Designing effective national incentive and subsidy schemes in industrial policy (energy and water) Jerson Kelman Brazil Round Table Comparative Analysis of Industrial Policy Worldwide Moscow, April 27, 2004

Brazil Population (millions) 180 Territory (millions km2) 8.5 Per capita income (US$/year) 2,700 (?)

Globalization and its discontents (2002) Joseph Stiglitz (Nobel Prize of Economy, 2001) In Russia, market economy has delivered less than expected. Substitution of central planning by market driven economy and reduction of military expenditure could, in theory, lead to overall prosperity. Instead, in Russia industrial output went down 60% (in contrast with the period, 24%)

Key Considerations of Russia’s New Industrial Policy 27. The strategy of minimal state interference in industrial policy has exhausted itself…

Key Considerations of Russia’s New Industrial Policy 9. …An industrial policy cannot be tantamount to giving away of state budget resources. 12. The first priority would be supporting of exports … The mechanism for doing this entails state guarantees of up to 25 percent of from investments for creating such production project…

Key Considerations of Russia’s New Industrial Policy State guarantees Case 1: Brazilian Electric Power Industry

Country Wide Integrated Electric System  Installed Capacity = 73,000 MW  96 Hydropower plants > 30 MW  57 Regulating reservoirs  Country is interconnected by 70,000 km of high-voltage lines

Reservoirs and power plants in cascade TRÊS MARIAS V = 19 billion m³ 396 MW SOBRADINHO V = 34 billion m³ 1,050 MW ITAPARICA V = 10 billion m³ 1,500 MW PAULO AFONSO IV 2460 MW XINGO 3000 MW MOXOTÓ 440 MW PAULO AFONSO I MW II MW III MW 95% Hydro  Centralized dispatch

The Liberal Power Sector Reform of 1996 (which failed…) Rationale: –To promote economical efficiency Guidelines: –Private investment and competition in energy generation and retailing –Transmission and distribution to remain regulated, with provisions for open access

SOUTH-SE System Energy Wholesale Market Prices (US$ / MWh)

THE ENERGY CRISIS OF 2001 (load curtailment of 20%) There was a market failure  Government restored centralized expansion planning for new plants and transmission lines Owner of a new hydroelectric plant now gets, before construction, a long term contract with a pool of distribution companies (equivalent to an annual “rent”) All power plants operate according to rules set by central dispatch

Key Considerations of Russia’s New Industrial Policy 15. Support of industrial infrastructure development needed by business. 16. The purchase area for industrial development needs the following: ….. - tougher control should be exercised over investment activities of the “natural” monopolies…

Key Considerations of Russia’s New Industrial Policy State control should be exercised on processes or on results? Case 2: Subsidizing sewage treatment plants for cities

SEWERAGE Residential Service Coverage 56 % Urban areas 3 % Rural areas 47 % Brazil

River Pollution  Water Rationing TIETÊ RIVER IN SÃO PAULO

CANTAREIRA SYSTEM

CANTAREIRA SYSTEM Is responsible for the water supply to approximately 10 million inhabitants of the Greater São Paulo Area. Guaraú Water Treatment Plant Nominal Treatment Capacity: 33 m 3 /s Water inflow at the entrance of Guaraú Plant – Cantareira System

Basic Assumptions and Objectives: Government does not pay for civil works or equipment. It pays for results. Government does not pay service provider before the plant is in full operation.

Terms of the contract between Government and service provider estimated Government subsidy is 50% of the total estimated capital cost of the plant, according to a Reference Value Table Payments are made quarterly on fixed amounts for a period varying from 5 to 7 years, provided sewage is treated according to quality standard set in contract Government makes a bank deposit in favor of the service provider equivalent to present value of the cash flow

Case 3: Integrated management of natural resources taking into account interests of multiple sectors of economy

Water allocation among sectors Navigation Hydroelectricity Urban supply Industrial supply Tourism Fishing Flood Control Irrigation

Reservoirs and power plants in the São Francisco River TRÊS MARIAS V = 19 billion m³ 396 MW SOBRADINHO V = 34 billion m³ 1,050 MW ITAPARICA V = 10 billion m³ 1,500 MW PAULO AFONSO IV 2460 MW XINGO 3000 MW MOXOTÓ 440 MW PAULO AFONSO I MW II MW III MW

Loss of firm energy for each m 3 /s used for irrigation 2,79 MWmed 2,54 MWmed 2,08 MWmed 1,06 MWmed 0 MWmed 3,22 MWmed

SOLUTION..... River Basin Committee Water Rights Enforcement Polluter pays Water Resources Management