Utility Business / July 1999
By Larry Luxner
When a Brazilian executive makes a mobile phone call from his Sao Paulo office, chances are good the call will be carried on a modern cellular network owned by Atlanta-based BellSouth International. Likewise, the plants that supply electricity to Colombia, are operated by KMR Power of Arlington, Va., while the natural gas that warms homes in central Chile during winter is piped by a venture owned jointly by San Diego-based Sempra Energy and New Jersey-based PSEG.
From Buenos Aires to Bogota, U.S. interest in Latin American water, gas, power and telecommunications projects hasn't let up -- despite last year's slowdown caused by the Brazilian currency devaluation and general worldwide financial turmoil. For the most part, the economy throughout Latin America is on the rise, and utilities are investing in upgrading their infrastructure to meet the needs of the region's growing population.
Of the 100 largest mergers, acquisitions and privatizations taking place south of the Rio Grande last year, 20 were in telecommunications, 14 in electrical energy, six in oil and gas, and one in water and wastewater.
"Most of the panic is behind us," says Al Angulo, regional director for Latin America and the Caribbean at the U.S. Trade & Development Administration in Washington. He notes that Brazil remains the economic powerhouse of Latin America, with 160 million inhabitants and a gross domestic product of nearly $1 billion.
Angulo says Brazil's economy is bouncing back, and while American companies tend to be more cautious than European competitors, U.S. companies are optimistic about Latin America's future.
Nevertheless, the lingering uncertainties have led President Fernando Henrique Cardoso to push back to next month Brazil's privatization of three state-owned electrical generating entities. Reasons for the delays include economic instability, debt problems, questions related to the legal process and opposition from the governors of some states such as Rio de Janeiro.
Furnas, Chesf and Eletronorte were to have been spun off during the first half of 1999. The government now says Furnas will be divided into three units, with transmission remaining in state hands; the other two will have generating capacities of 5,570 and 4,633 megawatts. Chesf will split into four units, with transmission remaining state property and the other three with generating capacities of 4,638, 4,575 and 1,500 megawatts.
Eletronorte will be split in two-one unit for transmission and the other with a generating capacity of 4,116 megawatts.
Brazilian national development bank BNDES says the sale of 50.1 percent of the utilities' voting capital to strategic investors and the rest to the general public will generate about $4.5 billion at current exchange rates.
Yet, a report issued in February by investment brokerage firm Bozano Simonsen Securities concludes that neither the recent currency devaluation nor the threat of recession will have much long-term impact on Brazil's electric utilities.
In fact, only two power producers, Copel and Celesc, are at risk, it says, since their concession contracts don't contain clauses that let them pass on any uncontrollable cost increases to consumers.
"The effects of a general meltdown on the Brazilian economy would not have any marked effect on electricity sales in Brazil, due to the fact that demand for electricity is relatively inelastic," says the report, noting that, thanks to population growth and other factors, domestic electric demand has risen even in years of negative growth. Even so, Cemig, Bandeirantes and others that depend heavily on industrial clients may still be hurt if a recession hits Brazil this year.
One of the largest U.S. utility investors in Brazil is PSEG, which along with several partners recently acquired Rio Grande Energia -- an electricity producer in the southern state of Rio Grande do Sul -- for $1.5 billion.
"In general, we're still bullish on investment in Latin America," says Robert Logan, director of business development for PSEG Americas. "The investment climate in Brazil has obviously had some ripple effect, but we're optimistic that the reforms that have taken place in recent years will prove substantial enough to weather this storm. We're still actively seeking investment opportunities all over Latin America."
PSEG has found at least one of those opportunities in Chile. In early June, PSEG and Sempra Energy jointly announced the purchase of 90 percent of Chile's Chilquinta Energia S.A. for $840 million. The deal includes Chilquinta Energia, Chile's third largest electricity distributor, serving 405,000 customers in central Chile; Energas S.A., a natural gas distribution company that'll reach more than 50,000 customers in central Chile by 2003, and a 37 percent controlling interest in Luz del Sur S.A., the second-largest power distributor in Peru, serving 690,000 customers in metropolitan Lima.
"We view Chile as one of the more attractive electric markets in Latin America, and the chance to make a strategic investment in Chile was important to us given that the window of opportunity had been shut for quite a number of years," Logan says. "When it finally opened a little bit, we decided to pursue an investment there. We also like the Peruvian marketplace, and having the company packaged in such a way there were assets in both countries was very attractive to us."
Under the deal, Sempra and PSEG will have shared control and equal representation on Chilquinta Energia's board of directors. Sempra will oversee operations in Chile, while PSEG will supervise Peruvian operations.
Chile is still considered the healthiest economy in Latin America -- with gross domestic product growth last year exceeding 4 percent, compared to a regional average of only 2.3 percent. This growth is not only affecting the electricity market, but the water market, too. In fact, it is in Chile that the movement in the water sector is expected to be most pronounced.
In coming months, Empresa Metropolitana de Obras Sanitarias (Emos), Santiago's state water and sewer utility, will be sold off to private investors. The government will follow the same process as it did with regard to Valparaiso's Esval -- 40 percent of which was bought by a consortium led by Enersis Chile S.A. for $138.4 million. The state's Sistema Administrador de Empresas will keep a 35 percent stake in Emos, while transferring 40 percent to the private sector and 10 percent to employees, and placing the remaining 10 percent on the Chilean stock market.
The winning bidder will have to invest at least $220 million-one-third of that by 2002. Emos is part of the package of four sanitation entities to be privatized this year, the others being Essal, Essel and Essbio, all in southern Chile.
"We're cautiously optimistic about the medium- to long-term outlook in Brazil," says Scott Whitney, senior vice-president at Ogden Yorkshire Water. "They have economic difficulties to get through, but they seem to have come to grips with the types of contractual and financial structures that need to be in place to allow for successful privatization of their water utilities. There are a number of significant privatizations coming up in Rio de Janeiro and São Paulo, and that's what we're focused on."
Whitney says these contracts -- each worth in excess of $100 million a year -- involve bidding for a concession fee to be paid every year to the government, "and commitments from the winning bidder to expand the system significantly to provide for greater coverage of potable water and wastewater collection services."
In Latin America, the most important investors in water besides Ogden are French conglomerates Vivendi, Lyonnais des Eaux and Houston-based Enron, a gas and electric giant. In mid-May, Enron subsidiary Azurix Corp. announced it had won the water and wastewater concessions for two regions of Argentina's Buenos Aires province. Azurix bid $438.6 million for the 30-year concessions, which include the large industrial cities of Bahia Blanca, the provincial capital of La Plata, and rural areas in the interior of the province.
Gas and electric companies are not only getting involved in water, they also are making plays in the telecom industry.
"It's a regional trend that power and even gas pipeline companies are doing deals with telecom firms to put fiber optics in their pipelines or power pylons," says Jason Feer, publisher of two Washington-based industry newsletters, Latin America Energy Alert and Latin American Power Watch. "The company gets a percentage of the capacity on the fiberoptic line, which they can either use or lease back to the company that strings the line."
Whether the pace of U.S. utility investment in Latin America will slow down remains to be seen.
"In terms of glamorous privatizations, there aren't that many coming up," says Feer. "In Ecuador, they're restructuring the power sector and splitting up Inecel into generating, transmission and distribution units, then they're going to sell stakes of varying sizes in each of those. Ecuador and Mexico are the few countries that are really doing a whole lot of privatizations. In Peru, the government is basically done."
Feer says Mexico alone will need $25 billion in new electricity generating investment -- but old-fashioned politics stands in the way. "Mexico is an interesting case because they came up with this proposal to privatize the power system, sell off the distribution operations of [state-owned] CFE, and sell their generating assets. But they didn't prepare public opinion for it very well. When they tried to introduce the bill in Congress, the unions and opposition went crazy. Even the old guard of the ruling PRI opposed it."
All signs, however, point to increased activity in Latin American utility markets in coming years -- and a growing presence of U.S. companies eager to participate in the region's growth.