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WATER POLITICS

Via The Economist, a look at a secret hydropower deal between Brazil and Paraguay which is causing a political crisis in Paraguay:

WHEN BRAZILIAN soldiers invaded Paraguay in 1865, after banding together with Argentina and Uruguay, the country lost a quarter of its territory and as much as 90% of its male population. A century later Brazil sent soldiers to a disputed border region, and withdrew only after the two countries agreed to build to build the world’s largest hydroelectric dam, with Paraguay selling its unused energy to Brazil below market value.

The dam, named Itaipu, is still a sore subject in Paraguay. Last month it emerged that in May Paraguay’s current president, Mario Abdo Benítez, struck a secret deal with Brazil, further reducing Paraguay’s access to cheap power. The resulting outcry has put Mr Abdo Benítez at risk of impeachment. The fiasco has underlined the importance of a renegotiation of the dam’s governing treaty, which expires in 2023.

Under the current agreement, which was signed in 1973, each country has the right to half of the roughly 100m MWh produced each year by the dam. Paraguay, a country of 7m people with little industry, only uses about a quarter of its share, which fulfils 90% of its electricity needs. It sells the rest to Brazil, which depends on the dam for 15% of its power. But Paraguay is only paid for the cost of producing the power (including debt repayments on the construction), not the market price of electricity. According to the calculations of Miguel Carter, a political scientist at DEMOS, a think tank, had Brazil been made to pay market rates, between 1985 and 2018 it would have paid $75.4bn more, or roughly twice Paraguay’s current annual GDP.

In 2009 Brazil’s then president, Luiz Inácio Lula da Silva, agreed to triple Brazil’s annual payment, and to take steps to allow Paraguay’s state power company, ANDE, to sell directly to private Brazilian companies. But in May’s secret deal, a clause that would have made Brazilian companies bid for power was struck out. Paraguay also agreed to receive around 18% less over the next three years.

The agreement became public in July, when the head of ANDE, Pedro Ferreira, refused to sign it, resigned and accused Mr Abdo Benítez of “high treason”. He and Paraguay’s minister of foreign relations—who also resigned, along with three other high-ranking officials—told prosecutors that a “parallel negotiation” was under way to sell power exclusively to a Brazilian energy company, Léros. A politician from the party of Brazil’s populist president, Jair Bolsonaro, travelled to Paraguay three times on behalf of Léros.

Mr Ferreira gave text messages to the Paraguayan press purporting to show that an adviser to Paraguay’s vice-president, Hugo Velázquez, acting with the knowledge of Mr Abdo Benítez, was arranging meetings with Léros and lobbying on behalf of the company. In the messages, the adviser, José Rodríguez, claims that the Brazilian politician, Alexandre Giordano, represents not only Léros, but also Mr Bolsonaro’s family and the Brazilian government.

The vice-president now denies employing Mr Rodríguez, though he admitted to meeting him to discuss the possibility of Léros buying energy from Paraguay. Mr Ferreira has a different story: he says the vice-president personally introduced Mr Rodríguez as his legal adviser. In one of the text messages, Mr Velázquez asks Mr Ferreira how negotiations for the sale are going.

News of the secret deal prompted thousands of people to take to the streets, calling for Mr Abdo Benítez to be impeached. On August 1st Mr Bolsonaro agreed to scrap the secret deal. Proceedings against Mr Abdo Benítez in Paraguay’s congress, which had the support of some of the president’s allies, were dropped. But it is too late to stop the outcry about energy policy in Paraguay. In 2023 the $2bn loan taken out to build the dam will finally be paid off. The question is what to do then. “2023 is four years away, but people on the streets are already talking about the renegotiation [of the deal],” says Mercedes Canese, a former vice-minister of Mines and Energy from Frente Guasú, an opposition party.

Many in Paraguay argue that the country should use the excess power itself. A team at the National University of Asunción led by Gerardo Blanco, an engineering professor, has identified four sectors that could scale up quickly: plastics, cement, glass and wooden furniture.

In recent years, firms have been drawn to Paraguay’s industrial border zone by low taxes, cheap labour and the dam’s cheap electricity. Car companies with factories in Brazil have started manufacturing cables in Paraguay. In Ciudad del Este, just south of the dam, many locals engage in Bitcoin mining, an exceptionally power-hungry business. Demand from homes and offices is growing quickly, too. Within a few decades, Paraguay’s half of Itaipu’s output “will go to air-conditioning,” says Christine Folch, a cultural anthropologist from Duke University who is the author of “Hydropolitics”, a forthcoming book about the dam. By that point, the country will need some other sources of energy.

Until then, however, most of the power will still be sold to Brazil. Brazil’s economy is 50 times bigger than that of its landlocked neighbour. And Paraguay is not well equipped to negotiate a better arrangement. Whereas Mr Bolsonaro put a trio of military generals in charge of the Brazilian half of Itaipu, Paraguay doesn’t even have a fully fledged energy ministry. The messages published by Mr Ferreira between government officials in the lead-up to the abandoned deal show this asymmetry. Brazil sets the agenda; Paraguay caves to its every demand.

Public pressure may help change that. On August 7th Paraguay’s government named Mr Blanco, the engineering professor, to Itaipu’s governing council, in a show of transparency. As it contemplates its strategy for 2023, Paraguay may look to other smaller countries’ battles with big neighbours. In the 1970s a campaign in the United States involving letters from the actor John Wayne helped persuade Jimmy Carter and the US Congress to pass a law that returned Panama’s canal in 1999. As for the businesses best suited to provide the investment and know-how to fuel Paraguay’s industrialisation, Paraguay doesn’t have to look far. They are right over the border in Brazil.