Electricity Abroad - The Paradox of Argentina
Following last month's look at the world-leading reforms of Chile's electricity sector, EMcrosses the Andes to visit neighbouring Argentina, where the success of a similar process now hangs in the balance.
The republic of Argentina has long been something of a paradox. It is the eighth largest country in the world, with abundant natural resources, a highly diversified industrial base and a strong, export-led agricultural sector. It was once among the richest countries in the world, with a per capita income comparable to that of the major European states. Despite this, the country has been rocked by periodic economic convulsions which have shaken it to its foundations.
It is from that economic turmoil, however, that the reform of Argentina's electricity industry was born. Like its neighbour across the Andes, Chile, Argentina was one of the first countries in the world to implement a sweeping reform of its electricity sector, a process which proved highly successful until the Argentine peso's collapse in 2002 precipitated an economic disaster. Nevertheless, the reformed electricity industry is an accomplishment which can only contribute to Argentina's economic reconstruction - if it can meet the challenges which lie ahead.
Historically, Argentina's economy relied on foreign credit and foreign demand for its agricultural produce. When foreign investment in Argentina declined sharply in the wake of World War I, the Argentine economy all but ground to a halt. After decades of stagnation and a second World War, the Argentine government undertook a programme of direct intervention in the economy, with extensive nationalisation of domestic industry aimed at greater self-sufficiency.
It may have looked good on paper, but it didn't work. By the time the populist government of Carlos Menem took office in 1989, Argentina was crippled by enormous foreign debt, and inflation had reached 3,000%. Urgent action was required to stop the slide into insolvency. The Menem government's response was a radical programme of privatisation and liberalisation. The reforms boosted confidence and gave rise to new investment which rapidly transformed the ailing economy.
In total, the Menem government privatised 154 state companies, raising almost €15billion in the process. The extent and speed of the various privatisations was astounding, but in no other industry were the effects more profound than in the electricity sector.
The process was devised and implemented largely by Energy Minister Carlos Bastos, one of the leading reformers within the Menem government. While not personally one of the "Chicago Boys" whose economic philosophy reshaped the Chilean economy, Bastos and his colleagues could not help but be influenced by the Chilean experience.
Beginning with an industry which was entirely in state ownership, 100% of the transmission network, more than 80% of the generation capacity and 60% of the distribution sector was transferred into private ownership. Public ownership persisted only in the state-owned nuclear generating company and two hydroelectric plants in which state ownership was shared with foreign investors.
All this occurred within just three years, in the context of a new Electricity Law which was passed in April 1992. This law provided the legal framework for the sale of the state-owned companies, the creation of a wholesale energy market and the establishment of an industry regulator. It also set up a Federal Energy Council to advise the government and administer the National Fund for Electricity, which provided a programme of regional subsidies.
The three vertically integrated state-owned electricity companies were broken up into 27 generating companies, seven transmission companies and numerous regional distribution companies. The generators were further divided into eight regions - Cuyo, Comahue, Northwest, Center, Buenos Aires/Gran Buenos Aires, Littoral, Northeast and Patagonia.
At the same time, a wholesale electricity market - Mercado Eléctrico Mayorista, or MEM - was established. The MEM represents 93% of Argentina's electricity demand, excluding only southern Patagonia which has its own geographically separate market - Mercado Eléctrico Mayorista del Sur Patagónico, or MEMSP.
The Sistema Argentino de Interconexión, or SADI, is the main electric transmission grid in the area covered by the MEM. The Sistema Interconectado Patagónico, or SIP, operates in the MEMSP region. (Plans for interconnection of the two grids are at an advanced stage.) The principles of market operation and access in both regions were kept deliberately simple, with transmission charges paid by generators and suppliers, and free rights of access to the entire transmission network for all.
The results were swift and compelling. Investment flowed into the industry, which saw the installed capacity in the main MEM system expand from 13,267MW to 22,831MW over 10 years, a growth rate of 4.9% per annum. The transmission network also experienced substantial growth, with the MEM system increasing from 16,958km to 22,140km over the same period between 1992 and 2002, a rate of 2.9% per annum. Consumers also experienced benefits, as electricity prices in Argentina fell to among the lowest in Latin America. As well as things appeared to be going, however, Argentina was headed for another economic meltdown.
The national debt remained intractable, and at the end of 2001 the government declared a debt moratorium. This was merely papering over the cracks, however, and within days Argentina officially defaulted on $93 billion of its foreign debt. In swift succession, the Argentine peso was massively devalued, a deep recession set in and inflation grew out of control.
As recovery began the following year, demand for electricity suddenly boomed, and supply could not keep pace. Nearly half of Argentina's electricity is generated by gaspowered plants. Without reserves in place, the industry was at the limit of its capacity by 2004, and serious shortages began to affect the capital, Buenos Aires, and a number of other regions. The Argentine government was compelled to restrict exports of natural gas, which led to diplomatic tensions with its neighbours, particularly Chile, Uruguay and Brazil. Emergency provisions of oil from Venezuela managed to see Argentina through the crisis, and matters have improved somewhat since that time.
However, as Argentina's President Néstor Kirchner said in March 2005, "for a long time the possibility will remain that we must move on the brink". The country still relies on natural gas and imported oil for 61% of its production, and the problem of matching supply with demand will remain for the foreseeable future. (Hydroelectric plants make up another 32%, and Argentina's one nuclear plant - a second is scheduled for completion in 2010 - makes up the balance.) Security of supply, sufficient to meet the needs of a recovering economy, now and in the future, is a major challenge.
The big question facing the Argentine electricity industry today is whether the success achieved by privatisation and reform in the decade after 1992 - which was so completely derailed by the economic turmoil of 2002 - can be reclaimed. It is a question on which not just the electricity sector, but the whole nation's future depends. EM
