The people halt privatisation

Héctor Béjar
Comité de Iniciativa de la Conferencia Nacional sobre Desarrollo Social (CONADES)

The privatisation of electric energy services guaranteed the buyers that they would obtain large profits on their operation at the expense of the State and consumers. The State delivered captive consumer markets and converted a public monopoly into private ones. This process has nothing to do with a market economy, but rather with profitable commercialism, which the present government has maintained under pressure from the International Monetary Fund and other financial bodies.

Until1990, electric lighting and drinking water services in Peru were supplied bypublic companies. In 1990, the government launched the privatisation process,converting public monopolies into private ones under a system that could bedescribed as profitable commercialism, in which the cost of electricity to theconsumer has increased 14 times. Following the departure of the autocrat AlbertoFujimori in 2000, civil society has so far managed to halt new privatisationsthat the Toledo administration wishes to carry out.

Bythe end of 1990, Peru had managed to instal a national energy network, mainlyusing hydroelectric energy fed by Andean mountain water and, in other cases,thermal oil plants. This network resulted from the cycle of nationalisations andpublic investment developed in Peru between 1968 and 1975 under the governmentof General Juan Velasco Alvarado and from prior private investments. Subsequentgovernments maintained state administration but neglected the financial healthof the companies, maintaining low tariffs for electoral purposes, while the rateof inflation grew. Between 1985 and 1990, the administration of Alan Garciasubsidised industry, giving it cheap energy, thus causing enormous losses to theState’s electricity companies. Following a period of hyperinflation that tookplace at the end of Garcia’s  termin office, public companies generating and distributing electricity were unableto invest in extending and modernising their services and, like the country’swhole productive apparatus, found themselves in a disastrous situation.

Furthermore,the terrorist action triggered  by  Shining Path between 1980 and 1990, sabotaged the country’selectric network as a method of war. Consequently, in 1990 most of the networkwas out of service as many transmission pylons had been blown up.

Thedisastrous condition of the electric network and the financial difficulties ofthe public companies that administered it served as a pretext for their sale.Alberto Fujimori won the elections in July 1990 and reopened relations with theWorld Bank, the Inter American Development Bank and the International MonetaryFund that had been suspended by President Garcia. In April 1992, Fujimori closeddown Congress, annulled the regional governments and intervened the courts in analliance with the Armed Forces. This illegal government fulfilled theinstructions from Washington to sell the public companies, starting with thetelephone, electricity and drinking water services.

In1992, Decree-law 25844 divided the electric network into production,transmission, distribution and marketing activities in order to sell it inparts. The state company, Electrolima, was separated into three private law state companies.In 1994, it became Edegel (aproduction company), and Edelnor and Edelsur(distribution companies). Edegel wassold to the United States Energy Corp.;Edelnor was sold to the Chilean Enersis andthe Spanish Endesa; and Edelsur was sold to the Canadian Ontario Hydro and to the Chilean Chiquinta. The country’s main generating plant, the MantaroHydroelectric Plant, was to be sold later on.

Inthe process of selling the distributors, refunding the contributions made byunderprivileged populations in Lima in the purchase of poles, networks andmetres was not considered. Thus, in fact, goods were confiscated. A fact thatthe population accepted among the confusion and lack of transparency of thewhole process. In addition, the State funded 560 electrification projects forthe privatising companies for an amount (in July 2000 figures) of USD 104million using the National Housing Fund (Fondo Nacional de Vivienda - FONAVI)composed of worker contributions from the whole country. At the end of thisprocess, the companies did not reimburse the State for these funds, which infact belonged to FONAVI. In June 2002, conciliation meetings took place betweenthe State and Edelnor, whichquestioned this debt. An agreement was reached whereby Edelnorpaid only USD 28 million, less than 40% of its debt. Similarly, Luz del Sur paid only USD 10million, less than 27% of its debt. Congress has requested criminal trial of theState officials involved in such arrangements, but nonetheless the contributorsto FONAVI have been adversely affected.[1]

Underthe present regime, the production of electricity rose due to the combination ofhigh state production (expected to be sold during the next privatisationprogramme) and low private production and distribution of energy.[2]Although no private investment took place, the State continued its effort toincrease distribution to Andean poorer areas in particular.

Fujimoriand the fettered State

TheFujimori administration fettered the State’s capacity for regulation.Legislative Decree 662, for the Promotion of Foreign Investment, passed on 2September 1991, and Legislative Decree 757, Framework Law for PrivateInvestment, passed on 13 November 1991, granted purchasing companies thefollowing advantages under legal stability agreements: special income taxes;unlimited availability of foreign currency; tax-free remission of profits,dividends and other income; use of the most favourable exchange rate; and theright to hire and fire workers at any time (2,000 workers from the former statecompany Electrolima, which was divided into several privatised electriccompanies, were forced to resign.[3])It was also established that this agreement could not be affected by any law fora minimum of 10 years, with a maximum of 15. Arbitration would be resorted to inthe event of controversy regarding the interpretation of the contract betweenthe corresponding company and the State. OSINERG, the body regulating electrictariffs, is not empowered to intervene in tax matters.

Themajor advantage for the companies was the increase in tariffs. While theadministrations of Belaunde (1980-1985) and Garcia (1985-1990) had forced themto work with tariffs below their operational costs for the benefit of industryand urban consumers, after privatisation, the companies were entirely free toincrease rates because OSINERG had no political leverage and did not provide forusers’ representation. As the economist Alan Fairlie has pointed out, onceinflation had been controlled in 1992, the consumers paid 2,64 Soles(approximately USD 1.76) per 100 kw/hour in that year. In 2002 they had to pay36,97 Soles at values readjusted for the exchange rate and inflation,[4] an increase of more than 14 times.[5]

SupremeDecree 120 enabled the companies to experience double depreciation of theirassets, resulting in very low tax payments. For example, a study by the NationalTax Administration Superintendence (Superintendencia Nacional de AdministraciónTributaria - SUNAT) of 110 major companies showed that under the terms of thebenefits of this decree, tax collecting on income tax dropped from USD 281million to USD 71 million between 1997 and 2000.

Article33 of the Income Tax Law Regulations promulgated by Fujimori is sufficientlyvague to allow companies to deduct from the net taxable income what theyconsider to be “tax losses” due to untaxed expenditures according to the“generally accepted accounting principles”. For example, a company with aprofit of USD 100 million, would be able to distribute up to USD 70 million taxfree, or 70% because it includes accounting profits, among its shareholders.However, the company would not necessarily pay tax to the State as it has taxlosses. This is the case with Edegel,which has shown accounting profits and tax losses between 1997 and 2000,enabling it to avoid paying taxes.

Furthermore,when a small company merges with a large one, the large company changes its nameto that of the small company. As the assets of the large company are reassessed,the law enables it to deduct these depreciated assets from its income tax. Thesmall company, which was formerly worth one, upon merging with the big company,worth 100, deducts as if it were worth 100, and therefore the merger does notpay income tax for a whole decade.[6]

Dueto this systematic evasion – which employs mechanisms established by thegovernment itself –, the State’s capacity to collect revenue dropped,compromising funding of the national budget. While the GDP grew by 3.8%, taxincome dropped from 14.1% to 12.3% of the GDP between 1997 and 2001.[7] Additionally,because of privatisation, 650 contracts for legal stability were signed with theState whereby tax conditions were frozen for ten years. Regardless of whetherthe rate of income tax went up or down, what these companies paid could not bechanged.[8]

Inequityand deforestation: firewood for the poorest people

Meanwhile,the characteristic inequity of the electricity consumer market was maintained.In Metropolitan Lima, private companies enjoyed a monopolistic service,exploiting a captive audience of consumers without rights. As from 1993, theState expanded electricity to small villages in rural areas as part of the fightagainst poverty, but stumbled over peasant families’ insolvency, which made itimpossible for them to pay the costs. In spite of the growth of production andthe expansion of the electricity network, only 42% of those in extreme povertyhave electricity in their homes.[9]

The highcost of tariffs makes electricity unattainable for poor people. This continuesto worsen the living conditions of underprivileged families, especially womenand girls. In the city, the poor are obliged to use kerosene, a highly pollutingfuel, for their lighting and cooking. Firewood is used by 67% of the extremelypoor families, forcing girls in rural areas, following traditional customs, tocarry the firewood on their backs for long distances. The daily consumption offirewood by peasants is one of the factors contributing to deforestation in theAndes while the lack of electricity prevents development and doubles women’sworkload.

Thecase of water: risky and not very lucrative

Theprivatisation process for drinking water was more complicated because the mostimportant state company, SEDAPAL, had no way of controlling illegal extractionof water taking place in many parts of Lima, especially in marginalisedneighbourhoods. Thus, acquiring water utilities was too risky and unattractiveto investors during the initial stages of privatisation when companies that weremore appealing, such as electric or telephone utilities, were available.Consequently, privatisation of water services was put on hold while other moredesirable companies, such as Petroperúand the Peruvian Telephone Company, were sold.

People’sreaction and an open future

Publicopinion has started to oppose privatisation because of its lack of transparencyand the damage it has caused consumers and the State, while the government hascontinued to sell various other companies. The discovery of the mafiosi networkestablished by Fujimori and his “right-hand,” Vladimiro Montesinos, whichwas unable to account for the USD 8 billion obtained from the sale of publiccompanies, discredited the whole privatisation process.

Nevertheless,the Paniagua and Toledo administrations, which succeeded Fujimori, did not varythe privatisation policy of their predecessor and continue without any majorobjection to obey the pressure of the IMF, the World Bank and IDB. However,although the model has not changed, the political and social conditions have.Poverty and unemployment have increased, and Congress is more independent fromthe executive branch than before. In addition, the public, which was mobilisedto restore representative democracy, remains vigilant, demanding transparencyand accountability.

Consequently,although Toledo’s government has insisted on continuing to sell companiesduring 2002 to fund the budgetary deficit, resistance by trade unions and thepeople have paralysed his objectives. Popular demonstrations and regionalstrikes promoted by the Light and Energy Workers Federation of Peru, regionalfronts and mayors from the South and the Centre, have prevented the sale of theMantaro Hydroelectric Plant and the Arequipa and Tacna electric companies. InJune 2002, Toledo decided to postpone these privatisations following anagreement with the authorities of the department of Arequipa. The prospect ofselling the Egasa (Arequipa) and Egesur (Tacna) electricitycompanies to the Belgian company Tractebel sparked violent disturbancesin southern Peru, resulting in two deaths and over 100 injured, and forcing themilitarisation of Arequipa, the second largest city in the country. The futureis still to come.


[1] Investigation Commission on Economic and Financial Crimes Committed Between 1990 and 2001. Informe Final de Investigación. June 2002, p. 46.

[2] According to data from the Instituto Cuánto using figures from the Ministry of Energy and Mines and the National Statistics and Computer Science Institute (INEI), in 1990 Peru produced a total of 13,162 gigawatts/hour, of which 10,170 corresponded to hydraulic energy and 2,992 to thermal energy. In the year 2000, Peru produced 19,027 gigawatts/hour, of which 14,571 corresponded to hydroelectric energy and 4,456 to thermal energy. Instituto Cuánto. Anuario Estadístico Perú en Números 2001, Lima, 2001, p. 437.

[3] Investigation Commission on Economic and Financial Crimes Committed Between 1990 and 2001. Op. cit. p. 45.

[4] Statement by the economist Alan Fairlie to the newspaper La República, quoted in Federation of Light and Energy Workers of Peru, Diagnóstico del Proceso de Privatización Eléctrica, Lima, June 2002.

[5] USD 1 = 3.36 Soles at 30 June 2002.

[6] Investigation Commission on Economic and Financial Crimes Committed Between 1990 and 2001. Op. cit.

[7] Ministry of Economy and Finance. Presupuestos de la República 1997 y 2001.

[8] It is being discussed whether the arbitration clause is appropriate for tax disputes, because only the State can decide on the payment of taxes in accordance with its jus imperium. With Edelnor and Edelsur, the State has lost a total of USD 300 million in tax collection since privatisation. Furthermore, during a talk to congressional representatives for the Perú Posible government party held at the end of 2001, the head of SUNAT, Beatriz Merino, maintained that the State annually lost some USD 1 billion, due to the application of various tax exemptions. She reported that the electric companies owed around USD 20 million. In the same year, the Controller Commission and Economic Crimes Commission passed a sentence ruling in favour of Luz del Sur and Edelnor making payment. The ministers of Economy, Energy and Justice, backed by President Toledo and the opposition leaders, Alan Garcia and Lourdes Flores Nano, objected to the decision of Congress and stated that they were in favour of arbitration (which should not have applied as this was a tax issue), thus backing the companies’ position. As expected, at the beginning of 2001 arbitration passed a sentence ruling against the State. The alternative of the judicial power could have been used, where the rulings of arbitration could have been questioned because they were addressing a prohibited issue, but the State abstained from appealing.

[9] Encuesta Nacional sobre Medición de Niveles de Vida (ENNIV) 1994-1997.