The economic model developed in the USA and Britain in the 1980s was later imposed on developing countries by the international financial institutions (IFIs) – the World Bank, the IMF and in Latin America the Inter-American Development Bank (IDB). The model advocated cuts in public spending and the privatisation of state-owned enterprises, especially utilities such as energy companies.
Although most urban areas in Nicaragua had electricity, in 1990 half the population were still not connected to the grid … Nicaragua could ill-afford to challenge the impositions of these IFIs. But in any case, for 16 years it had governments that embraced them enthusiastically and were able to portray them to critics as inescapable requirements.
The crown jewel of privatisation was the electricity distribution system, … Only one company, Unión Fenosa, made a bid. It created two distribution companies and various offshoots to give the appearance of not being a monopoly, and bought the whole system with its bid of only $115 million (slightly more than half the value placed on it by the government). As well as the infrastructure, it acquired Nicaragua’s limited technical expertise – the engineers and economists who run the system, and even the laboratory which tests household meters.
Nicaragua therefore entered the current century with a newly-privatised electricity system covering only half the population, massively dependent on oil imports, and charging the highest consumer prices of any country in the region. The government had limited regulatory ability to control a multinational company whose contract was, in any case, underwritten by World Bank guarantees. It had also completely failed to develop alternative, more sustainable power sources, which might have increased its flexibility in dealing with the Spanish multinational. …
Despite the promises, privatisation brought little new investment, so not only was power generation based on imported oil, it took place in old and inefficient power stations afflicted by frequent breakdowns. A combination of mismanagement and large numbers of illegal connections meant that, of the power that was generated and passed to Fenosa, some 30% was still being lost before reaching legitimate end users. …
While higher prices in Britain affect transport costs and might lead people to curb optional travel or switch to public transport, in Nicaragua the effects of oil costing up to $100 per barrel have been much more dramatic. The cost of basic foods has increased by up to 40%, and the daily bus journey to work might consume most of your weekly earnings. …
Despite the fact that the original sale had factored in guaranteed profit levels, and had even assumed a high level (15%) of ‘technical losses’ in the distribution system, Fenosa has persistently sought higher prices or has added extra charges to bills. … Electricity prices in Nicaragua are higher than anywhere else in Central America. …
In 2006 and 2007, amidst widespread protests and a situation described by one of the main national newspapers as living “… in a state of ctastrophe”, the power cuts were extended and formalised so in most places they lasted up to ten hours per day. The effect on the economy was disastrous. …
Yet these problems only directly affect half the population, as the other half continue to have no connections to the grid. The system has hardly grown at all since Fenosa took it over. Although its bid contained promises of investment, there was no contractual timetable about how and where this should take place. In fact, … where rural areas have secured electricity for the first time, this has been through international aid rather than as a result of investment by Fenosa.
Source:
John Perry (2008) ‘The debate on energy and climate change – a different perspective’, Ch. 17 (pp 229-244) of ‘Opening Doors – Improving housing services for refugees and new migrants’, Chartered Institute of Housing.