MDB & Energy Project: Regional Studies: Latin America Report

Latin America Report

Summary

TABLE OF CONTENTS

1. Overview of the energy sector in the region
2. Potential for renewables and energy efficiency
3. MDB policies and loans
4. Conclusions and recommendations

1. Overview of the energy sector in the region

The Latin American energy sector is characterized by marked differences between countries and subregions. Such differences are related -among other aspects- to the available energy sources used in each country, to the volume of production and consumption -global and per capita-, to the uses of energy and to the level of energy self-sufficiency of each country.

Four countries (Argentina, Brazil, Mexico and Venezuela) concentrate more than 80% of the energy produced and consumed, while the majority of Latin American countries have low levels of production and consumption, being marginal in the regional context.

A group of countries produce and export oil, others are net importers, while a third group produces oil but does not have a surplus for export. Some countries produce energy in excess, while others don't have enough and must resort to imports. The main energy sources vary from country to country. In some cases of predominantly rural countries -such as Haiti, Honduras, Guatemala, Guyana and El Salvador- more than 50% of the energy is produced by firewood and charcoal, while in other countries, such energy sources represent less than 10% of the energy balance. Only three countries (Argentina, Brazil and Mexico) produce electricity from nuclear reactors.

While in some countries electrification -as an expression of the degree of access to modern energy by the population- benefits more than 90% of the population (as in the case of Uruguay, Argentina, Brazil, Chile and Venezuela), in others between 20% and 35% of the population does not have access (such as Paraguay and Ecuador), while in Central America access is restricted to less than 50% of the population.

There are also marked differences in relation to the consumption of energy by the different economic sectors. In some countries the main consumer is transport, while in others it is industry, and the weight of the residential sector also varies widely from country to country.

Perhaps the only common characteristic of the regional energy sector was that it was almost entirely state-controlled and that the government’s approach was to subordinate the market logic to political and social considerations and to consider electricity as a public service and not a profit-driven activity.

Given such heterogeneity -including enormous differences even inside the different countries- it would seem that solutions to the different problems would need to be tailored to the different realities. However, recent trends clearly show that the same solution is currently being put forward for every single country. The conclusion seems to be that such solution does not respond to the specific needs and realities of each country, but to a programme -with an explicit ideology- developed centrally by the international financial organizations and implemented -with minor adaptations to the local realities- through the leverage represented by credits.

It is difficult to understand how the same "solutions" (privatization, de-monopolization, new regulatory framework, regional integration, etc.) can be pursued in countries with an energy surplus as well as in countries with serious energy external dependency. They are also equally implemented in highly electrified countries and in countries where more than half of the population does not have access to electricity; in highly industrialized and urban countries and in eminently agricultural and rural countries.

In truth, what's being implemented in the energy sector is no different from what is being carried out in all the other sectors of activity. Using the argument of the inevitability of globalization a new economic paradigm is being imposed which, among other aspects, states that access to national and natural resources must be open to all under the market rules. The aim is to downgrade the importance of the state and to asign it a subsidiary role, to liberalize markets and to open up barriers to the entry of foreign capitals.

Within this approach, private companies must concentrate in developing their comparative advantages and the state's intervention is limited to guaranteeing free competition and a stable economic, social and political environment which stimulates investments and technical improvements.

Within the energy sector, the aim is to introduce competition, supporting the liberalization of the energy markets and regulating natural monopolies. One of the main aspects of this policy implies the privatization of the state enterprises and an increased participation of the energy sector in the capital markets.

One of the arguments used for the reform of the energy sector is the need of vast capitals to develop the required infrastructure investments to respond to the increased demand. The idea is that such investments should not be done by the state but by private enterprises and thus the need to make the energy sector attractive through privatizations and adequate regulatory frameworks.

Within this logic, regional energy integration becomes a major goal and natural gas a major tool to achieve that goal.

All the above (privatization, integration, promotion of natural gas) are being implemented at great speed throughout the region, changing dramatically the previous situation.

2. Potential for renewables and energy efficiency

2.1. Renewable energy sources

The main renewable -at least theoretically- energy sources used in the region are hydropower, fuelwood/charcoal and sugarcane bagasse. Geothermal energy is only important in two countries (El Salvador and Nicaragua), while wind and solar energy have not yet taken off in the regional context.

Hydropower is a very important energy source in Paraguay (62% of primary energy sources consumption), Suriname (34%), Costa Rica (26%), Uruguay (20%), Brazil (18%), Honduras (13%) and Peru (11%). During the 1970-1995 period, the participation of this energy source increased -in many cases dramatically- in most of the countries in the region and only fell in Bolivia, (from 7.9 to 6.3), Mexico (2.7 to 1.1), Nicaragua (3.3 to 2.0), Dominican Republic (5.9 to 4.8) and Suriname (64.0 to 33.7)

Hydropower received in the past strong support from MDBs, which centred their loans on large dams which have had devastating social and environmental impacts. As a result, opposition to such projects has increased and the banks are now withdrawing from funding large dams. Minihydropower has received little attention, although the region’s hydraulic potential is enormous and the impacts of such use would be minimal.

Fuelwood (including charcoal) is still an important energy source in many countries, with the exceptions of Argentina (1.2%), Cuba (2.4%), Mexico (3.5%), Bolivia (7.4%) and Suriname (9.6%). With few exceptions, use of firewood does not constitute a major cause of deforestation in the region and the incorporation of adequate forest management could ensure renewable use of a still abundant resource.

Although there is some experience in wood gasification to produce secondary energy, much more research is needed for a more efficient and comfortable use of this traditional fuel. Even when fuelwood is mostly used at the household level, some countries (particularly Brazil and Uruguay) have made ample use of wood as an energy source for industry (charcoal in the former and wood gasification in the latter).

Use of fuelwood has dropped in many countries, having been substituted either by electricity or fossil fuels (particularly LPG and kerosene), in many cases through government policies. Wood use in Brazil dropped from 64.2% in 1970 to 21% in 1995, in Dominican Republic from 51.5% to 31.7%, in Costa Rica from 43.1% to 20.4%, in Ecuador from 39.4% to 10.7%, in El Salvador from 79.1% to 46.2%, in Paraguay from 80.1% to 25.8% in Colombia from 23% to 13.4%. Although in some cases, fuelwood has been substituted by hydroenergy (particularly in Paraguay), in most cases it has meant an increase in fossil fuel use with its negative impacts on the global environment.

Sugarcane bagasse is the third widespread renewable energy source. The energy balance of the majority of the countries in the region include this source as an important component, though only some few surpass 10% (Guyana 44.8%, Cuba 44.4%, Barbados 40.8%, Brazil 19.5%, Jamaica 15.6%). In spite of its obvious advantages from a global environment perspective, it is not without local environmental problems, particularly linked to impacts derived from extensive "green revolution"-type of monocultures. The approach is however interesting, in the sense that countries take advantage of a locally-produced renewable production and transform its "wastes" into different forms of energy, among which a modern fuel such as alcohol (Brazil). Such approach could be extended to produce energy (particularly modern) to other biomass resulting from other agricultural productions.

Few countries have until now given much attention to geothermal, solar and wind energy, although in most of them there exists sufficient knowledge and experience, particularly concerning the two latter.

2.2. Energy efficiency

Energy efficiency has received scarce attention within the region. Available data indicate that between 10% and 20% of current energy consumption could be saved in the short and medium term through more efficient energy use. In fact, not only have there been few advances concerning energy efficiency but, on the contrary, there has occured -during the 1980-1995 period- a decrease in efficiency in the region as a whole, which is reflected by the indicator energy consumption/GNP. According to this indicator, only 3 countries improved their situation as respects to energy efficiency (Guyana, Jamaica and Uruguay), while 6 others achieved no improvement and the remaining 13 worsenend their situation.

Such decrease is not merely a technical issue, but the result of the predominant development model. Such model stimulates the accelerated urbanization of Latin American societies and a growing consumerism by its population. The increased concentration of the population in big cities increases energy requirements, both in the residential and transport sectors. Consumerism promotes, for example, the intensified use of electric appliances and an immoderate increase in the number of private cars -and consequent decrease in the use of collective means of transport- which implies a growing consumption of fossil fuels for motor vehicles, which are the main consumers of hydrocarbons and the main source of atmospheric pollution within the region's energy sector.

Current MDB-promoted energy sector privatization could result in an even worse situation. Private energy suppliers will probably aim at an economically-efficient demand-side management in order to abate energy production costs, but will necessarily oppose a decrease in overall energy consumption which would conspire against their economic interests.

3. MDB policies and loans

The World Bank and the Inter-American Development Bank (IDB) show the same set of consistencies and inconsistencies with their own policies. Both banks are consistently promoting energy sector privatization (or at least corporatization of state-owned utilities) and supporting regional energy integration. On the other hand, both are inconsistent as respects to environmental and social impacts of energy sector development.

3.1. Consistencies with their own policies

Both banks are very consistent regarding privatization. Of a total of 37 IDB projects analysed in this study, 15 have a strong component for the sector's privatization, while an additional 8 projects directly support the private sector. In the case of the World Bank, between 55% and 83% of its 1993-1997 portfolio includes a strong privatization component.

Additionally, the International Finance Corporation (part of the World Bank Group), totals 18 loans to the private sector and 5 technical assistance loans (of which 4 have a strong privatization component).

In their lending activities to the energy sector, the banks are imposing -as a precondition for future loans- the parliamentary approval of a legal and regulatory framework for the energy sector, which opens up the market to private -national and foreign- capitals and establishes the rules for the sector.

The new model is being imposed gradually upon the countries of the region and its advance has been uneven according to different national realities -with different internal correlations between the forces for and against the new model. In some cases, the presence of strong authoritarian government regimes facilitated a rapid transition to the full implementation of the model. Such was the case in Chile and Argentina, which are being publicized by the MDBs as the example of the road to follow. Other governments have followed -at different paces- the same road or are trying to do so -even against the explicit wishes of their people- as in the case of Uruguay.

One of the central aspects of the restructuring process of the energy sector in Latin America is the privatization of the state-owned companies in the electricity, oil and other energy subsectors. This is part of a broader privatization process, which increased during the 1990s and where MDBs have played a major role.

However, in 1996 the energy sector became the main privatization arena, concentrating 46% of all privatizations (US$6,700 millions). For 1997, such figures would increase globally (US$23.700 millions of privatizations), among which the energy sector would concentrate almost 50%.

All these changes have a clear beneficiary: the transnational corporations. For some of them, privatization and the new regulations have implied access to a very profitable investment area. For others, this process fulfills the strategic objective of securing cheap energy supplies for their investments in other economic sectors, thus ensuring profitability.

The privatization process has resulted in the emergence of global energy corporations, particularly in the electric sector, who act in a currently globalized energy market. Such is the case of Electricite de France, Endesa, PowerGen, Southern Electric and many others.

As respects to energy integration, both banks are actively promoting such integration, particularly in relation to natural gas. Both have facilitated loans for the Bolivia-Brazil gas pipeline (which will in the future link with Peru and Argentina). Indirectly, the banks’ policies (privatization and integration) have spurred a number of private initiatives linking Argentinian natural gas with Chilean and Uruguayan customers and other natural gas projects within specific countries both with and without bank loans. Central American energy integration is also being supported by IDB loans, while Belize, Honduras and Uruguay are also receiving credits for energy integration with one or another neighbouring country.

3.2. Inconsistencies with their own policies

The Banks’ policies include issues such as social equity, clean and renewable energy sources, energy efficiency and social participation. However, the MDB-supported restructuring of the regional energy sector is in practice doing very little on those key aspects and is in fact resulting in the opposite.

- There has been no serious advance on the issue of equity of access to modern energy sources. On the contrary, at least in the first phases of the restructure (such as in Chile and Argentina), the problems of access by the poor were aggravated by: i) the increase in electricity tariffs due to the elimination of subsidies and the policy (imposed by MDBs), that tariffs should include costs, new investments and profits. This entailed that many poor families had their electricity services discontinued; ii) the companies' aggressive policy to eliminate clandestine connections to the grid, which was one of the ways through which the poorer had access to electricity.

In the rural area, the IDB's portfolio includes only one project clearly aimed at providing access to modern energy by isolated rural communities (Peru). The World Bank's portfolio shows only 1 in Bolivia and 1 in Peru, while the International Finance Corporation has 1 for Haiti.

- There have been no major steps in the use of new and renewable energy sources. The existing cases -though numerically abundant in most countries- are isolated and marginal in the energy balance. There is no real support from the banks for the promotion of these alternative energy sources. Under the guise of a "cleaner" energy, what is actually being promoted is the widespread use of natural gas (in truth, it is only cleaner than the dirtier: coal and oil). Although the argument for natural gas is environmental, the real motives are economic (cheaper, regionally abundant and transportable throughout the region by pipelines, thus supporting energy integration). The portfolio of the banks in this area is enlightening:

In the case of the IDB's loans for energy generation, 10 support polluting and non-renewable sources (4 coal and oil and 6 natural gas), while 9 are aimed at renewables (2 geothermal, 1 wind, 4 hydroelectricity and 2 non specified). The bank has no projects for solar energy, biomass or minihydro plants.

The World Bank's portfolio is even worse: during the 1993-1997 there are only three projects aimed at promoting renewables: 1 hydroelectric,1 biomass and 1 renewables general. There are none on solar, geothermal, minihydro and wind energy sources.

The International Finance Corporation's portfolio shows 9 projects for hydrocarbons (oil and gas), 2 hydroelectric, 1 wind, 1 bagasse (plus fuel-oil) and 1 renewables general

The World Bank-implemented projects within the GEF include only 1 project for renewables: the Tejona Wind Power project in Costa Rica

- Little attention has been paid to energy efficiency. For the period 1993-1997, the World Bank’s portfolio includes only one project with an energy conservation component and only one with demand-side management. The IDB’s portfolio is slightly better, having 5 projects that are either centred on or contain elements focusing on improving energy efficiency.

- There have been no advances in social participation.The participation of civil society in relation with planning and control over the energy sector has not taken place anywhere. The restructuring of the energy sector -exemplified by Chile- gave preeminence to the private sector, little importance to public institutions and none to the main actor: the consumers. This has shown over time to be the cause of a number of complex conflicts,given that issues such as equity, environmental protection or ensuring a really competitive environment -and not simply the substitution of a state monopoly by private oligopolies- had not been taken adequately into account. Monopolic or oligopolic practices have not been eradicated, nor the vertical integration of activities. Additionally, the process of economic concentration increased. In Chile,the main energy-generation company controls 61% of total generation. The same has happened in the areas of transmission and distribution.

4. Conclusions and recommendations

The situation in Latin America shows a wide gap between some of the banks' policies and their practices. The privatization process, which in many cases is taking place against the wishes of major social actors -such as political parties, trade unions, social organizations- is at the same time showing the real capacity of the banks -and other major actors such as the IMF- to influence national governments. The banks could therefore play -if they so wished- a totally different role, in accordance with their own stated policies.

Most countries in the region have already completed the privatization process and the rest are well advanced in the same direction. The private sector -mostly transnationals associated to powerfull local conglomerates- has enough capital to enter this scenario without any need of MDB loans.

MDBs should therefore concentrate their loans in those areas in which the private sector is not interested because they are not seen as profitable: new and renewable energy sources, energy efficiency and access to modern energy sources by the region’s poor. Both the banks’ leverage and lending capacity could result in a major breakthrough towards a sustainable energy economy, including social and environmental benefits, both locally and globally.