Brazil and Paraguay: Brazil concedes on Itaipú Energy Deal, Signals Commitment to “Good Neighbor” Policy

July 25, 2009 marked the passage of a landmark piece of reform that was brokered between Brazil and Paraguay. The agreement, signed in Asunción, finally resolved a decade long disagreement between the two governments regarding the Itaipú dam. The revisions in the Itaipú treaty had far reaching implications for the national standing of Paraguay’s President Fernando Lugo and Brazil’s President Luíz Inacio Lula da Silva as well for Brazil’s leadership role in Latin America. It is also expected to bring about a series of new prospects for energy initiatives in the region. The agreement represents a historic turnaround on the part of Brazil, which had been vehemently opposed to tariff concessions for decades. Analysts believe that the new agreement is indicative of the “good neighbor” policy that Lula has recently advocated in the region, as Brazil attempts to solidify its leadership role and shore up a base of moderate democratic support for its foreign policy initiatives.

The dam is already one of the world’s major hydroelectric projects, as it straddles the triple border area between Brazil, Paraguay and Argentina on the Paraná River. It was the product of a 1973 treaty between the then-dictatorial governments of Brazil and Paraguay, and has been a subject of contention ever since. Paraguay has long protested the stipulation in the treaty that required it to sell its surplus energy exclusively to the national Brazilian company, Electrobrás, for a fixed annual rate of $120 million. The issue came to a head after Bolivia nationalized its gas reserves in 2006, resulting in Brazil having to pay the country a much higher price for natural gas. As demand for power surged dramatically in Southern Cone countries such as Argentina and Chile, Paraguay calculated that it could earn billions if it were allowed to sell its Itaipú surplus on the open market. When President Lugo embarked on his presidential campaign, he made the revisions to Itaipú agreement a key part of his platform, demanding “energy sovereignty” and the right to sell its share of surplus power directly into the Brazilian market. Paraguayan officials have argued that the terms of the treaty were invalid, as they were the result of mismanagement by Dictator Alfredo Stroessner, who signed the Paraguayan half of the agreement in 1974. Stroessner and his Colorado party allegedly used Itaipú revenue for acts of personal acquisition rather than for national development.

Paraguay claimed that the terms of the treaty exploited their state’s weaker and poorer status as they had no control over their surplus power, and were being forced to sell it at an unprofitable rate. Jorge Lara Castro, Deputy Foreign Minister and the future ambassador to Brazil likened the treaty to the “realpolitik of an ant staring up at an elephant,” in a comment to Bloomberg News.

Lugo had a difficult path ahead of him when he took power in 2008, as the president of one of the most impoverished countries in Latin America, which suffered from a corrupt reputation and a lack of adequate infrastructure. Although Paraguay produces a substantial amount of electricity, the country has failed to transform the resource into a profitable export and source of foreign investment. At various points in his presidential tenure, Lugo attempted to engage Lula on the subject of increasing the Brazilian energy tariff for Itaipú power. For example, he stated at a debate in Belem, “We believe in a different Latin America. I believe that Lula cannot let me down. I do not think that a treaty that was signed in times of two dictatorships should continue in force in the times in which we are living.”

Brazil’s side of the story
Brazil, however, refused to concede, arguing that the terms of the treaty should remain unchanged until Paraguay paid off its share of the $19 billion debt owed to Electrobrás since the construction of the dam. Jose Muniz, CEO of Electrobrás noted that, “They didn’t have to put any money up front and most of the water that powers the dam isn’t even theirs, its source is Brazilian…when the debt is paid in 2023 they’ll own half of a dam that will give them enough to run their whole economy.” As late as June, the opposing views of the two countries appeared irreconcilable: Brazil was insistent on its historic claims, while angry Paraguayans branded Brazil’s President Lula as an “imperialist” and demanded the right to sell their shares on the open market.

After the two leaders met in Asunción on July 25, however, the discussions yielded a hugely positive result for Paraguay. The revised terms of the treaty will nearly triple Brazil’s annual compensation payment to Paraguay, from $120 million to approximately $360 million. Paraguay will also be allowed to bypass Electrobrás and sell its surplus energy directly on the open market. Brazil also made a commitment to help improve Paraguay’s infrastructure by constructing new transmission lines from Itaipú to Asunción in order to increase its electrical efficiency. This agreement, in conjunction with Brazil’s concessions to Bolivia, has attracted criticism from Lula’s opposition who claim that the president is “caving in” to the demands of Brazil’s smaller neighbors. For Lula however, the agreement is part of Brazil’s good neighbor strategy, as Lugo’s electoral victory created a favorable environment for political alliances between the two countries. The Brazilian government signaled their willingness to help Paraguay in the aftermath of Lugo’s election when Minister Marco Aurelio Garcia, special adviser to the President’s Office on International Affairs, stated the following in a BBC interview:

“The Paraguayans themselves have told us that they want to change the country’s image from that of a country of forgers and counterfeiters. I am sure there would be interest on the part of Brazilian businessmen, and a number of Brazilian firms are getting ready to announce investments there in the area of capital goods. I feel there is a possibility of that being extended to other sectors such as consumer goods for the domestic market and also for export. Another subject we have been discussing there even longer is the biofuel industry. It would be perfectly easy for them to begin producing ethanol and biodiesel. Lastly, the inauguration of a new president creates conditions and possibilities enabling a country to rethink its economic calling and, as a result, to see where Brazil and other countries in the region can genuinely help.”

President Lula has since claimed that Brazil’s secure position in the midst of the global financial crisis obliged it to assist its less fortunate neighbors. Analysts have noted that Brazil maintains a trade surplus and has a large economic presence in the financial sectors of surrounding countries. According to the Irish Times, the good neighbor policy is an attempt to assure smaller countries that their interests will not be ignored, as Brazil assumes a stronger leadership role in the region. It is also in the interest of Brazil to maintain regional stability as various Latin American regimes continue to topple due to outside forces (Honduras being the most recent example). Brazil might also be courting regional alliances in order to fulfill its goal of obtaining the Latin American seat in the UN Security Council.

Aftermath
In Paraguay, the signing of the 31 point Itaipú amendment was greeted as a historic occasion and created hope for increasing regional cooperation. This agreement could not have come at a more fortuitous time for Lugo, who is facing a decline in approval ratings after a number of allegations claimed that he fathered illegitimate children during the time of his priesthood. Itaipú director Mateo Balmelli commented that as Brazil continues to expand economically and seeks additional foreign investment, it cannot afford to be seen as an “imperial” presence and must address the development gaps between itself and its less fortunate neighbors.

Regardless of the motivations, the new Itaipú agreement will be remembered as a watershed moment for the Paraguayans and a much welcomed windfall for President Lugo as he attempts to regain public support. What Paraguay chooses to do with this newfound energy sovereignty, however, remains to be seen.