Half dark or half light?

Latin America’s electricity problems won’t be solved by backtracking on reforms

By Jaime Millán

But all of these problems pale in comparison to the crisis that struck Brazil in the second quarter of this year, which forced the country to cut power usage by at least 20 percent for the remainder of the year and possibly into 2002.

People are understandably wondering whether all of these problems are linked and whether—as opponents of reform are quick to claim—they are the result of the "neoliberal" policies promoted by multilateral banks as the only solution to the electricity sector’s historic problems.

A more careful look at this scenario shows that even if significant problems occur in the implementation of sector reforms, they do not constitute strong grounds for predicting the failure of the reform model. On the contrary, these events can be considered warning signs that there are genuine threats to the sustainability of the reforms, which, if properly addressed, will effectively contribute to their consolidation. In most of the countries, the progress achieved under the reforms is substantial enough—compared with the alternative of continuing with the former paradigm—that reversing course is not a viable option. Even with the demands imposed by reform, there is no alternative but to continue implementation.

In general, initial expectations regarding the difficulty in implementing reforms were quite optimistic, since they did not take into consideration the tremendous complexity of an institutional transformation when many of the components necessary are not present or are foreign to the prevailing culture. Establishing new regulatory bodies, wholesale market administrators, and system operators, while ensuring the coordination required to guarantee an uninterrupted power supply, are overwhelming tasks even for countries with more developed institutions. These challenges make the transition period from a centrally planned system to a market-driven one particularly vulnerable to events that may limit supply.

This is the case in Brazil, where delays in the privatization of government enterprises, in conjunction with the lack of a framework for attracting private investment in power generation, are partly responsible for the current rationing.

Immediate response. The crisis is thus an opportunity to recognize these problems and to take measures to address them. The Brazilian government seems to have understood this, as evidenced by its immediate response of creating a shortage management program that gives consumers an incentive to conserve power. It has also conducted an in-depth analysis of the problems that caused this situation with a view to devising solutions under the proposed model without sacrificing the progress achieved.

These initiatives contrast with how inappropriately power rationing was handled in Colombia in 1992. In that case, the highly politicized environment triggered a witch-hunt for a scapegoat, prevented price signals that would have helped reduce consumption, and led to widespread blackouts for more than a year. Rigidities in the Chilean system also made it impossible to avoid blackouts. However, the government in Santiago is now revising regulations to make the necessary changes.

Introducing competition in the generation sector has not been easy either. This is particularly difficult in small countries where there are a modest number of consumers, as is the case in El Salvador. Even in larger markets, problems have emerged in electricity transmission. In Colombia, for example, the market was fragmented by guerrilla bombings of transmission lines. In these situations, it is better to intervene temporarily in the market, even considering the costs that this may entail, than to continue the illusion of a competitive market when the conditions to make it possible do not exist. Such intervention can take a number of forms, but it must be designed not to hinder the future development of competition once conditions are right.

All of these experiences emphasize the need to give due consideration to the reform implementation process in order to anticipate the difficulties entailed by the magnitude of such an undertaking. This is an ongoing process in which adjustments and amendments must continuously be made. Moreover, the complications that may affect the process as a result of opposition to the reforms on the part of stakeholders must be addressed. The commitment to reform must endure long past the initial approval and implementation. The IDB is prepared to assist the countries of Latin America and the Caribbean throughout the long, difficult period of consolidation.

Date posted: July 2001