Brazil’s Senate Approves Itaipú Binacional Energy Deal: What Paraguay Should Do

Quick Review: Itaipú Binacional is the world’s largest hydroelectric dam. It sits across the Paraná river border between and is co-owned by Brazil and Paraguay. With an “installed capacity” of 14,000 megawatts, it churns out enough electricity to meet 19% of Brazil’s needs and 95% of Paraguay’s… or, almost enough electricity to power two New York Cities.

The Controversy: Though Itaipú’s equally owned by Brazil’s and Paraguay’s public electricity companies, the energy isn’t split evenly because Paraguay’s market isn’t big enough. So, as part of the original treaty (1973) between the two countries, Paraguay sells the vast majority of its electricity (80% of its half) to Brazil. For this energy, Eletrobrás (the Brazilian energy company) pays Paraguay about $2.80 per megawatt hour and then has marked it up anywhere between $20 and $80 on its own market, pocketing the difference.* Three years ago, the unthinkable happened in Paraguay: the ruling party lost the presidential election for the first time in living memory. Former Bishop Fernando Lugo (and a lefty, to boot) won the 2008 election, campaigning on a promise to renegotiate this financial arrangement and to then use the money to invest in social development.

The Resolution: High-level negotiations began between Paraguay and Brazil, resulting in a dramatic agreement between Brazilian President Lula da Silva and Paraguayan President Lugo in July 2009, which called for (among other things):

1) a three-fold increase in what Eletrobrás pays Paraguay for Paraguay’s half of the energy—an annual increase from ~$120million to ~$360million (that’ll end in 2023)

2) Paraguay’s electricity company to gradually begin commercializing its energy directly on the Brazilian market—worth about $1.5billion.

Oh, did I mention that in 2010, Paraguay’s GDP was $16billion? These are game-changing amounts.

What Just Happened: The last hurdle to these changes was cleared this past Wednesday, when Brazil’s Senate voted to approve the agreement (though not without some opposition).

And Now: Paraguay should start getting three times as much for its energy starting this month and EVERYONE wants a piece of the easy money $360million pie (interestingly, no one is talking about the even heftier $1.5billion). The question is how to spend this money in a country that regularly sits at the top of “most corrupt” Latin American countries from Transparency International’s Corruption Perception Index. Will $360million go to finance the supporters of the new government? Will it [continue to] go to local governments to cover recurring costs, even though it’s just a temporary windfall? Will it get absorbed into the annual budget of the government (which was more than $8billion in 2010… half of GDP!) where it’s likely to be siphoned off in endemic patronage?

Or will it be invested in developing the educational and infrastructural capacity of Paraguay so that it can develop?

* note that these numbers don’t include the base cost of production, which is paid to the dam for the energy.

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