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8 June 2017

China Makes a Power Play in Brazil and Argentina

The last two years have been hard on Argentina and Brazil. A sweeping corruption investigation and the impeachment of President Dilma Rousseff have sent Brazil's currency tumbling. The country's economy contracted by 3.8 percent in 2015 and by another 3.6 percent the following year. The Argentine peso, meanwhile, fell 40 percent against the U.S. dollar after the government lifted currency controls in late 2015. But for foreign investors, the two South American nations' economic hardship presents an opportunity. The depreciated currencies in both countries, combined with their governments' need for investment, has enabled Chinese companies to buy up cheap assets and launch major infrastructure projects in Argentina and Brazil alike. The electricity sector in particular has been a focus of their activities.
Power Down

In Brazil, the economic decline has hit the electricity sector hard, especially after years of government price controls. Rousseff passed a measure in 2012 forcing power companies in Brazil to lower their rates to renew their 30-year contracts with the government. Then a severe drought in 2013-15 diminished the country's water reservoirs, causing many power companies to switch from hydroelectric to thermoelectric energy. The transition was costly. State-owned energy firm Petroleo Brasileiro, for example, had to import 30 percent more natural gas from Bolivia in 2013 to fuel its thermoelectric plants. Most power companies had to sell off some of their assets to offset the added expense. Today, Brazil's electricity sector has the second-largest debt of any of its industries, behind oil and natural gas; its outstanding obligations surpassed $54 billion last year. President Michel Temer, however, is trying to change the country's regulatory framework to alleviate the power companies' troubles. Temer is working on a measure that would allow the firms to sell the electricity they generate to commercial customers, such as electricity trading companies or large industrial consumers, at a higher price for a limited time.

Price controls in Argentina, likewise, have hindered the country's electricity sector. The measures discouraged investment in power generation, and now Argentina lacks the infrastructure to handle peak demand. Buenos Aires had to import electricity from Uruguay and Brazil last summer to accommodate the spike in usage. Even so, Argentina experienced several power outages. The number of blackouts in the country, in fact, doubled between 2004 and 2014, according to Argentine electricity company Edesur. Electricity prices for energy providers also increased over a similar timeframe by over 400 percent. Yet prices for consumers rose just 10 percent. To remedy the sector's problems, which prompted the country's energy minister to declare a state of emergency in December 2015, President Mauricio Macri introduced an unpopular measure to raise consumer electricity rates — in some cases by over 300 percent.
Cashing In

Despite the political steps they've taken to rehabilitate their decrepit electricity sectors, leaders in Brazil and Argentina understand that legislation can only do so much. To truly address the issue, they need money — and China is happy to oblige. Since 2015, Chinese companies have spent a total of $21 billion to purchase 21 Brazilian electricity companies. The transactions included an arrangement early this year in which the State Grid Corp. of China bought a majority stake in Brazil's third-largest power company, CFPL Energia, for $4.5 billion. State Grid already operates close to 10,000 kilometers (more than 6,000 miles) of power lines throughout Brazil. The Shanghai Electric Corp., meanwhile, is considering acquiring Brazilian power company Eletrosul for over $1 billion.

On top of that, China pitched in $15 billion for a joint investment fund that will finance energy projects in the country along with logistics, mining, technology and agribusiness ventures. (Beijing's partners, Brazilian Development Bank and Caixa Economica Federal, another Brazilian state-owned bank, will provide the other $5 billion.) The fund, which entered operation June 1, will pave the way for Chinese companies to win contracts for the infrastructure projects it finances, especially since most of Brazil's biggest engineering companies are wrapped up in the corruption probe. The investigations have limited the Brazilian firms' access to credit and caused them financial problems. Their plight is part of the reason the Brazilian government is trying to draw foreign investment to help fund major infrastructure projects. If Beijing's interest in the country is any indication, the efforts are paying off. All told, China is expected to invest more than $20 billion in Brazil this year, a 68 percent increase over 2016.

And it's not far behind in Argentina. On May 17, Macri met with Chinese President Xi Jinping and signed an agreement for a $17 billion loan that Buenos Aires will use to construct two nuclear power plants, as well as solar energy and railway projects. The leaders also discussed expediting negotiations over a deal Chinese firms made to invest in four new hydroelectric dams in Argentina. That endeavor, like the power plant project, is a legacy of former President Cristina Fernandez de Kirchner's time in office. After assuming the presidency, Macri put the brakes on the initiatives, arguing that the Chinese firms involved had negotiated the deals directly with his predecessor rather than going through the Foreign Ministry in accordance with protocol. His misgivings notwithstanding, though, Macri opted to move forward with the projects because Argentina needs capital to increase its electricity output.

Beijing has taken advantage of the economic recession and decaying electricity sectors in Argentina and Brazil to increase its presence in the countries. Its activities in the region play into its overarching plan to internationalize its companies and expand its influence abroad. And the Brazilian and Argentine governments are so desperate for cash that they've laid aside their concerns that Beijing could use the investments to insinuate itself in their most strategic sectors.

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