Economy & Business - October 2003

The privatisations in the region during the 1990s have proved to be, for the most part, pretty flimsy constructions. The most dramatic unpicking of an electricity privatisation occurred in the Dominican Republic, where the government simply renationalised. It was, however, careful to ensure that it bought out the new owners of the electricity distribution companies, Unión Fenosa, at a profit for the Spanish company. In Brazil, too, private companies misjudged the market and their capabilities and have had to rework deals. In Argentina, several companies have simply handed the government the keys to what are now unprofitable companies and walked away. In Mexico, where there was no privatisation boom, the government is hoping that its weak reforms will bring foreign companies flocking in. 

Electricity privatisations have gone wrong in Latin America for a range of reasons. In Argentina, power companies thought that they had licence to print money as the prices they charged were legally tied to the dollar and the US inflation rate. When the government ignored that provision, following the debt default, and froze prices, the unhappy owners tried to mobilise a lobby to get the decision overturned. They have got almost nowhere. Some of the US companies that were lured into buying regional electricity businesses have decided to cut their losses and toss the keys of business back to the governments they had bought the businesses from. 

Privatisation proponents in Argentina claimed that, initially, privatisation did deliver. They claim that before privatisation the electricity industry had an installed capacity of 15,000MW with 55% availability. Post-privatisation the capacity went up to 22,000MW with 85% availability. Argentina was not alone: Peru's electrification coefficient reached 75% in 1999, from 47% in 1992. Colombia's installed thermal electricity capacity increased by 111% between 1992 and 1999. 

Argentina
The problem is that these increases appear to be one-offs. One of the big players in the Argentine electricity industry, Electricité de France (EdF), issued a warning in October that, unless prices were unfrozen, the national grid would collapse because of the demand. EdF argues that the combination of the price freeze and the devaluation has left Argentine prices among the cheapest in Latin America. This in turn means that people are careless about their use of power.

The mostly foreign-owned companies that piled into Argentina when it started to privatise its inadequate state industries from 1992 have been repenting over the past couple of years. The companies are all struggling with large dollar debts and puny peso revenues streams. They have also halted virtually all fresh investment. A recent World Bank report noted that private sector investment in infrastructure (covering all sorts of privatised utilities) had fallen from an average of US$5.2bn a year in the 1990s to just US$200m in 2002. 

The Argentine government appears to believe that it has the privatised companies over a barrel. It said that it will not allow them to raise their prices until it has reviewed all 61 of their contracts to supply services. The IMF had insisted on the government allowing the companies to increase prices as part of its recent deal: once again the Argentine government outmanoeuvred and embarrassed the Fund. The government is in no rush to review the contracts: it reckons that the process will take until the end of next year. 

The desperation of the companies that were lured to Argentina is clear from the fact that, of the 60 cases pending at the World Bank's International Center for Settlement of Investment Disputes, a third involve the Argentine government as a defendant. 

Another sign of deteriorating relations is that the Argentine government is quick to slap fines on privatised companies if they fail to deliver services. The government imposed fines of Arg$9m (US$3.2m) on utility companies in late October. Aguas Argentina, which is owned by French and Spanish water companies, was fined Arg$1.3m for a cut in water supplies to Buenos Aires on 20 October. The company had accepted responsibility for the problem and the fine was expected.

What was less expected was the Arg$7.5m fine handed out to Argentina's three main electricity companies, Edenor, Edesur and Edelap. The government said these fines had been accumulated since 2001. Commentators interpret the fines as a warning to other electricity companies not to allow more blackouts. In late October, parts of Buenos Aires were blacked out for hours. 

Argentina the advanced
The irony is that the privatisation proponents originally claimed Argentina as a model for the region. The consensus was, in 2001, that the advanced countries, with the most liberal energy markets, were: Chile, Argentina, Bolivia, Colombia, Brazil, Peru and El Salvador. Behind them came Ecuador, Mexico and Venezuela, which were in the process of testing various liberalisation schemes. Uruguay and Paraguay brought up the rear. 

Now the order is a bit different. Chile still has the most liberalised and efficient energy sector in the region. Brazil may be running second, largely because the government has shown itself capable of negotiating solutions to disputes rather than imposing solutions, or, in Argentina's case, punishments. 

Brazil
The big dispute in Brazil involved the privatisation of the country's main electricity company, Eletropaulo. It supplies the country's most economically developed area: São Paulo. 

Brazil's development bank, BNDES, and the AES Corporation from the US finally struck a deal over how to restructure US$1.2bn of debt that the US-based power giant incurred to buy Eletropaulo, and build a business that brings AES more revenue than all its North American operations. The deal ended the government's threat of renationalisation but gave BNDES a big stake in AES operations in Brazil.

The stakes for both sides were high. BNDES had to be seen to stand up for the national interest and the enforceability of contracts. AES too had a lot at stake. Not only is the Eletropaulo business a huge revenue producer, the company had also invested US$4bn in Brazil since it arrived in 1996, making it the single largest investor in the country's power industry, which is mostly hydroelectric. 

Under the terms of the deal, BNDES will trade its debt for a 49.9% equity stake in AES's Brazilian businesses. BNDES had threatened to renationalise not only Eletropaulo but AES's other Brazilian business. These are two other electricity distribution companies, AES Uruguaiana and AES Tiete. AES also promised to inject its AES Sul company into the new company. 

AES has agreed to pay US$60m of the debt it owes BNDES on completion of the deal, scheduled for mid-December, US$25m one year after closing, and the remaining US$515m over 10 to 12 years.

The dispute had become a test case for President Lula da Silva. His Partido dos Trabalhadores had opposed the privatisation process that had allowed Eletropaulo to be sold to AES. The negotiations were seen as an indicator of President Lula's treatment of foreign investment, particularly in the troubled energy industry. Commentators are mostly favourable about the result, which they say shows that the government prefers market-based solutions over renationalisation. One cunning element of the deal is that BNDES has created a sort of preferred stock convertible into Eletropaulo voting equity: this will be issued if AES misses debt repayments. 

There has been some criticism of the pragmatism. In effect, AES has rescheduled its debt to BNDES. There is a price, as Brazilian officials know, for getting more time to pay. Eletropaulo's competitors are none too happy. They say that the company has gone from being a debt-laden laggard to being the best capitalised operator in the market.