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 That Brazil has produced some of the most expensive and
environmentally damaging hydro projects yet conceived
by man (outside China) is never mentioned in political debate.
By Conrad Johnson
The most newsworthy development in the recent eventful months of Brazilian politics:
the Workers Party (PT) has begun to speak to issues other than "corruption" in
and "moral reform" of government. The PT presidential candidate Lula has over 30
percent of intentions to vote. That is 50 percent more than his nearest rival. Lula is a
three time runner-up in consecutive presidential elections; once he was only defeated in a
second term, or run-off election. With candidates aligned against the ruling coalition
polling a startling 70 percent of eligible voters, the PT is already beginning to act as
if it will win national elections set for 2002. What are these ‘opposition’
candidates saying about the electric energy crisis? And of what they are saying, what
might we expect them to be enacting were they to win in 2002?
Two very important benefits have already been delivered by the crisis. The most
important is that even before rationing began on June 1, 2001, according to University of
São Paulo Professor and Brazil’s most respected international voice on electricity,
José Goldemberg, "more had been accomplished on conservation than in 15 years of the
expensive government program for electric energy conservation, Procel." This is no
small accomplishment indeed. If the voters look closely at the patterns of use they will
see that even in the weeks leading up to rationing, residential and commercial users
decreased their use of electricity while industry increased its already heavily subsidized
use.
Given Brazil’s rate structure, dominated by long-standing sweetheart consumption
deals with private and state-owned industry, one might draw the conclusion that price
matters. Instead, the opposition chooses to blame the ruling coalition for unnecessarily
increasing electric retail consumer rates in excess of general inflation indicators. The
industrial companies who utilize subsidized electric are, after all, where most PT
activist members get their paychecks; at least those that don’t get them directly
from a government owned or controlled institution.
There is moreover, strong evidence that electric regulators have consistently applied
an interpretation to the purchase and concession contracts of distribution companies
against the distributors and in favor of residential users. An ex-central bank president
has so commented, and several lower Brazilian courts have so held. The opposition, without
mentioning this probability (and not because these issues in various forms are in
litigation) has instead chosen to emphasize the fact that private distributor investment
in generation has been "disappointing". According to the opposition, the
privatization of electric energy distribution erred in not mandating additional investment
in generation and this contributed to the present energy shortage.
The fact that ‘independent’ government regulators may be consistently
interpreting franchise agreements against distributors, consistently giving distributors
less than they had bargained for when purchasing previously state owned companies—in
other words, intentionally creating a hostile investment climate—is not mentioned by
anyone running for office. That most distributors have decreased their projected
investment in generation is true.
Distributors cite as the principal reason the belief that there are not clear rules on
setting rates they can charge consumers because the regulators are inconsistent about the
expenses to be included in calculating and determining rates. If that were true and the
investors were, as they have been lately, foreign corporations, they would be violating
fiduciary responsibilities to their shareholders if they invested into such an
environment. That would indeed be a hefty additional ‘cost’ to the price of
doing business in Brazil.
A deeper worry is not just that there are no clear rules for determining fair rates,
but that there is no clear public agreement that Brazil desires a competitive market in
electric energy, whether government or opposition inspired. Without agreements on desired
effects, even the plainest of rules are meaningless: they cannot be interpreted. The
opposition will permit ‘space’ in the electric sector for private investment.
They articulate honestly that contractual obligations with private companies should
unambiguously provide for the maximum benefit to consumers and a ‘fair’ return
to investors.
Of course Brazilian politicians and their constituents know ‘fair’ rates when
they see them. What the opposition wants is that the 80 percent of generation capacity
still unprivatized must stay, all opposition candidates agree, under public control. That
means the 90 percent of distribution capacity already privatized can be ‘fairly’
held politically hostage to strong public political control of distributor price and
profit. Naturally then, the opposition wants to suspend the wholesale market.
The unstated but logically inevitable assumption of such a position in the controversy
is that since free markets (the ones where price and investment capital are necessarily
connected concepts) mean foreign return on investment should be avoided, or at least
controlled at all costs. ‘Voters in Brazil have a 1988 Constitutional right to energy
supply, any "profit" should inure to their direct, politically determined
benefit’, or so the story goes.
The other important lesson of the crisis too goes without significant public comment.
Brazil’s electric generation system is over 90 percent produced by hydro. As one of
the more attentive Brazilian observers of the crisis (Prof. Adriano Pires, head of the
Federal University of Rio de Janeiro ‘s Center for Infrastructure Studies) and one
who has been warning of its probabilities for several years notes: "even if Brazil
had completed ten other expensive dam projects, that would be no sure protection against
the present drought induced crisis".
Brazil cannot, despite the world’s most favorable hydrology, rely only on the gods
of rain. Like any other country, developed or striving for development (Chile and Colombia
have already learned, e.g.), Brazil needs diversity in its generation matrix. Instead
‘give the hydro based state-controlled companies like Furnas all the fiscal financing
necessary to keep rates low and energy unlimited’ is the last line in all the
opposition ‘crisis’ arguments, though a meaningless (because theory-less) nod is
given to its infant environmental wing.
That Brazil has produced some of the most expensive and environmentally damaging hydro
projects yet conceived by man (outside China) is never mentioned in political debate. The
PT solution so far, more of the same: to build larger reservoirs, more expensive and with
even greater social and environmental impacts.
This logical second lesson for the opposition instead serves other purpose. The
opposition uses ‘the crisis’ to build further on statist, nationalist logic.
Since government-controlled Petrobras is involved in the majority of the projects that are
off the drawing board and intended to create needed natural gas generation, it proves that
only state owned companies are reliable partners for producing the electric energy the
nation needs. Private investment is welcomed in the role of "project partnerships
with government companies" the opposition insists.
Whatever else the opposition candidates may disagree about, they must, according to
Lula, insist that Furnas, the biggest federally owned electric company, never be
privatized; and if privatized by the present government, have the "courage to retake
it" when the opposition gains power. This is the opposition form of
‘respecting’ the authority of twice democratically elected agents of the Real
Plan.
Very mindful, one might think, of another opposition presidential
candidate—military ‘protector’ of Furnas generation reservoirs and Governor
of Minas Gerais—Itamar Franco. His ‘legal’ repossession of the board of
directors’ seats purchased by AES and Southern Electric on the board of
"his" state electric company attracts voters. The seats were part of a purchase
agreement of a 22 percent stake in Cemig, negotiated with the predecessor governor and
legislature of Itamar’s beloved Minas.
Furnas, the largest generation company in the country and the transmitter and supplier
of almost one-half of total Brazilian generated electricity, has in fact single-handedly
stunted the infant wholesale market for electric energy. Since the inception of the
wholesale market in September of 2000, Furnas has refused to transfer, as its President
says, "public money to private investors" for obvious breach of the contractual
responsibilities it assumed in commercializing the energy of Angra II (the country’s
second nuclear generator) on the wholesale market. As a consequence clearing accounts has
totally broken down. It seems that for the political opposition, distributor investments
in excess generation capacity (which have no clear, predictable saleable value outside a
wholesale market) must be further held hostage to the public owners of Furnas.
That the PT’s largest support is from unions whose professional and bureaucratized
members have benefited enormously from being employed by state controlled firms, goes
without mention. Also unmentioned is the fact that now having debilitated the wholesale
market—a necessity if a surplus of reserve generation is a goal—Furnas (after 10
months of stalled negotiations) seems ready to finally take responsibility for
commercializing the product of Angra II. Suddenly, and in the midst of a crisis, Furnas is
amenable to receiving the profits (wholesale prices approach US$300 per mwh) now that it
knows its losses are covered. No mention is made by the opposition of this sequence of
events; and worse, no ruling coalition spokesman mentions it either. Taking large
vertically integrated and state-owned companies out of the ‘market’ is clearly
not a popular Brazilian purpose.
What appeals to the voters, evidently, is the ‘efficiency’ of government
producers (on fully depreciated assets Furnas sells electricity for US$ 20 mwh on average
and still makes handsome profit) dedicated to purposes beyond the ‘selfish’
profit motives: the incorruptible moral justice of investing public money in state
controlled firms dedicated to providing public service under political control. (Lula
recently returned from China, without press accompaniment, where he was treated, he says,
to further enlightenment on such matters.)
Naturally the IMF, as always, is a logical whipping boy for such logic. Never mind that
inclusion of government companies’ operational accounting in IMF conditions has
actually, because operational balances are favorable, expanded fiscal financing for social
welfare programs; all opposition candidates paint the IMF as the enemy of Brazilian
welfare and the ally of North American hegemony. The governing coalition "sold
out" to the IMF. Because of IMF "conditions", the opposition insists,
‘state-controlled companies have been "restricted" from investing in
generation, and forced Brazilians to endure an energy crisis that tax supported
institutions could have avoided if controlled by moral and responsible politicians’.
There are no such IMF conditions. How Brazil achieves IMF targets is left to Brazil;
but evidently, voters are subject to believing opposition lies, and that unfortunately
doesn’t offer much evidence that Brazil is growing into political and economic
maturity. Apparently four decades of bad experience with the bad debts of state companies
has only ripened the Brazilian appetite for more of the same. The 60 percent of GNP that
is presently on government accounts is not enough for the opposition. (Compare that 60
percent government participation with the 80 percent of the US economy powered by consumer
spending.) Politics works best, according to the opposition logic, the closer government
share gets to 100 percent. Worse yet, maybe the electorate agrees?
The role the energy crisis plays in present public political debate indicates a firm
‘yes’. Sixty nine percent of Brazilians favor state ownership of electric
companies against 29 percent who favor privatization according to a late June national
poll even though, by any standard measure, delivery of electric service has improved with
privatization of distribution. The historic role government control of the economy has
served to make the rich in Brazil richer than anywhere else in the world when compared to
the poverty of their Brazilian poor is ignored in the process. After all, the poor own
these fat (for their past and present employees, stock-holders and the politicians that
run them) state companies too, don’t they? That must be why 78 percent of Brazilians,
a recent poll discloses, care for a larger presence of the "State" in their
economy.
Perhaps the road to grandeza (greatness) is in Brazil being the first nation to
show how more government in the economy doesn’t simply result in more politicians
deciding what citizens should consume and how they should conduct their economic activity.
Everywhere else these public policies garner current cash value, like during Brazil’s
military ditadura (dictatorship), it’s had to be at the point of a gun after
all.
As Guido Mantega, head of the PT economic brain team puts it, FHC as a social democrat
is like a cat next to the PT leopard. To emphasize the point, Lula recently claimed that
the ditadura economic legacy was more beneficial for Brazil than the FHC
contribution. He was of course referring to the giant state enterprises the ditadura
created on borrowed capital, at least for that portion they couldn’t just print with
the inflation press. It seems the opposition leopard slouching toward Brasilia to be born
again will have, as the PT says with sincere pride, "all red" spots and new
"revolutionary" white elephants. The pragmatic Real Plan will be replaced by a
harvest of Brazilian politicians "without fear of being happy" as their slogan
chimes.
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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