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27/03/2005 | Relations with Privatised Utilities Remain Tense in Argentina as Date for Start of Public Hearings Approaches

WMRC Staff

The date for the start of a programme of 11 public hearings for gas and power companies is only a few weeks away but agreement has not yet been reached over renegotiation of contracts.

 

Significance

A programme of public hearings with several foreign-owned utilities is set to start in April, despite them not having reached an agreement with the government over the renegotiation of their public-service contracts (PSC).

Implications

Negotiations have been complicated by government pressure for companies attending the hearings to drop any arbitration claims against the government.

Outlook

The President's call for a boycott against Shell has undermined the investment climate for energy companies and raised concerns about the government's intention toward the sector, as well as about the radicalisation of piquetero groups who have threatened to attend the hearings. Economy Minister Lavagna's rejection of the renationalisation of privatised utilities in an interview with the FT this week should help to ease some of their concerns, despite uncertainty about the future of his position in the government, but greater legal security is needed in order to guarantee future investments in the sector.

Renegotiation of Public Service Contracts 

The success of the sovereign bond swap, which ended on 25 February 2005, has allowed the Argentine government and International Monetary Fund (IMF) to re-start talks over the US$13 billion standby programme suspended in July 2004. With campaigning ahead of the legislative elections scheduled for October this year set to distract legislators soon, the Kirchner administration is reportedly seeking to conclude the process by June. Resolving the government's long-running tariff dispute with the mainly foreign-owned privatised utilities and completing the renegotiation of public service contracts (PSCs) is one of the main remaining unresolved issues at stake in the negotiations and the recent surprise announcement of a programme of public hearings for gas and power utilities can be seen as an attempt to kick-start the process. 

The importance of an improved investment climate for foreign companies for mending relations with the IMF was also apparent in the personal intervention made by IMF chief, Rodrigo Rato, on 16 March in the wake of the government's call for a boycott of oil company Shell. Rato urged the government to fix 'rules for investment, foreign as well as national, that are clear and respectful of the functioning of private enterprise', and added that IMF officials would be discussing criteria for juridical security as pre-condition for a future programme with Argentina.

Resolving the enduring rate dispute with utilities is key to attracting new investment in the gas and power sectors. 

Foreign-owned utilities are under pressure from the government to increase investment in gas and power infrastructure. However, companies claim that they have been unable to meet their investment goals due to a tariff-freeze in place since January 2002. President Kirchner accuses privatised public-service providers (particularly in the electricity sector) of using the ongoing tariff-hike furore as a smokescreen to hide the fact that they have simply failed to invest in their services since recession took hold in 1998, leading to a stalemate in the re-negotiation of the 64 PSCs. In the meantime, the slowness of the authorities to implement rate hikes for residential consumers has led to growing frustration and an increase in international arbitration claims against the government.

Timetable for Public Hearings for Gas and Power Utilities

20 April

Edenor and Edesur

22 April

Metrogas

27 April

TGS

28 April

Camuzzi

5 May

Transcomahue

6 May

Ente Provincial de Energía del Neuquén

13 May

Gas Natural BAN

18 May

TGN

20 May

Transnoa

26 May

Transnea

31 May

Transpa

Outlook for Hearings is Uncertain

The hearings are due to start in April. However, the discussions between the government and most of the privatised utilities over the renegotiation of their contracts have failed to make much progress, whilst the President's call for a boycott against Shell for raising its fuel prices has added to existing concerns about the government's intentions toward privatised companies.

One of the main sticking points in the negotiations has been the utilities' demand for tariff hikes. However, concerns about rising inflation and the upcoming elections mean that the government will be reluctant to agree to a hike in tariffs for residential consumers, with industrial consumers likely to bear the brunt of any tariff adjustments. In addition to the tariff dispute, the renegotiation over the PSCs have been slowed by pressure from the government for utilities to drop any claim against the government as a precondition for a new contract.

Outlook and Implications

Out of the 64 contracts with public service providers, only 28 have been resolved to date, including the signing of MoUs (memoranda of understanding) with electricity companies Transener, Transba, Edelap and Districuyo. Meanwhile, Gas Natural's announcement that it is dropping its claim against the government is expected to facilitate the swift conclusion of an agreement over the renegotiation of its contract. However the reaching of agreements over the majority of contracts with gas and power companies is still a long way off and it is unclear as to whether setting up a timetable of public hearings before the main points have been agreed upon will help matters.

Concerns that the public hearings might be taken over by angry consumer and 'piquetero' groups (consisting of the poor and unemployed), have led the electricity distribution companies Edenor and Edesur to consider whether to attend their hearing scheduled for 20 April, according to local press reports this week. Worries about being targeted by radical piquetero groups will have increased following the Shell boycott.

Although the boycott only applied directly to retail fuel distributors Shell and Esso, it has had wider repercussions for investor confidence. A series of expropriations in other sectors have already raised concerns that the government may be considering a broader programme of nationalisations of privatised public-service providers, with utilities regarded as potential targets and energy companies will be worried that the Shell boycott points to a hardening of its stance against foreign companies.

The Economy Minister Roberto Lavagna, in an interview with the Financial Times (FT) this week, sought to ease these concerns, rejecting a return to 'populist' policies or the renationalisation of privatised utilities as the state does not have the capacity to increase investment in the sector. Lavagna's thinking is clearly more in line with that of the IMF and foreign investors than that of other members of the government. However, despite his assurances, it is unclear how strong a guarantee Lavagna's comments can provide. There has long been speculation that once the debt swap was out of the way his usefulness to the Kirchner administration would end, and other members of the government have already been seen to exert greater influence over the renegotiation of the PSCs than the economy ministry. Nevertheless, the investment needs of the energy sector do mean that the wholesale renationalisation of the privatised utilities is not a feasible proposition and should increase pressure on the government to increase legal security in order to facilitate a completion of the renegotiations as well as increased investments in order to prevent further gas and power shortages in the coming years.

WMRC (Reino Unido)

 



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