Mr. Chairman, members of the Subcommittee, I am William Haener, President and CEO of the CMS Gas Transmission Company, a subsidiary of the CMS Energy Corporation. I want to thank you for the opportunity to present my company’s perspective on the current crisis and to emphasize the great concerns that we and other investors share.
Argentina had previously -- and justifiably – been held up as a model for an IMF-supported economic recovery based on sensible, transparent economic policies and free market principles that fostered sound investments. In recent weeks, however, both policy and principle have been reversed. The government's new economic regime represents a summary abrogation of Argentina's legal obligations and treaty commitments and contravenes the framework of that country's constitution. It signals an abandonment of Argentina's free-market orientation and successful privatization program -- which brought billions of dollars of foreign investments into the Argentine economy.
Argentina did not come to its present economic condition because of foreign investors. In truth, neither investment nor credit could keep pace with the speed at which Argentina was incurring sovereign debt. It is Argentina’s sovereign debt, which it accumulated by ignoring a giant fiscal imbalance for too long, that is the cause Argentina’s economic troubles. That is something that cannot be cured by forcing the adoption of an increasingly devalued currency or by mounting politically charged attacks on investors. Attacking sources of investment, whether they are domestic or international, will only worsen the plight of the Argentine people and will do nothing to foster a recovery.
Our main concern with the new policy regime is not the devaluation of the peso. Rather, we are far more troubled by the government's cancellation of public and private contracts, its imposition of restrictions on the free transfer of funds and its elimination of adjustments for inflation and currency fluctuations. While in some respects it could be understandable that the government needed to adjust the value of and float its currency, these other measures are throttling the revenue stream of energy projects. Since there is no corresponding relief on the external debts and other obligations of these energy projects, the Argentine government is forcing many of them into a position of insolvency.
Since the energy sector is fully privatized, from gas production through gas transportation, power generation, and electricity distribution, there is a cascading effect throughout the sector. In this type of policy environment, insolvent projects could go into bankruptcy, bankrupt projects could be re-nationalized, and service to Argentine citizens definitely will be less efficient, more expensive and subject to disruptions. Over the long term, a sustainable economy can be achieved only if there is access to reliable and affordable sources of energy to fuel the growth of the Gross National Product. But in the short term, Argentina could be exposed to power outages at any time. The energy sector is heading into a crisis that could have grave economic, social and political implications.
As recently as this week, President Duhalde announced his government was contemplating a new "emergency tax" on utilities in response to what he termed "the extraordinary" profits that foreign investors have reaped in recent years. I want to be very clear about this issue. American and international investment in Argentina’s electricity sector has been of extraordinary benefit to the Argentine government and people in terms of lower prices and increased reliability of service. According to the independent and highly regarded Cambridge Energy Research Associates, spot energy prices in 2001 were the lowest on average in Argentina since 1995. Monthly average prices did not rise above $14 per megawatt hour during the second half of the year. Only in the winter months of May and June did average prices rise above $16.50 per megawatt hour. These compare to average prices in neighboring Chile of about $30, in Peru of about $30, and in the United States between $25 and $35 per megawatt hour. I should emphasize that the prices in Argentina were no accident – they were the outcome of a well designed and transparent privatization process.
Similarly in the natural gas sector, prices to the typical residential customer in Buenos Aires rose only 20% between December 1992 and January 2001 while reliability of service rose significantly. The vast majority of the price increase was due to government taxes, which rose nearly 69% on gas in that period. Gas transmission and distribution costs were essentially flat, rising only 1.9%.
At the same time, due to the robust level of competition in the Argentine marketplace, the returns to foreign investors who produced those low prices were thin – in many cases less than what could be made in the United States. On top of that, CMS Energy and other companies reinvested a large percentage of whatever returns were made in order to strengthen our operations, increase their efficiency, and make them more competitive in the tight market. For instance, CMS Energy and the other shareholders in one of our investments, the TGN Pipeline, have invested more than more than $1 billion since 1992 – above and beyond the $392 million initially paid for the asset – to upgrade and improve that system. President Duhalde’s comments notwithstanding, we have not repatriated huge dividends and profits but rather re-invested them to benefit the Argentine people.
Let me be equally clear about something else. We are not complaining about the fact that we faced low prices or had low returns. We as investors are fully prepared to live with unexpectedly thin margins as long as our contracts are being honored and implemented. When our contracts are summarily abrogated, however, and when a government changes the rules and re-regulates revenues in such a fashion as to place sound investments into a position of insolvency, it is fundamentally unfair, will result in further economic turmoil, and could lead to massive expropriations. Cheap and reliable energy supplies are critical to economic stability and growth but cannot be obtained under current circumstances in Argentina. There will be no recovery, no matter how much financial support is poured into that economy.
Through its interference with public and private contracts, the Argentine government has moved well beyond a simple devaluation and is ensuring that the crisis will be far worse and longer lasting than in other recent cases such as Mexico and Brazil. Unless Argentina honors its contractual and treaty commitments, its actions will continue to undermine its competitiveness, threaten the viability of its energy infrastructure and virtually guarantee that there will be no additional foreign investment in the sector
I would also urge the Subcommittee to consider that events in Argentina will have an impact on the US and other economies. American energy companies brought approximately $6 billion in equity and commercial and other loans into Argentina during the privatization process. Argentina as a whole brought in about $80 billion in capital and another $80 billion in credit, mostly in the form of debt. Unless the situation is corrected, there will be losses to those shareholders whose equity was invested. There will be losses to US suppliers and service companies who provide spare parts or hold operations, maintenance and service contracts. There will be losses to the US banks that hold the debt, and to US insurance companies that backstop the banks and the energy investments. There will be losses to the US taxpayer, as the American government invested in and insured some of these projects through the Overseas Private Investment Corporation and the US Export-Import Bank. And there will be a contagion effect on other emerging economies, as prospective investors and corporate boards look far more skeptically at future investments elsewhere. It is difficult to see how private investors will find their way to other markets in the region, much less to places like Afghanistan or Pakistan, if Argentina is allowed to fail.
As a matter of utmost priority, a bailout is not the answer. CMS Energy urges the Congress, the US Administration, and the international financial institutions to work with Argentina to produce a credible, sustainable economic plan. That plan must enable existing investors to succeed on the terms that were espoused in their contracts, and in order to achieve this outcome there must be an element of accountability introduced in the process. We would encourage the adoption of strict and enforceable conditions on any future lending to Argentina to ensure compliance with the original terms that were the basis for the initial investments. This means enabling payments to energy companies in dollars or in pesos indexed to the dollar so that prices will cover all costs, including depreciation and financial costs, in accordance with the original economic equation of our contracts. We must also have the ability to transfer funds freely as stipulated in the bilateral investment treaty. Only under these circumstances will energy projects remain solvent, will energy prices remain low and service reliable, and will Argentina’s ability to recover stand a better chance.
If you will permit me, Mr. Chairman, I will conclude on a more personal note. CMS Energy was one of the earliest US participants in the privatization process and is now one of the largest US investors in Argentina. We have developed deep and lasting ties to the country, have employed and trained hundreds of Argentine citizens, and have been pleased to help develop the country’s infrastructure. It disappoints us greatly to see Argentina reverse course and head down the path to economic chaos. It worries us to see the instabilities emerging in Argentina’s political system. It alarms us to see the periodic eruptions of social unrest, with perhaps greater turmoil in store. And it especially troubles us to see our Argentine employees and friends have their savings and hard-earned money denied to them and their futures thrown into doubt. As a friend to the Argentine people, we hope very much to be able to work constructively with the authorities there to turn the situation around. Thank you, and I will be happy to respond to whatever questions you and the Subcommittee members may have.
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