The Corner

And Now The Utilities

Argentina’s dramatic recovery after the break-up of the dollar/peso peg in late 2001 is often used as support for the proposition (a) that Greece could bounce back more quickly from a euro zone exit more quickly than is usually assumed and (b) that there is an alternative to the usual IMF trudge back to prosperity. There is plenty of room for argument about both those claims, but there ought not to be too much debate over the idea that unorthodox economic treatment should not be extended for too long.

This Financial Times story provides a textbook example of why not:

Argentine electricity companies, including the local subsidiary of Italian utility Enel, say a virtual 10-year freeze in energy tariffs is pushing them close to collapse, raising fears that the government might nationalise them, as it recently did with oil company YPF.  Oscar Lescano, head of the sector’s light and force union, told the FT he estimated the two main groups, Edesur, owned by Spain’s Endesa which is in turn a unit of Italy’s Enel, and Edenor, which is owned by Argentina’s Pampa Energia, were losing more than $10m each a month.

 Fulvio Conti, Enel’s chief executive, added to industry complaints last week. “Today we are experiencing a moment of difficulty on the tariffs front. We are confident the Argentine government will see it needs to increase encourage investments in the country,” he said.

But the Argentine government, which has already had to step in to enable the companies to pay salaries, say the utilities have made handsome profits since privatisation in the 1990s and should not focus on “immediate gain”.

 Cheap electricity helped Argentina get back on its feet after its default on nearly $100bn in 2001, when more than half the population was plunged into poverty and one in four was out of work. But as one former senior official said: “They have kept the system too long and now they’re driving Edenor and Edesur to the wall.”

Whether to rescue the companies and encourage more investment by raising tariffs that have been eroded by inflation, or to support consumers by keeping tariffs low, is a problem that goes to the heart of current Argentine economic policy-making.

Argentines have become used to paying less for their electricity bills than the cost of dinner in a restaurant – indeed, current tariffs only cover a third of the cost of distributing electricity, the former official said. But the government recently backtracked from attempts to transfer the cost of subsidies to consumers.

Raising tariffs would also fuel inflation that is already running at 23.5 per cent, according to private estimates…

So does nationalization lie ahead? The FT points out that the utilities don’t enjoy the nationalist appeal of YPF, the oil company recently expropriated from its Spanish owner. Unlike YPF they are loss-making and would add to the government’s financial burdens. That said, nationalization would be a handy way to kick this particular can of worms a little further down the road.

Meanwhile the Argentine telecoms sector continues to thrive. The two main companies (Telecom Argentina and Telefonica de Argentina) are under foreign control. That is not something that will have escaped greedy Peronist attention. 

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