Evo Morales, the president of Bolivia, has decided to nationalize the energy sector, to the disbelief of the global community. Foreigners see this measure as a populist attack that will do little to benefit Bolivia because the country lacks the resources it needs to develop the necessary technology for extracting crude oil. Spain’s Repsol YPF, along with Brazil’s Petrobras, are two of the large companies affected by this measure. The details remain uncertain; no one knows what means will be used for the nationalization of natural resources in the country. As a result, foreign companies are cautiously awaiting Morales’ next move. They fear that these sorts of policies will spread through other countries in Latin America, such as Argentina, Peru and Ecuador.
The nationalization of Bolivia’s energy sector, announced by President Evo Morales, will “pour cold water” on multinationals and endanger investment in the country, according to the International Energy Agency. According to the IEA, some Latin American countries are embarking on “a dangerous road” by making changes in their contracts with energy multinationals. However, the IEA has also warned that the nationalist trend has spread from energy-producing countries to such energy consumers as Spain and France. This warning came at the same time as Spain and Brazil were trying to save the investments of Repsol YPF and Petrobras, the two companies that have the greatest presence in Bolivia’s gas sector. “If a balance between the interests of the companies and those of the country is not achieved, the country [Bolivia] will lose. You only have to focus on the production capacity of Venezuela, which has fallen dramatically, to realize that is the price [for such measures],” says William Ramsay, the IEA’s deputy executive director.
Experts seem to agree about the possible negative consequences of the nationalization of the energy sector that is currently planned by Bolivia. According to José Ramón Pin, a professor at the IESE business school, there would be two sorts of repercussions. On the one hand, there would be “increasing distrust of those countries where populist policies are the trend, and the application of great political risk to those countries that have similar tendencies. This would lead to a downturn in foreign investments viewed as too speculative.” On the other hand, Pin notes that the companies could relocate their investments to those countries “that have not applied these policies, in an effort to be more cautious about their investments.”
According to Enric R. Bartlett Castellá, professor of public law at the ESADE business school in Spain, “This would create an atmosphere that is not very favorable for business, characterized by greater legal insecurity with predictable changes in the rules for engaging in economic activity. [There would also be] threats to the exercise of companies’ freedom to decide where and how to invest, and how to manage their company and spend their funds. All of this is about the fiscal conditions in the country where companies invest the profits they obtain.” Adds Juan Carlos Castellá, a professor at the Instituto de Empresa: In Latin America, “those investments that have been made can be compromised. And if these policies spread, they will wind up [moving to] those economies where rights and legitimate interests are respected.”
Bolivian Resources
One of the main dangers of populism, say experts, is that these policies are not realistic. Many people think that when Bolivia made this decision, it did not take into account whether the country had the necessary resources for exploiting hydrocarbons. Martínez Lázaro argues emphatically that “Bolivia has neither the technology nor the capital required to exploit its energy resources autonomously. The petroleum industry requires significant investments, not only with regard to exploration but also exploitation. Those countries that do not invest in maintaining their productive capacity will see their production levels decline. We have many examples of this. That means that if Bolivia winds up expelling foreign oil companies, it will limit [Bolivia’s] capacity to develop new gas production. What is worse, its production could decline in the medium term.”
Bartlett notes that “although financing can be obtained through the guarantee of natural resources, in every case the country will need to contract for the technical and logistical assistance it needs for exploitation and commercialization. The gas needs to be transported by gas pipelines and processed into liquid in plants destined for Chile and Peru, and the reverse process has to take place in the port of destination. These operations require consumption by one or more large energy companies.”
Pin goes further, referring not only to economic realities but also the political outlook of operations. “Developing countries alternately pass through periods in which they open their economies to the global market, and then periods when they nationalize their productive sectors. This is not the first time that this has happened. The problem is not ‘who is the owner,’ but ‘who manages and how much independence he has to pursue business criteria.’ There is an abundance of skills in the world, and these projects could be subcontracted. The question is not whether they have the resources. The question is whether they have the political will to exploit them by using criteria for profitability and business efficiency, and whether they will leave the responsible people alone so they can do that.” The answers to these questions depend only on the Bolivian government.
Although populist policies appear to be successful, they have damaging consequences for the economy of a country that winds up deviating from the goals it is pursuing – i.e., either avoiding or, in some cases, overcoming the crises that face developing countries. Pin notes that “experience shows that it is very hard for this sort of government to provide independence to business managers so that they can act on the basis of economic criteria. Nor is it easy to find managers who have the ethical strength required for applying business criteria without giving into pressure. Nor it is easy for government administrators to resist the temptation to use power for their own advantage. Some do not remain steadfast (defending their independence with ethical criteria). Others moderate their desire to exert influence to their own personal advantage — something very hard to do. The normal thing is for companies to suffer from reduced efficiency, and for the benefits derived from the creation of wealth to wind up being wasted.”
Nevertheless, these measures can also have a positive side for the country if they take advantage of the money they get [from this process], Pin says. “If the price of energy products continues to rise, the companies will dispose of significant financial resources for several years. If they invest the funds in education that has no preconceived ideological biases, and educate people in freedom and with a diversity of opinions, democracy will flourish. So will a range of alternatives, within a stable institutional framework. That can help future development. If, however, they follow the temptation to invest in subsidizing a uniform populist ideology of indoctrination, it will be just another lost opportunity.”
Massive capital flight is one of the risks associated with populist policies. Pin predicts that foreign capital will leave Bolivia, and there will be an absence of new investments if the legislative changes in the legal framework wind up hurting foreign companies. Martinez Lázaro suggests that it is important not to forget this fundamental premise: “All investment is made in search of profitability. If the conditions do not permit companies to make a profit, there will be no foreign investments or local investments, in all likelihood.” In addition, he notes, “Because the levels of internal savings are insufficient, Latin America needs foreign investments to finance its growth. Investments will flow to those countries where there is a stable regulatory framework and property rights are respected. And those countries that do not attract foreign investment will find out that their poverty persists.”
For Bartlett, “Historical experience shows that public-sector management of the economy is not usually the most efficient means for allocating resources. Although the battle against poverty justifies public intervention, greater efficiency results when the public sector is involved in the redistribution of the wealth — not if it is involved in the creation of wealth and there is no wealth to redistribute. On the other hand, in countries that have fragile political institutions, this could lead to relationships that tend to perpetuate the power of those who flaunt it.”
Although populist policies can dissuade private investment, it is predictable that investors will continue to support some emerging nations, at least as long as those countries do not all pursue these sorts of measures, says Bartlett. “You cannot generalize. Many of the so-called emerging countries — at least those that contribute more to world trade (China, India, and Brazil) — have opted for measures designed to involve private initiative more closely in their economic activity. In any case, those countries need new investments, and capital needs opportunities to make investments. In principle, the logical thing is that they continue to find points of collaboration and cooperation.”
The Virus of Populism
It makes sense that many companies are afraid that these sorts of policies will spread to other countries, especially in Latin America. The first case was in Venezuela under [Hugo] Chavez. Then there was Morales in Bolivia. Who will be next? Last week Repsol YPF, the Spanish oil company, asked Argentina not to nationalize [its local operations in that country], because it was afraid that Argentine President Nestor Kirchner would soon imitate the behavior of his neighbors. Pin believes “Brazil could [theoretically] represent the greatest danger but that does not seem to be the case. On the contrary, Chile has the institutional development of a developed country, so nothing similar is foreseeable there. Colombia’s development is different and, despite its guerrilla war, its institutional stability will make it the second-ranked regional power after Brazil. Chile will continue to grow, but its population is a lot smaller. Argentina can be tempted [to pursue populism] but it would mark the definitive end to its way of being. Peru and Ecuador are in a state of flux, depending on their election results. Venezuela is already immersed in populism.”
Pin adds that “the three engines of development – Brazil, Chile and Colombia – do not seem to face this risk. The other countries in South America, because of populist measures, will play ever smaller economic and social roles. As for Mexico and South America, the situation is different there. Mexico will continue to integrate its economy with the United States for the mutual benefit of both those countries. This means a political line opposed to nationalization, sooner or later. Central America has other problems that are more pressing. The first is its economic integration and its gradual move toward integration with the U.S. and Mexico.”
According to Martinez Lázaro, the most obvious risks today involve Peru and Ecuador. In his view, Mexico’s leading presidential candidate, Lopez Obrador, has populist tendencies. However, Martinez Lázaro agrees with Pin that it would be difficult to apply these policies, given Mexico’s economic integration with the United States.
Populism could spread not only to other surrounding countries but also to other sectors within the same countries. In the case of Bolivia, the nationalization process could affect other sectors besides energy since Morales in his electoral campaign defended the nationalization of such extractive sectors as mining. Pin also notes that large-scale agricultural properties could be subjected to this process. Bartlett agrees about the mining sector, and Martinez Lázaro notes that other sectors, such as forestry and services, could be involved.
“The origin of these policies is the high level of poverty, tremendous social inequalities, and political corruption in the region. A substantial segment of some Latin American societies views these populist approaches as a means toward change. However, we are not fooled. For Latin America, populism is not a solution for any of these evils and it can even aggravate these problems in the medium term,” says Pin. For his part, Bartlett adds, “It should not be forgotten that the economies of the developed world, until recently, limited the ownership of essential resources to their public sector. That also applied to the exploitation of those resources, in one form or another. Even during the full-fledged deregulation process of the 1990s, through the first part of this decade, the European Commission and its member states faced the so-called ‘golden shares.’” For his part, Pin notes, “these sorts of measures can be just what a desperate electorate craves, given socio-economic conditions. But they probably will not solve fundamental problems unless leadership is completely honest and there is a long-term effort to invest in education. The problem with populist leaders is not their personal honesty and intelligence; it is that they must also be collaborators and they have inherited the entire apparatus of the State. Can we trust them?”
Legal measures
It’s critical to understand that any sovereign state can expropriate or nationalize its natural resources and change its regulatory framework. Nevertheless, it still has to deal with the contractual obligations that it previously incurred. And it must compensate any company or individual affected by these new measures. On the one hand, companies that are affected [by these measures] have an important role to play, as does the executive branch of the country where those companies suffer as a result of those measures.
In that regard, Bartlett believes that “companies most incorporate into their strategy various initiatives for making a positive contribution to their society, involving improvement in the standard of living. This means making moves based on the 10 global principles of the United Nations and the “Global Compact.” For example, they should support freedom of [political] affiliation and recognition of the right to effective collective bargaining. They should also promote the growth and diffusion of technologies friendly to the environment. In their relations with governments, they must also try to contribute to the development of the country. Fundamentally, they must go beyond simply bringing new investments towards making an improvement in the standards of management.”
Regarding intervention by the Spanish government, as directly implied in the Bolivian case, the executive branch should apply pressure [on Bolivia], using diplomatic and even legal means and appealing to international law, experts agree. Martinez Lázaro goes even further, noting that “the Spanish government should appeal to international arbitration tribunals to suspend cooperative financial agreements with Bolivia.” Nevertheless, he says, “it is questionable whether this violates international law when, for their part, developed countries like Italy impede BBVA’s takeover offer for BNL by resorting to subterfuge. As a result, [those developed countries] do not have the moral authority to demand that undeveloped countries behave differently.”
As for Andina (Repsol’s subsidiary in Bolivia), Pin notes that “the managers of Spain’s petroleum companies will need to win the trust of a populist government, and [Repsol’s] board of directors will now be in a minority position. Its technical skills and honor will be the keys for doing that. The task is not going to be easy because this is a field where its technical skills, political skills and ethical standards are all going to face a major challenge. All this will happen within an initial period of six months when they have to establish new contractual conditions.”
Adds Martinez Lázaro: “A significant part of Repsol’s gas reserves are in Bolivia, and now Repsol [will not be able] to count those reserves as its own. Apart from any compensation that may rightfully be owed to Repsol, its continued presence in that country will be conditioned on whether the new rules that the Bolivian government wants to apply satisfy Repsol’s interests.” Although, in principle, the [government’s new] measure seems to affect only 51% of Repsol’s subsidiary, its precise terms have yet to be spelled out, which makes it difficult to make predictions, says Bartlett. For the moment, the stock market has reacted with patience to the situation. Repsol’s share price has dropped slowly, along with the prices of the other petroleum companies active in Bolivia.
