A Dictator's Bad Deal
A contract signed by two dictatorships in the dark days of 1970s South America is making it impossible for Paraguay to benefit from its hydroelectric generation.
With energy demand at the crisis level in Brazil, Argentina and Uruguay, Paraguayans are seeking a dramatic change in the price of electricity they are selling to Brazil.
A 1973 contract forces Paraguay to provide Brazil with all unused electricity from its 50% share of output from the Bi-national Itaipú Dam at a less then market price for fifty years. Currently Brazil uses 95% of the electricity and Paraguay just 5%. Paraguayan Dictator Alfredo Stroessner (1954-1989) struck the deal with Brazilian Dictator General Mario Garrastazú Medici (1969-1974) at a time when no citizen input or control was possible.
Paraguayans contend the problem is similar to the Panama Canal where under unfair pressure Panama ceded the control of the canal to the United States in perpetuity. And in a way similar to the decision by the United States to return sovereignty to Panama, Paraguayans are asking Brazil to renegotiate an unjust contract from the past.
The demand that Paraguay be paid more for it's electricity became a major issue during the recent April 20th Paraguayan presidential election which saw the ruling Colorado Party toppled from the presidency for the first time in 61 years.
The new government-elect, headed by former Bishop Fernando Lugo, is now turning its efforts to making good on their campaign promise to obtain a renegotiation of the 1973 contract. They say a fair return on Brazil's use of Paraguay's unused portion of the electricity from the dam would be about $2 billion instead of the current earnings of $300 million in royalties and payments. The incoming Lugo administration also is seeking a better deal from the Argentine-Paraguayan Yacyretá Hydroelectric dam which is bringing in about $100 million in earnings.
An Unjust Contract From The Past
Both dam projects got their start under the Stroessner Dictatorship which had as its principal aim benefiting from the construction work. The border region of Brazil, Argentina and Paraguay experienced a tripling of its population while the two dictatorships built the world's largest hydroelectric dam (capable of a maximum output of 14,000 megawatts per hour).
Corruption has always been synonymous with the dam projects and Paraguay Human Rights Activist Martin Almada told the Paraguayan daily ABC Color recently, that disappearances went hand and hand with the operation of the dam-related construction companies. Almada is calling for an historic investigation of Paraguayan corruption involving the damn over the last three decades. He has called the Itaipú Treaty Stroessner's "greatest betrayal." 1,2.
The damn projects go to the heart of activities by the dictatorship which still affect Paraguay today.
Initially, Brazilian President Luiz Inacio Lula da Silva has announced that the contract, which runs until 2023, will not be renegotiated but he has offered to talk about other forms of compensation to Paraguay. Starting August 16, Paraguayans and Brazilians will begin formal talks.
Previously Brazil has tinkered with the electricity rates and the interest on the debt -- sometimes at Paraguay's expense. In 1986 the electricity rates were set below cost of production producing a $4 billion dollar debt that Paraguay feels should be paid by Brazil. In 1997, facing an economic crisis and near bankruptcy at the dam, Brazil convinced Paraguayan President Juan Carlos Wasmosy (1993-1998)to raise the interest on dam debt owned to Brazil and implement dollar indexing. The refinancing included the $4 billion and brought an increase in the debt of about $6 billion. That decision is still bringing calls for legal action. The total debt owed to the Brazilian Electrobras Corporation has reached $20 billion. 3.
Paraguay Demands Sovereignty Over Electricity
In 2005, Brazil reversed course and made some small modifications to its formula for calculating the cost of energy and lowered the interest on the debt which boosted Paraguayan earnings slightly. And in an exchange of diplomatic notes, Brazil and Paraguay established a $30 million per year social spending program for Paraguay.
The 2005 changes were a beginning of change. But the lack of Paraguayan congressional control over the social spending program quickly resulted in charges that it had been captured by the Colorado political machine. And with energy prices on the rise, Paraguayans don't feel it's enough compensation.
Ricardo Canese, a member of the left Tekojoja party, which helped propel Lugo into office, has been in the forefront of a national campaign aimed at rallying Paraguayans to demand a better price for their hydroelectric energy.
Canese said there are two main issues: The price of the electricity and management of the Itaipú Dam Bi-national Corporation. Similar problems also exist with the Yacyretá project.
"The fundamental thing is to have a just price. And it has to be calculated according to opportunity costs, the cost of substitution, the market price of the energy. So if the Brazilian energy is substituted with natural gas of Bolivia or petroleum the cost of substitution of that energy has to be used to calculate a just benefit for Paraguay," Canese said. Currently Paraguay receives $2.81 a megawatt hour for electricity while the Brazilian wholesale market sells the electricity at $80 a megawatt hour. Brazil also reexports the electricity to Uruguay and Argentina. 4.
Paraguay also would like a bigger say in the running of the Itaipú Corporation and to implement greater financial controls.
"Itaipú is 50% Brazil, 50% Paraguay in theory but in practice it isn't. Everything is managed by Brazil since the beginning in 1976," Canese said. Brazil controls the finance office, the general management office and the technical office which controls the energy generation, he said.
Brazilians have charged that the campaign to raise the electricity price is not justified and that the contract is more than fair to Paraguay because Brazil pays $2.81 per megawatt hour but also pays another $36 per megawatt hour to the Itaipú Corporation to pay off the remaining debt. Reaction in Brazil where electricity rates have been rising has been strong.
Former Brazilian President José Sarney (1995-1990) took up the defense of the contract in his column in the Jornal do Brazil. "Brazil is facing a wave of hostility which has a motivation that is absolutely demagogic and populist," he contended. Since Brazil obtained financing for construction of the dam while Paraguay provided land and water the Paraguay government got into the damn project for "just a piece a change", he said, and will be half owner of a $30 billion corporation when the debt is paid off. 5,6.
Hopes Lula Will Right Historic Wrong
Joao Pereira, head of the South America Office of the Brazilian Foreign Ministry, predicted Fernando Lugo will find himself in an uncomfortable situation over his election campaign promise to change the contract and was "badly advised" to link the price of electricity to the price of oil.
Pereira told a Brazilian congressional hearing that President Elect Lugo has demonstrated a "profound lack of understanding of the Itaipú question."
Jorge Samek, the Brazilian manager of Itaipú, has blamed the rising demand for a contract renegotiation on the Paraguayan newspaper ABC Color which has written repeatedly about the need to change the contract.
Despite the opposition from the Brazilian rightwing establishment President elect Lugo has taken the view that the two governments are now in a different era. And that Brazil and Argentina are increasingly recognizing the need to help the smaller countries in the Southern Cone overcome development differences.
"We are defending our national interests and are asking for justice," Lugo told a press conference. "If by asking for justice we are called something, we accept it. But we will be coherent in our discourse to defend the interests of the Paraguayan nation." Lugo has said that he will go to an international forum if Brazilian negotiations fail. 7.
Paraguay, Canese said, is pinning its hopes on Brazil's leftist president Lula da Silva. He negotiated an increase in the price paid for Bolivian national gas after Evo Morales nationalized the gas fields with the aim of increasing the direct benefit of gas export earnings to the Bolivian people.
Paraguay would like similar treatment because they have suffered an historic injustice.
"Stroessner wanted big business deals. He did big business with the construction of Itaipú. It was him and all his group," Canese said. "And the Brazilian dictatorship supported Stroessner. In return for political support and his business he handed over practically for free the electricity to Brazil."
1. ABC Color Interview with Martin Almada. Itaipú fue la traición más grande que hizo Stroessner.
2. Momarandu.com May 15, 2008. Piden investigar desapariciones y muertes en binacionales.
3. ABC Color April 1, 2008 El Tratado de Itaipú no se renegocia se viola.
4. Interview Ricardo Canese, Tekojoja Party.
5. ABC Color May 4, No Somos Imperialists, pero no renegociamos El Tratado.
6. ABC Color, May 26, 2008 commentary, Itaipú en la visión de Sarney.
7. ABC Color May 9, 2008 Fernando Lugo Contestó al Brasil.