Paraguay Pushes ‘Imperialist’ Brazil on Hydro Power: Week Ahead

By Joshua Goodman
July 20 (Bloomberg) -- South America’s Itaipu dam, built three decades ago in what Brazil and Paraguay heralded as a triumph of cross-border cooperation, is now the object of a sharpening feud between the two countries over which is benefiting the most.
Brazil gets 20 percent of its electricity from the dam straddling the Parana River, paying its neighbor about $120 million a year. Paraguayan President Fernando Lugo has vowed to recover “sovereignty” of the world’s most productive hydro dam, and is seeking more money from Brazil. State-controlled utility Centrais Eletricas Brasileiras SA and Brazilian consumers may get stuck with the bill.
Brazil’s President Luiz Inacio Lula da Silva will try to break a stalemate in negotiations when the two leaders meet July 25 in Asuncion. Lula wants Lugo, a former Roman Catholic bishop, to give up his demand to reopen the dam’s treaty, Brazilian Energy Minister Edison Lobao said in May. The nationalist pitchforks may be ready, as they were during Lula’s last visit in 2007, when Paraguay’s biggest newspaper called Brazil an “imperialist nation and exploiter” on its front-page.
“We don’t want to be a Brazilian protectorate,” Jorge Lara Castro, deputy foreign minister and future ambassador to Brazil, said in an interview in Asuncion. “This isn’t demagoguery. At stake is the viability of a poor country.”
Ant and Elephant
Itaipu’s 1973 treaty, written by the dictators then in power in both countries, reflects the “realpolitik of an ant staring up at an elephant,” Lara Castro said. Each country is entitled to half of the dam’s output, which last year reached a world hydroelectric record of 95 million megawatt hours.
That’s given Brazil, Latin America’s largest economy, access to a lot of cheap power. Paraguay, whose $12 billion rural-based economy is 1/100th the size of Brazil’s, can use only about 5 percent of the dam’s output. Banned from selling elsewhere, it must cede its unused share to Rio de Janeiro-based Eletrobras, Latin America’s largest utility, for about $3 per megawatt hour.
Lugo, whose election last year ended 61 years of one-party rule, is pushing for the right to sell directly to Brazilian distributors, or to Chile and Argentina, both of which recently faced energy shortages. A “fair price” and “energy sovereignty” is his mantra.
More Revenue
If they succeed, Paraguay estimates it can boost yearly revenue from the dam to around $1 billion, compared with $370 million from royalties and fees last year, based on average auction tariffs for new hydro projects in Brazil. The same energy is sold to Brazilian consumers at average electricity rate of $128 per Megawatt hour.
“We’re not looking for a gift or any concession other than allowing market forces to work,” Carlos Mateo Balmelli, Paraguay’s director at Itaipu, said in an interview.
Eletrobras paid the $17.5 billion to build the dam. Itaipu, which is jointly controlled by Eletrobras and the National Electricity Administration of Paraguay, still owes the company and the Brazilian government $19 billion.
“They didn’t have to put any money up front and most of the water that powers the dam isn’t even theirs, its source is Brazilian,” Jose Muniz, chief executive officer of Eletrobras, said in an interview. “When the debt is paid in 2023 they’ll own half of a dam that will give them enough to run their whole economy.”
Work on the dam started in 1974 when 40,000 workers rerouted the Parana, South America’s second longest river, using enough iron and steel to build 380 Eiffel towers.
Brazil Investments
The standoff is being closely watched by Brazil’s neighbors. Since 2003, annual foreign investment by Brazilian companies surged to $20 billion from $2.5 billion, according to the United Nations.
None of the diplomatic feuds with Bolivia, over President Evo Morales’ nationalization of Petroleo Brasileiro SA’s refineries, or in Ecuador, where Rafael Correa threatened to stop payment on $243 million in loans linked to a Brazil-built power plant, match Itaipu for its economic or symbolic weight.
“It’s our Panama Canal,” said Rubens Barbosa, a former ambassador to the U.S. and president of the Sao Paulo Industrial Federation’s foreign trade council. “It’s a natural target for claims that Brazil is an imperial power.”
Lula, who once accused the U.S. of trying to “annex” Latin America, has tried to soften the imperialist stigma. In May, the former union leader offered Paraguay $1 billion in development loans and greater say in Itaipu’s management.
New Proposal
A new unpublished proposal would double to $240 million Brazil’s yearly payout to Paraguay, Estado de S. Paulo said July 18, citing government officials not identified by name. Without altering the treaty, Paraguay would be allowed to bypass Eletrobras and sell in Brazil, though not other markets, before the dam’s debt is to be repaid in 2023, the newspaper reported.
Conceding to Paraguay’s demands “could cause a huge financial problem for Eletrobras,” said Adriano Pires, head of the Brazilian Center for Infrastructure, a research group. Eletrobras’s half stake in Itaipu represents 15 percent of the company’s generating capacity.
For Paraguay, where power outages are frequent even in the towns bordering Itaipu, there’s little to lose. Lugo’s demand that Brazil renegotiate the “illegitimate” treaty as payment of a “historical debt” owed for helping wipe out an estimated 90 percent of its male population during the 1865-1870 Triple Alliance War has rallied even opponents.
“We’re all in this fight to the end,” said Sebastian Acha, lawmaker for Paraguay’s opposition party Patria Querida.