GUEST COLUMN: Energy transition perspectives

Bnamericas Published: Friday, April 25, 2003
The following is a guest column submitted by Jeremy Martin, energy program director at the Institute of the Americas. Formerly Mr. Martin was with the Latin American division of the US Trade & Development Agency. There is no doubt that 2003 is a year of transition in Brazil. In early January, President Luiz Inacio Lula da Silva and his team took office and brought with them many different ideas for the country. Among the most notable and talked about of the ideas set forth to date is a restructuring of the country's electric sector. In stating that Brazil's electric sector is a unique system and coming shortly after major crises, the new government without question faces the same challenges as the previous, but has chosen to consider more radical changes to the sector to find a solution. As one would expect, this has proceeded to enliven serious debate within the sector. Seizing upon this need for dialogue and discussion amongst those involved in the energy sector in Brazil, the Institute of the Americas organized and invited key industry players to participate in a roundtable discussion. Over the course of the two-day roundtable convened in Rio on April 8-9, almost 100 of the most important participants in the energy sector in Brazil including investors, financiers, government officials and analysts, set forth several key areas and issues. While the discussion points were many, there were key themes shared and pondered by all. What follows is an analytical synopsis of the discussion and key points for consideration both during the roundtable and over the next few months. Despite the call by some for no radical change, most feel that creating a new electric sector model could be a useful exercise; however, there is consensus that it must be done with input from all parties and in a manner to adequately address existing contracts, legal framework and investment in Brazil. Both on and off the record, the government has indicated that it fully comprehends the need for dialogue and input as they develop and discuss implementation of a new model - yes, a positive indicator, but more needs to be done and with more alacrity so as to diffuse rumor and innuendo. It should be noted that the ministry made important pronouncements prior to the roundtable; there have been important references indicating the incorporation of the necessary competitive and transparent regulatory frameworks. In addition, statements regarding the new model make clear that a genuine effort to increase project bankability and guarantees to investors are provided for under the new plan; as well as properly dealing with the ever-present issue of hydroelectric reliance and risk. It will be very important for the government, with the new model, to find the appropriate balance between a transparent and meaningful regulatory environment, one that is legally constituted and one that retains its autonomy over the long term. Moreover, in contemplating and developing the new model, the complexity of Brazil's existing partially privatized electric sector and its labyrinth-like network of contracts with diverse issues must be fully considered and properly incorporated. Examples of the long-term efficacy of a single buyer model, such as from Mexico, do not portend well if this alone forms the core of the new model in Brazil. Much emphasis is being placed on the reconfiguration of the electric sector and rightfully so. Moreover, the obvious synergies between a new electric sector model, the role of fuel costs, the potential for natural gas and lack of adequate incentives for natural gas generation projects demand that any discussion on a new electric model include perspectives and input from the oil and gas industry. Less contentious at the moment but equally important are the achievements to consolidate and efforts to redouble in the oil and gas sector. One roundtable participant likened the hydrocarbon sector in Brazil to a plane that has not yet lifted off. Based upon points made, it seems that the real possibility of Brazil becoming self-sufficient in terms of energy production depends greatly on consolidating the nascent regulatory framework and, again, achieving the appropriate balance between the fiscal and regulatory structure for the sector that will foster and maintain investment in development of Brazil's excellent hydrocarbon potential. The direct correlation between the hydrocarbon sector and the electric sector is only made more evident by the deepening doubts with regards to the fiscal and tax issues surrounding exploration, fuels and distribution. Quite similar to the demands of a new electric sector model, a proper fiscal and regulatory equilibrium must be attained for both public and private sector to be successful now and into the future and to realize energy self-sufficiency in Brazil. The most obvious result of the roundtable discussion is that serious dialogue has just begun and the government must continue to work with investors, companies and the public to attempt to reach a consensus for the new electric sector model. There is no doubt that the public in Brazil and companies aiming to serve the public deserve the most rational model possible. It would be premature to predict the exact shape and form of their proposal, nor is it appropriate for us to render judgment at this point. However, it is clear that there must be several factors properly addressed to avoid long-term ramifications for the government, and, more importantly, for the country. It may not be a stretch to say that if the government does not do this right, there could be significant impacts on current and future investment in Brazil's energy sector. What seems to be the key point for Brazil right now is that the country remains in the minds of many a key market - arguably the most important market in Latin America - one replete with potential for great returns yet one increasingly beset by serious risks. Achieving the most rational fiscal and regulatory framework for electricity, oil, and gas development and investment is critical for Brazil to successfully compete for the finite resources that exist in the world today. While the argument of the need to reduce the financial burden placed upon average Brazilians is valid, the loss of important investment revenue to another country might only have a worsening effect. Any major alterations and modifications should be collaborative efforts and cooperation, as some have hinted, is without question imperative; yet, the risk return for Brazil must always be contemplated and kept in line for the sake of Brazil's long-term economic growth.

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