Coming Into Power

AGUAYTIA, Peru — Later this month, a new power plant will fire up on the edge of the Amazon jungle here and begin generating 7% of Peru’s electricity, a milestone in a daring venture by Texas entrepreneurs whose audacity would impress the most jaded wildcatter.

Maple Cos. of Dallas conceived the project--Peru’s first major natural-gas-fired power plant--in 1992, when car bombs were still rocking downtown Lima and Sendero Luminoso guerrillas ruled the Peruvian countryside. Foreign companies were prohibited from selling energy in Peru, and no bank had ever made a loan on such a project.

Now, after floating two 120-ton generators up the Amazon and stringing 250 miles of transmission cable over 15,000-foot Andean peaks, the company is about to inaugurate its $254-million facility and begin delivering electricity to Peruvians at one-third the cost they’ve been paying.

The way was paved by Peru’s electricity deregulation and liberalized foreign investment laws pushed through the congress in 1993 by President Alberto Fujimori. Among the early financial backers was Los Angeles-based Trust Co. of the West. Now the investors stand to make big profits: a more than 20% annual return on their nearly $100-million equity in the project.

“People thought we were crazy,” Maple President Rex Canon said during a recent visit to the plant west of the steamy river port city of Pucallpa, about 300 miles northeast of Lima. “Now they think we’re pretty smart.”

The Aguaytia plant is a striking example of an unprecedented wave of new energy projects engulfing Latin America as the 20th century winds down, bringing at last the kind of infrastructure long promised to a continent whose potential has repeatedly foundered in part because it lacked such basic underpinnings of modern economies.

With the region’s rapidly developing economies boosting power demand by 6% to 7% a year, more than four times the U.S. rate, the World Bank estimates that a staggering $170 billion worth of electricity projects will be built in Latin America and the Caribbean during the next 10 years. Peru will need a new electricity plant the size of the Aguaytia project each year just to keep pace with demand.

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Much of the capital is coming from U.S. companies lured by the prospect of high profits and encouraged by formerly protectionist countries, such as Peru, that desperately need electricity, highways, airports and modern telecommunications facilities but can’t afford them on their own.

El Paso Energy of Houston, for example, is building no fewer than five Brazilian power plants worth $800 million. General Electric is developing a giant $647-million electricity plant near Chihuahua called Samalayuca, Mexico’s largest privately owned power facility. Bechtel of San Francisco is an investor in a plant going up in Cali, Colombia.

Yankee money is also flowing into natural gas fields, pipelines and distribution systems in South America, which go hand in hand with electricity generation because gas is often the fuel of choice for the new or refurbished power plants. Governments are pushing natural gas because it is cheaper and cleaner than the fuel oil and diesel fuel used in Peru and other countries.

About 200 miles south of Aguaytia in southern Peru, Shell, Mobil and Bechtel are developing the $2.7-billion Camisea natural gas field, which could someday provide energy for a string of planned power plants for Lima, Peru’s capital. Enron, Amoco, Shell and El Paso Energy are heading a $2-billion project in Bolivia to develop and ship gas by 2,000 miles of pipeline to energy-starved Brazilian utilities and manufacturers.

In addition to such green-field projects, U.S. energy companies are buying up existing power facilities that governments are unloading through privatization. Brazil alone has sold or is selling 18 state-owned power utilities, two of which are now controlled by U.S. companies. During the next two years, Brazil will auction off state-owned power generation facilities worth $23 billion.

New projects, especially the privatization of existing facilities, are not always greeted enthusiastically by locals. The downside in the privatization wave has been massive layoffs, with tens of thousands of jobs lost in Argentina, for example, as new owners eliminate “make-work” jobs that had often been created as political favors.

Meanwhile, the benefits of lower power costs are greatest for commerce and industry and take years to filter down to consumers, noted Sandra Boente, a Latin American utilities analyst with Salomon Smith Barney in New York. That’s because new utility owners slash rates to mollify the big industrial customers who are typically free to shop around. They then keep residential rates high to create the cash flow needed to pay off debt or upgrade the electricity distribution network, Boente said.

That has brought political pressure to reduce rates for consumers. But the need for additional power capacity to foster economic growth--and jobs--is so overwhelming that political leaders, with a few exceptions, have been able to sell constituents on the reforms.

The rush of investment reflects a reading by U.S. industry that the region has become a legitimate market with real prospects for financial returns that surpass what’s available in the United States. And U.S. companies are not alone: Spanish, French and Swiss firms are also establishing beachheads. All are operating on the premise that the free-market reforms sweeping the region will continue to stoke economic growth and stimulate energy consumption.

Inadequate energy is, of course, only part of Latin America’s infrastructure problem. During the last two decades, the region’s countries have made only one-twentieth of the annual per-capita investment in infrastructure that the United States has.

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That’s put Latin America in a hole globally, because every 1% increase in money spent on roads, power plants, ports and the like leads to a 17% gain in productivity, Colombia’s Finance Minister Antonio Urdinola said at an Inter-American Development Bank meeting in Colombia earlier this year.

“Infrastructure is the basis upon which a modern society is built. Latin countries know they can’t be competitive on world markets without it,” said Everett Santos, a former top World Bank official who runs a $1-billion investment pool that so far has put money into a new wireless telephone system in Mexico, an ammonia plant in Venezuela and a privatized port in Argentina.

“And if efficiency savings generated by new projects can be turned into a revenue stream for investors, everybody wins,” said Santos, whose Emerging Markets Partnership manages the IG-GE Capital Latin American Infrastructure Fund.

For Peru, Maple’s presence in the Amazon reflects a reversal of earlier policies that kept foreign companies out. Governments previously protected state-owned power companies, and the political tenor of the times made foreign companies, especially those from the U.S., unwelcome.

But that has changed radically in the 1990s. As the entire continent shifts from state-controlled economies to free markets, countries such as Peru, Brazil and Bolivia don’t merely allow foreign investment, they solicit it.

Energy has been a prime focus because it can boost or dampen the competitiveness of a country’s exports as well as enhance the domestic economy. For mining, steel, cement, manufacturing and other heavy industries that spend hundreds of thousands of dollars a month on electricity, the implications of cheaper power are huge.

Besides, there is gold to be mined from such dull-sounding investments. State-run services--be they power plants, ports, toll roads or telephone utilities--are typically so inefficient that privately run operations can easily undercut prevailing prices and still make a big profit.

In addition to their padded payrolls, state-run utilities around Latin America have been characterized by high rates of energy losses, a burden paid by consumers and industry alike. Before it was privatized, Argentina’s electricity system was estimated to be losing 28% of the power it generated because of thefts, unpaid bills and technical failures. Energy losses in the U.S. power industry average less than 10%.

U.S. firms such as Maple figure they can make a good profit simply by cutting down on energy losses. For example, the average cost of power sold over Peru’s electricity grid today is nearly 6 cents per kilowatt-hour. Maple says it will deliver electricity for less than 2 cents.

Yet its projected 20% annual return on the investment at Aguaytia is nearly twice the regulated 11% profit allowed to utilities in California, noted George Liparidis, vice president of San Diego-based Enova International, which has won the rights to distribute U.S. gas to two Mexican cities, Mexicali and Chihuahua.

There is added risk, of course. Power developers must brave the threat of political reversals, regulatory whimsy, the possibility of abruptly being nationalized and, in some countries, guerrilla attacks. Moreover, the prices being paid for some utilities in state-sponsored auctions have become astronomical, particularly in Brazil, Liparidis said.

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Although the discussion of such risks has become muted in the excitement, they’re still there, warns Luigi Manzetti, a Southern Methodist University political science professor who studies Latin American economies.

“Some cases, like Argentina’s energy privatizations, have been done in a hurry under the assumption that government will not harass them with future regulations. But inevitably, the government comes under political pressure, reconsiders and starts to interfere again, most of all in rates,” Manzetti said, adding that some foreign companies have had trouble making a profit in the Argentina power market.

Despite the risks, more lenders, including giants such as Chase Manhattan and Bank of Boston, are making loans on Latin American projects. Chase provided part of the financing for the Aguaytia project, and Bank of Boston is lending money in Argentina.

Even better news for power projects is that the Inter-American Development Bank, the Washington-based lender that specializes in infrastructure, now makes 5% of its loans directly to private developers, a percentage that might soon be raised to 10%. Until 1995, the bank lent only to governments.

The IDB, in fact, lent the Aguaytia developers $60 million, more than a third of what they borrowed to build the plant.

In addition, several private investment funds, which are typically formed with money put up by huge institutional investors, have been set up in the last two years specifically to invest in Latin American infrastructure projects. The Washington-based Darby Investment Group, headed by former U.S. Treasury Secretary Nicholas Brady, launched a $500-million fund in March that will seek out South American energy deals, among others.

Maple and other companies are betting that Latin American governments will stay the free-market course and not revert to the nationalizations of decades past. They are also counting on governments to adhere to new regulatory frameworks that not only lure foreign capital but in some cases seek to protect their investment in the case of a major currency devaluation.

Devaluations are a concern to Maple and other developers because the loans they have taken out to build their projects are typically dollar-denominated. So electricity bills paid in local currency suddenly weakened by a devaluation could create a nasty debt crunch.

Maple and other foreign power developers in Peru also face the continuing threat of guerrilla attacks, although less so than in previous years. As with insurgents in Colombia, Peru’s Sendero Luminoso (Shining Path) guerrillas oppose foreign companies’ exploitation of oil and gas. And the Aguaytia project is situated in a “red zone,” or an area designated by the U.S. government as being a hotbed of guerrilla activity.

Although the Sendero Luminoso is not nearly the subversive force it was a decade ago, there are still flare-ups in the Peruvian outback. And unlike in Colombia, whose army protects energy installations and pipelines, Maple is getting no such protection for its facilities. The company says it is insured against guerrilla attacks.

Peru favors natural-gas-powered plants like Aguaytia because they lessen the nation’s dependence on hydroelectric power, which now represents more than 74% of its electricity supply. New hydro plants take six to 10 years to plan and construct because of the vast environmental effects of building one, and Peru simply cannot wait that long, officials said.

By contrast, the Aguaytia plant, which is being built as a “turnkey project” by the Swiss firm Asea Brown Boveri, took 19 months to build.

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Another disadvantage of Andean countries’ reliance on hydropower has been highlighted by the droughts caused by the El Nino meteorological phenomenon. The droughts have cut hydropower production significantly and led to blackouts throughout the Andean region.

Construction on the Aguaytia project finally began in August 1996 after Peruvian reforms were passed and Trust Co. of the West came through with its $78-million loan. Later, the Inter-American Development Bank lent $60 million, and Banco Wiese of Peru provided $20 million. Maple and five other investors chipped in $96 million in equity.

Maple’s next project: a 90-megawatt power plant on Peru’s northern coastal region that will be powered by sugar cane waste.

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Power to the Pueblo

An estimated $170 billion will be invested in Latin American and Caribbean electric power projects during the next decade, the World Bank estimates. Much of the money will come from private U.S. investors lured by liberalized investment laws, big profit potential and a rapidly expanding market. Some South American power and gas projects with U.S. investors:

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Mexico

Samalayuca: A $647-million power plant under construction near Chihuahua will generate 700 megawatts as Mexico’s first privately financed power station. Lead partner is General Electric, working with El Paso Energy and InterGen, a partnership of Shell and Bechtel. El Paso Energy is also building a 45-mile pipeline to bring fuel oil to the site from Texas.

Mayakan: A 437-mile pipeline on the Yucatan Peninsula will connect gas fields with new plants and plants being converted to natural gas from fuel oil. Owners of the $266 million project, Mexico’s first privately owned pipeline, include TransCanada PipeLines and InterGen.

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Peru

Aguaytia: A $254-million project 300 miles north of Lima that includes a 155-megawatt electricity plant to begin operations this month, a 250-mile transmission line, and a natural gas field connected to the plant via a 130-mile pipeline. Developed by Maple Cos. of Dallas.

Camisea: An enormous natural gas field 310 miles east of Lima with deposits of 11 trillion cubic feet of gas. Partners Shell, Mobil and Bechtel plan a $2.7-billion project that includes gas pipelines to power-generating stations and a petrochemical complex on Peru’s Pacific coast.

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Colombia

Termo EmCali: A 234-megawatt power plant under construction near Cali that will be partly owned by InterGen. Total cost of the natural-gas-fired project is $210 million.

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Bolivia

Bolivia-to-Brazil pipeline: A $2-billion, 2,000-mile pipeline will move gas from Rio Grande, Bolivia, to southern Brazil. The gas field and pipeline project are owned by Amoco, Enron, Shell and El Paso Energy. It could anchor a new gas network serving the bottom half of South America.

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Brazil

Several power plants are under construction, including four by El Paso Energy in or near the cities of Manaus, Rio de Janeiro, Corumba and Curitiba, for $800 million.

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Argentina/Chile

GasAtacama pipeline: A 585-mile, $715-million pipeline under construction from Cornejo, Argentina to Mejillones, Chile, will ship 200 million cubic feet of gas a day to power plants and mines in northern Chile. Partners include CMS Energy of Dearborn, Mich., and Endesa of Chile.

NorAndino pipeline: A 682-mile pipeline is proposed from Tartagal, Argentina, to Tocopilla, Chile, to compete with GasAtacama. The $530 million project’s investors include a unit of Southern Co. of Atlanta.