Bet on a Brazilian Salsa

Junior Isles

Managing Editor

Latin Americans play football like they Salsa. For those of you that follow football (that`s soccer to the Americans), remember the way in which the Brazilians, led by the `irrepressible` Ronaldo came to the World Cup finals last year? The confidence, the flamboyance, the style. Hot favourites. You could be forgiven for thinking “here is a safe bet” – even though in the back of your mind you knew that at anytime they could be inexplicably prone to erratic and lacklustre performances.

Investing in the Latin American electricity market can at times seem like betting on the Brazilian football team or doing the Salsa – you`re not always on to a winner but the action is never dull. Indeed at the time of the World Cup and for much of 1997, all roads seemed to lead to Brazil. Latin America, with Brazil as the biggest economy, was the hot market. Then at the beginning of this year, Brazil was in a crisis after the depreciation of the Real. For a while projects were severely affected but now just six months later, the country has confounded critics by pulling out of recession so quickly. As Latin America`s biggest economy, analysts believe this will contribute to improving the outlook for the region`s economies.

In theory, this should be an active year for the main Latin American power markets. With increasing demand in most countries, suppliers should continue to see orders and things should also pick up for investors later in the year.

In Brazil the board of Brazilian energy group Furnas has approved its breakup into three separate companies. The sale of at least two of these companies could be carried out by the third quarter of this year. Furnas will be split into two generating companies and one transmission company, pending the approval of the company`s stockholders.

But remember last year`s attempt to sell two distributors spun off from Electropaulo? The government failed to attract a single buyer for one of them. The market will have its first test with this month`s (June) planned auction of Saelpa, the energy distribution company for Paraiba state. Saelpa went to the auction bloc last December but was not sold due to a lack of interest.

Unlike the sometimes uncertain Brazilian market, Argentina, according to a Datamonitor report, is seen as the most attractive region for IPP investment. This was because it is seen to have the best planning and approval process. But it will be interesting to see what happens as it assesses the consequences of a possible currency flotation.

Peru, meanwhile, quashed fears that it might reverse its privatization programme with the announcement that it would sell a series of electricity companies next year. The country had come in for criticism of post-privatization fuel and electricity price increases.

Venezuela has managed to find a compromise. Its power companies have reached an agreement with the government to increase rates over the next two months by less than they were authorised to do last December. The agreement marks an attempt by the government to soften the social impact of price increases while guaranteeing a reasonable rate of return to investors. In line with this agreement the country said electricity utilities Enelco, Enerven and Enelbar will be completely privatized this year.

Despite the uncertainties in the region, investors are never put off for long. In May Spanish utilities group Endesa finally ended a long-running battle to gain control of Chilean energy group Empresa Nacional de Electricidad (Endesa Chile). In the largest ever stock operation in Chile, Endesa bought 30 per cent of Endesa Chile through Enersis, its Latin American investment vehicle. The deal has made Endesa Spain the leading player in Latin America`s markets. Endesa Chile owns or controls generating assets in Argentina, Brazil, Chile, Colombia and Peru.

Further, according to a report by The Financial Times/Andersen Consulting, Brazil (along with China and India) was ranked at the top of a list of countries in which companies from America`s midwest plan to make investment over the next five years.

So it seems to be a question of keeping the faith. Like South American football, Latin America usually turns out to be a good bet. But like the Salsa, expect many twists and turns. And remember, in the World Cup I lost money on Brazil.