Brazil and Paraguay have embarked on the hemisphere’s largest energy negotiations (in terms of money and megawatts) of the first half of the 21st century over ITAIPU Binational Dam, the largest dam in the world. The 14,000-megawatt dam straddles the rugged Paraná River boundary between the two countries who co-own it, providing almost 15 percent of all the electricity consumed in Brazil and nearly all the electricity consumed in Paraguay.
In spite of how energy policy often veers into the inscrutably technical or wonky, a scandal about ITAIPU energy contracts between the two countries has erupted into the public debate in Paraguay leading to weeks of protest that may cost Paraguayan executive Mario Abdo Benítez his presidency. The crisis has also spilled across the border as Brazil’s Workers Party (PT) has demanded an investigation into Brazilian president Jair Bolsonaro’s role in the deal. In fact, one of the Paraguayan principal actors in the drama has called it nothing less than an attempt “to shove a Lava Jato into Paraguay”—the infamous construction-corruption scandal that engulfed Brazil.
Today Paraguay exports most of its half of ITAIPU energy to Brazil (the smaller country lacks sufficient demand). This exported electricity represents 5 percent of the electricity consumed in Brazil. The original treaty mandated that Paraguay sell this energy at below-market prices to Brazil, a point that has become an issue of public dissatisfaction in Paraguay. As a result, the dam’s energy pricing, $3.5 billion in total annual energy sales, and energy distribution agreements enumerated in the 1973 ITAIPU Treaty, is sure to come up in scheduled 2023 negotiations. Public sentiment in Paraguay is particularly sensitive to the asymmetry with its neighbor because of memory of the devastating the War of the Triple Alliance (1864-70) which Paraguay lost to the combined forces of Argentina, Brazil, and Uruguay. In an irony of history, the initial treaty was signed under two rightwing military governments; the revision of the treaty will take place under two governments tied to those military regimes: Bolsonaro openly admires the Brazilian dictatorship of the 1960s-1980s and Abdo is the son of Paraguayan General Alfredo Stroessner’s (1954-1989) private secretary.
When the president of Paraguay’s public utility company ANDE, Pedro Ferreira, dramatically resigned from his job last month in protest to a secret ITAIPU agreement signed in late May discontent boiled over. The secret agreement had been signed by the foreign ministries of both countries, but was leaked to the public in mid-July, sparking a public uproar. To try to tamp down the chaos (public protests, calls for impeachment and denunciation by different groups) caused by the Bilateral Act of May 24, Paraguay’s foreign minister, ambassador to Brazil, newly appointed head of ANDE and executive director of ITAIPU all resigned on July 29.
Public opposition bubbled over into the political sphere. Opposition parties in Paraguay’s national Congress and even some defectors from Abdo’s Colorado party mounted an impeachment of the president. Abdo barely escaped the vote on August 1, but in the political uproar both countries decided to formally annul the Bilateral Act. Nevertheless, the bad feelings linger and calls for a vote against Abdo continue daily. Since his resignation as head of ANDE, Ferreira has generally avoided media attention, but testified in Congress that the secret deal limited Paraguay’s ability to access its half of ITAIPU energy and constrained Paraguay’s capacity to grow economically, described by the Paraguayan press, public, and opposition parties as treason.
In an exclusive interview recorded on August 3, 2019 and published for the first time on Global Americans, Ferreira explains why he opposed the Bilateral Act that rocked Paraguay and resulted in his resignation. Many of the details are now public record: the Act limits the amount of ITAIPU energy Paraguay can contract for the next four years—energy which it legally owns—an unprecedented move in the 40-year history of energy sales. The Act also raises the price of ITAIPU energy for Paraguay by insisting that Paraguay contract more expensive “guaranteed” electricity from ITAIPU and less “excess” electricity. But the real trouble, according to Ferreira, was that ANDE planned to sell electricity directly on the Brazilian market and, apparently, the family of Jair Bolsonaro wanted all of that business to themselves, which Ferreira refused.
And this is where it gets wonky, but it’s worth it to understand the shocker from Ferreira’s interview. Per the ITAIPU treaty (1973), the dam is not-for-profit, which means that its energy sales are supposed to cover the dam’s expenses, nothing more, nothing less: construction debt plus interest, operation costs, fees to the governments (energy rent).
The treaty-specified basic formula for the ITAIPU energy tariffs expenses divided by the guaranteed production of the dam, the amount of electricity the planners knew they could count on. The guaranteed production is a little more than 75,000 gigawatt hours a year and the guaranteed energy tariff comes out to $43.80/megawatt hour. Brazil and Paraguay’s contract guaranteed 93 percent of electricity to Brazil and 7 percent to Paraguay. But because ITAIPU was so well-built and because the Paraná River is so well-regulated, the dam regularly produces more electricity. A lot more. The “additional” electricity is not contemplated in the ITAIPU treaty and usually runs between 20,000 and 25,000 gigawatt hours a year. It has a much lower tariff of about $6/megawatt hour and is now divided 50 percent Brazil, 50 percent Paraguay. And so, the average cost of ITAIPU electricity was $26.16/megawatt hour for Paraguay compared to $41.45/megawatt hour for Brazil in 2018.
ANDE, under Ferreira’s leadership, planned to open an international tender for at least 300 megawatts, and possibly 3 blocks of 300 megawatts, of Paraguayan ITAIPU energy for sale on the Brazilian market. Despite ANDE’s head technocrat’s support for this item (based on an international agreement signed between Brazilian president Lula da Silva and Paraguayan president Fernando Lugo in 2009), when the Bilateral Act was signed by the ambassadors without consultation from ANDE, it was removed. Instead, José Miguel Rodríguez, an intermediary lawyer associated with Paraguayan vice president Hugo Velázquez, approached Ferreira with an offer from LEROS, a company closely related—per Rodríguez—to the “presidential family of Brazil.” Rodríguez and LEROS repeatedly pressured Ferreira to agree to a hidden exclusive energy contract instead of a public tender for Paraguay’s Itaipú energy.
In the interview, Ferreira recounts, “And we said ‘No, we’re going to do a public tender.’ Because if we didn’t, it’d be like shoving a Lava Jato into Paraguay. It’d introduce corruption.” Ferreira wanted companies to bid for Paraguay’s ITAIPU energy to find the best deal for Paraguay; anything less would introduce personalism and favoritism. LEROS wanted an exclusive concession with no public competition. Ferreira refused and was asked to resign by a representative of president Abdo.
The Bilateral Act diminishes the amount of low-cost “additional” electricity that ANDE can purchase, but doesn’t say what will happen to the rest of the additional electricity. If that were the energy that LEROS wanted to contract, the Brazilian company stood to make a hefty profit at the expense of both Paraguayan and Brazilian citizens.
Ferreira says much more in the interview about the crisis and the opportunities ahead for Paraguay. But a key lesson is that one of the principal problems with the search for the short-term gain of one country at the expense of another country or countries is the loss of the ability to create real regional integration in Mercosur with high quality production chains that protect the environment, improves living standards, and reaches global markets. And as we’re seeing throughout South America, this loss of opportunity generates its own political and governance problems.