MDB & Energy Project: Regional Studies: Latin America Report

Energy and the Multilateral Development Banks in Latin America Contradictions between facts and discourse

Chapter 2

MDBs push for restructuring of the energy sector

The institutional structure of the energy sector in Latin America is changing dramatically. The Multilateral Development Banks (MDBs) are among the main agents pressuring for this change.

The ongoing "reforms"...

What is the nature of the transformation of the energy sector that is being imposed in every country of Latin America—in many cases as a real "copy"—independently of national peculiarities?

The main changes that are promoted and being implemented are:

* Privatization of state utilities that deal in energy resource exploitation or generation and/or its transportation, distribution and industrialization. Where privatization is not possible, state utilities are to operate under the logic—and presupposed efficiency—of private enterprise. In some sectors, privatization does not consist in the sale of public companies or assets to the private sector but in concessions to private agents for oil, gas or other kinds of exploration and exploitation.

* Elimination of monopolies and introduction of competition in the energy markets. Competitive logic should replace the conception of public service under which the state guaranteed service with some independence of the purchase capacity of users. Within the new framework, the creation of wholesale markets is fostered, as in the case of electricity where administrative bodies represent generators, transporters and distributors, large consumers and the state. The idea is to create "open" markets with theoretically free access to new operators.

* De-verticalization or fragmentation of the energy chain into basic functions—of generation, transmission and distribution in the electricity sector—operated by different agents, as a way of promoting specialization and competition and avoiding market "distortions" such as transference pricing within an economic group or big company.

* New regulations or regulatory frameworks that guarantee free competition in energy markets, prevent the formation of monopolies, oligopolies or other "market distortions" and, supposedly, enable consumers to defend their interests. For this purpose, the creation of regulation and control bodies is proposed.

* New tariff systems—mainly in the electric power sector—to enhance and maintain financial soundness of companies by absorbing costs and ensuring profits, hence making them attractive to private capital. This implies the setting of market prices and the removal of subsidies to enterprises and groups of users. Under this approach, energy users are clients of profitable enterprises.

* Regional integration through physical interconnections (gas pipelines, oil pipelines, binational hydroelectric plants, electric interconnections, etc.) and the establishment of common energy markets to facilitate international energy transactions. The aim is to make the energy systems of different countries complementary and to optimize the contribution of each to achieve cost reduction.

This new model for the energy sector is gradually being implemented in Latin America. It is progressing unevenly in various countries depending on national political situations, that is to say depending on the balance of power between those in favor and those resisting the new model. In some cases, the existence of authoritarian governments facilitated the transition to full implementation of the model. Argentina and Chile are in this sense paradigmatic, or "examples to be followed" according to the international financial institutions and consultants who profit from dissemination of this model.

The banks behind the scene

The MDBs are not—nor have they ever been—mere spectators or simple financial supporters of structural change in the Latin American energy sector. On the contrary, they actively promote the "reforms" through their financial and political power.

A World Bank (WB) policy paper (The World Bank's Role in the Electric Power Sector, 1992) for the energy sector clearly states: "Bank lending for electric power will focus on countries with a clear commitment to improving sector performance in line with [WB] principles". The Bank provides assistance "only when satisfied with the government's institutional and structural reform policies for the power sector."

What are the principles which condition WB lending to a sector? Following are the outstanding ones:

1. "To encourage private investment in the power sector the Bank will use some of its financial resources to support programs that will facilitate the involvement of private investors."

The bank intends to play a significant role in supporting governments in the creation of financial mechanisms for mitigating those risks perceived by private investors in the energy sector, which inhibit their investments.

2. "The Bank will aggressively pursue the commercialization and corporatization of, and private sector participation in, developing-country power sectors."

According to the WB: "Commercialization and corporatization of state-owned utilities are necessary first steps in the process of restructuring and attracting private-sector participation." The WB states that "[c]ompetition in power supply and greater reliance on the pressures of the capital market for financing power expansion are required to sustain the effort, and these can only come from greater participation by the private sector."

3. "In some of the least developed countries, the Bank will assist in financing importation of power services to improve efficiency."

4. "A requirement for all power lending will be an explicit country movement toward the establishment of a legal framework and regulatory processes satisfactory to the Bank. To this end, in conjunction with other economy-wide initiatives, the Bank will require countries to set up transparent regulatory processes that are clearly independent of power suppliers and that avoid government interference in day-to-day power companies operations (regardless of whether the company is privately or publicly owned)."

The bank proposes to "shift away from the monolithic type of governmental management and toward more decentralized and market-based systems. Government would retain responsibility for setting objectives and articulating overall policies and planning and coordinating sector development. It would also establish the legislative and legal framework to protect the interests of the various stakeholders and the public."

The policy articulated by the Bank is crystal clear: the Bank will require, and it will be a condition for its assistance, that governments abide by its principles. In other words, countries must restructure their energy sectors in line with the paradigm of the Bank or they will not receive assistance for energy infrastructure development.

Though it seems less imposing, the strategy of the Inter-American Development Bank (IDB) pursues a similar policy of encouraging a new institutional and regulatory model for the energy sector.

In its paper on energy strategy (Energy Strategy Profile, draft, IDB, December 26, 1996), the IDB states: "The challenge faced by the Bank in designing its strategy for the region's energy sector, is how to optimize the use of its resources to support the countries in achieving their sustainability goals and aims. During the period under consideration, this implies support for the process of transition to a sector ever more autonomous and clean, less dependent on the State and/or direct intervention by multilateral banks, and with a larger private sector participation."

The document affirms"[t]he necessity that the Bank's financial support acts primarily as catalyst to attract other financing from the private sector and that its instruments are targeted to ameliorate the risks perceived by investors. Thus, a large portion of the strategy for the sector is concentrated in identifying the new credit instruments and the Bank’s role in facilitating the participation of the private sector. These issues, although approached within the wider framework of financing of infrastructure and the strategy for the private sector, still have special connotations for the energy sector."

The IDB considers that the challenges facing all countries in Latin America and the Caribbean are:

1. Consolidation of the regulatory reforms undertaken during the 90's. According to IDB, "the task of consolidating such reforms shall be the main challenge faced by the countries of the region in the energy sector during the next decade,.... It is not easy to underestimate the complexity of simultaneously performing three innovative transformations almost unprecedented in the world, namely, restructuring of the sector, establishment of a new regulatory framework and privatization. The task is even more complex because, in many countries these transformations should be accomplished within a process of State modernization and structural adjustment, in order to lay the legal and institutional framework required for the proper operation of a market economy; also, the liberalization of the hydrocarbons market is still resisted despite its evident benefits for consumers; and finally, energy pricing does not reflect the opportunity cost since it is highly dependent on political circumstances." (Energy Strategy Profile, draft, IDB, December 26, 1996)

2. The incorporation of foreign and national capital investment under reasonable conditions for supporting the expansion of the sector.

3. The development of production and consumption patterns compatible with environment preservation.

4. The extension of modern energy options to the whole population.

5. The integration of regional energy markets.

6. The creation of a truly integrated energy market with an active participation of the private sector, which is hindered, according to the IDB, by the "trend towards self sufficiency and the protection of state monopolies" that still exist in the region.

7. The inclusion of multisectoral considerations in dealing with the energy sector.

While the MDBs claim different considerations (environmental, efficiency, social, etc.), their performance shows a clear bias toward certain objectives—those that are a part of the new economic paradigm: privatization, liberalization, etc. The pressures exerted by the MDBs on governments and the resources they provide are focused mainly on the modification of regulatory frameworks and the creation of conditions favorable to private involvement, not on social, environmental or energy end-use efficiency considerations.

Intervention of the MDBs in tariff and price setting—and associated regulations—has mainly served to encourage private investment.

Such pressures are evident in loan negotiations and conditioning and also in the threats—occasionally effected—of loan suspension. Mexico and Colombia are cases in point.

The biased view of the MDBs

The Mexican example

The MDBs' priorities are shown by their investment portfolios. Several projects are oriented toward the proposed changes.

The World Bank granted a US$46 million loan to the Mexican government for Infrastructure Dis-incorporation—an euphemism for "privatization". This project, approved in 1995, was designed to assist the Mexican government in the articulation of policies and strategies and in the preparation of laws and regulations for the infrastructure of three sectors: energy and secondary petrochemicals (33% of the funding), telecommunications and transport.

The IDB approved a loan of US$1.5 million from the Multilateral Investment Fund (MIF) in 1996 to support the Mexican government in the "establishment of a regulating framework suitable for private involvement in the natural gas subsector and the institutional strengthening of the Energy Regulatory Commission (CRE)

In 1996, the IDB approved a loan "Support for privatization" for a total of US$33 million (US$12 million from the IDB and the rest from other sources). The loan is to assist the privatization or concession of infrastructure in the transport, energy, telecommunications and sanitary service sectors.

The efficient use of energy—which is less expensive and more effective than the big hydroelectric dams that have absorbed much of MDB loans—represents less than 5% of the WB's investment portfolio.

In Mexico, the WB provided approximately US$960 in loans to the energy sector since 1990, while the IDB financed two projects for a total of US$405 million. The "High Efficiency Light" project is the only WB project (through the Global Environment Facility) that truly addresses the problem of efficiency in the end-use of energy. Although it is an excellent project, it received only US$13 million from the WB—scarcely 1.4% of the funds allotted to the Mexican energy sector and one-third of the amount destined to "infrastructure dis-incorporation".

Data indicate that regulatory changes supported by the MDBs are mainly for promotion of private-sector participation within the framework of energy sector restructuring in every country. Other potential regulatory changes—to support efficient energy generation and consumption, energy conservation and the participation of small companies and producers in more innovative schemes—have not been emphasized by the MDBs.

Summarising

MDB programs for the energy sector in Latin America are similar to programs in the other sectors. Claiming that globalization is inevitable, an economic paradigm is being imposed in our countries that, among other things, proposes that assets and natural resources should be made freely available under market rules. It aims at reducing the sphere of what is considered "public". It generalizes the principle of state subsidiarity by promoting market liberalization and neutrality in economic policies, and by disregarding any differentiation among productive sectors or per source of capital.

In line with this view, companies should concentrate on developing their competitive advantages and the state should intervene only to guarantee free competition and economic, social and political stability so as to provide confidence, foster investment and promote dissemination and incorporation of technical progress.

One aim is to progressively reduce the burden of the energy sector on the national budget, despite the fact that in many countries of the region, taxes on energy goods still account for a significant part of fiscal revenues.

Another aim to introduce competition into the energy market, fostering liberalization of tradable goods and regulating natural monopolies, while favoring publicly-owned companies, privatization and a greater involvement of the energy sector in the capital markets.

One stated reason for energy sector reform is the need for capital to develop the infrastructure required to respond to the growing demand that exerts pressure on the sector. These needed investments should come from the private sector and not from the state. To this end, the energy sector must be made attractive to and regulatory frameworks appropriate for outside investors.