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Showdown in Latin America

Fortnightly Magazine - April 1 1998

Latin America.

One Southern Co. official in Brazil, who asked not to be named, says: "We look at what [AES is] doing in some places and say 'Gee, I wish we could do that.' In other places, we wonder, 'How can they sell a deal like that to the board?'"

Both Southern and AES look to gain control of Cemig in an auction this year as yet-undefined implementing regulations skew solid assessments of such a multi-

billion-dollar investment.

"Generation and transmission regulations are not as clear in Brazil as distribution regulations are, unlike in Argentina and Chile, where the regulations have already been issued," observes Boente. Although Brazil has yet to finalize regulations on generation, U.S. investors have staked billions in such capacity, gambling that regulators won't strand investments.

Still, investor funds for Latin America-focused U.S. utilities seem to be abundantly available. The California Public Employees Retirement System, for example, recently pumped $500 million into a partnership with Houston's Enron Corp. The venture is aimed at international electricity and gas opportunities, including Latin America, says Brad Pacheco, a Calpers financial analyst. Calpers holds substantial equity in other U.S. utilities also pursuing Latin American opportunities. It has found such investments lucrative.

"We had a previous joint energy development investment with Enron, and got bought out with a 23-percent return," Pacheco says. He adds that the emerging market, including the Latin American energy sector, offers growth.

Other institutional investors agree that investor funds are available and that there's growth potential.

"The infrastructure needs of Latin America are not any less than before the Asian crash, and the fundamentals of infrastructure there are still very much alive and well," says Everett Santos, CEO of the Emerging Markets Partnership and chief adviser to the AIG-GE Capital Latin American Infrastructure Fund. The fund began a few years ago as a $1 billion-plus venture that will finance (em and profit from (em the need for Latin American infrastructure that sovereign and state governments can no longer afford.

Power Poker Across the Andes?

The fate of one set of competing power projects being backed by several risk-conditioned U.S. utilities has been battered by the winds of fate several times since initial plans were announced.

That's in the copper mining region of northern Chile, the Sistema Interconectado del Norte Grande, or SING. The three utility groups targeting the growing demand for electricity there have lined up investments as high as $850 million to serve this market, based on Argentine natural gas resources.

But as strong as the SING market may be, the expected electrical demand will support only two of the three projects.

"There's room for two¼ but to go so far as to say plenty of room for two, no," says Robert Simmons, director of the Power & Infrastructure Utilities Group at Deutsche Morgan Grenfell. "If only one is built, and finished, then it's a great story. If two get built, it's probably a reasonable story, depending on what the forecast [for power] is. If three get built, it's close to a disaster."

The first project involves Endesa, Chile's