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.

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. www.df.cl

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
Starting a Business	62	58	-4
Dealing with Construction Permits	24	25	1
Getting Electricity	51	47	-4
Registering Property	56	55	-1
Getting Credit	79	71	-8
Protecting Minority Investors	36	33	-3
Paying Taxes	33	28	-5
Trading Across Borders	63	62	-1
Enforcing Contracts	56	56	No change
Resolving Insolvency	58	72	14

Source: DB2016Click here to see all reforms made by Chile.

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.

Economy	DB 2016 Rank	DB 2006 Rank
Mexico	38	62
Chile	48	24
Peru	50	78
Colombia	54	76
Uruguay	92	70
Paraguay	100	110
Brazil	116	122
Ecuador	117	120
Argentina	121	93
Bolivia	157	126
Venezuela, RB	186	144

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. www.df.cl

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[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.

http://www.ft.com/cms/s/0/773f9baa-cfb3-11e2-be7b-00144feab7de.html#ixzz3r6BnoHF9. http://www.gmanetwork.com/news/story/543779/money/economy/phl-slams-doing-business-report-in-complaint-letter-to-wb-chief