Belo Monte: State Subsidies a Trojan Horse for Mega-Risks

Trojan Horse

Last week ANEEL released the final list of 18 companies participating in the Belo Monte consortium.  Everyone expected some big name investors to carry the USD$17 billion project.

How about Vale, the world's largest mining company? Vale controls Carajás, the largest iron mine in the world, and is one of the largest energy consumers in Brazil.  What about Alcoa, the darling of the United States metals companies? Alcoa has sought to expand its Brazilian bauxite and alumina production after large drops in market share over the past few years.  How about Odebrecht, the global construction firm that has faced dozens upon dozens of lawsuits in Brazil? Odebrecht practically wrote the book on Belo Monte, after all, by writing the dam's environmental impact assessment with Eletrobras.

The government set aside 10% of Belo Monte for investment from what are called "auto-produtores," large energy-intensive industries that both consume and produce electricity.  Surely some large mining company will invest!  But who will it be?

Drum roll please……

And the investors in Belo Monte are:

State-led Eletrobras: 49.98% (Eletronorte 19.98%, Eletrobras 15%, Chesf 15%)
State-led Petros, the pension fund for Petrobras workers: 10%
State-led Previ, the pension fund for Banco do Brasil workers: 10%, through Bolzano Participações
State-led Funcef, the pension fund for Caixa Económica Federal workers: 5%.

Shortly after the announcement was made, Eletrobras' engineering director Valter Cardeal reaffirmed to reporters that "Belo Monte is a private project."  The only problem is, I don't see a lot of private investors.  I could be wrong, but the majority are state companies.  In fact, the above state-owned corporations own 74.98% of shares in the consortium.  Let's see who rounds out the list:

Gaia Energia e Participações, 9%, Construtora OAS, 2.51%, Construtora Queiroz Galvão, 2.51%,
Galvão Engenharia 1.25%, Contern 1.25%, Cetenco, 1.25%, Mendes Junior 1.25%, Serveng 1.25%, J. Malucelli Construtora 1%, Sinobrás, 1%, J.Malucelli Energia, 0.25%.  

...Who?

More private companies could still be brought on as contractors, of course, including Odebrecht and Camargo Corrêa, who have been trying to convince the government to accept a new proposal in which they would take the helm of construction.  But, as of now, the state has close to a 75% stake in this "private project."

So what's happening here?

Today's O Estado de São Paulo editorial called it.  The Brazilian government is parading a few small-time players in the country's hydroelectric market to give the appearance that investors are actually interested in the dam.  In reality, the participation of private companies in the consortium was only made possible because the government fronted huge subsidies for them to do so.

It's the same story with the Brazilian subsidiaries of Alstom, Andritz, and Voith Siemens, who are using government-funded credit to subsidize 30% of their offer to build the 72 turbines that would transform the Xingu river into hydroelectricity.

Valter Cardeal

The danger in this strategy is that the subsidies are making it appear as if the project is feasible, when it's not.  The subsidies are a trojan horse for the project's mega-risks.  The dam could lose up to $8 billion dollars over 50 years.  It will emit more CO2 equivalent than 2 million cars.  And perhaps worst of all, no one is sure of the geological viability of digging two Panama Canals in the middle of the Amazon, because it's never been done.  Belo Monte has become a de facto state project not because the government planned it that way, but because private companies would never touch it.

Nonetheless, when questioned later in the day as to why larger investors are not participating, Cardeal said: "it's all part of our strategy."  

What strategy, I wonder?  One should question how strategic it is to shift the burden of the project's risks onto the Brazilian taxpayer by siphoning their pension funds before an election.  

While the government is pretending that everything is rosy, the detractors of Belo Monte are growing, and most private investors are running as far away from the dam as they can.  "If the state wants to take on the risk," they say, "let them fail."

Beware the trojan horse of Belo Monte, they're heard to say.  It's headed straight to the Xingu River.  And wooden horses can't swim.