MIGA in Guatemala

December 2, 2002—The government of Guatemala’s signing of a peace agreement with the revolutionary guerrilla movement in 1996 brought to an end one of Latin America’s longest-running and more fratricidal wars, which had resulted in the deaths or disappearance of more than 200,000 people over a 35-year period. The peace agreement was important not just for its content, but for the willingness of key actors on all sides to negotiate after decades of inflexibility, state-sponsored terror, and guerrilla brutality. Among other things, the accord acknowledged the importance of improving the country’s infrastructure—an area where the government had historically committed unsustainably low levels of funding—particularly by reaching rural, mostly indigenous, communities with basic services. The government is now addressing this need by setting and working to achieve targets for access to power, water, and transportation services.

Among the many challenges faced by Guatemala was the need to build the country’s power infrastructure from the ground up. In 1998, Guatemala’s share of households with an electricity connection was 60 percent, one of the lowest in the region. This number was reduced to 52 percent in rural areas. Historic underinvestment, the poor performance of the state’s two power utilities, and the destructive effects of the civil war were to blame for the situation. To address the problem, the government of Guatemala embarked on a full-scale privatization of the electricity distribution system in 1998.

The rural distribution business of INDE, the national electricity company, was split into two new companies (DEORSA and DEOCSA) and placed on the auction block, with 50-year concessions to operate power distribution. Unión Fenosa Internacional S.A. of Spain won the bid for both companies. MIGA supported the project by providing investment insurance coverage against the risks of currency restriction, expropriation, war and civil disturbance, and breach of contract.

“At the time of privatization, INDE was facing substantial losses, which made the purchase of the newly created entities unattractive,” says Rodolfo Santizo, vice minister of Energy and Mines. “The low levels of electricity consumption per household in the rural areas, 30 kilowatt-hours (Kwh) per month on average, compared with the low population density in rural areas made it quite hard for a distribution business to be financially sustainable.”

An ambitious government rural electrification program (PER) designed in 1998 to address the country’s rural electrification needs made the privatization more attractive. Under this innovative output-based scheme, DEORSA and DEOCSA are paid $650 for each community that is “electrified.” According to the construction contract, all new installations will become part of DEORSA’s and DEOCSA’s fixed assets when finished. The government has tapped the $101 million in proceeds from the sale of assets for this incentive program. The setup serves both the investor and the government, which obliged Unión Fenosa to meet the program’s extension targets by incorporating the scheme into the concession agreement.

“The introduction of the PER has certainly helped increase the number of customers as well as energy demand, which means that more Guatemalans now have access to power and that the two companies have a greater chance of financial sustainability,” says Fernando Quevedo, Unión Fenosa’s manager of the PER.

“I believe we could not have possibly come up with a better idea to promote development in rural areas,” Santizo adds. “Electrification was badly needed. Without electricity the country cannot develop.”

The project aims to connect 280,000 new households in some 2,600 communities by the end of 2004. This rate of connection would raise the national electrification rate to about 90 percent. In its three years of operation, the project has reached about 150,450 households.

Getting to this point was not a simple matter. “We had lots of problems identifying what we needed to do and where,” says Quevedo. “To manage the situation, we held weekly negotiations with INDE to identify the communities to be reached and develop an electrification grid.”

In the village of Savana, 20 wood and straw houses stand in the middle of a coastal forest 110 kilometers from the nation’s capital. Inside one of the houses is Rosa Gómez, a 30-year old mother of three. Gómez has just received her electricity connection. She and her neighbors hope to pitch in to buy a refrigerator together in a few years. For now, a single light bulb illuminates the walls of her one-room house. “This is a very good change in our lives,” she says. “The value of our property is going to increase now.”

The local elementary school is also a beneficiary of the project. Rain, a frequent event in a tropical forest, tends to darken the school’s interior. The power connection is providing the electricity to light up the classrooms as needed. Unión Fenosa’s operating know-how and investments are also playing a substantial role in the operation’s success. Its ability to operate the distribution companies more efficiently is helping to create significant energy savings for the country, and individuals, and allowing for expansion of the distribution system without significant addition of generating capacity. Among these improvements are upgrades in customer management, widespread use of metering, and the installation of modern information systems.

Protection of the project agreements, including those for power purchase and the trust fund, was a particularly sensitive issue for Unión Fenosa. “Because the project agreements extend through various government entities, our partnership with MIGA is vital,” says Carlos Fernández Gómez, executive vice president of Unión Fenosa-DEOCSA/DEORSA. “It enhances our confidence that each government agency will support this important development initiative as it was originally conceived.”

The project does not overlook the burden of cost on the poor. The National Commission for Electricity, the sector regulator, determines the prices the companies can charge. In addition, households using less than 300 Kwh a month (virtually all rural customers) receive a subsidy. As a result, the average electricity bill comes to $3 a month.

In order to make sure that people understand what the bills mean and how to pay them, Unión Fenosa has opened a 20-person call center spread throughout the countryside. “We have to be close to the people and understand what they need,” says Fernández.

“This project came at a very challenging yet hopeful time for Guatemala,” Fernández adds. “After 35 years of war, the country required significant investment in infrastructure. We are doing our part by working to improve and extend electricity in rural areas, where, in most cases, there has never been electricity before.”