MAC: Mines and Communities

Bolivian president proves sceptics wrong

Published by MAC on 2004-07-23

A nationwide poll, held in Bolivia, gave support to the new president's policy on extractive industry. Carlos Mesa came to power last year in the wake of massive opposition to former president "Goni" Lozado's proposal to pipe natural gas through Chile and Brazil. But is there in fact a new policy? The majority of the country's Aymara people - and others - oppose gas exploitation per se. Others want the resources fully nationalised. Mesa is likely to tread a "middle" path, seeking to increase royalties to Bolivia, but still remaining in hock to multinationals such as British Gas and BP. As for mining: there are no proposals to re-nationalise the country's silver, tin and gold operations or increase taxation on them.

Bolivian president proves sceptics wrong

By Richard Lapper, Latin America editor in La Paz, Financial Times

July 23 2004

Carlos Mesa seemed to be on a hiding to nothing last October when he became the latest occupant of the Quemado Palace, home to most of Bolivia's 82 presidents since its 19th-century independence.

His predecessor, Gonzalo Sánchez de Lozada, had just fled the country after an insurrection in El Alto, the sprawling dirt poor Aymara indian city that neighbours La Paz, the capital.

Plans to export natural gas - Bolivia's most valuable resource - through Chile, its historic enemy, had sparked widespread opposition to the liberal economic policies favoured in the 1990s. Divisions between the western highlands and gas-rich east and south were growing. With the country apparently on the edge of chaos, few thought that Mr Mesa, an independent journalist and historian, had the political experience to survive. Nine months on, Mr Mesa has proved the sceptics wrong - for the moment at least. Last Sunday, he won overwhelming backing in a referendum called to endorse his plans to develop Bolivia's gas reserves - the second largest in Latin America.

Radical calls for a repeat of the October protests to block the poll were ignored and the president won up to 92 per cent support on the five separate proposals laid before the electorate. "Bolivia demonstrated to the international community that it didn't want dissolution and break-up," Mr Mesa told the FT. "The entire country knows that these [radical] actions have no absolutely no support."

Rather than weaken his clout in Congress, Mr Mesa's independence has allowed him to distance himself from what he describes as an "exhausted" and "discredited" political system. He hopes to persuade Congress to approve a new oil and gas law that would ensure the state took a bigger share of revenues in tax and royalties, placating leftwing opposition. This would help him drive through a broader plan to increase gas exports and increase Bolivian use of gas, in turn reducing a yawning fiscal deficit and improving economic viability.

The president believes foreign capital and skills are essential for the sector's development. He is betting that companies - including British Gas and BP of the UK, Total of France, Repsol of Spain and Petrobras of Brazil - will choose to stay because they have invested $3.5bn (?2.8bn) over the last eight years. "It won't be easy, it won't be the same scenario as they expected some years ago," , says Mr Mesa. "But they want security for their investments."

Already, though, there are signs that the going will get more difficult in the next few months. The president persuaded Evo Morales, a radical, to support his referendum plan. But the Quechua coca growers' leader is now stepping up calls for outright nationalisation of foreign companies, reducing the possibility that his party, the leftwing Movement to Socialism, will support the president in Congress.

More seriously, it is far from clear that the foreign companies will take kindly to new rules that envisage an increase in the state's take to 50 per cent of revenues, especially since the average return on capital for the gas companies was only about 3.5 per cent last year.

Revival of the sector is at least partly dependent on the suspended $6bn liquid national gas project that originally envisaged exports through Chilean ports.

Mr Mesa had hoped to persuade energy-hungry Chile to make a territorial concession in return for gas but the president won only modest backing for this in the referendum. Chile, in any case, is not interested. This week Mr Mesa revived the idea of piping gas through Peru, an option dismissed by the industry as too expensive.

Negotiations are going to be tough. But for the moment - euphoric after Sunday's triumph - Mr Mesa is adamant: "I can't put forward the idea of exporting through Chile because this would generate a social explosion," he says. "This is not demagogy or populism it is realism."

Bolivia's gas poll

Financial Times

July 21 2004

Prices of oil, gas and minerals may be high but the world's natural resource companies have not been having it all their own way in Latin America. True, Colombia, keen to attract oil companies back to boost exploration, has reduced its take from tax and royalties but the sector faces the challenge of a new state energy company in Argentina and higher mining royalties in Chile and Peru. It has lost opportunities with a botched liberalisation in Ecuador and on Sunday saw Bolivians vote in a referendum for the state to play a much bigger role in developing South America's second biggest reserves of natural gas. Executives, however, should not get too depressed.

First, much of what has been happening simply reflects what could be a long- term change in market conditions. With the prices of oil, gas and minerals rising it is understandable that producer nations are looking to increase their income from the windfalls. Moreover, some of the money is being invested in stabilisation funds that can smooth macro-economic performance over time, helping bolster investment conditions in a more general sense.

Second, as Bolivia demonstrates, in many Latin American countries the debate is not whether public or private companies should exploit the region's natural resources but whether they should be exploited at all. In this sense Sunday's referendum result was a victory for common sense.

Many left-wing and indigenous opponents of Carlos Mesa, the president, are opposed per se to exporting gas and were seeking to disrupt the referendum. All this raised fears that the country was about to re-live the anarchy that led to the overthrow of pro-US President Gonzalo Sanchez de Lozada last October. By routing these extremists, Mr Mesa has won himself a mandate not only to develop the gas resources but to govern.

Defeat would have been disastrous not just for Mr Mesa but for foreign companies, such as BG, the UK gas group, and Repsol of Spain, which have sunk hundreds of millions of dollars into gas exploration but have so far been unable to sell as much gas as they would like.

Mr Mesa now needs to use this political capital effectively. He will seek to raise royalties and tax rates, but must be careful not to make investments uneconomic and to be mindful that companies have alternatives.

The president knows that he needs foreign companies to develop his country's energy resources. He has sensibly promised not to nationalise private assets and will want to forge new relationships with existing investors. Ideally, he should look to build a pipeline to a port on the Pacific coast to allow Bolivia access to the attractive Asian and west coast North American markets, although given popular opposition to any deal with Chile, Bolivia's historic enemy, this could be difficult. It is a tough agenda but Mr Mesa has made an excellent start. Investors should respect his efforts.

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