bolivian costs
structure compared with that of other smelters and how they are modified by
exchange rates is probably needed before hazarding a financial target for ENAV. ENAF's position as a government imposed monopsony ore-buyer is cause for concern. Thus far ENAF has used the monopsony position to purchase only those tin concentrates which it can smelt wilzh least difficulty. The temptation to push down prices of its purchases remains a strong one. Never- theless it is clear that financial returns - and thus government revenues - to COMIBOL and the other mines depend on receiving as high a price for their ores as possible. It is clearly very undesirable for these firms to subsi- dize ENAF, or to be put into the position of potentially financing ENAF.
1/ Because of the glut of tin refinery capacity, posted prices for smelting are higher than actual (negotiated) prices so that to small degree those who sell concentrates to ENAF also subsidize ENAF, since they receive prices net of posted treatment costs. is 2/ In ENAF (1978) on p. 25, total consumption of fuel oil by ENAF in 1977 given as 28,717 barrels (3,424 million liters) at an average cost per barrel of $6.56. If the shadow price of fuel oil was $15, the subsity was $242,424. In 1977 ENAF's margin between amount paid for minerals and amount received was $14,669,383 - (ENAF profit and loss statement for 1977). So the fuel oil subsidy was 1.6% of operating costs. - 29 -
This reasoning suggests that ENAF's monopsony be withdrawn.
In more general terms the discrepancy between economic values and
Bolivian prices for inputs and outputs of ENAF implies divergence between
allocative efficiency and financial efficiency. It may make sense both to
explicitly discuss such divergence in any effort to develop targets of finan-
cial performance for ENAF and to discuss the implications of such divergence
for the financial performance of both COMIBO. (a major purchaser of ENAF's value
added) and YPFB (the sole supplier to ENAF of the highly subsidized input 2/ of fuel oil ).
COMIBOL The Bolivian Mining Comp is~a conglomerate of 14minn enterprises
(plus two cooperatives) put together following the nationalization of the three large
private mining companies in 1952. The enterprises continue to be well defined and sepa rate entities so that it makes sense to apply the tripartite fiscal objective to each enterprise. (It has often been suggested that COMIBOL be disbanded and each mining property converted into an independent entity, or that the enterprises be combined into a number of new firms.)
According to COMIBOL accounting data, about half of COMIBOL's enterprises
are in deficit. So the application of even the minimal cost-covering goal presents 3/ oroblems. Table 4 orovides detail on the financial Performance
1/ There is also a connection between ENAF performance and Bank lending. Loans to support the Mineral Exploration Fund, or private mines will be more attractive to the degree that ENAF's charges are low.
2/ An essential element in the analysis in this section is COMIBOL's cost accounting. The quality of that accounting is controversial. The ana- lysis must, therefore, be taken with substantial reservation.
3/ The deficit is measured after the payment of taxes. F 30-
of the thirteen properties of COMIBOL which produce substantial
quantities of tin plus the three which do not. (In 1977 COMIBOL produced 1/ eight different minerals, but tin accounted for 77% of sales receipts. )
Two of the tin producers - Huanuni and Caracoles - accounted for most of the profits,
A useful piece of analysis that can be extracted from Tables 4
and 5 is percertion of the volatility of COMIBOL's financial
performance. As indicated in column (2) of Table 5 the mean annual
percent change in the dollar price of tin for 1971-78 (excluding the anomalous
year 1974) was 17.5%. The price fell in two of those nine years. Were the
price to fall in 1979 by say 15%, the mean price would be $4.99, and losses
per fine pound could be about $0.40 - assuming a 20% increase in costs in 1979 over
those of 1977. (Actually the price is projected to peak in 1979 at $5.99 per fine
pound and then is to drop somewhat thereafter.)2Z/The three most profitable properties would continue to cover costs. But Metalurg,ia, Bolivar, and Catavi would swing from being marginally profitable to having substantial deficits. In the case of
Catavi the calculation shows a loss of $0.90 per pound. In 1977 Catavi's total output was 5.8 million pounds. The same output in 1979 at a price
I/ One property, Quechisla produced substantial quantities of all eight: tin, silver, lea4, zinc, bismuth, copper, wolfram, and cadmium.
2/ World Bank (May, 1979), Table 94. The spot.composite price of tin on June 6, 1979 was $7.43, Table 4 FINANCIAL PERFORMANCE OF COMIBOL ENTERPRISES. ACTUAL 1977. PROJECTED 1979 (Values in US dollars)
1977 1977 1977 1977 1977 1977 1979 1979 Price Gain or All Activities Value of Projected Number of Costs Per Ree'd Per (Loss) Per Gains (Losses)!/ All Sales 4/ Costs Per Projected Enterprise Employees Fine Pound Fine Pound Fine Pound (millions) (millions) Fine Pound Gains (Losses) 1/ Tin- 4 49 5.08 0.59 15.633 341.1 5.39 .60 Huanuni 2,027 3.49 5.04 1.55 18.6 60.6 4.19 1.82 Caracoles 984 3.92 5.12 1.20 4.1 18.0 4.70 1.29 Quechisla 4,305 4.22 5.11 0.89 (1.1) 3/ 56.9 5.06 0.93 Viloco 781 4.46 5.02 0.55 0.8 8.8 5,35 0.64 Metalurgica 4.76 5.23 0.47 0.3 3.8 5.71 0.28 Bolivar 427 4.82 5.06 0.24 . 3.2 12.6 5.78 0.11 Catavi 4,625 4.91 5.09 0.19 2.4 65.0 5.89 0.10 Colquiri 2,559 5.09 5.00 (0.09) (0.7) 27.3 6.11 (0.12) tnificada 2,243 5.36 5.15 (0.21) (1.5) 31.5 6.43 .(0.44) Kami 2/ 16' 5.25 5.03 (0.22) (0.6) 10.2 6.30 (0.31) Bolsa Negra 2/ 20 5.13 4.90 (0.23) (0.1) 4.7 6.16 (0.17) I Santa Fe 907 5.64 5.16 (0.48) (0.8) 8.5 6.77 (0.78) Colquecha 312 6.11 5.12 (0.99) (0.9) 2.1 7.33 (1.39)
Others Corocoro (copper)470 (2.2) 3.6 Matilde (zinc) 397 (5.1) 13.3 San Jose (lead/silver) 518 (0.9) 14.2
I/ The enterprises listed under tin are major tin producers. Many produce other minerals as well. 2/ Cooperatives which sell production to CONIBOL and rent COHIBOL properties. 3/ Quechisla's gains from minerals other than bismuth were $3.557 million, losses on bismuth sales and smelting were $4.614 / For all minerals and smelting. million. Sources and Explanation: Accounting data, COIBOL, Gerencia de Finanzas, Informe Eonomic Financiera, Gesti n 1977, pp. 10-16. Projections for 1979, tin price assumed to be $5.99 based on World Bank preliminary commodity price fore- cast. Costs in 1979 assumed 20% higher than 1977. Costs include outlays for realization, such as smelting and transport. - 32 -
Table 5 TIN PRICES IN BOLIVIAN PESOS AND US DOLLARS, 1970 - 1978 (1) (2) (3) (4) (5) US Annual Percent Bolivian Bolivian Price in Dollar Change..in Peso Price Bolivian Pesos Year Price US Dollarå- Price Deflater of 1970
1970 1.67 20.16 100 20.16
1971 1.59 - 4.8 18.96 104 18.23
1972 1.71 7.5 23.66 110 21.50
1973 2.19 28.1 42.20 145 29.10
1974 3.60 64.4 72.20 236 30.51
1975 3.11 -13.6 62.20 255 24.39
1976 3.43 7.1 68.00 267 25.47
1977 4.83 40.8 95.60 288 33.19
1978 5.85 20.9 114.40 317 36.08
1/ (P -p )/P
Sources: (1) World Bank (May, 1979), Table 94. These are prices of the London Metals Exchange.
(3) Convårsion using the official exchange rate. Devaluation from pesos 12 to pesos 20 per US dollar onOctober 1, 1972.
(4) Banco Central, Bulatin-staditica., No. 229, March 1978. This is the official La Paz index. It may substantially underestimate inflation in Bolivia. An index of the Ministry of Planning and Coordination has prices increasing more than twice as rapidly over 1975-1977. See World Bank (1978) Report No. 2195-BO, p. ii. - 33 -
of $4.99 could mean total losses of about $5-2 million. COMIBOL's accounting [(total for 1977 implies total profits on tin alone of about $13.8 million. 1/ production) (gain per pound) = (23,250,579)(.59) $13.8 million.] At projected costE of $5.39 per pound, and a tin price of $4.99 per pound - although the projected price
is $5.99 and the actual price in June 1979 was over 87.00 ner pound - the same amount of production would mean losses on tin alone of about $9.2 million..
It is revealing to consider how a change from the present system
of royalty and export taxes to profit taxes would affect this picture.
COMIBOL accounting estimates average royalty and export taxes per fine pound 2/ of tin concentrate in 1977 as $1.136 and $0.331 for a total of $1.467. As If shown in Table 4 , mean costs .in 1977 per fine pound of tin were $4.49. taxes these are reduced by taxes to $3.02 per pound, the mean surplus before
per pound is $2.06 ($5.08 - $3.02). Thus taxes took 71% of tin profits, by rate, world COMIBOL accounting. More revealing is the fact that the exchange that market price, and COMIBOL's cost structure combined to give the result
no enterprise had losses on the production of tin, before payment of the pro-
duction taxes. Even Co1quecha, whose losses per fine pound were $0.99, had
pretax profits on tin of $0.48 a pound.
It is generally agreed that taxes on profits are preferable to pro-
duction taxes. The latter can lead to "high grading" of ore, as well as in-
hibit'investment on new capacity, or restrict improvements to increase recovery
ratios such as for milling operations. Production taxes can lead to mortal over-
taxation in the sense that otherwise profitable firms are driven out of business
1/ The 1978 financial data show a largerprofit for the entire corporation than when in 1977. Results by individual properties for 1978 were not available this was written.
2/ COMIBOL (1977), p. 25. -34-
because of tax induced losses./1/
The disadvantages of taxes on production-as opposed to taxes on
profits-clearly apply to private firms. In the case of COMIBOL as hitherto
managed, and with the kind of overall governmental intercession and direction
which it has received, some advantages of high production taxation need to
be pointed out./ It is very clear that most central governments, including
that of Bolivia are successful in claiming only part of the net surplus of
public enterprises. Further, as suggested by the experience with YPFB,
inherently highly profitable firms tend to let costs rise more than is
warranted and thus eat into the taxable surplus. Heavy taxation of output,
therefore, is a way of forcing managements to eliminate "slack," or at least
to prevent them from letting it built up. (Of course it is also possible to
have progressive taxation of profits so that the result is equally heavy
taxation.) Moreover COMIBOL is very concerned and embarassed by having so
many mines with chronic deficits. In addition there is a certain amount of
pressure in general and from the Ministry of Finance in particular to eliminate
1/ Gillis at al (1978), pp. 722 ff. discuss at length the "major problems of an output based tax system."
2/ The ratio of taxes to value of production on tin mining is considerably higher in Malaysia, Thailand and Indonesia, the three other major proaucers4than in Bolivia. In these countries taxes are at least partly based on income. World Bank (March, 1979) p.4. But high taxes may be "offset" by a relatively high rate of exchange of currency. the local The local purchasing power of a pound of tin higher may be far in Bolivia than it is in Malaysia or even Indonesia.
...... 0...... -35-
such deficits because of their threat to tax collections. In brief given the present state of the manageent arts in CONIBOL and of government controls, moving to taxation on profits couldreduce pressure for good performance, because the financial performance of many firms which now appears to be terrible would appear to be less inadequate. Presumably, however, this dis- advantage would be far outweighed by the many advantages resulting from a movement to taxation according to profits. In any event no matter what the form of taxation, maximizing financial surplus remains the more basic goal.
It is well known that COMIBOL management is highly centralized.
Enterprise managers are given production targets but have very little freedom to vary inputs, little financial autonomy, and often do not have very good ideas about their cost structure. They take the size and composition of their labor force as largely given. It is possible to decentralize with respect to some of these items. This will be desirable if the managements of the individual properties were to become responsible for their financial performance. Generally speaking the goal fot the deficit mines should be one of minimization of losses with the immediate target being reduction of losses over time or more fundamentally reductions in cost of production as 1! the least productive mines and shafts are gradually phased out. Cost of production is a far better target than losses, since the latter are also
1/ In the long run, it is clear that what needs to be done for any truly hopeless mines is to pursue a policy of gradual winding down of operations. Employees who leave need not be replaced. As other mines expand, employees should be given an opportunity to transfer, and perhaps should be dismissed if they refuse to transfer. - 36 -
functions of world market price, and exchange ratep,two variables beyond the control of COMIBOL management. Reducing the costs of production is a necessary first step toward eveittual achievement of financial surplus. - 37 -
Controls and Goals
Control Mechanisms
As suggested above, dissatisfaction with the performance of the public enterprises has led to a great deal of concern with their control primarily by entities of the central government. As a consequence many controls have been designed so as to improve their performance. There has been, however, insufficient appreciation of the relation between goals and controls. Specifically, clear and non-conflicting goals and evaluation of performance in terms of those goals probably would make much of the con- trol-machinery directed towards the public enterprises unnecessary. But preliminary to a discussion of what is involved in this assertion we need to review some of the antecedents to the controls issue and their attempted resolution through Presidential Directive Number 2 of 1977.
Controls are of two types, those within the enterprise
and those between enterprises and the central government.
The focus here is primarily upon the latter. As noted above, in the mid- seventies there was full awareness in the central government of the overwhelming importance of the public enterprises for generating foreign exchange and fiscal revenue. There was also a good deal of dis- satisfaction with their performance. Very often, rather than provide revenues, they drained the treasury. The burden of servicing their foreign debt was resulting in alarming projections. There was deep suspicion of the quality 38 -
of their investments. In the words of the World Bank Report on Bolivian mining of 1976:
On the project level, no economic or serious financial analysis has been undertaken and no firm control over project implementation and financing, has been exercised. Therefore, investment of the state mining and metallurgical sector was often haphazard, dependent upon available foreign financing and bearing little relationship to Govern- ment development plans. As a result, investment decisions often were not conducive to optimum sector development. For example, whereas ex- ploration and mine development on the one hand and rapid expansion of tin smelting and refining on the other, seemed to be of highest pri- ority and would probably have produced the highest economic returns, the investment effort was concentrated on COMIBOL's tin volatization plants and ENAF's antimony smelter which were projects of relatively low priority or doubtful financial viability, at least over the medium term.
More recently the experience of YPFB suggests that this
suspicion was warranted. Most of YPFB's recent investment presumed
increasing production of crude oil as new fields were brought into production.
This was to be the result of the exploration activity by many foreign
firms in the mid 1970's. The reverse has occurred and total production has
dropped more than a third since 1973. Nevertheless investments were carried
out which could be justified only if the production increases occurred. At
a cost of over $200 million, refinery capacity was increased three fold
to 69,500 barrels per day. Capacity now exceeds production by about two
thirds. (Some of this, however, may be replacement for obsolete facilities)
As late as 1977 the enterprise decided to carry through plans
to increase pipeline and storage capacity for exportation via Arica as well
1/ World Bank (1976) p. 28. -39-
as to increase pipeline capacity for exportation to Argentina. Yet by 1978--
and probably earlier-- it was clear that in the near future YPFB would have very little if any petroleum to export.
It has been argued that these investments will be justified some years hence if the enormous exportation of natural gas to Sao Paula, Brazil
becomes a reality. In which case daily production of condensate would be 2/ 80,000 barrels. In any event, we have a very obvious error in the timing
of investment.
The problem with the undesirable investments was seen and still
is seen as lying primarily in the fact that many of such investments were made autonomously without central government participation. In general un-
desirable performance is considered as being caused by the fact that the
public enterprises are "out of control," and de facto not answerable to any 3/ one. The Big Three, for example, are occasionally referred to as "super-
states" whose managers have more power than the ministers to whom they
1/ UL arig, "La Problematica Actual del Retroleo, "Informe que Dirige al Pueblo Boliviano el Gerente General de YPFB. Col. (r) Ing. Jose Patio Ayoro, 25 February 1979, pp. 10-11.
2/ El Diario, "Ex Gerente General de YPFB Rechaza Acusaciones," March 2, 1979, pp. 18-19.
3/ According to one senior official in the Ministry of Finance not until 1978 did the central goverment through IMDEF measure the previously unknown total of public external debt. Prior to that what the public enterprises owed and on what terms was not well known. - 40 -
formally report. The most comprehensive expression of this dissatisfaction
was Presidential Directive 2. As noted the Directive is an attempt at
completely restructure the public sector in part by greatly increasing the central government's control mechanisms.
The Directive states, for example, that for every public enterprise the "financial limits" of expenditure are to be "set by the government and
shall become the required basis for their annual operations and budgets."
Further "no enterprise shall be able to contract financial obligations,...
nor shall it negotiate either domestic or foreign credits without a correspond-
ing budget item or favorable disposition of the Ministry of Finances."
'Further, "beginning next year (1978) the Supreme Government shall
annually approve the limits to current expenditure and investment for all
entities of the public sector according to recommendations of the Ministries of Planning and Coordination and of Finances."
The Directive then prescribes in great detail the manner of draw-
ing up annual budgets and how these budgets - including those of the public
enterprises - are to be included in the drafts of the national operational plan and of the national consolidated budget.
The Directive then continues with a section on developing investment projects. Again the investments of the public enterprises are to be subject to rigorous and highly detailed development and review in the same fashion as the investments of the various ministeries. This is to include a large' number of hurdles including prefeasibility study, feasibility -41-
study and final design, "according to guidelines provided by the Ministry of
Planning and Coordination through INALPRE (Instituto Nacional de Preinversion)
so as to have uniform criteria and to evaluate the merit of the projects."
To what degree the many prescriptions of Presidential Directive 2
are actually being enforced is not clear, although it is clear that to the 1/ moment the technical council for the Public Enterprises has not been named.
It is clear, however, that there is a large number of organizations designed
expressly for control. Several of these are concerned primarily with public
investments:
1. National Institute for Preinvestment (Instituto Nacional de Pre-
inversion INALPRE) - Organizes cost/benefit studies. Recommends approval or rejection of project proposals based on technical criteria. It is an autonomous public organization.
2. National Planning Council (Consejo Nacional de Planificacion, CONE -
PLAN) - This is a national planning committee at the ministerial level. It is chaired by the Ministry of Planning and Coordination. Inter alia it pro- vides basic guidelines for the administration of public enterprises. It may review enterprise budgets. It may take a position on proposed investments.
It authorizes execution of major projects.
3. National Financing Institute (Instituto Nacional de Financiamiento,
INDEF)- An autonomous organization which either conducts or participates in
1/ See the earlier discussion. -42-
actual loan negotiations with foreign entities for approved public sector projects.
In addition there is a fair number of other organizations designed,
at least in part, to regulate and monitor the performance of the public en- terprises:
4. Ministry of Finance In addition to involvement by the Minister
per se, there are at least three elements. in the Ministry coacerned with the
public enterprises; namely the Direccion de Politica Sectoral, the Subdireccion
de Emprasas Publicas in the Direccion General de Presupuesto and the Comite
Nacional de Informacion Finanniera. One of the basic tasks of the Ministry
of Finance is to review all public entity budgets and integrate them into
a consolidated public sector budget. This also includes operational budgets
for the public enterprises. Of fundamental importance is the requirement by
the Ministry of Finances that use of foreign exchange by the public entities
be according'to the approved foreign exchange budget of each entity.
5. General Office for Management of Public and Mixed Enterprises
(Direccion General de Gestibn de Empresas) An element in the Ministry of
Planning, the entity describes itself as being in part the technical support or secretariate to the not yet active Technical Council for the Public Enter- prises. Recently it has been compiling data on the financial performance of the public enterprises.
6. General Auditing Office (Auditoria General) Audits the public en- terprises. An autonomous government agency which is many years behind in its - 43 -
work.
7. External auditors - According to law, annually the balance sheets and profit and loss statements for all public enterprises are to be audited by external public accounting firms. .Government officials assert, however, that these audits "do not come to grip" with the "real problems."
Nor do they "really get inside the firms."
8. Boards of Directors - Generally.consist of high level government officials. The positions, de facto are frequently close to honorary sine- cures. They reign but do not rule. One government officer described them as "an ornamental species." For each of the Big Three there is ample re- presentation from the ministries of the central government.
9. Interventors - The Ministry of Finance has an "interventor" in each public entity who must approve each expenditure as being authorized by the budget. In practice the interventors do not insist on close correspon- dence between expenditures and budget.
Effectiveness of Controls
Investments - Notwithstanding the impressive and convoluted control mechanisms, as the foregoing materials show, the recent investments of the Big Three have been far from optimal, although many of these controls existed before the investments were made. In case of the Big Three, an important reason for this-outcome
1/ The Board of Directors for COMIBOL consists of a president, named by the Minister of Mines, a representative from ENAF, a representative from the Ministry of Finance and three members named by the president of the Re- public. ENAF and ypF have boards of directors which are similar to those of COMIBOL. -44
could be the difficulty in making technically adequate benefit-cost appraisal
of major investment proposals which also carry political weight. The
reasons for such difficulty are of two kinds: (i) The experts in the subject
matter are frequently in short supply and their ability to communicate with
or treach" decision makers is often limited. This is particularly likely to a be the case of professionals working in government appraisal organizations
such as the Planning Ministry or the National Institute for Preinvestment.
Usually, when the investment is very large and "the stakes are high," lower
level public servants are excluded from the decision making process. Perhaps
this occurred with respect to the Big Three investments in the recent past.
Part of this problem, of course,
is due to the fact that those who head the Big Three are likely to be
powerful individuals in their own right. In contrast the expert evaluators
are in institutions headed by individuals with less political stature who
for one'reason or another may not wish to support their own experts. (ii)
In periods of national euphoria, or simply in situations in which a prominent
leader endorses a project as an overwhelming nece-
asity or required by the national interest, it is difficult for any "insider"
to maintain a balanced perspective. And the rare individual who does main-
tain perspective is likely to be reluctant to voice opposition for several
obvious reasons. To avoid this vicious circle, the easiest thing to prescribe is the do. development of wise leadership. This is also about the hardest thing to
For the foreseeable future it is likely that the circle will maintain itself.
About the only suggestion I have for breaching it, is to set up a mechanism whereby highly qualified ekperts--probably foreign--agreeable to and perhaps contracted by both the Ministers of Finance and Planning are brought in automatically to review in detail project proposals of the Big three. In Bolivia this poses less of a problem than in many other countries since to the present foreign advice is at least listened to with a good will.
The World Bank itself in effect perform this function of "project certification" wherever it makes a loan to fund part of a project. And no doubt this Imprimatur is valued by many decision makers in the Bank's client countries. What is suggested here is the institutionalization of the certification function, possibly, by the Planning and Finance Ministries working together. In the present climate in
Bolivia - - shock at the financial burden and poor results from catch-as-catch- can investments by major public enterprises - - it is possible that such a notion could receive a favourable reception.
The existence of an independent second technical opinion, could be
in part the antidote to the disfunctional pressures toward a too facile
conformity discussed earlier. In cases of divergence between the two opinions,
it would provide a counterweight and support for those in the government who
1/ The newspaper Tr-encia.reported that Engineer Patino, the General Manager of YPFB declared that sales of natural gas to Brazil were contingent on a number of factors. 2_aPascia.continues, "he confirmed that the petroleum enterprise is generating credits with international organisms such as the World Bank or IDB so that an enterprise 'of international prestige' takes the responsibility by means of competitive international bidding for evaluating the reserves in the country." (March 13, 1979, p. 2). -46-
were inclined to resist a popular project with a great deal of political
support. In part this would be because the loyal opposition would be able to
reduce the resistance to their unpopular stand by emphasizing that the source
of their resistance is the negative technical evaluation coming from dis-
interested experts,
Control of Operations - In-March 1979 the Minister of Finances personally
reviewed the budgets of COMIBOL and Y-FB with particular attention to their
overall indebtedness and the resulting financial deficits projected for 1979.
Should the government accept financial surplus as the basic goal, such annual
budget hearings could be converted into an annual performance review in which
the basic performance criterion would be the degree to which financial targets were achieved. (As discussed earlier the amount of surplus to be achieved would need to be determined by the central ministries considering the circumstances completely beyond the control of the enterprise; e.g., domestic pricing of petrol, minimum wage and manning requirementsand so forth.) This would bring home to
management that their performance was being evaluated primarily in terms of the tripar-
tite financialgoal and should therefore provide a strong incentive to management
to indeed achieve such goals. This would also provide a readily grasped criterion to guidethe discussion. It would move the analysis and concern away from the tendency
to treat public enterprises as non-market government entities where the focus is
inevitably on the amount of resources needed and their disposition. For the public
enterprises the focus need not be on their operational budget per se but whether
they can generate the desired financial surplus or whether the proposed activities
are most conductive to generating such a surplus.
Along with such a goal oriented approach could go some slackening of
controls, with the exception, perh7?s, of those on investment. There are enough mechanisms to assume that publIc, et*rprises conform to the law. Of importance, -47-
therefore is not what the enterprises do or how they do it but whether their activity conduces most effectively to achieving clearly delineated financial goals.
As indicated earlier the worldwida practice of saddling public en-
terprises with vague, multifarious and not necessarily consistent goals brings
in train the likelihood of a good deal of management slackness or inefficiency
for a number of reasons. Conflicting performance signals obviously provide to managements strong incentives to avoid conflict and strass by satisfying their various patrons. This is frequently at the cost of financial efficiency. Con-
flicting performance signals are also often accompanied by a good deal of ministerial and political intervention into enterprise policy and practices. Under such
circumstances to some degree managements may evolve into dependent executing
agents for powerful groups and individuals. Or as may have recently been the
case for the Bolivian Big Three, confusion and obfuscation on goals, including
political considerations, permits managements to take a basic course of maxi- mizing their welfare in ways which may diverge substantially from a course which
promotes community welfare.
In general there is no reason to expect much congruence between the
personal goals of managers and those of the planning authority or of those of
some concept of the community at large. Managers are likely to be interested
in financial gain, popularity, a political career, and/or a quiet life. There 48
is substantial disparity in Bolivia between these personal goals and that of pur- criteria suing financial surplus. Being very clear on goals and-performance
while rewarding good performance both financially and with 'Drestigecan reduce this
goal disparity, with some improvement in performance the consequence.
An element in getting the Big Three to promote the public welfare,
therefore, is to design management incentives which induce them to so manage
the enterprises that the public welfare is promoted. Once goals are designed
which promote such welfare the incentive system serves to induce management
to pursue those goals. In this context an annual review of performance using
as criterion financial surplus makes a good deal of sense. Of course the
review needs to be very explicit on the basic goal as being primarily maxi-
mization of financial surplus. (Considering the environment in which some
enterprises operatethe goal may also beone of minimizing financial losses.)
In general there is a tendency in organizations to attempt to improve
performance by increasing centralization, which is to say by increased control
from the center of the activities of the operating units. This is usually due
to a conviction that the competence, goal-orientation, and perhaps probity of
those at the center exceeds that of the operational managements. This pers-
pective is common to Bolivia where the reaction to poor performance has recently 11 been a concerted attempt to centralize public sector activity.
1/ In spite of poor performance by entities of the central government, the latter has been attempting to control the regional development authorities of the departments (provinces) to make their operations consistent with national development goals. Yet it may be that these authorities use their resources - frequently mining and petroleum royalties - more wisely than the central government uses its resources. 'Y 49-
This perspective fails to consider the fact that it is likely that
much poor performance of enterprises could be' attributable to the failure to
specify what good performance would be as well as a failure to use performance
criteria in evaluating management. For example, it is probable that the managers
of the various COMIBOL enterprises have not been given targets other than in
terms of production. Moreover COMIBOL appears to be highly centralized with
respect to accounting, material procurement, and choice and disposition of
labor. So that pursuit of more fundamental goals such as developing activities
so as to cover costs is greatly constrained because management has very
limited ability to vary its production pattern. The enterprises of
ENAF may be in a similar situation. For example accounting data, including
material on labor costs, is available only in La Paz for ENAF's major enter-
prise, the tin and antimony smelter at Vinto.
One of the basic shortcomings of centralization is that senior
personnel are usually overtaxed so that they are able to give only,cursory
attention to issues requiring immediate attention. In addition, what might
be called the risk avoiding dynamics of upward reporting personnel in heirarchical
organizations insures that the quality of information on which decisions must
be based is frequently faulty. As a consequence decisions taken at the center
are frequently less effective than what could be taken within the operational
units.
All of this amounts to an argument for considering a certain
amount of autonomy or decentralization for the Big Three within the context
of a very specific orientation toward the Tripartite Goals. To conclude, - 50 -
clarity about goals and use of goal-achievement to evaluate management per-
formance, coupled with looser controls within enterprises and between the Big
Three and the central government could result in more efficient operation of the Big Three. - 51 -
The Question of Labor
Union Power
One difficulty in moving the Big Three toward financial
efficiency is Bolivian labor practice and ideas about what labor policy should
be. The role of COMIBOL as a social institution has already been discussed.
A very common notion in Bolivia is that enterprises exist basically to benefit
their employees. It is probably true that a large proportion of
politically active Bolivians believe that Public enterprises should
maximize some combination of employees and employee benefits, subject to the l/ constraint that costs are covered.
In the past,pro-labor groups have held governmental power
long enough to develop labor unions which are extremely powerful, in part
because the legislation which has been developed in support of unions provides
them with a strong legal basis. In addition certain unions are in sectors of
great economic importance. In the case of YPFB, a strike by the workers means paralysis of the entire traiisport system, andtherefore of micht of
industry and'agriculture. In the
case of COMIBOL a strike usually means a foreign trade crisis within a few
1/ Needless to say this perspective is not shared by the Ministry of Finance, nor many officials of the private sector, nor many of the military leaders. Nevertheless, notwithstanding Bolivia's lack of ideological consensus the labor maximization idea.is sufficiently common to warrant the above pre- sentation. - 52 -
months as the available foreign exchange needed to purchase imports is used up.
In the case of the national union of truckers, bus, and taxi drivers, a strike
again very quickly paralyzes most economic life.
And the threat of strike is real. In the last half century,
strikes have been basic to Bolivia's political process and have played a
principal role in changing governments. They frequently begin as protests
against economic deprivation of one sort or another, but often end in bloody
suppression or occasionally successful coups. particularly if they receive
military support. Many strikes, however, are completely political from
their very beginnings. Some are contrived by political leaders; others are
spontaneous. Often their denouement depends upon the response of the military.
One can illustrate these points with description of certain events in
the last half century. In 1936, the Chaco War resulted in inflation including
a rapid increase in prices for articles of "first necessity." The Printers'
Union led a strike to force a price reduction which grew into a gateral uprising
at which point Generals Toro and Busch carried out a coup d'tat after they "decided
to take power." In 1946, "a series of strikes broke out" which grew into a full
insurrection and ended with the death of President Villaroel and a chaotic
period of government by a tripartitie committee of "workers, students, and teachers."
In 1952, a basic revolution, "the culminating moment in Bolivian history," began as a genenal strike fomented by the National Revolutionary
Movement . In 1970, General Juan Jose Torres waited until a military junta had forced President General Ovando Candia out of power. Torres -53-
called a "general stirke" and "the military junta crumbled away" leaving
Torres in contol.
Awareness of the consequences of strikes, and of the militancy of
the unions which make them possible, makes all governments in Bolivia very
reluctant to risk confrontations with the stronger unions. It also means
that when the unions are active, governments are more constrained in their
policies, than when they are not active as in the government of Barrientos
and Banzer, both of whom exiled the major union leaders.
The events associated with the sizeable increase in the retail
price of gasoline and diesel fuel in 1975 illustrate these conclusions
very well. By 1975 the price of motor fuels in Bolivia was far below
the world market price. To increase this price became a principal goal of
the Banzer Government. The government succeeded. But notwithstanding exile
of the most militant union leaders, it paid a high price to the National
Confederation of Drivers to gain their acquiescence to the price in-
crease. According to Bolivian government officials this included in-
creasing the government subsidies for urban mass transport; increasing the
government's subsidy for the social services which the transport unions pro-
vide theirmembers; government guarantees on loans to members for purchase
of new vehicles for transport union members;reduction of import duties on
1/ Rojo (1978), pp. 141, 145, 146, 155.
0...... 354-
such vehicles; reduction of import duties on television sets purchased by mem-
bers. Finally it is asserted that many of the union leaders received cash payments.-
Production and Labor Data
Because of the state of affairs with respect to labor, one outcome for the Big Three is total costs of labor exceeding opportunity costs and reduced flexibility in the use of labor in the process of production. Some broad brush estimates for labor costs of the Big Three are given in the tables below. In the case of YPFB it may be that real labor costs per worker have about doubled since the period immediately prior to the OPEC action in 1973, as given by the comparison of per worker labor costs in 1973 with 1978 in row (6) of Table 6. Assuming YPFB's accounting data are correct, there still remains the question of price deflation. The deflator used in row (6) is the La Paz price index which may seriously underestimate total inflation.
Nuch more suggestive is the calculation of YPFB's labor costs as a share of total recipts using world prices. The world price.of
$15 per barrel of crude oil is used to value output. This gives an aggregate value for crude of $177.7 million in 1978. Add to this 2/ the sales of natural gas abroad ($US 79.8 million)- and the total
1/ An anecdote, current in La Paz in March 1979, had it that it was impossible to raise motor fuel prices a second time (regular gasoline retailed at $0.27 per gallon), because after 1975 the transport unionist was a "man who had everything."
2/ YPFB, Informe Mensual de Estadistica, December 1978, here and there. - 55 -
Table 6: YPFB, PRODUCTION AND LABOR DATA, 1972-1978 1972 1973 1974 1975 1976 1977 1978 (1) Crude petroleum (barrels per day) 43,623 47,290 45,486 40,362 40,590 34,728 32,450
(2) Natural gas (millions of ft3 per day) 331 414 395 376 421 408 424 % available for sale 30 37 39 42 39 42
(3) Number of employees 5,209 4,797 4,590 4,510 4,679 4,613 4,520
(4) Costs of labor (millions of pesos) 168 194 347 422 490 591 803
(5) Labor costs per worker (pesos per year) 32,252 40,442 75,599 93,570 104,723 128,116 177,655
(6) Labor costs per worker (1972 pesos per year) 32,252 30,638 35,162 40,332 43.096 48,899 61,686
Sources: (1) and (2) YPFB, Departamento de Estadistica Diez Anos de Estadistica Re=olera--de-altvia-1k68-19.71, Tables 1 & 7. YPFB, Departamento de Estadistica, Informe Mensual de Estadistica, December 1978, p. 4 (3) and (4) YPFB unpublished sheet "Cuadro Comparative de Numero de Trabajadores, Salarios yBeneficios," 1979. (6) Price deflator de- rived from Table 5. - 56 -
Table 7: ENAF, PRODUCTION AND LABOR DATA, 1973-1978
1973 1974 1975 1976 1977 1978 Tin
Metric tons 6,954 7,092 7,533 9,185 12,786 16,184 Employees 526 565 612 826 1,204 1,500-1,700 Tons per employee 13.22 12.55 12.31 12.11 10.62 9.52-10.79
Antimony
Metric tons 1,964 3,431 Employees 238 288 300-500 Tons per employee 8.3 11.9
6 Sources: ENAF, Memoria Tegnica 97-1.., Publicaci n Tecnica No. 6, Julio 1978, pp. 12. Ministerio de Planeamiento y Coordinacion, 6 Dirección Gesti n de Empresas, Analisis Financiera de las Empresas Publicas y Mixtas, Gesti6n 1977 (typescript), Empresa No. 34, ENAF. Ministerio de Mineria y Metalurgia, Dreccion de Comercio Exterior, Boletin de Comercio Exterior, No. 60, December 1978, p. 15. - 57 -
Table 8: COMIBOL, LABOR COSTS, 1970, 1973-1977
1970 1973 19.74 1975 1976 1977 1978 Accounting data ($US million)
Wages and social benefits 23.9 27.9 42.7 43.7 50.3 55.5 Administrative costs 4.2 3.5 4.2 5.2 6.7 8.2 Profit sharing, restrictedi/ 3.0 3.0 4.7 2.8 3.0 5.2 Profit sharing, general2/ 0.8 1.9 1.7 - 1.0 1.7 Total labor costs 31.9 36.3 53.3 51.7 61.0 70.6 Purchase of minerals 13.1 14.9 21.8 19.3 22.7 29.5 Broad labor costs 45.0 51.2 74.9 71.0 -83.7 100.1
Labor force 21,834 24,071 24,556 24,943 24,023 24,605 25,060
Labor costs per employee ($US) 1,461 1,508 _2,171 2,093 2,539 3,869 Labor costs per employee at 1972 pesos 1,270 1,508 1,332 1,189 1,380 1,944 1,847Y
Value of sales ($US millions) 97.5 198.4 232.8 211.3 255.4 335.1 268.9
Value of sales, net of purchase of minerals ($US millions) 84.4 183.5 211.0 192.0 232.7 305.6 247.0
Labor costs as percent of sales (ni et of purchase of minerals) 37.8 19.8 25.3 26.9 26.2 23.1
Labor costs as percent of sales 48.3 27.2 34.0 38.8 36.9 32.9 (mat of treatment costs) 4/ 1/ Profits distributed only to employees of enterprises with profits.
2/ One quarter of net profits distributed to all employees.
3/ Assumes inflation at 10% in 1978. There was a 35% increase in wages in November 1978. For the year, real wages are assumed to have fallen 5%.
4/ ]Differs from above in that value of sales has been reduced by treatment costs.
Source: COMIBOL annual profit and loss statements; labor force data are from COMIBOL, Of icina Central, unpublished table titled, Total Fuerza Lboral.
Note.: Dollar data are based on official exchange rates. They were 12 pesos to the dollar in 1970, and 20 pesos to the dollar beginning in late 1972. - 58 -
costs of labor come to about 16% of value of output. This is high
for a hydrocarbon producer. At pre-1973 prices, for example, Bolivian
labor costs in 1978 would have eaualled nearly the total value of
production. In this context it may be useful to recall that Bolivian petroleum
production has always been a high cost operation. Prior to 1973, YPFB's unit
costs of production exceeded world market prices by 3 or 4 fold.
In the case of ENAF, data are very fragmentary. Using the materials
which ENAF has made available, as presented in Table 7, it appears that em-
ployment in the tin refinery grows more rapidly than production, although one
would have expected that in a process industry, expansion of production to
plant capacity, would result in less than proportional need for labor. A
complicating factor here is that a good share of the increase in ENAF em-
ployees may be destined for work in the plant to volatalize low grade tin
concentrates which is currently being constructed at ENAF's Vinto complex.
In the case of COMIBOL the accounting data are more detailed than
either YPFB or ENAF. The total number of employees from 1973 through 1978 has remained largely constant. Labor costs in constant pesos per employee were held down from 1970 through 1976. In 1977 they experienced a sharp in- crease. There was a wage increase for COMIBOL employees of 35% in November
1978. Presumably, therefore, more recent data would indicate a further
substantial increase in COMIBOL real wages since wage increases far exceeded inflation after 19 7 7 .
A familiar statistic about Bolivian mining is that labor costs came to 30% of revenues in 1974 for COMIBOL, as opposed to 18.8% for the medium
mines. - COXIBOL's accounting data permit a similar calculation as.given in
1/ Gillis et al (1978) p. 76. These data were generated in a special survey of the cost data of the medium mines and COMIBOL. - 59 -
the lowest row in Table 8. Rather than 30%, COMIBOL data give 34% for 1974.
A serious difficulty in carrying out the calculation is how to classify,
"purchase of minerals." As discussed above, COMIBOL purchases minerals from
cooperatives and other individuals working on COMIBOL properties. To calcu-
late the total value of output produced by COMIBOL labor, it is necessary to
reduce COMIBOL sales by the amount of sales produced by these non-COMIBOL
workers. But some of the minerals sold to COMIBOL by Cooperatives and others
are stolen from COMIBOL mines by its own employees. Consequently in a calcu-
lation of COMIBOL labor costs the value of stolen ore which is purchased should
be added to total labor costs. There are no data on this component, how-
ever, and no adjustment is made for it. Consequently total labor costs are
understated by the amount of this component. In 1974, treatment and
transport costs were 26% of gross sales value. The penultimate row measures
labor costs as a percent of sales value before reduction for these costs.
If COMIBOL labor costs in 1977 were 23% of net sales receipts rather
than 33%, the financial surplus available would have been increased by $25 million. This would have been equivalent to about a 7% increase in central 1/ government tax revenues.
In similar fashion, if labor costs per worker in YPFB had grown in real terms but 3% annually after 1972, the total labor bill would have been 2/ $15 million less in 1978. This is equivalent to an increase in central government tax revenues of about 4%.
1/ Total taxes of the central government in 1977 were $B 7,261 million. Report No. 2195-BO, p. 112.
2/ Labor cost reduction per worker in 1978 would have been $B 67,509 with 4,520 employees the total is $US 15,257,011. -60-
Labor Problems and Prescriptions
As indicated earlier, apparently a most serious problem faced by
COMIBOL is that of exhausted mines which should be closed because of their
unavoidable losses. Hitherto COHIBOL's management probably has not considered
this alternative because of overwhelming union resistance. Catavi provides a
good illustration. Catavi is one of COMIBOL's oldest and largest properties. 1/ It also has one of the most difficult labor situations. This is unfortunate
since it has more employees, about 4,600 in 1978, then any other mining complex
in Bolivia. Once an extremely profitable mine, it currently produces ore with
a tin content of a third of one percent. At present prices (April 1979),
according to COMIBOL bookkeeping, it covers costs. However as the mine is
exploited further, costs per ton of fine tin will continue to increase, as
deeper and otherwise less accessible veins are mined. It is possible that within five years, given present projections for tin prices, Catavi will go
into a substantial deficit. (A substantial devaluation would alter this assertion.) To forestall this outcome COMIBOL considered moving to an open pit system at Catavi. This might have resulted in lower costs per ton mined, and would have resulted in a very sharp drop in the need for labour.
COMIBOL has dropped the open pit project ?t Catavi. The decision to do so may be related to the very serious political problem which would have ensued.
The drop in the demand for labor would have taken the form, primarily, of
COMIBOL's forcing out of work "los Marginales," the contractors worltng on
COMIBOL's property at Catavi in variouo kinds of outcropping usually with only primitive tools. Their response to the loss of their means of livelihood
1/ "Labor relations" at Catavi have often been bloody. In 1965 Catavi was an important participant in the miner's strike protesting the exile their of leader Juan Lechin Oquendo . The Army broke the strike. In 1967 the Army killed a number of miners at Catavi in the "masacre de San Juan," that is during the annual festival of Saint John. Rejo (1978), p. 152. Apparently the killing was done without specific provocation by the miners in an attempt to reduce miner political resistance to central government policies. - 61 - would have been a fierce strike. The regular COMIBOL labor force would probably have added their forces in a sympathy strike.
In 1978, COMIBOL's management attempted to rationalize the labor force by gradually retiring 3,500 to 4,000 "supernumeraries." Many of these were older men - according to one COMIBOL official a'out 10% of COMIBOL's
labor force is over 65 - and many were nearly invalids. The decrease was
to take place over 3 years with retirements to either old age or invalid
pensions. The supernumeraries strongly resisted being forced out for two
reasons. Many, perhaps most of them, were performing very undemanding work 2/ above ground. Retirement would have meant a reduction in income and loss
of access to most subsidized social services. The high resistance to the
retirement program and the associated political risk involved led to the
plan being delayed indefinitely.
l/ Ventilation in many mines is inadequate. As a result-deep shaft mining in Bolivia often generates a great deal of quartz dust which gradually clogs the lungs of the miners. The result is silicosis, a crippling disease which leaves many miners as invalids within a decade of their entrance into the underground labor force. The disease debilitates and r Yreduces average life span. It is narticularly prevalent at Catavi where block caving,which produces a great deal of quartz dust, is the usual mode of production. It is also an important reason for COMIBOL's high above-below ground ratio: Men who can no longer work well below ground are given light work above ground. These same men make up a large share of the supernumeraries. Quite apart from the a2ony of silicosis, perhaps increased investment in mine ventilation would be cost effective when the long run consequences are brought into the calculation. In addition many of the supernumeraries in their sixties are veterans of the Chaco War, who are entitled by law to employment as long as they desire it.
2/ As one COMIBOLexe:utiveput it, "a contemplative life with salary." One rough and ready gauge of labor productivity is the ratio of workers above the ground to those actually working in the mines. Among all of the mining enterprises in Bolivia, COMIBOL has one of the highest above-below ratios. - 62 -
The above material indicates COMIBOL's.labor problems. YPFB's
labor situation has similarities because of YPFB also has a very cohesive
and militant union with even greater economic power. The factor which makes
YPFB's situation different from COMIBOL is that it is inherently a far more
profitable organization.
A Labor Recommendation
In Bolivia there is a body of labor legi3lation in which con-
ditions of employment, retirement benefits and so forth are stipulated.
On the crucial question of how wages should evolve, there is apparently 1/ no well developed procedure. It might make sense to carry out
a study to recommend a basic approach for the public enterprises to
wage policy in particul4r and labor policy in general.
Such a study would consider the costs and benefits of the "social institution"
approach. It would also need to deal with how the central government at the
highest political level should relate to wage, and employment negotiations. It would need to consider the optimal distribution of the provision of social
1/ In 1975 the government set up a National Salary Commission (CNS) to develop guidelines for wage negotiations in the private sector. "At the beginning of each year the CNS establishes a range of permissable increases for wage adjustments, taking into account the likely rate of inflation, the profit- ability of enterprises and workers' productivity. In practice, these guidelines have tended to be generous and somewhat unrelated to the actual course of wage negotiations." IMF (1979) p. 9. - 63 -
services between enterprise and central government. It would need to address the question of profit sharing. (COMIBOL has a general system of profit sharing in which employees have received'more than a third of profits in recent years.)
The goal of financial surplus carries strong implications for these issues: If an enterprise is supposed to maximize financial surplus, it needs to pay laborits opportunity cost and should employ labor only if the oppor- tunity cost exceeds marginal product; it should not be burdened with provision of social services; it should not share profits with workers insofar as they are unrelated to production incentives; and it should be supported by the central government in its maximization objective. Clearly, such a cold-blooded
approach is antithetical to Bolivian practice and thought. Any labor policy study vill need 'to include as a basic consideration the question of present practice and thought and their effects on the political feasibility of any basic re- commondationn.
It might be possible to carry out such a study in a quasi cost/ benefit framework, at least in part. To illustrate, in 1977 if COMIBOL's labor had been as productive as that of the medium mines, COMIBOL's wage bill might have been about $25 million less, or about 7% of central government taxes
in the same year. Would it have been politically more feasible to reduce
COMIBOL wages - that is not increase them to offset inflation - than to develop new taxes or to improve tax administration to generate an equivalent addition
in resources? Table 9: VALUE OF PRINCIPAL MINERAL EXPORTS, 1971-1978
(millions of US dollars)
1971 1972 1973 1974 1975 1976 1977 1978 (%) (%) (%) (%) (%) (%) (%) (%)
Tin 105.9 61 113.5 65 131.0 58 230.1 59 181.1 58 228.1 60 328.8 67 373.7 73 Wolfram 13.6 8 10.3 6 11.1 5 21.1 5 22.3 7 34.8 9 45.5 9 39.5 8
Antimony 9.0 5 9.1 5 17.3 8 29.1 8 17.2 5 31.4 8 18.1 4 16.6 3 Silver 8.3 5 7.6 4 12.6 6 26.8 7 28.5 9 24.3 6 30.8 6 33.8 7
Zinc 15.3 9 15.4 9 26.0 11 37.7 10 40.3 13 39.1 10 44.7 9 31.4 6
Others 21.2 12 18.2 11 27.9 12 42.5 11 24.8 8 20.9 7 25.1 5 20.1 3
Total 173.3 100 174.1 100 225.9 100 367.3 100 314.2 100 378.7 100 493.0 100 515.0 100
Note: These valueng re before deduction of treatment costs.
Source: Ministeria de Mineria y Metalurgia, Boletin de Comercio Exterior, No. 60, December, 1978, p. 2 - 65 -
Table 10: DISTRIBUTION OF PRINCIPAL MINERAL EXORTS BY EXPORTER, 1975-1978 (thousands of fine metric tons)
Tn1975 1976 1977 1978 COMIBOL 14,310 15,093 12,919 9,356 Medium mines 2,968 2,762 1,041 1,869 Small mines 1,665 2,632 2,350 2,563 Other producers 492 492 1,101 028 Smeltersi/ 7,497 9,868 12,679 15,879 26,932 30,847 31,090 29,695
Zinc
COMIBOL 33,607 33,067 35,140 32,597 Medium mines 13,019 11,704 23,296 19,025 Small mines, Others 2,918 4,435 2,920 49,544 49,206 61,356 51,621
Antimonv
Medium mines .7,459 10,079 7,739 6,844 Small mines 4,337 5,584 3,474 846 Other producers 7 7 1,178 640 Smelters 1 9641/ 1,431 2,197 11,803 18,634 12,391 10,527
1/ Smelters, primarily ENAF, purchase their entire production in the form of concentrates from Bolivian mines.
Sources for 1975 and 1976: Rojo, Hugo, Boero, Bolivia Magica (Editorial, los Amigos del Libro, 1978), pp. 238-242. Sources for 1977 - 1978: Ministerio de Minos y Metalurgia, Boletin de Comercio Exterior, No. 60, Decembre 1978, pp. 4 ff. Table 11: DISTRIBUTION OF SALES OF TIN TO ENAF AND ABROAD BY SUBSECTOR,1971-1978
(thousands of metric fine tons)
1971 1972 1973 1974 1975 1976 1977 1978
COMIBOL 20,113 67 21,383 69 20,161 68 20,106 68 18,919 71 21,076 69 22,940 70 21,116 72 Medium mines 6,124 20 5,858 19 6,551 22 6,223 21 5,807 22 6,870 22 6,094 18 5,641 19 Small mines 3,810 13 3,683 12 2,920 10 3,214 11 1,972 7 2,632 9 3,838 12 2,613 9
Total 30,047 100 30,934 100 29.632 100 29,543 100 26,698 100 30.578 100 32,872 100 29,370 100
Source: Ministeria de Mineria y Metalurgia, Boletin de Comercio Exterior, No. 60, Diciembre, 1978, p. 1. - 67 -
APPENDIX I
.1/ The Mineral Sector and the Suvply of Foreign Exchange
To illustrate how the Bolivian foreign exchange market might evolve without a minerals sector, two functions are basic: the functional relation
between the supply of non-mineral exports and the' exchange rate; and the demand
for foreign exchange as a function of the exchange rate. Assume that these
functions are stable, well defined, and linear over the range of interest to us.
They are illustrated in Figure 1, where the demand curve for aggregate foreign
exchange has the usual negative slope. SNM is the supply curve for non-mineral exports and ST is the supply curve of total exports. The difference between the two is therefore the supply of mineral exports. Both are described as functions
Pif the rate of exchange. Let us assume ceteris paribus conditions for all other variables which affect the demand and supply of foreign ex- change, and let us also assume that there is equilibrium in the foreign exchange markets. In Figure 1, Q 0 is the total quantity of foreign exchange
1/ The illustration developed here largely recapitulates that which Malcolm Gillis carried out for 1973-74. See Gillis et al (1978), pp. 82 ff. - 68 -
Table 12. FOREIGN EXCHANGE AND EXCHANGE RATES, WITH AND WITHOUT MINERAL PRODUCTION
Mean of Mean at Net New Mean of Exports Ecuilibrium 1976-77 1976-77 Exchange rate 20 20 31
Mineral exports ($ millions) 517 465
Non-mineral exports ($ millions) 163 147 270 (net)
Total exports ($ millions) 680 612 270
supplied and demanded atprice Ro. As indicated in Table 12, RO is $b,20L per US dollar, and Q0 is $612 million. Mean foreign exchange generated by merchandise and service exports in 1976-77 was $680 million, However this needs to be reduced by the value of imported inputs used to generate the exports. These 1/ are assumed to be 10% across the board. Consequently we end with net gene- ration of total foreign exchange of $612 million (Q0 in Figure 1). Net generation of non-mineral foreign exchange (QNM) is $147 million.
Gillis assumed that the elasticity of supply of non-mineral exports(ENM was 1.5 and that the elasticity of aggregate demand (DD) was -1. He found that these were reasonable parameters "considering the types of goods exported
1/ Gillis measured these as 20% of sales in the case of mining, and 15% in the case of the remaining exports of goods, and services and imports of foreign capital. jbjd., p. 86. Prices of mineral exports have greatly increased since 1973-74. - 69 -
1/ and imported by Bolivia." The assumptions and these parameters imply the
following equations:
(1) ENM 1. 5
(2) ED = - 0-
We have the following values: R,= 20
Q = 612
QNM = 147
Solving for the partial derivatives we have
4QtNM/dR = 11.0
dQ/dAR = 30.6
The partial derivatives equal the slopes of the supply and demand
functions, and measure the change in foreign exchange supplied and demanded
per unit change in the exchange rate. For example if the rate of exchange moves from 20 to 21 pesos per dollar, total foreign exchange demanded in the
new equilibrium will be $30.6 million less.
After the mineral sector disappears, there is a gap of $465 million
(612-147). This gap is eliminated by aR, the required change in the rate
of foreign exchange as given by the solution to equation (3).
(3) (1QNM/AR + 4Q0/8R.]E. (Q0 - NM) 465
AE 11.2
1/ Ibid, p. 87. - 70 -
Consequently the new equilibrium exchange rate is $b 31.2 to the US dollar,
and the net quantity of foreign exchange provided is
147 + (11.17)(11) = 270
Assuming intermediate consumption of imports of 10%, total exports of
goods and services would be $300 million, a decline of 44%. Much, perhaps,
most of the new exports would have their origin in the agricultural sector.
It needs no emphasis that this is a useful illustration of
how things might work rather than measurement. The ceteris paribus
assumption holds constant, technology, relative prices other than
the rate of exchange, capital movements and other variables which significantly
affect the foreign exchange market. Obviously disappearance of mineral
production would be accompanied by a completely different development
strategy with profound repercussions on policy variables. The Weltfremd-
heit of the ass=mptiorsis suggested by a comparison with the similar
calculation made by Gillis for 1973-74. The exchange rate in 1973-74 was also $b 20 - 1 US dollar. Yet the "equilibrium" (actual) quantity in 1973-74 was
$293 million. The "equilibrium" quantity supplied - using the Gillis
approach which included capital inflow such as public loans as part of total foreign exchange - in 1976-77 was more than $900 per year. Only a
part of this increase can be explained in terms of world-wide in-
flation. Notwithstanding the enormously,increased supply,,there was a reduction in foreign exchange reserves in both 1976 and 1977. - 71 -
APPENDIX 2
World Bank Support for Minerals Development
Bank Group support to mineral sector development has been provided 1/ in three projects.- The first, a US$ 6.2 million IDA credit approved in 1974
included (i) US$5 million to the private Bolivian Industrial Bank (BISA) for
financing expansion and modernization of predominantly medium size mines; (ii)-
US$0.85 million for a national survey of small mines to be carried out by the
Bolivian Geological Service (GEOBOL); and (iii) US$ 0.35 million for technical
assistance, including a study of the mining taxation system, a feasibility
study for a national mineral exploration fund, and technical assistance to the
Ministry of Mines and Metalurgy (M) for project evaluation and planning and
equipment for data collection. The second, a Bank loan of US$ 10 million to the Government of Bolivia, approved in. June 1976, increased the capacity of. BISA to
finance both industrial and mining projects. The third, a Bank loan of US$ 12 million to the Government of Bolivia, approved in September 1976, included (i)
US$ 9.0 million to develop small mining through a credit program to be managedby the
publicly owned Mining Bank (BAMIN);(ii) US$ 1.9 million for technical assistance to
GEOBOL to continue its survey of small mines and to prepare preinvestment studies of small mining projects; and (iii) US$ 1.1 million for assistance to the MM in policy planning and cadastral survey and to BAIN in management con- trol and project appraisal techniques.
The first two Bank Group projects, described above, have benefitted the mining sector, principally the medium-size mines that have both estab- lished operations and identifiable project requirements. BISA has almost
1/ Report No. 276a-BO, Credit No. 455-BO; Report No. 1132a-BO, Loan No. 1270-B0; Report No. 1236b-BO, Loan No. 1331-B0. - 72 -
fully committed its share of the IDA credit and about 20% of the IBRD loan.
Delay in disbursing the loan results from BISA's stringent conditions upon
lending and slow development of sound mining projects. The technical ahd
managerial competence of BISA, GEOBOL and the MMM has been enhanced by the Bank projects, which also have prepared the way for possible policy changes
in mining taxation and exploration through the 1975 study of mining taxation,
the 1975-76 feasibility study of a mineral exploration fund, and the small
mines inventory survey. The Bank loan for small-scale mining development
has encountered delays due to slow preparation of preinvestment studies by
GEOBOL, lack of cooperation between BAMIN and GEOBOL and inadequate program promotion.
As the above synopsis indicates, World Bank support in the mineral sector has attempted to foster expansion of both medium and small mining by providing sizeable loan finance through two established Bolivian financial
intermediaries. In addition, World Bank support has also attempted to come to grips with several of the most serious institutional shortcomings whose effects are to greatly impede mineral production. Prominent here is the
funding for the recently completed study of mining tax reform. As noted
earlier, mineral exploration has been very defective in Bolivia notwithstanding
sizeable, largely unexplored, but highly mineralized areas. Most deposits now mined were already known at the turn of the century. Consequently, the Bank funded the exploration fund feasibility study which may lead to the Bank's fourth -. 73 -
loan which would be designed to foster the development of the mineral ex-
ploration fund. Hitherto the Bank has not attempted to work with the three
large public enterprises of the minerals sector either through participation
in their investment programs or through any kind of study on technical
assistance, notwithstanding the fundamental role of these institutions in 1/ Bolivian development now and for the foreseeable future.
1/ Noteworthy here is the following statement from the Bank' s 1976 report on Bolivian mining".... considering COMIBOL's importance as by far the largest mining firm any attempt to make mining in Bolivia more viable would have little success if rehabilitation of the state company were not given top priority," (World Bank, "Present Position and Prospects of the Mining and Metallurgical Sector of Bolivia," Report No. 1251a-BO, 11/14/76, p. 15). Table -3; CAPSULE DESCRIPTION, WORLD BANK ASSISTANCE TO MINERAL SECTOR
Financial Aspects of Loan Credit Total Loan Amount for Sub- Sub Loans Share Project Signed in Yr. ($ millions) Loans ($ millions) Intermediary to Committed
(1) 1974 (IDA) 6.2 5 BISA medium mines fully (2) 1976 (IBRD) 10.0 10 BISA industry and mines 20% (3) 1976 (IBRD) 12.0 9 BAMIN small mines --
Remaining Uses of Loans Amount Project millions) ($ Use Executor Coal . I
(1) 0.85 Study GEOBOL Small mines inventory survey
(1) 0.35 Study MMM Studies of mining tax reform and feasibility of National Mineral Exploration Fund
(3) 1.9 Study GEOBOL Completion of small mines inventory survey (3) 1.1 Study MMK Policy planning and cadastral survey
Technical assistance BAMIN Management control and project appraisal - 75 -
APPENDIX 3
DESCRIPTION OF THE MINERALS SECTOR
Mining
As indicated in Table 9, tin dominates the Bolivian mining sector although exports of tin have stagnated over the last seven years. Neverthe-
less, Bolivia is still the world's second largest tin producer, accounting for about 15% of the world supply in recent years. In contrast, combined
exports of other major minerals have increased by almost 6% per annum over the last seven years. Zinc has become the second most important mineral and has grown rapidly. Bolivia had doubled its share in world zinc production, which, however, has remained very small. About a third of Bolivia's zinc is produced by COMIBOL's Mina Maltilde, which is also experiencing extremely large losses ($5 million in 1978). Bolivia maintains its position as the world's second largest producer of antimony, although antimony production is heavily dependent upon world prices. Bolivia's production of tungsten has remained relatively stable over the last seven years varying between 2,600 and 2,900 metric tons. There are over 400 small tungsten mines in the country.
Their operations are very sensitive to world price changes and contribute about 15% of the country's tungsten output. COMIBOL's share is about 35% of the total. Bolivia, which accounts for about 11% of world tungsten reserves, - 76 -
has been active with other producers in attempts to form an international
organization of tungsten producers and consumers to stabilize prices within
an agreed upon range by means of a buffer stock. Output of lead increased
rapidly through 1970 but has been declining since then. Lead is mined
more for the silver associated with it than for its own value. Silver
is also produced as a by-product of tin mining. Silver exports have
fluctuated between 147 and 209 metric tons over the last eight years.
The mining sector divides into. COMIBOL, the medium, and the small
mines. All medium and small mines are private.COMIBOL consists of over 90
mines organized into 12 mining companies, 2 cooperatives and several small proper-
ties leased to private parties., COMIBOL's production accounts for about
55% of total mineral output. Since its creation in 1952, COMIBOL has had problems of overcentralization, decapitalizatiori, and inefficient use of labor. For example, employment in COMIBOL exceeds requirements with about
35% of the labor force actually employed underground, as against over 60% in the medium mines. Most of COMIBOL's mines are decapitalized and operate with low levels of ore reserves. Operational costs are rising as mines be- come progressively deeper and the grades of ore decrease. In the past operational,maintenance has been poor. There is also weakness in middle management at the mine and plant levels. There has been some recent investment in mine development and ore processing. The latter has resulted in increased recovery ratios despite falling mineral content of the ores. - 77 -
Medium mines are firms which have a share capital of at least US
$ 100,000 and which meet certain minimum production levels. Recently there were
27 medium mining firms. Medium mines, as a whole, are the most efficient seg- ment of the sector and account for about 20% of the sector's exports and 25% of mining taxes. They are capital-intensive, and employ proportionately less labor than COMIBOL or the small-mining subsector but provide their workers with better working and living conditions than the latter. For many of the medium mincs the shortage of skilled workers and lack of sophistiation in. dealing with international mineral markets are serious problems.
Fear of nationalization and the extreme difficulty, due to legislation, of stopping or reducing operations if marketing conditions deteriorate have inhibited the growth of the medium mines. Growth has also been hindered by the shortage of credit for exploration, investment and working capital.
The small mines range from one-family operations to medium-sized cooperatives comparable in output and employment to smaller medium mines.
In 1978 there were more than 5,200 small mining properties. Whether they operate and how much they produce depends in part on the international mineral prices and world market conditions. Although they produce only about
9% of the sector's output, small mines and cooperatives are an important source of employment. Small individual and cooperative mines employ primitive technology and often neglect elementary health and safety standards. They face difficult marketing problems for their products and have limited access to credit. The Mining Bank (BAMIN) has traditionally been the main source of finance for small mining. However, owing to its limited resources and its - 78 -
preference for servicing larger market operations, BAMIN's credit to small
mines has consisted mainly of cash advances for future mineral deliveries and
short-term loans for tools and materials bought' from BAMIN's warehouses. The
traditional pattern of BAMIN'scredit activities* is expected to change and 1/ easier access to credit will be provided for small mining enterprises. In
a move which is expected to increase medium- and long-term prospects for mining output in all three subsectors, the Bolivian Geological Service (GEOBOL)
has been conducting a cadastral survey to measure where mining concessions have
been granted and where not. Resolution of boundary conflicts, which effectively
inhibit operations in some areas, will then be possible leading to the stimula-
tion of new exploration.
Most Bolivian mines, including those of COMIBOL, are at high altitudes.
They generally have narrow-vein underground deposits of complex ores. These characteristics, together with the country's limited physical infrastructure, make mining a relatively capital-intensive and costly activity. Inadequate exploration and mining development have seriously hampered output growth over the past 25 years. Less than 10% of the country has been systematically ex- plored. Government policies have adversely affected exploration activities.
Until recently, large possibly mineralized areas included in the fiscal reserves were excluded from private exploration. Yet COMIBOL undertook only minimal exploration in these areas. The authorities have recently opened these
1/ The World Bank has made a loan for this purpose. See Appendix 2. - 79 -
areas to national and foreign companies. In 1978 exploration charters were in-
dividually approved and were inevitably government/private joint ventures similar
to those granted to firms operating in the hydrocarbon sector.
Taxation has been an important obstacle to the expansion of mining. At
low world prices the principal metals taxes - a variable royalty and an ad valorem
export tax - are progressive with respect to world metal prices. But the effective
rates peak and thereafter are proportional for all higher market prices (38% in
the case of tin). No consideration is given to differences in cost structures
among mines. Consequently, otherwise profitable firms,or within firms mines
whose unit costs plus tax exceed world price, are forced out of production. An
uneconomical pattern of exploitation results in which only the richer ores ("high-
grading of ores") are mined. The system precludes adequate government partici-
pation in profits when export receipts are high, while the tax is overly burden-
some in situations of low prices and export receipts. In addition the existing
tax system also reduces investment expenditures since expenditures for exploration
and development are not taken into consideration in computing tax liabilities.
On the other hand, the tax is relatively simple to enforce while more rational
taxes lend themselves better to tax evasion.
The negative incentives resulting from the tax system have been of
some importance in the "winding down" of Bolivia's private mining sector. The
medium mines have made very little exploration since the 1930's notwithstanding
preliminary estimates which indicate that their ore reserves are no more than l/ two years of production. COMIBOL has also nearly completely neglected
exploration. For example, by 1974 proven reserves had declined to about 2.8
1/ IBRD, Staff Appraisal Report, Bolivia National Mineral Exploration Fund Project, Report No. 2309-BO, 3/16/'9, p. 5. - 80 -
1/ years of production. Moreover, the metal content in COMIBOL ores is very
low - Catavi, COMIBOL's largest mine, is mining ore with a grade of 0.3% -
while costs also necessarLy rise due to the mines becoming progressively deeper.
It is interesting to speculate to what extent Bolivia is an extreme
example of a worldwide pattern. After centuries of mining, one would expect
that the remaining mineral is in beds and veins which are less accessible and of lower grade. Much of the recent development in mining technology suggests
that this is actually the case. Block caving and open pit mining lend them-
selves very well to low grade ones. The volatilization process greatly reduces the costs of refining low grade ores of tin and other metals.
Bouyant prices for most mineral exports in 1977 resulted in an 11% expansion of mining value added. Tin sales of about 33,500 tons earned 47% of
the total income from exports. As suggested by Table 5 mineral prices continued high in 1978. For tin they were about a fifth higher at the end of the year, than at the beginning. For all major mineral exports, with the exception of bismuth, prices were higher at year's end than at the beginning. Consequently notwithstanding declines in the production of all the major minerals, except wolfram, the total value of mineral exports increased 5%.
COMIBOL programmed an investment of US$ 50 million in 1978. The program included the deepening of shafts in different mines, installation of new vetilation systems and conveyor circuits and the initiation of studies for the setting up of mining without rails with the truckless system. In the
1/ Ibid. metallurgy field, COMfIBOL intends to start renbdelling preconcentration,
flotation and ultra.f lotation mills and improving drying systems. Much em-
phasis is also given tovolatilization of low,grade tin. The plant at Palca
in Potosi is to be completed in 1979. It will treat 400 tons a day of precon-
centrates with a tin concentrate as low as 2.6%. Annual output will be 3,500
tons of concentrates of 50%. A second plant will be built at
Machacamara (Oruro) to process 400 tons of low-grade ores per day.
Over the medium term, there is substantial potential for expansion
of output in mining. Investment and technical assistance could well he con-
centrated in about a dozen medium and small mines and the more promising pro-
*perties of COMIBOL for the purposes of intensifying reserve development, increasing
mechanization and Improving mine operations. Over the longer term, develop-
ment of Bolivia's mining potential will depend heavily an the scope and quality
of geological exploration. Without exploration output will eventually decline
as deposits become progressively exhausted.
A mineral exploration fund has been set up by the ministry of Mining
and Metallurgy to coordinate and grant credits to private and state companies
C involved in mineral exploration. Several exploration projects are underway in
the Departments of La Paz, Oruro, Potosi, Cochabamba and Chuquisaca.
Hydrocarbons
The hydrocarbon sector is vertically integrated in Bolivia. YPT93
is the sole Bollivian firm in the sector. It carries out or manages all - 82 -
exploration, development, processing and distribution - including retail sales - of hydrocarbons. With over 4,500 employees and gross recipts in 1978 of $ 217 million, it was the second largest enterprise in Bolivia. In worldwide comparison with other hydrocarbon firms, however, YPFB is very small. Production of crude oil, for example, is a literal drop in the world bucket: YPFB's average daily production in 1978 was 32,450 barrels. Two foreign firms, Occidental Boliviana and Tesoro Petroleum started production in 1978. Their combined average daily production was 2,561 barrels. It is not expected to exceed about 6,000 barrels annually in future years. YPFB receives as its share of their production more than half of the crude produced by these two contractors, and purchases the remainder.
YPFB has 253 producing wells of which 109 are flowing wells, 79 use gas lift extraction, and 65 employ hydraulic pumping. The daily average out- put per producing well was 128 barrels per day in 1978.
Since 1973, YPFB's production of crude has dropped by about a third and is expected to drop further, although in the next several year production by contractors may fully offset further decreases.
Prices for most refined products are still the lowest in South America - gasoline retails at $US 0.27 per gallon - contraband to neighboring countries continues to contribute to rapid growth of apparent internal consumption : In the period 1973-77, annual growth in consumption of petroleum products was
7.9%, notwithstanding an increase in retail gasoline prices in 1975 of some 80%. - 83 -
The consequence of the rapid internal growth of consumption and falling production is a possible reversal from a net exporter of petroleum products. Bolivia's light crude has an average of 5? API with a small content of heavies which makes production difficult for diesel oil and other heavy products. It is likely that Bolivia will import diesel fuel in 1979 while exporting very little other petroleum pro- ducts. (In October 1978, exports to Argentina were interrupted,. as all crude produced in the country was fed to the refineries to separate all the heavies to meet the internal demand for diesel fuel. As a consequence there was an excess of gasoline which was transported to Arica for sale to the USA.)
In 1978 for the first time, the value of exports of natural gas exceeded the value of exports of petroleum products. There was a substantial revenue increase which was the result of several increases in the price of gas sold to Argentina, rather than because of increased volume exported. Production of natural gas in 1978 increased only 2% to
152 billion cubic feet. During 1978 there was a total of 74 gas producer wells in 17 active fields. Occidental and Tesoro, the two contractors to YPFB, also produced a small amount of gas which was delivered to YPFB. Domestic consumption of natural gas is very low, about 5% of total production. The
95% remainder is exported to Argentina. There is discussion of increasing domestic consumption of natural gas, to replace diesel power in certain uses such as providing energy for the mines as well as in several industrial projects now being considered, including a possible petrochemical complex. At the same time the government plans to increase exports of natural gas to Argentina. - 84 -
The government has agreed to sign a contract in July 1979 to
enlarge the volume of exports to 220 million cubic feet per day later
year, an increase of about one half of the volume in 1978. These plans
to increase production for export and domestic consumption are feasible
since, unlike petroleum reserves which are very low, natural gas reserves
are extensive. In October 1978, Bolivia and Brazil signed a letter of
intent concerning future gas sales to Brazil through a future gasliae from
Santa Cruz to Sao Paulo. The initial volume is to be 400 million cubic
feet per day with increases in the future. No specific agreement was
reached on the sales price, although the price paid by Argentina is to
be a negotiating base. The US firm of Glover and McNaughton is evaluat-
ing the amount of gas reserves. The gas project faces opposition in
Bolivia on the grounds that the sale of large quantities of gas to Brazil,
together with the existing commitment to Argentina, would imply that
Bolivia was giving up the expectation of ever having its own petro-chemical
and steel industry. (Bolivia has a large iron ore deposit at Mutun.)
In recent years YPFB has contracted with foreign companies to pro-
vide the bulk of risk investment in exploration while YPFB's investments have
given priority to transportation, storing and processing facilities. Over
1973-1977 nineteen firms spent a total of US$ 125 million (twice YPFB's ex-
ploration expenditure), covered 16.5 million hectares, produced more than
21,000 seismic line-km, drilled 23 wells and identified two fields with
commercial production prospects. Nevertheless by 1979 disappointing exploration
results for some companies, recent changes in the US corporate income taxation which eliminated tax credits for foreign drilling in cases where local tax payments - 85 -
are made in kind and reduced depletion allowances have acted to reduce to
three foreign companies associated with YPFB in exploration activities.
YPFB is a major source of fiscal resources. In 1978 it accounted
for about 15% of central goverment taxes, and probably a greater share of
departmental taxes. The corporation is exempt from income tax but is
subject to an 11% royalty on production at the well-head with payment to
the Department where extraction takes place as well as a 19% royalty on well-head production to be paid to the Treasury. In addition, YPFB's net
export earnings are subject to a 20% tax on the value of exports. The
later tax also applies to domestically consumed output valued at the far higher export price.
The refining of hydrocarbons in Bolivia is performed exclusively by
YPFB which operates six refineries. YPFB's recent investment in expanding capacity has produced an excess of capacity of about two thirds. Probably the smaller refineries will be closed and only refined products should be exported
in the future. YPFB also operates two lubricant plants. In addition two gas absorption plants for liquid products were recently completely at the Rio
Grande and Calpa gas fields. YPFB also has 3,711 kilometers of pipeline linkig production fields, refineries and points of distribution or exportation. The
enterprise also owns 62 service stations, 77 pumping stations and licenses 137 retail outlets for lubricants and kerosene. It also has considerable storage capacity for various kinds of hydrocarbon products.
In 1979 Stanford Research Institute is due to complete a feasibility study for a petrochemical industry. The chemicals in question are olefine, - 86 -
derived from natural gas, styrene, phenol, polyethelenes and polypropylene.
The latter are all derived from petroleum. Plans are well underway for the construction of an urea and amnonia plant. There is also a good deal of dis- cussion concerning the possible construction of a gasline from the Santa Cruz fields to the Altiplano. Initially the gas would be'used by industry with later distribution to households. In addition YPFB is also carrying out a certain amount of exploratory drilling as well as constructing or enlarging pipelines.
Metallurgy
Large scale modern smelting activity has only recently been undertaken in Bolivia notwithstanding the country's long history as a mining economy.
The creation of ENAF in 1966 marks the beginning of tin refining on a large scale. Substantial production began in 1970 at Vinto near Oruro.
Since then the Vinto complex has been expanded several times. By 1978 its capacity equalled 20,000 tons, although production in 1978 was 15.8 thousand tons, slightly more than half of total production in the country.
ENAF's Vinto complex also,includes an antimony smelter which in 1978 produced over three thousand tons,of which about three quarters was metallic and the remainder trioxides. ENAF has had serious problems in marketing the antimony produced and in early 1979 had a very large inventory of antimony on hand.
In 1979 work was proceeding at Vinto on the construction of a tin smelter for low grade ores. In contrast to the older and larger conventionai smelter - 87 -
at Vinto,half the inputs of the low grade refinery would be concentrates of
25%. These will be volatilized in a cyclone fuming f6rnace. The tin oxide
so produced will then be blended with 50% concentrates for reduction by
charcoal in an electric furnace to produce a tin about
94% pure. This will be further refined through chemical and thermal means.
A combined ENAF/COMIBOL smelter is also under construction at
Karachipampa near Potosi to smelt complex lead/silver concentrates produced by COM7,BOL mines. Design through-put is 20,000 metric tons per year of lead and 150 metric tons per year of silver. The capacity of the lead smelter
exceeds Bolivia's present total lead production. Lead reserves also may be inadequate to supply the smelter for a ten-year period. Silver reserves, how- ever, are more than adequate.
In addition to these projects, ENAF has been planning a number of other projects. These include a copper smelter and refinery (with COMIBOL);
*a zinc refinery; and a residue treatment plant at Vinto for reclaiming the tin and antimony in the tailings left from earlier smelting.
With the inauguration of COMIBOL's bismuth refinery in 1976, the country became the largest producer of bismuth in the world. Bismuth pro- duction and exports have suffered because of the drop in European pharma- ceutical consumption. New alloy uses for bismuth are being developed, especially in the United States, while in France use of bismuth in pharma- ceuticals is recovering and new applications in solar energy are being developed so that exports as well as prices are expected to improve in the medium term. - 88 -
1/ List of References
Government of Bolivia
Bancó Central, Boletin Estadistica, No. 229 (March, 1978)
Corporacion Minera de Bolivia, Gerencia de Finanzas, Informe Economico Financiero, Gestion, 1977 (1978),
Empresa Nacional de Fundiciones "Memoria Tecnica, 1971-1977," Publicación T'cnica, No. 6 (July, 1978)
Ministerio de Mineria y Metalurgia, Boletin de Comercio Exterior, No. 60, (December, 1978).
Ministerio de Planeamiento y Coordiiacion, Plan Nacional de Desarrollo Economico y Social, 1976-1980-(1976).
Plan Operativo, 1977 (1978).
Direccion Gestion de Empresas, "Macro-Diagnostico de las Empresas Pfiblicas"(1979) unpublished.
Presidencia de la Republica, Directiva Presidencial No. 2,Prescripciones para el Ordenamiento del Sector Publico Descentralizado (as published in El Dianio, Sept. 4, 1977).
World Bank
Choksi, Armeane,"State Intervention in the Industrialization of Developing countries: Selected Issues, World Development Report, 1979,"Background Paper, World Bank (October,1978).
Nankani, Gobind,"Developmental Problems of Mineral Exporting Countries," World Development Report, 1979, Background Paper, World Bank (November, 1978).
World Bank,"Present Position and Prospects of the Mining and Metallurgical Sector of Bolivia,"Report No. 1251a-BO (Nov.19, 1976).
,"Economic Memorandum on Bolivia,"Report No. 2195-BO (Nov. 3, 1978)
1/ Balance sheets, profit and loss statements, other unpublished materials, and newspaper articles are fully referenced when cited in the text. They are not listed here. - 89 -
World Bank, "Staff Appraisal Report, Bolivia National Mineral Exploration Fund Project,"Report No. 2309-BO (March 16, 1979)
"Economic Analysis and Projections Department, Commodity Price Forecasts, (May, 1979).
Other Publications
Gillis, S.M. and others, Taxation and Mining: Nonfuel Minerals in Bolivia and Other Countries (Ballinger,Cambridge, 1978).
International Monetary Fund, "Bolivia Recent Economic Developments " SM 79/60, (Feb. 26, 1979) Because of confidential information, circulation is restricted.
Rojo, Hugo Boero, Bolivia Magica (3rd edition) (La Paz, Los Amigos del Libro, 1978).
Tait, Allen and cthers, "Internatiohal Comparisons of Taxation for Selected Developi.ng Countries, 1972-76," International Monetary Fund, Staff Papers, Vo. 26, No. 1 (March, 1979).
14 DOIMSTIC FINANCE STUDES
( 56. A St.:tistical. Analysis of the Dynamics of Economic Growth in Iran: 1959-73. Decer-iber 1977. W.A. Dellalfar & J. Khaliladcb-Shirazi.
N.K>ThingaTaya, /16. Innovations in Banking: The Syndicate's Experience. January 1978.
0 47. Interest Rate, Transaction Costs and Financial Innovations. January 1978. V.V. Bhatt. of Swaraj Tractor. February 1978. # 48. Decision Making in the Public Sector: A Case Study V.V. Dhatt.
I 49. Portfolio Determinants of Commercial Bank Earnings in Selected Asian Countries. March 1378. Katrine Anderson Saito and Dan P. Vil18nueva. 0 50. Some Theory of the Financial Intermediation in Less Developed Countries. May 1978. Alan R. Roe. Patel. 0 51. Innovations in Banking: The Gujarat Experiments. August 1978. V.G.
K. Artus, 0 52. Development of the Japanese Bond Market. September 1978, Kazuko Sector in the Philippines, December 1978, # 53. Transaction Costs of Credit to the Small-Scale Katrini Anderson Saito and Dan P. Villanueva. Sarvodaya and Socialist Approaches i 554. Development Problem, Startegy and Technology Choice: in India. January 1979, V.V. Bhatt. January 1979, V.V. Bhatt. # 55. Financial Institutions and Technology Policy,
'June 1979. V.V. Bhatt. # 56. Development Banks in the Financial System. Income or Where.Do We Put # 57.. The Violated Neutrality Assumption and Counterfactual the Transfers ? June 1979. Jacob Meerman.
of Budget Incidence, July 1979. # 58. Estimating Counterfactual Incomes in Studies Jacob Meerman and Parthasarathi Shome. '
Capita: Is the Difference Important? # 59. Household Income or Household Income per October 1979, Gautam Datta and Jacob Meerman.
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