Presentation
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Transcript of Presentation
Impediment to Investment in the Latin America Power
Sector Jaime Millan Inter American Development
Bank
CLAI – OAS Energy Conference
March 19th, 2002
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Presentation
• Power sector reforms
• What investors want
• Investment drivers change with time
• Technical & institutional constraints to power sector reform
• Conclusions
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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
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Latin America is world leader in private investment in electricity
0 50 100 150 200 250 300 350 400 450
Ecuador México
Venezuela Honduras
Nicaragua Guatemala
Costa Rica Bolivia Perú
JamaicaRepublica Dominicana
El Salvador
Trinidad y Tobago Colombia Panama
Brasil Argentina
Chile
Private investment 1990-99
Fuente: PPI Project Database, Banco Mundial
Desinversión
Nueva inversión
Operación y manejo privado con inversión mayoritaria privada
Dólares per cápita
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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
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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 questioned :Colombia; Brazil
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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
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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
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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
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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
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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
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Today’s investors
• Not enough incentives for investments
• The changing rules of the game
• Broken promises• And we need a better
world
• Vertical integration• Talk to the circus
owner and seek special treatment
• Ask their government intervention
• Seek only PPAs
Complains Strategies
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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
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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 foreclosing future opportunities for competition
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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
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The world’s largest utilities, 2000Source : Goldman Sachs
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Cap
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m.)
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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 the original sin
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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
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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
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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
Impediment to Investment in the Latin America Power
Sector Jaime Millan Inter American Development
Bank
CLAI – OAS Energy Conference
March 19th, 2002