Transcript Impediment to Investment in the Latin America Power Sector Jaime Millan Inter American Development Bank CLAI – OAS Energy Conference March 19th, 2002

Impediment to Investment in
the Latin America Power
Sector
Jaime Millan
Inter American Development Bank
CLAI – OAS Energy
Conference
March 19th, 2002
Presentation
•
•
•
•
Power sector reforms
What investors want
Investment drivers change with time
Technical & institutional constraints to
power sector reform
• Conclusions
2
Reform has produced substantial
benefits
• Private sector has taken the investment
burden while the lights are still on.
• Substantial improvements in efficiency
• Many sectors have profited from lower
prices and higher quality
– Large industrial and commercial consumers
• State coffers drain has been reversed
3
Latin America is world leader in
private investment in electricity
Private investment 1990-99
Chile
Argentina
Brasil
Panama
Colombia
Trinidad y Tobago
El Salvador
Republica Dominicana
Jamaica
Perú
Bolivia
Costa Rica
Guatemala
Nicaragua
Honduras
Venezuela
México
Ecuador
Desinversión
Nueva inversión
Operación y
manejo privado
con inversión
mayoritaria
privada
0
Fuente: PPI Project Database, Banco Mundial
50
100
150
200
250
Dólares per cápita
300
350
400 4
450
Reform elements
• Attracting private sector investors, mainly foreign
• Enlisting market forces to attain efficiency in the
competitive segments of the market, thus
minimizing regulatory burden
• Establishing a new regulatory framework and
regulatory institutions that foster competition,
attain efficiency in the monopoly segments and
protect the consumer
• Using non-distortion, well targeted instruments to
address social considerations
5
But Recently...
• Little appetite for investment
– Few bidders for distribution, Ecuador,
Colombia
– Investment in generation in Chile
– Brazil: Reluctance to invest in thermal
generation
– AES and ENRON
• Wholesale Market interventions in
Colombia, Brazil
• Regulators independence and competence is
6
questioned :Colombia; Brazil
What investors want and some
ways to get it
• Low risk
– Commercial PPA
– Regulatory good connections
– Country
insurance, IFIs loans
• High profit
– Low cost
IDB loans, tax holidays, subsidies
– High prices avoid competition, seek vertical
integration
– Improve efficiency
• The strategies to attract investors have
evolved over time
7
The Pioneer: The text book
sequence to reform
• Attracting private investors was a major concern
of Chile’s Reform
• Corporatization of SOEs
• Regulatory framework Little regulatory
discretion
• Limited scope for competition
• Finally privatization with plenty of
incentives for local investors
8
The second wave: Argentina had to
rush but learned from others
experiences
• Privatize SEGBA without having in place the
regulatory framework and the market
• Need to grant initial contracts for SEGBA thermal
plants and attractive conditions for distributors
• Later on investors were eager to participate in a
competitive generation market driven by
abundance of natural gas and a sound investment
climate
• But, market mechanisms for transmission
expansion have not been successful
9
The second wave:Privatizing
distribution a critical step
• Capitalization: a success story
– Made Bolivia’s reform possible
– Bogota’s successful experience was key to
Colombia’s reform but has not been replicated
• Sequence in privatization is important but
not sufficient as the Brazilian case shows
• And some privatized companies were slow
in making efficiency improvements
10
But generation faced bigger
challenges
• The establishment of a competitive
wholesale market in Colombia and Brazil:
Work in progress
• Matching long-term and short-term price
signals
• Price volatility in a hydro dominated system
• The problems of the transition and the
threats of government intervention
11
Today’s investors
Complains
• Not enough incentives
for investments
• The changing rules of
the game
• Broken promises
• And we need a better
world
Strategies
• Vertical integration
• Talk to the circus
owner and seek special
treatment
• Ask their government
intervention
• Seek only PPAs
12
Changing rules of the game
• Wholesale Markets are work in progress
and must be adjusted
– Handling market power and capacity charges in
Colombia
– Brazilian MAE Reform
– Chile’s change in Law
• A sword of two edges: The Colombian
distribution charges review
13
Workable competition
• Concentration of ownership. Several countries that
had unbundled prior to privatization have relapse.
• Limitations in the number of players due to small
market sizes and strategic behavior of multinationals
• Perfect competition is not possible and
some degree of workable competition is the
only competition we may still hope for.
• There is a trade-off between the short-term
needs for regulation and the danger of
14
foreclosing future opportunities for
Questions: Workable Competition
in Small Markets
• Is market concentration inevitable?
– The Global strategies of multinationals
– The difficulties in integrating regional energy markets
in the short-term
• If the markets are not workably competitive then
some sort of regulation is inevitable
– what kind of market power mitigation mechanisms
should be used
• Contracts, Caps, cost based pools
• Regulated of vertically integrated monopoly
– how best could they be enforced in weak institutional
contexts
• Trade-offs
15
C
o
Vi rp.
v
En end
el i
Su E. SpA
ez ON
Ly A
on G
AE na
Du S C ise
ke or
En p.
En er
g
W des y
ill a S
So iam A
K uth s C
or e o
ea rn .
EP Co
Co .
Sc RW rp
.
ot
tis E A
Ib h P G
er ow
dr e
ol r
a
SA
n
En
ro
Capitalisation (US$ m.)
The world’s largest utilities, 2000
Source : Goldman Sachs
70000
60000
50000
40000
30000
20000
10000
0
16
Who is to blame?
• Lack of coherence between the reforms and
institutional endowments and lack of time
consistency in incentives have made them
vulnerable to external shocks
– economic downturn
– weather
– strategies of the multinationals
• For that reason it is necessary to search for
17
the original sin
Institutional constraints
• The critical role of institutions was seriously
underestimated
– Consultants lacked expertise in institutional issues
– Regulation is a foreign concept in French Law,
therefore the lack of regulatory culture
• Institutional endowment is a limiting factor
– Antitrust institutions are weak or nonexistent
– Property rights are often not clearly defined and control
is not always exercised by the owner
– Unpredictable and prone to capture Judiciary
– Weak financial institutions and lack of hedging
instruments
18
Institutional Constraints...
• Regulatory capacity is also limited
– Regulatory bodies and governance of the pool
lack independence, human and financial
resources, and expertise
– Lack of coherence between regulatory and
oversight functions, and the adequacy of the
institutions
– These and the asymmetric relation with the
private foreign investors make regulators easy
to capture
19
Conclusions
• Investors have participation constraints that must
be met
• There is not easy answer because building
credibility in regulatory institutions takes time and
solutions in the interim may foreclose the scope of
a future competitive market
• Tradeoffs must be
20
Impediment to Investment in
the Latin America Power
Sector
Jaime Millan
Inter American Development Bank
CLAI – OAS Energy
Conference
March 19th, 2002