Brazil: Pushing the Right Buttons

The past 15 years in Brazil were marked by retrogression in the electricity sector, with questionable investments and misguided regulations. The Rousseff administration aggravated the situation alarmingly. There was no lack of warnings from specialists. There was too little dialog and too much incompetence. More recent developments suggest that likely solutions to the sector’s woes can often come from unlikely places.

According to the asset manager 3G Radar, Eletrobras has cost the federal government BRL228bn. The calculation includes the value destroyed and losses accumulated by distribution companies, and excludes additional debts assumed (the gross debt has risen by BRL18bn since 2012). The losses result from mismanagement and inefficiencies, such as the participation in projects by government imposition – Belo Monte, Jirau, Santo Antônio and Angra 3. The infamous Provisional Measure 579 issued by Dilma in 2012 came at a high price, requiring the company to renew concessions of companies responsible for one-third of its power generation in exchange for underestimated revenues.

Even if these figures are modestly overstated, the order of magnitude is still striking. To give you some context, the current market value of Eletrobras is less than BRL30bn (excluding debts).

PM 579 was a disaster for the sector. By reducing electricity rates artificially (by 20%), it generated huge losses for companies, inhibited investments and produced an imbalance between energy supply and demand. The result was the huge rate hike, known as “tarifaço”, of 2015 and the country’s greater vulnerability to drought.

Estimates are that PM 579 and the decision not to impose rationing in 2014, despite the low rainfall, left a financial liability of RBRL100-150bn, and it certainly left an avalanche of lawsuits. There’s also a negative physical legacy, the low reservoir levels, aggravated by the on-streaming of thermoelectric plants – which were delayed for the purpose of avoiding rate increases.

The Minister of Mines and Energy, Fernando Coelho Filho, has started putting things back in order. The technical quality of the ministry’s team has resulted in careful diagnoses and prioritization of the issues of the day. The Minster’s political skill and leadership have allowed for the negotiation of real solutions.

The focus is on eliminating distortions in the system, restoring efficiency and a realistic interest rate regime, to attract private investment. For this purpose, adjustments were made in the auctions for new transmission line projects, while changes have been proposed in the legal framework for the electric power sector, with greater access to the non-regulated market, privatization of loss-making hydroelectric plants (which function under a quota regime, with low prices), and adjustments in the formation of prices, essential elements to attract investments. Important regulatory advances have also been made in mining and oil & gas.

One element is crucial here: dialogue with the parties involved. Eletrobras has undergone a complete management reshuffle as it looks to boost efficiency, financial adjustment and good governance. The sale of assets has started (privatization of Celg), while privatization of Eletrobras itself is being discussed as an instrument for capitalization and better management.

The results are slowly starting to appear, such as the success of the transmission auctions, more investment in the power sector, and the renewed interest of the private sector.

The old picture of a loss-making sector, with a high level of unpredictability, dependence on subsidized resources, and with most of those inefficiencies passed on to consumers, is gradually being replaced. But speed is necessary, starting with the urgent need to make progress on the measures proposed so far, which depend on congressional approval. The combination of low reservoirs and recovering economic activity demands a rapid response.

It is necessary to reduce the sector’s risks, and to help it adapt to new technologies, to expand the market and lower the cost of energy. The impact of these reforms can be impressive, inside and outside the sector, due to its overall importance for productivity. Surprisingly, a political minister with no background in the sector is fixing the problems caused by Dilma Rousseff, a hands-on manager who claimed to be a specialist.

Americas Energy Projects & Infrastructure Macro Policy & Government Brazil Latin America

Zeina Latif is chief economist at XP Investments. She holds master and doctorate degrees in Economics at University of Sao Paulo (USP).

Previously she worked at Royal Bank of Scotland as senior economist for Latin America, and ING, ABN Amro and HSBC Asset as chief economist for Brazil.

She is columnist at the newspaper Estado de São Paulo and she is counselor at the Social and Economic Development Council of the Republic Presidency.

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