Currency instability in Argentina and Venezuela is causing energy firms to review their commitment to the region
Plunging revenue for power giants AES of the US and Spain's Endesa, combined with Enron's bankruptcy mean tough times for Latin America's investment-starved energy sector, especially in Brazil.
Mexico, the Dominican Republic, Venezuela, Brazil and other countries in the region with growing power demand must lower barriers and increase incentives for new investment. If not, they will miss out on a piece of a shrinking pool of foreign capital for projects in developing nations and risk power shortages.
Last week, AES and Endesa, two of Latin America's biggest power players, announced plans to cut spending in the region.
Endesa, Latin America's and Spain's biggest power company, said it would cut investment by 35%, or more than $6bn, over the next five years by reducing spending in Latin America and North America. Endesa has put $12bn into the region over the last nine years, mainly in Brazil, Chile and Argentina.
AES plans to slash spending by 41% and sell as much as $1.5bn of assets. AES has assets in the Dominican Republic, Colombia, Argentina, Venezuela and Brazil, among others. Its holdings include one of Venezuela's biggest power companies and another in Sao Paulo.
Bankrupt Enron is likely to sell assets all over the region, including two Brazilian power plants. More than half of Enron's $6.5bn of overseas assets were in South America, mainly Brazil, as of 30 June 2001.
International power companies are reviewing their commitment to the region after currency troubles in Argentina, Venezuela and Brazil put a huge dent in their revenue. A drop in all types of investment in the developing world makes it even more important for Latin American nations to offer better incentives to attract new money.
In few Latin America countries will the pullout have as big an effect as in Brazil. Just four years ago, foreign power companies 'were crawling all over each other to invest in Brazil,' comments Lehman Brothers' senior Latin America utility analyst Charles Barnett. Now, times are different.
An energy crisis caused by a long drought hobbled Latin America's biggest economy and forced the government to ration energy for the past nine months. Hydroelectric plants provide about 80% of Brazil's power. The shortage probably cost the nation a percentage point or two of growth in its gross domestic product last year.
On Tuesday, President Fernando Henrique Cardoso announced that rationing would end on 1 March, one month ahead of schedule, thanks, in part, to a heavy rainy season. Yet, Brazil is likely to face another power crisis next year if it doesn't catch the attention of power companies, and fast.
Brazil's power demand has outstripped supply for years. Power consumption grew at a compounded annual rate of 4.3% from 1991 to the end of 2000 while the annual growth of supply was 2.3%, according to one estimate. The difference in terms of new investment is as much as an annual $3.6bn.
Cardoso has vowed to make Brazil more attractive to power companies but little has changed so far. Last November, Cardoso said the government was shooting for $13bn in new power projects by the end of next year to prevent another crisis, with more than 70% to come from private industry.
It would be disastrous if a slate of proposals to attract energy companies gets lost in the run-up to October's presidential elections.
One of the biggest hindrances to energy projects in Brazil and elsewhere in Latin America are unpredictable or unattractive rate policies imposed by governments.
If global power companies could be more confident that utility rates would be in line with changes in costs and currency, they'd probably not be scaling back so quickly. What's more, whenever economic or political trouble hits countries in the region, one of the most popular reactions by politicians is to freeze, or even cut, utility rates. In the long run, this hurts.
One of the major sticking points in Brazil is the subsidising of long-term power contracts instead of promoting a more efficient energy wholesale market, which was closed in January without settling a single trade since 1999.
Enron had to idle a brand new $145m power plant last year because of the obstacles. Enron and AES both had trouble getting financing last year for four other new plants.
Along with recent currency instability and slowing economies, unattractive utility rate policies are 'a major contributing factor' to reducing foreign companies interest in Latin American power projects during these tough times, says Lehman's Barnett.
It's time for a change.
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