Half a century after Brazil and Paraguay signed the treaty that gave way to the construction of the Itaipú dam across the Paraná River, the company that runs the world’s second-largest hydroelectric plant on 28 February paid off the massive debt it incurred to build it.
That has far-reaching implications for both countries, but particularly for Paraguay. For one, Itaipú Binacional, the corporation both countries founded, no longer has debt servicing costs and therefore will be much more profitable, generating four times as much income as it has so far. Royalties could jump by US$2bn (a fourfold increase), or the same as the cost of debt amortisation until now. That would amount to a 10% increase, or 2.2% of GDP, in Paraguay’s fiscal revenue, according to an International Monetary Fund (IMF) paper.
In addition, the part of the treaty called Annex C, which deals with the revenue distribution and the operation of the hydroelectric plant, is up for review. That is significant because Paraguay could change the currents terms, for example increase the price of electricity it sells to Brazil, sell it to somebody else, or use it at home to fuel energy-intensive industries, be they steel or green hydrogen production.
The prospect of being able to dispose of nearly twice the amount of energy it currently consumes, as well as a massive additional revenue to boost public coffers, was celebrated like a second independence day in Paraguay. Many Paraguayans think Brazil used its diplomatic and economic muscle to impose a deal that favoured its bigger neighbour disproportionately.
Paraguay’s President Mario Abdo Benítez is committed to begin talks with Brazil on Itaipú before his term ends in August so as to leave a roadmap for the negotiations, Foreign Minister Julio Arriola told his Brazilian counterpart during a visit on 9 March in Asunción. Previously Arriola had said that negotiations would encompass the entire accord and take a “long” time. President Luiz Inácio Lula da Silva’s appointed representative to Itaipú Binacional takes office in late March, a month before Paraguay’s presidential elections on 30 April. Abdo Benítez’s successor is to take office on 15 August.
The points of the Itaipú accord likely to be re-negotiated are the following: the amount of royalties Paraguay and Brazil receive from Itaipú; the price of electricity sold to Paraguay’s Ande or Brazil’s Eletrobas power companies; and the price at which Paraguay sells its share to Brazil and whether it can sell to other countries.
Under the current accord, each country has the right to half of the power generated by the dam. Whatever part is not contracted by one country can be bought by the other at near-cost prices. In practice that means that Brazil has consumed the lion’s share of the electricity generated by Itaipú, around 80% in 2019, at rates far below market prices. Most Paraguayans consider that highly unfair because they paid for the dam together but only used a fraction of its output. According to Paraguay the dam cost US$63.5bn. Brazil, which guaranteed much of the funding, says it was US$17.6bn.
The hydroelectric plant at Itaipú, which means ‘the rock that sounds in the water’ in the Tupi-Guaraní language, first started producing energy in 1984, and in 2020 was surpassed in output only by China’s Three Gorges plant. This is the second time Lula will have to negotiate with Paraguay over the Itaipú dam. Towards the end of his second term, in 2009, Lula had already agreed for Brazil to pay better rates and for Paraguay to be able to sell power to private Brazilian customers.