Bolivia:
Capitalization, Pension Reform
and their impact on Capital
Markets
By
Pablo Gottret, Ph.D.
13th Plenary Session of the OECD
Paris, France
September, 1999
Bolivia: General information
• Population (1997): 7,8 millions
7.09 inhab/km2
61% urban
39% rural
• Net income per capita: $ 1078
The economy during 1985-1993
• Annualized inflation rate: 25,000% (august/85)
• GDP growth: - 1.68% (1985)
• Negative Int’l Reserves
Causes
• Fiscal deficit of more than 20% GDP
• Protected and deficient industry/low foreign
investment
• Fixed and overvalued exchange rate
• Subsidized interest rates/bankrupt financial system.
• High external debt and moratoria of payments
The economy during 1985-1993
Reforms adopted
• Liberalization of prices
• Liberalization and unification of capital flows
• Liberalization of labor markets
• Simplification of tax regime
• Closure of deficitary public companies
Results
• Decline of inflation rates to 8% (1994)
• Positive GDP growth by 4% (1990-1994)
• Price stability
• However, private investment was only 7.08% of
GDP (1993)
Challenges in 1994
• Key companies continued under Government
administration
• Utilities required large amounts of investment
• Most public investment directed to productive
and infrastructure sectors (24% and 48%) in lieu of
social sectors
• Most private investment financed out of pocket
and with development credits channeled through
the Central Bank
Challenges in 1994
• Low long term internal savings applied to pay
retirement pensions
• Non existent capital market development
• Weak pay as you go pension system
• Underdeveloped insurance industry
Capitalization Program
 A strategic partner takes over 50% of public Co. and
administrative control.
 100% of partner´s cash contributions, representing
50% of the investor´s best market value estimate, is
committed for new Co. projects.
 The remaining 50% of the shares is transferred to a
fiduciary fund managed by private pension
administrators
 The benefits of the latter are distributed among the
adult Bolivian citizens through a fund known as FCC
(Collective Capitalization Fund)
Capitalization Program
Features of the program:
 Modern sectoral laws and regulations
 Exclusivity periods
 Introduction of supervisory bodies.
 Contracts define specific investment plans
 The FCC is valued in US$ 1.7 bn. at
capitalization prices
Capitalization financial results
(millions of US$)
 ENTEL (telecommunications): $ 610 (Euro
Telecom/Stet Int´l)
 YPFB (hydrocarbons): $ 833 (3 Co.,
Amoco/PerezCompanc; YPF; Enron/Shell)
 ENDE (Electricity): $ 138 (3 Co., Dominion Energy;
Constellation energy; Energy Initiatives)
 ENFE (railroads): $ 48 (2 Co., Cruz Blanca)
 LAB (airline): $ 47 (VASP)
Pensions Reform
General Situation of the pay as you go system in 1995:
 Administration: divided in Basic (public) and
Complementary (semipublic)
 Covered population: 315.000 affiliates (22% of urban
labor force) and 115.000 pensioners
 Disclosed mean salary: $ 200/month
Financial situation: the system was bankrupt, needed
transfers regularly from the Treasury
Causes
 Active/passive ratio: 3/1
 Hyperinflation in the mid ‘80s
 High administrative costs (17% of total contributions)
 High evasion rates and private sector debts
Pensions Reform Design
First pillar: consists of the benefits for every
Bolivian adult citizen financed by the fund derived
from capitalization process
Second pillar: is based on a mandatory contribution
from the employees salary to an individual
capitalization account, which is privately managed.
Contributions:
14% (Incl. 4% premia for common risk & workers
compensation)
Pensions Reform
Benefits
 No fixed retirement age. Retirement allowed once the
individual account is actuarially enough to cover a for
life pension of at least 70% of the reference salary
 There is no minimum pension guaranteed by the
State.
Management
 2 private fund managers (AFP), appointed in
international bid. Contract grants them exclusivity for
a 5 year period.
 Affiliates were preassigned to an AFP.
Pensions Reform
Compensatory Pensions
 These compensations will be paid monthly upon
retirement.
Current retirees
 Their pensions are entirely funded by the Treasury.
Financing of the fiscal cost
 The pay as you go system was completely closed
 The fiscal cost in 1999 will be $300 millions (more
than 3.2% of the GDP
 Government will borrow from the new system ca.
140 million.
Capital Markets
• Prior to reforms, capital market was shallow, low
volumes of trading (mainly short term debt
instruments)
• However, post reforms, the structure of the capital
market hasn’t changed significantly.
Reforms had little impact in the capital market due to:
 Govt. crowds out most funds collected by pension
system
 Capital market’s law recently passed (March,1998)
 Capitalized companies not listed in the Bolivian
Stock Exchange
 FCC expected to bring new dynamism to trade equity
once the capitalized companies are listed.
Results (Capitalization)
• The administration of capitalized Co. was transferred
from public to private sector
 Clear rules and regulations were established
 The public sector activity is limited to regulation
 Capitalized Co. are complying with investment
commitments
 Additional foreign invest (hydrocarbons and mining)
 Change of structure of investment: 1998 Private
investment : 14.2% of GDP, public investment 6.3% of
GDP vs. 1993: 7.1% and 9.8%
Results (Capitalization)
 Change of Public investment composition
- 1993 social sector investment: 19.2% of total
public investment vs. 48% in 1998
 In 1993 most private investment were carried out
through developed credits channeled by the Central
Bank vs. 1995-1998 were most private investments
were channeled by capitalized companies
 Capital Market will soon list the capitalized
companies and will receive long term resources
from FCC
Results (Pensions)
 1995 covered pop. 300,000 vs. 400,000 in 1998
 1995 contributions inflow: $105 mm. vs. 1998: $180
mm.
 1998 rate of return of funds: 8.7% in real terms
 Long term resources expected to be provided by AFPs
 Capitalization resources not used to finance fiscal
pension cost. Such cost is financed by Treasury by
borrowing funds from the new system
 Contributors to former system were obligatorily
transferred to the new. Treasury pays compensatory
pensions to these people
Concluding Remarks
Required preconditions for a capitalization process:
 Stable macroeconomic and legal framework
 Independent regulatory authorities
 Exclusivity periods may be required
 Fiduciary players must have international
recognition and correct incentives.
Concluding Remarks
 Capitalization is a good marketing tool that puts
the country in the international scene
 Capitalization does not bring cash to the Treasury.
Therefore, when carried out jointly with a pension
reform, the Treasury must be able to cope with the
cost of the reform.
 These reforms don’t necessarily immediately
strengthen the capital markets