- The Washington Times - Monday, December 22, 2003

SAO PAULO, Brazil — The Brazilian Development Bank spent the year bailing out multinational energy corporations that had told the government a decade earlier that privatizing the sector would lead to greater efficiency and cut public spending.

“It was mostly U.S. companies that went out shopping in the mid-90s, confident of their ability to do things better and still make a profit. From about 2001 onward, there has been a giant retreat,” said Steve Thomas, a public services expert at the University of Greenwich, England, who worked in the autumn with Brazilian government officials on regulatory matters.

The bank, known by the acronym BNDES, spent more than $1 billion (3 billion Brazilian reals) helping electricity distributors stay afloat this year. All 24 firms the bank refinanced were bought in privatization auctions from 1995 to 2000. Households and industry saw their electric bills increase 174 percent and 115 percent, respectively, in the five-year period, according to government numbers.

The largest bailout was of AES Corp., an Arlington-based energy company that owns Eletropaulo, the largest utility in Latin America. The company’s power plants serve 11.6 million people in Brazil compared with 3.9 million worldwide.

The Virginia corporation defaulted on a $1.3 billion Brazilian government loan. AES made a deal this month with BNDES whereby the Brazilian government would own 49.9 percent of AES’ Brazilian operations, and the two would create a company called Novacom.

The position gives the bank two seats on the five-member board of directors, according to AES. BNDES threatened AES on Dec. 5 with a lawsuit in Washington if it did not agree to a deal that included shares in the lucrative power generator AES Tiete.

The Virginia corporation’s debt to the Brazilian government now stands at $540 million, payable in 10 to 12 years. AES agreed to give up Tiete shares and close the deal with BNDES last Tuesday.

Energy privatization is no longer part of the program here, said Haroldo de Britto, a consultant for government and industry at Goes & Consultants in Brasilia. “There’s still many more energy segments to sell, but privatization in public services is the ugly duckling.”

Market sources have expressed concern that the government of President Luiz Inacio Lula da Silva would start buying up troubled private firms.

“There are concerns in the market that the government will take over the energy companies, but so far I think they will keep away from that,” said Richard Lee Hochstetler, an energy expert at Tendencias, an economic research and consulting firm in Sao Paulo.

“BNDES intervened in favor of the market,” said Luis Nassif, a well-known commentator in Brazil and president of Dinheiro Vivo, an economics information agency in Sao Paulo.

“AES would be bankrupt without them. The government had the opportunity to take over Eletropaulo, but they did not.”

Both sides blame the corporate failures on the deregulation model Brazil used to privatize public utilities.

The Brazilian government of the time followed the advice of pro-market energy consultants from Coopers & Lybrand — now PricewaterhouseCoopers — that convinced energy officials to break up their utilities into distribution, transmission and generation segments, and create a competitive market that would allow companies to pick and choose where to buy power to sell back to the consumer.

It also focused on natural gas, though nearly 90 percent of the power generated in Brazil is hydroelectric.

Moreover, multinational firms bought in when the Brazilian currency was on par with the U.S. dollar. The real soon lost value and the dollar nearly quadrupled in comparison, placing a heavy burden on corporations with loans in greenbacks, whose clients were paying them in reals.

Brazil faced a severe energy crisis in 2001 that has left its mark. Consumption has dropped in some cases. For example, apartment buildings and hotels that once had fluorescent lights completely illuminating their basement garages 24 hours a day now are mostly in the dark.

“I don’t know why the country bought this model. It’s illogical to me,” Mr. Nassif said. “It was more ideological than realistic. The crises in this sector helped put Lula in power because it demoralized the [Fernando Henrique] Cardoso government.”

Mr. Cardoso was Brazil’s first-ever two-term president. His party, the Social Democrats, lost by a landslide to Mr. Lula’s Workers Party in October last year at a time when most Brazilians had a negative view of the privatization of public assets.

Corporations here also blame the government for not having clear-cut rules, a complaint state energy firm Copel says is moot.

“We didn’t have clear rules either, and we had no problems,” said Ronald Thadeu Ravedutti, chief financial officer of Copel. Global Finance magazine recently chose Copel as the “Best Latin American Electric Utility” for the third consecutive year.

Copel is partly a government-owned company, with common shares available to private investors. The government of Parana state, where Copel operates, is reorganizing the firm into one unit.

“Copel was always against the model, but our opinions were never solicited, despite being known as one of the best energy companies in the country,” Mr. Ravedutti said. The reasons for not being consulted remain a mystery to Copel.

Government regulators devised a new model on Dec. 11 that is supposed to focus on long-term instead of short-term contracts and create conditions allowing for corporate investments in expanding generation facilities, the government said.

“The idea is to return the sector to a regulated public service, not something the market is going to run. You can invest, but the returns are going to be smaller and more secure,” said Carlos A. Ramos Kirchner, director of Ilumina, an energy policy think tank in Rio de Janeiro.

Had AES dropped out of the BNDES agreement, the bank would have faced a $586 million loss this year, the first in its history, making it even harder for Brazil to invest in infrastructure projects that tend to generate jobs. Nationwide, Brazil’s unemployment rate is 12.9 percent, according to recent numbers from the nongovernmental Brazilian Institute of Geography and Statistics. In Sao Paulo, the economic and financial hub of the country, the rate is a record 15 percent.

“This year we’ve shed light on all of the skeletons that we’ve inherited,” BNDES President Carlos Lessa was quoted as saying recently.

“Commercial companies are hardly going to admit they were dumb,” Mr. Thomas said. “I think the blame lies with the Brazilian government and the international financial institutions for trying to impose a policy that could not be implemented.”

Brazil’s Central Bank this month allowed BNDES to use $16.31 billion for infrastructure projects next year, up from the previously planned $11.96 billion, making it one of the three largest development banks in the world.

Last year, the region’s largest creditor — the Inter-American Development Bank in Washington — approved 77 loans totaling $4.55 billion, the IDB said.

BNDES has changed course under Mr. Lula and is now seen as a “key institution to sustain Brazil’s economic growth,” according to Development Minister Luiz Fernando Furlan.

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