BNDES: HISTORY AND ASSESSMENT

1. BNDES:HISTORY AND ASSESSMENT Sergio G. Lazzarini Insper Institute of Education and Research Aldo Musacchio Harvard Business School and NBER March 2014

2. MOTIVATION State capitalism is one of the most misunderstood phenomena of our time Most observers see the rise of SOEs and “national champions” from China, Brazil, Russia, with apprehension

3. PART OF THE APPREHENSION COMES FROM THE FACT THAT LARGE SOEs DIDN’T GO AWAY W/ PRIVATIZATIONS (FIRMS with gov’t as majority owner—OECD, 2011) Total equity value of US$ 1.4 trillion, of which 61% are minority stakes in large co’s Source: Christiansen, H. “The size and composition of the SOE sector in OECD countries”, OECD Corporate Governance Working Papers, no 5, 2011.

4. IN EMERGING MARKETS... Source: Musacchio and Lazzarini (forthcoming). Notes: a These estimates include companies under government control and those with minority ownership. b For Egypt, the number of SOEs given here is for 2005 but the number of minority-owned firms is for 2002. Source: See Appendix 2-1. We include firms with government ownership of over 10 percent of the votes (i.e., control) as minority shareholdings and those with government ownership of over 50 percent majority-controlled SOEs.

5. NEW VARIETIES OF STATE CAPITALISM(Musacchio and Lazzarini, 2014) Privately-owned firms • Leviathan as a majority investor • Publicly traded SOEs with improved autonomy and transparency • State-owned holding companies (SOHCs) • Leviathan as an entrepreneur (owner/manager) • Full state control and ownership of SOEs, with limited autonomy and transparency • Leviathan as a minority investor • Partially privatized firms (PPFs) • Minority stakes under state-owned holding companies (SOHCs) • Loans and equity from state-owned and development banks • Sovereign wealth funds • Other state-controlled funds (e.g. pension funds, life insurance companies).

6. NEW VARIETIES OF STATE CAPITALISM(Musacchio and Lazzarini, 2014) Privately-owned firms • Leviathan as a majority investor • Publicly traded SOEs with improved autonomy and transparency • State-owned holding companies (SOHCs) • Leviathan as an entrepreneur (owner/manager) • Full state control and ownership of SOEs, with limited autonomy and transparency • Leviathan as a minority investor • Partially privatized firms (PPFs) • Minority stakes under state-owned holding companies (SOHCs) • Loans and equity from state-owned and development banks • Sovereign wealth funds • Other state-controlled funds (e.g. pension funds, life insurance companies).

7. DEVELOPMENT BANKS: UNDERSTUDIED ACTORS Source: based on Torres Filho (2009), with updated information from the banks’ annual reports.

8. DEVELOPMENT BANKSTHROUGHOUT THE WORLD

9. THE BRAZILIAN NATIONAL DEVELOPMENT BANK (BNDES)

10. THE INDUSTRIAL POLICY VIEW OF DEVELOPMENT BANKS • Development scholars argue that lack of credit and coordination failure will lead to suboptimal investment and entrepreneurship (Amsden, 2001; Gerschenkron, 1962; Rodrik, 2004; Yeyati et al., 2004; Amsden, 2001;). • Development banks, in particular, are specialized in long-term projects and have technical personnel with industry-specific expertise (Armendáriz de Aghion, 1999). • Emphasis on the development of latent capabilities (Hausmann and Rodrik, 2003). • They may also set performance targets as conditions to get loans (Amsden, 2001); and help signal credibility (George and Prabhu, 2000). • Thus, this view suggests a positive effect of development banks on firm-level performance and investment.

11. THE POLITICAL VIEW OF DEVELOPMENT BANKS • Soft-budget constraint hypothesis (e.g. Kornai, 1979): • Development banks tend to support underperforming firms (e.g. bail them out). • Rent-seekinghypothesis (e.g. Claesens et al., 2008; Faccio, 2006; La Porta et al., 2002): • Politically-connected firms are more likely to get subsidized loans. • Thus, we should not expect performance improvements after a company gets funding. • The “national champions” debate (Ades & DiTella, 1997) • Loans to help flagship firms for industrial policy reasons or because there is “political influence” in the back?

12. A BIT OF HISTORY…

13. BNDES AS A MINORITY SHAREHOLDER Source: Created based on data presented in Musacchio and Lazzarini (2014). Note: Indirect stakes occur when BNDESPAR buys a company that is part of a pyramidal ownership structure; that is, when it owns a company that, in turn, is a shareholder in another corporation (e.g., BNDES owns Valepar, which in turn owns Vale).

14. Funcesp Previ Funcef Espírito Santo Petros Opportunity Cidade de Deus Part. União Federal Mitsui Bradespar Litel Eletron Valepar BNDESPar BNDES AS A MINORITY SHAREHOLDER: THE CASE OF VALE Vale’s pyramid in 2009. Percentages refer to voting shares. 49% 18,2% 21,2% 11,5% 53,9% Furthermore, the government has “golden shares” and regulates the industry (e.g. royalties) VALE

15. BNDES: RESULTS BY LINE OF BUSINESS Source: Musacchio and Lazzarini (2014)

16. BNDES: RESULTS BY LINE OF BUSINESS Source: Musacchio and Lazzarini (2014)

17. AN INCREASINGLY IMPORTANT SOURCE OF REVENUE FOR THE GOVERNMENT Source: Afonso e Barros (2013)

18. FIRM-LEVEL EVIDENCE ON MINORITY STAKES BY BNDES (1995-2009) Source: Inoue, Musacchio and Lazzarini (2013)

19. Source: Inoue, Musacchio and Lazzarini (2013)

20. THE POSITIVE FIRM-LEVL EFFECT OF MINORITY STAKES WAS HOWEVER REDUCED AS CAPITAL MARKETS IN BRAZIL DEVELOPED...

21. IN ADDITION, RETURNS FROM THE EQUITY BUSINESS ARE FALLING... Estimatedvariation in themarketcapofBNDESPAR’s portfolio oflargefirms. 2014* 2013 2012 Source:: BNDESPAR, annual reports. * 2014 data until mid March, 2014.

22. BNDES AS A LENDER Source: Created based on original data from the Central Bank of Brazil

23. “NATIONAL CHAMPIONS”

24. “NATIONAL CHAMPIONS”

25. DO BNDES LOANS IMPROVE PERFORMANCE AND INVESTMENT? ECONOMETRIC EVIDENCE In general: inconclusive. Ottaviano and Sousa (2007): some lines positively affect productivity, other lines have a negative effect. Sousa (2010): overall null effect on productivity. Coelho and De Negri (2010) larger effect on more productive firms. De Negri et al. (2011) effect of loans on employment and the extent of exports, but not on productivity. Pereira, Simões and Carvalhal (2011): subsidized loans have positively affected investment (aggregated data). Lazzarini, Musacchio, Bandeira-de-Mello and Marcon (2012): no effect on firm-level performance or investment, except for a reduction in financial expenditures due to credit subsidies (2002-2009, publicly traded firms).

26. IF NOT BASED ON MARKET FAILURE CONSIDERATIONS, CREDIT MISALLOCATION(REGRESSIONS FOR 2002-2009)

27. BNDES IS APPARENTLY NOT LENDING TO BAD FIRMS IN GENERAL… Source: Lazzarini et al.. (2012)

28. BUT: SOME EVIDENCE FOR THE POLITICAL VIEW… Likely due to “pre-governmental selection” of “champions” and firms participating in concessions. Donations are not correlated with performance. Source: Lazzarini et al.. (2012)

29. BNDES: PERFORMANCE IN THE LOAN BUSINESS Between 2005 and 2009, the difference between the net interest margin of loans and the SELIC rate was, on average, -7.6%, which is close to the difference between the TJLP and the SELIC in the same period (-6.7%). Thus, BNDES pays around 7.6 cents per each dollar loaned Source: Calculated by Musacchio and Lazzarini (2014) with data from (BNDES 1953-2010). Returns are calculated as profits from BNDES’s investment portfolio (carteira de participações)—mostly through BNDESPAR—over the stock of such investments. All data was deflated using the IGP-DI index.

30. CONCERNS ON BNDES (1/2) • Credit Misallocation • Literature on state-owned banks: misallocation problem involves funding of bad firms (e.g. Bailey et al., 2011 in China). • Here: the bank is probably transferring credit to a substantial set of firms that would not need subsidized credit in the first place. • Some argue that loans promote new investment, which in turn generate more taxes and dividends (Pereira et al., 2011). The problem with this argument is that we need to believe in the counterfactual that investment would be lower without new loans from BNDES. • Selection of “Champions” • Lack of clear criteria (policy or politics?). • Policy of champions abandoned after 2012? Now champions are perhaps state-controlled firms?

31. CONCERNS ON BNDES (2/2) • Soft-budget Constraints and Bailouts • Very low index of nonperforming loans; and no systematic selection of bad firms. • Yet bailouts do occur from time to time especially through convertible bonds (e.g. JBS in 2011) • Residual Interference in the Target Firms • Especially when there is collusion of minority owners and firm-level rents. Example: Vale (BNDES + pension funds).

32. A contrasting example: CORFO (Chile) • Emphasis on small firms; no recent lending to large groups. • Acts jointly with private banks. Private bank lends; and then CORFO guarantees 50-80% of credit. • More recent emphasis on innovation (“InnovaChile”). • Grants to entrepreneurs are phased. Example: US$ 20k initially; extra money conditional on targets (such as 50% of sales growth in 6 months).

33. THANK YOU! amusacchio@hbs.edu sergiogl1@insper.edu.br

34. ANCILLARY SLIDES

35. Initially BNDES was making $ on loans

36. In the 1980s it became a hospital for ailing firms. Also lost $ on loans—began switch to equity

37. 1980s: BNDES giving away free money

39. Since 1993 (with privatizations) BNDES makes most of its money from equity investments (BNDESPAR)

40. OUR DATA • The extant literature has not tested empirically what development banks do; we have mostly theoretical arguments (e.g. Armendariz de Aghion, 1999; Yeyati, Micco and Panizza, 2004) • Hard to get data from banks (for confidentiality reasons). • Our data: 286 publicly traded companies between 2002-2009. They have to disclose loans by source (BNDES) or at least interest rate (we look for the subsidized rate, TJLP). Also, data on ownership (equity). • Our sample represent around 30% of the stock of outstanding loans and 70% of the stock of equity stakes (2009).

41. ESTIMATION STRATEGY • Firm-level fixed effects, year dummies and industry*year interactions; and then robustness check using combined fixed effects plus propensity score matching (Heckman et al., 1997). • BNDES loans and equity  Performance and investment: • Dep. variables (firm-level): Performance (ROA, EBITDA/Assets, Tobn’s q), cost of capital and investment (capex/assets and fixed assets/assets). • Key independent variables: BNDES loans and equity. • Firm-level factors  BNDES loans and equity: • Dep. variables (firm-level): BNDES loans and equity. • Key independent variables: ROA, EBITDA/Assets, Tobin’s q, “political connections” (to be explained next). • Controls:group membership, ln(assets), fixed assets/assets (except when it is a dep. variable), leverage (debt/assets), foreign ownership

42. MEASURING POLITICAL CONNECTIONS • Brazilian companies need to disclose campaign donations by candidate. • Endogeneity problem (best firms able to donate more?) • Besides fixed effects, we use donations to candidates who won the election (president, federal and state congress) and donations to candidates who lost the election (e.g. Claessens et al., 2008). • We find no correlation between donations for winners and firm performance.

43. DESCRIPTIVE ANALYSIS

44. EFFECT ON PERFORMANCE

45. EFFECT ON COST OF CAPITAL AND INVESTMENT Thus, marginal dollar from BNDES reduces financial expenditures to debt by around 4-12 p.p.

46. Robustness check: analysis of “financial constraints” (Fazzari, Hubbard, and Petersen, 1988)

47. SELECTION EQUATIONS: LOANS Likely due to “pre-governmental selection” of “champions” and firms participating in concessions.

48. SELECTION EQUATIONS: EQUITY

49. BNDES loans and equity investments