Overseas Development Institute (ODI) Blog : At what price gas? Bolivian energy policy and nationalism

At what price gas? Bolivian energy policy and nationalism

Tuesday, May 09, 2006 1:58 PM by Lauren Phillips

What are the implications of Bolivia’s recent decision to nationalise its energy sector? To answer the question, several levels of analysis have to be completed: international, regional and national.

At the international level, the largest potential implication is depression of international investor appetite for Latin American assets. However, generalising from Bolivia to other countries in Latin America is unwarranted. As recent ODI research has argued (www.odi.org.uk/opinions numbers 65 and 68), Latin America’s ‘new’ leaders should not be thought of as a homogenous group – while Morales and Chavez in Venezuela are clearly pursuing nationalist and populist economic policies, moderate social democrats are being elected or have been ruling elsewhere such as in Brazil, Uruguay and Chile. Thus neither the nationalisation in Bolivia or the recent contract renegotiations in the Venezuelan petroleum industry should be interpreted as a signal that investors all over Latin America are at risk. Nor is it clear that the either the Morales or Chavez government will to continue to pursue nationalisation in other industries, as the political and economic benefits of doing so may be limited.

From the regional standpoint, the nationalisation has served to incsrease tensions among South America’s largest economies. The investors which were the hardest hit by the decision were the Brazilians, whose state owned energy company, Petrobras was the largest foreign investor in the sector. The decision also impacts neighbours who are reliant on gas imports from Bolivia, notably Argentina. Increased tensions among these countries are contrary to recent efforts, spearheaded by the Chavez government, to enhance regional trade and financial integration on a ‘Bolivarian’ model through new membership in Mercosur, the creation of regional development Bank, etc.

At the national level, the impact is uncertain because it is not yet known how the nationalisation and the revenues that it is likely to produce will be utilised. The Bolivian government, like all governments experiencing a commodity boom, will face tradeoffs between using the revenues for short term spending on social services or other goods and investing the returns for future generations and / or to smooth income shortfalls in the future. While neither is a priori a better option, the choice between these two very different models have to be assessed carefully to determine which is the more appropriate for achieving short and long term national development goals.

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# re: At what price gas? Bolivian energy policy and nationalism @ Tuesday, May 09, 2006 4:03 PM

Evaluating the potential effects of nationalisation on the Bolivian economy is a complicated exercise, which involves potentially contrasting forces.

From a fiscal standpoint, there is the issue of whether the state will actually generate more revenues through the nationalisation. This will crucially depend on the way the gas sector will be re-organised. If the state will take direct control of the operations, then the viability (and thus the revenues) of the gas sector will depend on the state’s capacity to extract, process and sell the gas on the market. If on the other hand, the multinationals were to continue the operations in Bolivia, it has to be seen whether they would agree to a much higher royalty rate than the current one (82% as compared to 50% which is now being levied).

On the macroeconomic side, the likely disincentives to foreign investment which have been pointed out, need to be weighted against the possible political benefits that such nationalisation may bring about (e.g.: it may not be a coincidence that the day after the announcement of the nationalisation health workers decided not to undertake the strike they had planned for this week). The costs imposed by political (and consequent economic) instability on the Bolivian economy have often been higher than the benefits induced by FDIs.

This brings me to the other point of the discussion: the creation of a counterfactual to properly evaluate the rationality of the nationalisation decision. From a purely economic point of view Dirk Willem is right in pointing out that the nationalisation decision should be based on careful economic evaluation of whether foreign firms would invest more and create more jobs for locals in the process. However, political economy arguments may make the opportunity costs of non-nationalising very high in terms of social and political unrest, especially when Morales himself has been among the first ones to use the foreign ownership of the gas sector as a (successful) arm against the previous governments.

Massimiliano Cali

# re: At what price gas? Bolivian energy policy and nationalism @ Tuesday, May 09, 2006 4:04 PM

Throughout the CSPP consultations (including the one in Bolivia) it has become clear that what drove civil society demands is, yes, evidence but not the same evidence that we often use or talk about. For example, have a look at one of the case studies from Bolivia:

Environmental Law in Bolivia
This case study presented and discussed during the group work at the Bolivian consultation emphasises the application of environmental law and explains how social mobilisation can be based on evidence to strengthen its impact on policy. This specific case was an oil spill that contaminated 190km caused by a rupture in the Sica Sica-Arica oil pipeline, controlled and managed by the Transredes - an international company. The oil pipeline was fractured due to flooding at Rio Desaguadero but Transredes, the company responsible, did not promptly manage the rupture. The CSOs from Oruro, with the support of some NGOs, generated international support for subsequent research to analyse the impact of oil spill. These CSOs wanted the implementation of the Environmental Law - a law that had never been applied, and a strong communication campaign was launched to publicise the spill and its impact. The mobilisation of civil society, united in relation to the complaints, was a central element in this case. Eventually, the Bolivian Ministry of Sustainable Development authorised environmental audits and Transredes was found responsible and was forced to pay the indemnities.

http://www.odi.org.uk/cspp/Activities/Consultations/Latin_America_cs.html

Nationalisation (or estatizaciónm, which is the really scary word in Latin America) is then seen as a punishment or a way of serving justice after decades of impunity. Impunity, rather than corruption or the crimes themselves, is what is making people react. It was a response to impunity that prompted the marches in Peru in 2000 and it provided much of the fuel of the Argenitnean protests a year later.

If, as it was suggested in the A Change of Skin meeting, Latin America is witnessing a new kind of left (bottom-up) then this is the kind of evidence that will influence deicison-making. How then to adapt ours and make it more relevant? For example, in Lauren’s proposed study for Venezuela… what does the Venezuelan’s government want to read? A full-proof paper full of models, graphs and curves or an illusttration of what the future might with and without their proposals for the region; evidence of support or opposition?

Will the government respond to evidence of expert-opinion or evidence of grassroots-action. Opinion can be contested; action, when it has happened, is more difficult to hide or deny.

Enrique Mendizabal

In Peru the effect is difficult to describe. There is a bit of panic on the side of liberal-right camp, in particular after loosing their candidate in the first round of the current elections, and child-like expectation on the nationalist camp. In between, possibly, Alan Garcia wonders what will happen if the Bolivian experience is successful: will the more left/nationalist wing of his supporters demand similarly-inspired policies? And could he risk the support of the liberal-right that is now joining his side against the nationalist Humala? Nationalisation, in the event of a Garcia victory, will probably increase the tensions between the smaller economies, too.

In Peru, discussions on the national gas reserves have been inundated by a debate around systematic safety violations by the companies running the extraction and commercialisation of the gas. Issues around poor compensations, abuse, neglect, negative social and cultural impact, health and nutritional effects, foul-play and even corruption, and not so much the macro or micro considerations involved in decision making, are the ones guiding the demands of the general public.

But on the positive side these issues and now the re-negotiation process imposed by Bolivia might spark a new wave of discussion on the benefits and downside of FDI in the extractive sectors –and maybe an evaluation of the experience. The debate is already shifting from privatisations-as-the-only-option to energetic security and regional integration. This, at least, is a good thing.

# re: At what price gas? Bolivian energy policy and nationalism @ Wednesday, May 10, 2006 6:29 PM

The current nationalisation process of Bolivia’s natural resources may not have come entirely unexpected (‘How Morales took on the oil giants – and won his people back’, Guardian May 6), but the effects of it on economic development and social indicators will be harder to forecast.

It is true that much of foreign direct investment over the past decade did probably little to significantly spur development in Bolivia, beyond what locally owned investment could have achieved. In fact, research at ODI shows that FDI in Bolivia has made inequality worse, making the less skilled workers actually worse off.

Yet, such evidence does not provide an economic rationale to extend nationalisation to all other sectors such as mining, forestry etc. For a start, we actually still do no know exactly what is the most appropriate ownership model for natural resources under what circumstances. Just as it is not always easy to identify a special role for FDI in the statistics, it is not easy to test whether locally owned firms will, in the long-run, invest more and create more jobs for locals in the process.

Secondly, there is compelling micro evidence that foreign owned mines in Bolivia are more productive and pay their workers more than locally owned mines. Foreign owned mining activities have been important for overall level of economic activities in regions such as Oruro.

Finally, the development effects of natural resource based activities on the Bolivian economy are unlikely to be determined by the ownership structure alone. Appropriate, good quality and consistent, domestic economic policies need to go hand in hand with any decisions related to ownership structures.

Further info
http://www.odi.org.uk/IEDG/meetings/FDI_feb2003/dwtv_briefing_paper.pdf

http://www.odi.org.uk/IEDG/Meetings/FDI_feb2003/fdi_la_dwtv.pdf

http://www.grupointegral.bo/pdf/GI_E5.pdf

Dirk Willem te Velde

# The role of politics in investment climate: Some thoughts from the Bolivian experience @ Wednesday, July 19, 2006 12:42 PM

It was quite surprising to read in yesterday's Financial Times that the Bolivian government is set to...

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