Wednesday, November 11, 2015

Latin America energy integration: a pending challenge

South America is a region blessed with abundant natural and energy resources, fossil fuels and renewable sources, where its appropriate use can bring significant revenue to his population. While in the region remain large settlements of poverty and underdevelopment, with precarious living conditions for a significant part of the population, the region has not take advantage of all its energy resources potential.

In the region's oil reserves are 20% of world reserves and second in amount after the Middle Eastern, and allow meet current demand in the region for the next 100 years; natural gas reserves are 266 trillion cubic feet, and they increase in 500% if we add the technically exploitable reserve of unconventional gas, which is enough to supply the current consumption of the region for the next 400 years. South America also has a great opportunity to develop a renewable energy matrix, with a huge hydropower potential of 360 GW, of which only 40% has been developed. And, the to this availability of renewable hydro resources we must be added the great potential in new sources of electricity generation such as wind, solar, geothermal, tidal and ocean, and biofuels, which in the coming years will have an increasing role in the energy matrix in response to the great challenges facing humanity to develop a low GHGE energy matrix.

While the region has been favored with abundant renewable and conventional energy resources, they are not distributed uniformly in the countries, while also the distribution of these resources is not related to the current energy needs and demands presented in each of the countries. For example, in Chile the high costs of energy are explained in part by scarce energy resources has it is compared with other regional economies, putting on its aspirations to achieving development an obstacle because the loss of competitiveness that the high energy costs mean for the realization of productive enterprises. Energy resource access conditions are more favorable in other countries in the region with abundant energy resources which, besides a progressive consolidation of their democracies, political and social stability, have allowed them to create an increasingly favorable climate for foreign investment.

Energy integration in the region is moving, but slowly, and is an area of ​​development where everyone can win. Exporters get more resources to nurture their growth, employment and finance social programs; while importing countries, under a robust contractual and institutional design, access to more efficient sources of conventional and renewable energy, and at lower prices to reach a more competitive development.

What are the alternatives for energy integration? One possibility is to base the integration in the export of surpluses, based on the availability of energy surpluses existing at the time. In this model, for example, countries complement their electrical systems to reduce the risks of shortage facing a drought season or a glitch in their generation - transmission system, where energy trades have as main objective the provision of backup capacity and reserves to deal with contingencies. Here energy exchanges are small and certainly the benefits, where the countries underscores the concept of energy independence. A second model is one where the countries with abundant energy resources develop and commitment for long periods, energy infrastructure for export. In this model, the benefits of energy integration are higher for all stakeholders, and the exporting country may further advance the development of infrastructure such as electricity, which ultimately is funded by the importing country. An example of such integration is given by the binational Itaipu plant with 14,000 MW, a joint plant equally owned by Brazil and Paraguay, and where 80% of generation is destined to the Brazilian market.

The challenges of moving towards greater integration are not minor, they are technical, regulatory, commercial, but certainly the greatest is geopolitical. It is necessary to generate trust and certainty that what is agreed in matters of energy integration will be respected, and the region should avoid repeating situations like the failed experience of natural gas integration between Argentina and Chile which ended in a deep natural gas crisis where Argentina suspended natural gas exports to Chile. This crisis meant a before and an after in the Latin American energy integration process. It is therefore necessary to move decisively to achieve international agreements that have robust guarantees to generate trusts on the adequate security of energy supply. Undoubtedly, there are suspicions, but the conditions for appropriate energy integration should be worked and decidedly Latin America should move strongly into this game.

Tuesday, November 10, 2015

Doing Business: Is there a concern with Chile*

Doing Business: Is there a concern with Chile*

*This note complements on the note “Informe Doing Business: Otro llamado de atención para Chile", published with Felipe Larrain in Diario Financiero, on November 6, 2015, pg. 4.

October 2015 the World Bank released the Doing Business 2016 report (DB 2016), in its 13th edition. This report, with an universe of 189 countries, assesses the main regulatory and economic constraints that affect the development of small and medium enterprises in ten areas:
  • Starting a Business
  • Dealing with Construction Permits
  • Getting Electricity
  • Registering Property
  • Getting Credit
  • Protecting Minority Investors
  • Paying Taxes
  • Trading Across Borders
  • Enforcing Contracts
  • Resolving Insolvency

These areas are covered by more than 40 sub-indicators, with which DB constructs a global ranking on how friendly is the business environment in a country. The report also looks at aspects of labor market regulation, but this variable is not included in the DB ranking. DB is the best known report of the World Bank Group, which attracts the most attention from the media, business and government, and it has strong supporters and detractors.[1] In the past 12 years and for all countries covered, DB has logged over 2600 reforms in the areas measured by the report. The results have been very promising because the gap in regulatory frameworks between the best and the worst performing countries has narrowed, and several of the worst performing countries have undertaken deep reforms which allowed them to catch-up with the best performing countries. By way of example and globally, if in 2003 on average took 51 days to start a business, in 2015 this figure was reduced to 20 days. Easing the business environment does not mean having less or more inefficient regulation.  As is underscored in the  DB 2016, the best 30 performer countries are not those with little regulation but those with good rules that allow efficient and transparent functioning of businesses and markets while protecting the public interest.

Regarding previous years, the DB 2016 comes with many improvements that were considered in a thorough methodological revision recommended from an Independent Expert Panel that was called by the WBG for that effect in 2013. As previously committed, some of the recommended changes were introduced in the DB 2015 and the remaining ones in the DB 2016. The changes have meant methodological improvements over the previous reports, incorporating in the indicators aspects of quality while the previous indicators only accounted for efficiency. Thus, it has become more difficult to compare the DB rankings in a year with those of previous years. However, beyond the methodological changes, the broad assessment of a country business environment, in those areas measured by the DB report, has not changed as much, as illustrated by the following picture which shows for the sample of countries the distance to frontier scores under the old and the new methodology.

Distance to frontier scores remain similar under the new methodology

Source: DB 2016

A concern on Chile

For Chile in a window that runs from mid-2006 until mid-2015 (i.e., from the DB 2007 to 2016) the country has a total of 9 regulatory and institutional reforms in the areas covered DB which affect the business environment of small and medium enterprises. Until 2015 DB report, Chile had locked 7 of these 9 reforms, where all of them have been positively assessed by the World Bank in terms of their impact on the business environment for small and medium enterprises. In DB 2016 report, Chile locked two new reforms: a New Bankruptcy Law, positively assessed by the World Bank, which entered into force in October 2014; and a tax reform, implemented by the current administration and which was negatively assessed by the World Bank on the effects that it has on the business environment for small and medium enterprises. Thus and on balance, the net effects of these two reforms are that they cancel one another and Chile remained in the same position of the DB ranking globally. For the first time since the DB report is published, Chile has locked a reform that was negatively assessed on its impacts for the business environment, affecting SME which generate near 80% of employment is the country and are the ones with the greatest difficulties to increase their productivity. 

Chile: Topics in DB
DB 2016 Rank
DB 2015 Rank
Change in Rank
No change

But, and beyond the assessment of Chile in DB 2016, the main concern on Chile should be on the long term trends of the country in the DB rankings. With the exception of the years 2010-2013, since 2006 the country shows a long term downward trend in the ranking of DB. While in the DB 2006 Chile leads the ranking in Latin America, with the position No. 24 globally, followed by Mexico in position No. 62 (a distance of 38 positions in the global ranking), in the DB 2016 Chile is in the position No. 48, behind Mexico in the position No. 38 globally. The lack of reform in the second half of the past decade, added to the fact that other countries have engaged in doing reforms to improve their business environment, relegated in DB 2010 Chile to position No. 53 globally and the fourth place of Latin America, behind Colombia, Mexico and Peru. Shortly, on the period of DB 2011 – 2013, Chile leaded again in Latin America, reaching the position No. 37 globally in the DB 2013. However, the DB 2016 has not good news for Chile, where is behind Mexico, in position No. 48, and 24 positions down in the global ranking from where Chile was in DB 2006.

The negative trend in the global ranking of Chile should be a matter of concern. As Chile is not engaging in second generation reforms, many countries are making progress copying the best practices and creating a much better business environment to attractive investments. The advantage that once Chile had in the DB ranking within LAC has vanished, and the country has no longer a strong regional leadership on those areas being measure by the DB report; and competes in these areas with countries such as Mexico, Peru and Colombia.

DB 2016 Rank
DB 2006 Rank
Venezuela, RB

Chile, a country with about 17.5 million citizens, inserted in a globalize economy with over 7 billion people, has no room for bad reforms that hinder the business climate. For the first time Chile fails with one of the reforms recorded in the DB ranking. Had it not been for the Bankruptcy Act which came into force in October 2014, which cushion the poor assessment obtained by the tax reform and the absence of other reforms, Chile would have felled noticeable in the DB 2016 report.

But beyond the DB report, concerns about the future of the Chilean economy goes with respect to the impacts of the 2014 tax reform on investment, growth, job creation, shared prosperity and poverty reduction; and on the uncertainty that emerges with the announcement to open the discussion for a new constitution, together with some law proposals discussed in the congress that might imply a deep change in the labor and educational arena, where there is a deep disagreement about their benefits for social and economic development.

The DB reports is an invitation for the governments to improve the standards, the regulatory frameworks and to reduce the transaction costs which affect the business environment, promoting simple, well-designed and crafted policies to spur business investment, job creation, economic growth and development. Countries that do not take advantage of the opportunity to learn and implement reforms inspiered on the best practices, will lag behind of those who take the opportunity to improve the business environment and the living conditions for their citizens promoting the proper reforms.

*This note complements on the note “Informe Doing Business: Otro llamado de atención para Chile", published with Felipe Larrain in Diario Financiero, on November 6, 2015, pg. 4.

[1] For example, critics against the DB have notice disagreements with issues such as the frequent changes made to the methodologies (change that were recommended by an Independent Expert Panel that revised the DB report in 2013); the retroactive revision of the rankings a year after their publication (because of methodological changes); that it does not give due consideration to on-the-ground reforms compared with changes in laws or written codes; or that it has a built-in bias towards deregulation. However, supporters say that Doing Business is objective, thoroughly researched and spurs reform as countries try to improve their ranking. Further, a group of academics and policy makers has published an open letter to the World Bank calling on it to keep the rankings and broaden the data in the report. Further, as noticed in DB 2016, the majority of Doing Business indicators are based on a reading of the law, which makes the indicators “actionable”—as the law is well within the sphere of influence of policy makers and is thus amenable to change.

El Informe Doing Business: Otro llamado de atención para Chile*

El Informe Doing Business: Otro llamado de atención para Chile*
Felipe Larraín B. y Ricardo Raineri B.
Clapes UC y Facultad de Ingeniería PUC

El Banco Mundial (BM) dio a conocer recientemente el informe Doing Business 2016 (DB 2016) para 189 países. Este es el informe más conocido del BM: en un año su sitio web registra casi 4 millones de visitas y medio millón de descargas. El DB evalúa las principales restricciones  regulatorias y económicas que afectan el desarrollo de las PYMEs en diez áreas: iniciar una empresa, obtener permisos de construcción, acceso a energía eléctrica, registro de propiedad, acceso al crédito, protección a inversionistas minoritarios, pago de impuestos, comercio inter-fronterizo, cumplimiento de contratos y solución de insolvencia. A partir de éstas se construye un ranking global de cuán amigable es el ambiente para hacer negocios en cada país.

En los últimos 12 años un número importante de los países peor evaluados han llevado a cabo reformas importantes que les han permitido acortar la brecha con los mejores. Un ejemplo: en 2003, en promedio, tomaba 51 días iniciar un negocio; en 2015 esta cifra se redujo a 20 días.

DB 2016 tiene muchas mejoras luego de una exhaustiva revisión metodológica que se realizó a partir de las recomendaciones de un panel de expertos en 2013 y de su consejo asesor formado en 2014. Los cambios introducidos incorporan aspectos de calidad a los indicadores de eficiencia previos. Aunque esto dificulta comparar los rankings del DB en el tiempo, sí es posible apreciar cuales son las tendencias de largo plazo de los países.

Chile, desde mediados de 2006 hasta mediados de 2015 (esto es desde el DB 2007 hasta el DB 2016) registra un total de 9 reformas regulatorias e institucionales en las variables que mide DB. Hasta el DB 2015 Chile ya había sumado 7 de estas 9 reformas, todas evaluadas favorablemente por el BM en tener un impacto positivo sobre el ambiente de negocios. El informe DB 2016 suma las últimas 2 reformas de las 9: la Nueva Ley de Quiebras, evaluada positivamente por el BM y en vigencia desde octubre de 2014; y la reforma tributaria del actual gobierno, evaluada negativamente por el BM dados sus efectos adversos sobre las PYMEs. Así, por primera vez desde que se desarrolla el informe DB, Chile se hace un autogol con una reforma que impacta negativamente el ambiente para hacer negocios.

Asimismo, resulta muy preocupante la tendencia de largo plazo negativa de Chile en el ranking DB --con excepción principalmente de los años 2010-2013, en que mejoramos. En 2006 Chile lideró el ranking en América Latina con la posición 24 a nivel global, seguido por México en la 62 (38 posiciones de ventaja). Sin embargo, la falta de reformas en la segunda mitad en la década pasada relegó a Chile en el DB 2010 al cuarto lugar en América Latina, en la posición 53, por debajo de Colombia, México y Perú. Esta tendencia se quebró en DB 2011, y Chile logró recuperar la primera posición de América Latina con el DB 2013, en el lugar 37 del ranking global. Hoy, con el último DB 2016, Chile cae a la posición 48, por debajo de México. La tendencia de largo plazo de deterioro en el ranking global debe ser materia de inquietud. Mientras Chile no avanza o retrocede, muchos países siguen progresando en generar un ambiente de negocios más seductor y atractivo. Hoy, la ventaja que otrora tuvo Chile en el ranking DB sobre los países de la región --en sus aspectos institucionales y en su clima de negocios-- se desvaneció. Chile hoy ya no tiene un liderazgo marcado, y compite en estos aspectos con países como México, Perú y Colombia. Como el DB es un análisis dinámico, si Chile no implementa nuevas reformas que mejoren el ambiente de negocios --o si sigue implementando malas reformas, como la tributaria-- el liderazgo que hemos tenido en el ranking DB puede llegar a ser una anécdota.

Chile, un país pequeño inserto en la economía global, no tiene holguras para hacer reformas que deterioren el clima de negocios, puesto que el emprendimiento, las PYMEs y los empleos que éstas generan son una de las principales herramientas para promover la movilidad social, mejorar la calidad de vida de la población, dignificar a la persona y dotarles de libertad.

La invitación del DB es a perfeccionar normas, marcos regulatorios y reducir los costos de transacción que afectan el ambiente de negocios con políticas simples y bien diseñadas. Los países que no tomen en serio este desafío en una economía globalizada, sólo obstaculizarán su desarrollo y perderán terreno en mejorar las condiciones de vida de sus ciudadanos. Hoy por primera vez Chile reprueba con una de las reformas que se registra en el ranking DB. De no haber sido por la Ley de Quiebras que permitió amortiguar la mala evaluación de la reforma tributaria, la falta de otras reformas y los retrocesos en los otros indicadores del ranking DB, la caída de Chile en ese ranking habría sido mucho más notoria.

*Este comentario fue publicado en el Diario Financiero, el día 6 de Noviembre de 2015, página 4.