Argentina feels the heat as debt-ridden electricity companies warn of blackouts

By Adam Thomson
Financial Times; Oct 28, 2003

The summer heat hascome early to Argentina and it has sparked a clash of colossal proportions between the government and the country's electricity companies.

Last week, Gerard Creuzet of Electricité de France, the French electricity company and owner of Edenor, its Argentine-based subsidiary, warned that unless the government authorised price increases, Argentina's electricity grid could falter as a result of the seasonal surge in demand.

President Néstor Kirchner responded personally. "I won't negotiate under pressure from anyone," he said. "If these groups think pressure is the way to achieve their goals, they have made a mistake with me."

The friction is the latest evidence of a rapidly deteriorating relationship between the government and the mainly international groups that provide the country's public services.

From water and gas suppliers to telecommunications, companies insist that a price freeze introduced in January 2002 in response to Argentina's sovereign-debt default and subsequent devaluation is no longer acceptable.

Companies have been hit hard by Argentina's financial collapse. They suffered huge losses from last year's 70 per cent fall in the value of the peso and have also endured the price freeze while wholesale prices have almost doubled and consumption of public services has fallen 10 per cent.

The result is that Argentina's prices are now among the cheapest in Latin America and public services providers say they cannot cover their debt payments or keep up necessary investment. A recent World Bank report said private-sector investment in infrastructure fell to $200m last year compared with an average $5.2bn a year in the 1990s.

The peso was pegged to the dollar at a rate of one to one in the 1990s. Tariffs were expressed in dollars and increases were linked to the US consumer price index.

So far, the Kirchner administration has been unsympathetic to the debt- ridden companies. Despite congressional approval this month of a law allowing it to increase prices - one of the main conditions in the country's agreement with the International Monetary Fund - the government has said it will not do so until it has revised all 61 contracts with the privatised companies. That process is not expected to be completed until the end of 2004.

The government maintains that to design the new contracts and calculate price increases it must first assess how much the privatised utility companies profited during the golden decade of the 1990s. Yet many believe the delay is the result of a more fundamental problem - that the government still does not know what it wants the new contracts to look like.

"In public services there is an institutional vacuum, a policy vacuum and a vacuum in terms of rules," says Fernando Navajas, chief economist of Fiel, a think-tank in Buenos Aires. "Put simply, there is nothing."

One thing does seem clear, at least: the government wants to take a more active role in investment decisions. In telecommunications, it has already set up a fund to encourage local companies to make equipment such as modems.

The idea is that the privatised companies will contribute to the fund through eventual price increases, and that they will then have to buy equipment from the local companies.

Mr Kirchner's administration believes such funds could become the driving force of investment in infrastructure among the regulated sectors, with the privatised companies providing much of the money and the government deciding in large part how it is spent.

The companies are less enthusiastic. A telecommunications industry representative last week described the plan as "frightening" and "riddled with potential conflicts of interest".

Whatever model emerges, the long delay in clarifying the rules for public-services providers has produced a rash of legal cases from increasingly desperate utility companies. Of the 60 cases pending at the World Bank's International Centre for Settlement of Investment Disputes, for example, more than a third are against the Argentine government.

More worrying for Argentines, the delay has also created problems in the electricity sector. Last week, parts of Buenos Aires were plunged into darkness for several hours. According to Cammesa, the body responsible for co-ordinating payments and electricity delivery in the wholesale market, there are 11 areas across the country that could suffer blackouts this summer.

Mr Navajas, for one, is in no doubt how serious the situation could become. "If we wait until the end of 2004 to set the rules, which is what the government seems intent on doing, we are going to have an energy crisis."