Designing effective national incentive and subsidy schemes in industrial policy

(energy and water)

Jerson KelmanBrazil

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

(?)

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 MARIASV = 19 billion m³396 MW SOBRADINHO

V = 34 billion m³1,050 MW

ITAPARICAV = 10 billion m³1,500 MW

PAULO AFONSO IV2460 MW

XINGO3000 MW

MOXOTÓ440 MW

PAULO AFONSOI - 180 MWII - 480 MWIII - 864 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 SystemEnergy 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

SEWERAGEResidential Service Coverage

56 % Urban areas

3 % Rural areas

47 % Brazil

River Pollution Water Rationing

TIETÊ RIVER IN SÃO PAULO

CANTAREIRASYSTEM

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 m3/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 Government subsidy is 50% of the total

estimatedestimated 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

HydroelectricityUrban supply

Industrial supply

Tourism Fishing

Flood Control

Irrigation

Reservoirs and power plants in the São Francisco River

TRÊS MARIASV = 19 billion m³396 MW SOBRADINHO

V = 34 billion m³1,050 MW

ITAPARICAV = 10 billion m³1,500 MW

PAULO AFONSO IV2460 MW

XINGO3000 MW

MOXOTÓ440 MW

PAULO AFONSOI - 180 MWII - 480 MWIII - 864 MW

Loss of firm energy for each m3/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