Green or Blackouts?

Thermal power plants are seen as the most viable and green solution to providing Brazil the energy supply it needs, and foreign investors may offer Brazil its last hope to finance the construction of power plants. When multinational X decides to build a thermal power plant in Brazil, the process is, in theory, straightforward and simple to follow. A series of environmental licenses must be obtained from the national electric system regulator and granting and permitting authority, ANEEL (Agencia Nacional de Energia Eletrica) and the state environmental agency (such as CETESB in Sao Paulo) where the plant is being constructed. 

Investor frustration stems not from objections to the licensing process, but how Brazil’s judicial system is structured. At any point during the licensing process, regardless if all environmental licenses are applied for and awarded by the federal and state environmental agencies, any local public prosecutor may flex his judicial muscle and ask to suspend the planning or building. This interference can delay construction and planning for years, sending a company millions over budget.

“In Brazil local public prosecutors actually have a semi-autonomous mandate to protect the interest of the public. If an individual attorney believes a license granting is counter to the interest of the people of the state, he has the ability to bring suit,” says Christopher Erckert, partner at Vinson Elkins, Washington DC.

Fast track to nowhere?
The government introduced a new fast-track provisional measure in May, which provides that all environmental license applications should take no longer than four months.

Michael Dulaney, president of Duke Energy International Brazil, doubts that the fast-track system will produce any real benefits. “The law declaring four months for licensing is more of a goal. Legally it is not enforceable and at the end of the four-month period, projects continue to be drawn out,” he says.
But are these delays necessary to ensure that all the proper environmental standards are being met and are not just red tape? Marun Jazbik, partner, co-head of Latin America practice at Allen & Overy thinks so. “Investors complain that the [judicial] system is not strong enough [in Brazil] to be enforced, but when it is enforced against them, they complain. I am all for a system that is open and if anyone does not comply, the license should be fined or suspended,” he says.

Brazilian environmental non-governmental organization Instituto Socioambiental believes that the energy crisis is not because of interference by environmental groups and bullying by public prosecutors, but more likely from a lack of government planning.

“The current problem of the energy crisis is because the government is under great pressure to accelerate the approval of the environmental licenses for investors,” says Joao Paulo R Capobianco, founder of Instituto Socioambiental. “This could lead to disregard for important environmental issues.” Capobianco goes on to say that the current legislation regarding licensing is not so restrictive that it has provoked the energy crisis, and environmental NGO groups only intervene in the process when adequate environmental impact studies are lacking.

An uneven playing field
Fast-track system or not, the ability to build a power plant in Brazil must still undergo due process set out by the law. But investors are finding that where you build is as important as how you build. Not all states in Brazil have similar levels of environmental protection. Choosing to build in Rio de Janeiro or Rio Grande do Sul over Sao Paulo can mean the life or death of a project.

AES Tiete, the Brazilian subsidiary of US power company AES, is one of the largest foreign investors in thermal power generation facilities in Brazil. It has encountered numerous delays and problems regarding environmental licensing. AES Tiete is currently involved in three projects, including 1,070 MW and 700 MW plants in Sao Paulo, the most power-starved region. Andrea C Ruschmann, chief financial officer of AES Tiete, is finding that the legal world in Latin America moves very slowly and companies investing in energy projects must learn that patience is a necessary virtue.

“We have applied [for licenses] for three projects, for the one in the south, [Termosul in Rio Grande do Sul] the licenses were not as difficult to get as in Sao Paulo,” says Ruschmann. “The problem for the 1,170 MW project in [Sao Paulo], is that we applied for the license two years ago and every day there is a new concern and delay. As of today we do not have the license in Sao Paulo,” she says

Sao Paulo is one of the most industrialized areas in Brazil and has a serious lack of water resources. These factors combined make Sao Paulo the most desperate for power resources, but the region also suffers from vehement opposition to power plant construction by NGO environmental groups, who can have a strong influence on local public prosecutors. Enron Brazil is building two large-scale thermal plants, 480 MW and 379 MW.

“For the Cuiaba project [in the state of Mato Grosso], our permits were issued with strong state support, then suspended by a federal agency, and it came down to having to change construction techniques. But in our fast-track Eletrobolt project in Rio, both state and federal support have remained strong throughout the process,” says Joe Kishkill, co-president of Enron Brazil.

Enron will continue to look at Rio as a strong region for new investments, but areas such as Sao Paulo where AES is having most difficulty, are unlikely to see Enron’s business any time soon.

“Projects like the Carioba plant in the state of Sao Paulo, a 1,025 MW gas-fired plant funded by a consortium of Shell, Intergen and CPFL announced in October 1999, started the permitting process early and those companies still have not obtained the environmental licenses,” says Orlando Gonzalez, co-president of Enron Brazil.

Changes are afoot
The other side of the coin in Brazilian law is that the current make-up of the judicial courts can actually work in favor of the investor. The judicial system is not adequately equipped to deal with environmental concerns and often rules on the side of business if a license dispute reaches court.

“The judicial branch tends to be more conservative than the prosecution office in decisions published by the superior court. They are not familiar with environmental law,” says Fernando de Faria Tabet, head of environmental law at Brazilian firm Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados. Tabet also cautions that this balance may not remain as younger, more aggressive judges enter the courts with knowledge of environmental law and willingness to enforce it.

Allen & Overy’s Jazbik agrees that although Brazil has its fair share of corrupt government and judicial leaders, which may be pressuring prosecutors to delay the licensing process, there is a force of idealistic and savvy lawyers willing to evalutate the needs of the environment and the need for more power plants, and a better sense of balance is coming into play.

“There is clearly an urgency at all levels of the judiciary system and government to get it done and get it done right. Today it is more likely that things will be enforced,” says Jazbik.

Amidst all this finger pointing, there is a serious energy crisis in Brazil that could damage its economy and its already tenuous relationship with foreign investors. But Andy Jacobyansky, vice-president at Moody’s Investors Service sees the energy crisis as the wake-up call for Brazil that will push forward several environmental infrastructure issues. In the long run, it may not only help Brazil solve the energy crisis but also address other legislation hindering investment.