Power Sector Reform in Brazil: Challenges to Private Investment

Wed Aug 01 16:24:00 EDT 2001
By Dr. Michael Rosenzweig, et al.

Brazil restructured its electricity sector at the end of 1994 for reasons not very different from those advanced in the other emerging economies of Latin America and elsewhere. During the 1980s and at the beginning of the 1990s there was increased awareness that government resources, even including credits from multilateral agencies, would be insufficient to satisfy the needs of a growing economy. Alternative funding for investment in infrastructure in general, and in the electricity sector in particular, had to be found, and private participation in monopolistic activities historically owned by the government became recognised as the only feasible resource. In developed countries like the United Kingdom, rationales for restructuring included objectives like competition, efficiency, expansion of the capital market, etc. In Brazil, the unavailability of economic resources drove reform. Unfortunately, Brazil has not yet been able to create an environment that induces purely private investment, and this shortcoming impedes the progress of the reform and the development of the power sector itself.

The Government of Brazil (GoB) adopted an electricity restructuring model that envisaged the introduction of competition and reliance on private investors who would take the necessary actions to guarantee an adequate supply of electricity. The model's premise was that profit-motivated private investors would assume the activities previously managed by the GoB and state governments, improve existing service, and provide the necessary funds and services. Thus, private investors would not only assume the control of those assets that belonged to the GoB/states but would also develop new infrastructure, and would be the only alternative for the provision of generation, distribution and retail services. The GoB would redirect its actions to solve more fundamental problems of the country such as macroeconomic stability, education, and public health, and participate in the power sector only as a policy maker and as the sole provider of transmission service. The article explores the nature of the "private" investment in Brazil, presents the obstacles for private investment i.e. financial and development impediments, and shows the unsustainability of the reform based on the mix of private and governmental entities not capable of satisfying the growing power needs of the Brazilian market over the long term.

This article was published in Project Finance International, Issue 222, August 2001.