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 Brazil finds itself obsessed with assigning blame for
energy crisis effects when damage is yet nominal.
The profound achievements of creating reliable financial institutions,
a stable currency and the constant influx of foreign investment
are now all apparently irrelevant history.
By Conrad Johnson
Suppose one had not heard, of late, of Brazil and its immediate struggle to create the
conditions of its own growth and stability ("order and progress", as the
national motto prays). Then one was told (1) Argentina would go through a confidence
crisis (2) two important Senate leaders would resign under investigation and threat of
certain impeachment (3) energy rationing was in effect as the last line of defense against
imminent rolling black-outs: (4) all three conditions at the same time. Would the Brazil
one had described for himself expect (1) just mild damage like a point or two from its
growth targets (2) 6 percent annual inflation (3) a gradual loss of 20 percent against the
dollar, all as an evaluative working theory of the principal probable effects? The Real
Plan has made a difference. The Brazil that today confronts its particular set of economic
and political circumstances is not the Brazil of even two years ago. Unlike Argentina, no
one in Brazil has to talk about getting the economy growing again.
Instead Brazil finds itself obsessed with assigning blame for energy crisis effects
when damage is yet nominal. It feels compelled to soon make important political decisions
about the late 2002 election slates; its Chief Justice of the Supreme Court gives opinions
on legality of Executive branch crisis measures before there is even one case before any
court; nationalist, personalized, populist rhetoric colors nearly every report and
opinion. Nearly all causal explanations for the crisis seek a single descriptive cause, as
though thinking and describing could some how be singular and cleansed of multiple causes
and considerations. In fact if one complains that certainly some rare and unlikely
precipitation conditions had contributed something to the problem, a chorus of refuters
crop-up immediately and everywhere with the refrain, "Not the lack of rain, but the
lack of government investment".
Interpreting the political fallout rhetoric from Brazil's energy crisis, one would
think there had never been a Real Plan. One would think that no executive and legislative
coalition (only the second in Brazil's entire history!) had ever enacted or administered
such an event. The profound achievements of creating reliable financial institutions,
fiscally responsible governmental units, a stable currency and the constant influx of
foreign investment necessary to feed economic growth are now all apparently irrelevant
history. As the president of an industry sponsored think tank (the IEDI, the Institute for
Study of Industrial Development) said recently, "the government doesn't know
administration, but more evident than that, it has refused to create a national agenda to
go alongside the debate about IMF conditions… During the first hour in a University
level administration course one learns that to manage you have to plan, operate,
intervene; the present government didn't learn that lesson."
This theme is sweet music to nationalist and populist `opposition' political hopefuls.
There are four `opposition' candidates for the 2002 presidential elections. Together, and
still on the eve of rationing, they garner 70 percent of present intentions to vote. They,
like the industrialists, are rhetorically standing the Real Plan on its head: `the fiscal
austerity of the Fernando Henrique Cardoso government is the cause of the energy crisis;
IMF conditions rendered the government powerless', or so their causal explanations go.
The Real Plan was fashioned within the parameters of a populist 1988 Constitution that
mandated strict limits to public investment by making most government expenditures (for
example, `first world' or better pension benefits for millions of public employees and
retirees) a matter of strict obligation. In fact as we go to press there is still doubt
that even the governments rationing plan will pass muster. The 1988 Constitution also
provides that electricity is a subject of user `rights'. Three lower federal courts have
issued restraining orders against the soul of the rationing solution: escalating rates and
temporarily interrupting service for users who do not keep within mandated quotas. The
plan has been changed just three days into operation, specifically to meet judicial
review, but also in an attempt to be responsive to opinion maker concerns without thought
to their merit.
The implications of the nationalist arguments that the government should return to an
electric infrastructure administrated by government institutions ought to worry foreign
investors and good neighbors alike. With or without IMF loans to bridge current accounts
until stronger economic growth is achieved, there is no way the government could both
spend enough to meet the long-term increased electric demand assumed by that growth and
avoid fueling massive inflation. Causal explanations worth their salt will need to
concentrate on why private investment was so slow. Public debate, to date at least,
conspicuously avoids searching for that kind of understanding and is content to blame the
coalition for not spending money it never had.
What the electorate wants to hear is the message of the opposition: the message is that
private funds are a necessary condition for the electric sector all right, but those funds
must be under the command and control of the government. Such a conclusion assumes either
(1) making government companies so advantaged in the sector that their equity offerings
will be irresistible to foreign and domestic stock market investments or (2) future
government controlled generation projects are to be financed with private equity
placements structured on a minimum guaranteed hard currency return. Either
"industrial plan" is a doubtful solution for Brazil's continuing ravenous demand
for electric energy. Both are a certain death for the advantages of competitive market
conditions as contemplated by the Real Plan. The generation itself will no doubt be
constructed just as the electorate desires. The state companies will receive preferred
political treatment. Predictions are the sector needs $ 20 billions of investment over the
next three years. Furnas alone, with a balance sheet nearly clear of debt (10 percent of
assets) plans responsibility for $ 8 billions.
The widespread beliefs that `privatizations' alone creates competitive market
conditions and that `privatizations' caused the failure of the Real Plan in the electric
sector both fuel the illusion that a government controlled market can look to private
funding to build needed but non-advantaged government generation. Both these false beliefs
were encouraged by the actions of the FHC administration by explaining privatization to
the population as a fiscal necessity and not also as a first step toward a freer domestic
market.
But more importantly, Aneel, the electric sector independent regulating agency, took on
itself the responsibility of protecting users from being `abused' by their electric
distributors. Aneel is unrealistically perpetuating a disguised and unusual rate structure
so as not to contribute `excessively' to indices that measure overall price stability.
Armed with the mysterious belief that Brazil is one of the most attractive places in the
world for electric energy investment, Aneel has left its already cash flow strapped
private distributor clients to absorb yet another 25 percent reduction in 2001. This just
on the account of loss of revenues and other rationing plan expenses.
Aneel `protected' consumers have not yet been made aware—even by the popular
opposition—of the price structure in the electric sector. In the US, for example and
on average, industrial users pay twice the rate for electricity that residential consumers
pay. In Brazil, the situation is reversed. Moreover industry is by far the largest
consumer when compared to commercial and residential use. Until 1990 industry used over 50
percent of all electricity, though now it is just over 40 percent. But subsidies haven't
stopped. On June of this year the discrepancy between average residential rates and those
of industry are approaching 3 times and the rationing plan will aggravate the discrepancy
further. The present average regulated price structure, not considering rationing: $31 per
megawatt hour for industry, compared with $73/mwh residential. Commerce averages $61 mwh.
Most industrial and many commercial users are protected by long-term contracts expiring
between 2003 and 2006. Consumers, small industrial and commercial users are effectively
paying the entire `privatization' cost of the rate structures necessitated by distributor
concession agreements. The actual legal structure of rates— what establishes relative
prices among different categories of consumers—was established in 1986. Since 1995,
the residential rates have increased 108 percent on average, while industrial rates only a
corresponding 60 percent.
Given these structural conditions, Aneel has been reluctant to give the 80 percent
privatized distribution system the revenue it needs to stay enthusiastic about its present
investments in Brazil, let alone new ones in generation. Instead it has joined the
opposition chorus against distributor profits. In the words of a former Brazilian Central
Bank President, Aneel created "a hierarchy of priorities in which consumers, large
and small, come first, followed by distributors and state generators, and coming in last,
private generation. That hierarchy by definition benefited the short term at the price of
the long term, and meant the opening for crisis in supply, sooner or later."
Brazzil readers should be familiar with Itamar Franco. On almost his inaugural
day in January 1999, he unilaterally called a debt moratorium that was a certain causal
factor in devaluation of the real (because misunderstood by international finance
community); his state militia has maneuvered to threaten against federal privatization of
Furnas properties storing and using Minas Gerais sovereign water; he ousted AES and
Southern Power (22 percent owners) from Cemig, the state electric company. This
ex-President of the Union, present Governor of Minas Gerais and czar of Cemig has recently
returned to the PMDB, the country's largest political party and a key partner in the FHC
coalition. On the strength of his slogan "the water is ours" he and his allies
have captured state control of party administration apparatus for São Paulo, Minas and
Goiás states.
Now that a real energy crisis is at hand, he seems a likely candidate to upset, at its
September national convention, the party's role in the coalition with FHC. He already has
over 10 percent of voter preferences nationally and stands to gain the most from the
inevitable hitches in administering `the rationing plan'. He is, instead of following the
national plan, instituting his own separate state rationing plan, to be administered by
Cemig; threatening to buy both the soon to be privatized State of Paraná electric company
(Copel) and the São Paulo state-owned generation complex Cesp Paraná that `the nation's
water not fall into the hands of foreign multinationals concerned only with profits'.
Three times runner-up in presidential elections, Lula of the Workers' Party (PT), is
the most popular opposition candidate. He just got back from a two-week short course in
political economy in China. At home the government's problems have pushed Lula's straw
poll numbers near 30 percent. From China, where he allowed no Brazilian press to follow
him, he said in a telephone interview, "China is the country that receives the most
foreign investment, all the multinationals are here with mega projects, but the State does
not open its hand to its sovereignty and determines priorities. Unfortunately Brazil
neither plans nor sets priorities." Accordingly the leader of the country's largest
union CUT and the PT's principal financial support, wants to institute a nationwide
movement to stop paying electric energy bills altogether. He reckons the cause of the
energy crisis as the government's failure to maintain monopolies in oil and gas and
electric. He believes a boycott of utility bills would restore priorities.
Industrial users have, as yet, announced no such boycott. Their worries are
concentrated on unfair comparative advantages of North American industry and the
inevitability of Free Trade in the Americas: an `industrial policy' that follows the logic
of a `trade policy'. Meanwhile it seems strange not to see that the Real Plan has indeed
made a difference. How many years back could Brazil have even thought of growing through
an Argentine crisis, the resignation of two important Senate leaders and an energy crisis,
expecting both control of its currency and inflation environments and loss of a point or
two in its rate of growth—and all at the same time? The other parts are no doubt as
well thought through, but one doubts the political climate to substantively pursue
enabling events. An older discourse still seems to move the electorate and its opinions;
the politics follows dutifully behind. Brazilians are so busy complaining they can't
recognize their accomplishments. The preoccupation with fault, and not how Brazilians want
electric to serve them, could be a costly error.
Portions of this article appeared in the Financial Times energy
division publication, Power in Latin America. Conrad Johnson, the author, is an
American attorney, permanently residing in Brazil. He writes for various publications on
development and legal issues in Latin America. You can reach him at conrad@alternativa.com.br
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