Peru and Bolivia: Risk Outlook

Risk to planned dam in Peru, power contract risks in Bolivia.

Exclusive Analysis

In Peru, the Shining Path's northern faction is weak, but its southern counterpart is strong, posing a risk to Army helicopters and a planned dam.

In Bolivia, a draft law, in which the state will seek at least a 60 percent stake in power transmission and distribution, raises contract risks.


In December 2011, the leader of the Shining Path's northern faction, 'Comrade Artemio', acknowledged that the rebel group had failed to achieve its objectives and called for the government to open peace talks. The government rejected this initiative, seeing it as exposing the weakness of this faction, which operates in the Upper Huallaga valley, and is currently on the defensive. The situation is different with the Shining Path's 500-man strong southern faction, led by 'Comrade Jose', which is increasingly involved in drug trafficking in Peru's VRAE region.

The VRAE is a coca-growing area that has been the focus of a military operation since August 2008 in which around 60 soldiers and police have been killed. Part of the Camisea consortium (Pluspetrol, SK Energy, Sonatrach, Repsol-YPF, Tecpetrol and Hunt Oil) pipeline passes through the VRAE. Brazil's Odebrecht and Eletrobras plan to build the Pakitzapango power dam nearby. Most of the southern Shining Path faction's armed activity involves attacks on security forces, rather than on economic assets. However, there will be a risk of extortion and kidnapping once the Pakitzapango works get underway. Sixty-eight workers from Argentine firm Techint, which was involved in the construction of the Camisea pipeline, were kidnapped in 2003 and later released after an alleged $200,000 ransom was paid.

The southern Shining Path faction's increased involvement in the drug trade is also likely to result in improved funding, which the rebels and drug traffickers will likely use for the acquisition of weapons. This has implications for Army helicopters, as the rebels in the VRAE have heavy-calibre machine guns, capable of penetrating light armour. In September 2009, the rebels brought down an MI-17 helicopter in Junín province after hitting the aircraft's rotor system. Similar attacks have penetrated military helicopters' armour and killed soldiers since then in San Martin de Pangoa, Huachocolpa and Pampa Hermosa at the VRAE region; the latest such attack took place on December 11, 2011 near Ayna, La Mar, Ayacucho.

Peru is still far away from reaching the violence levels of Colombia, but it has already overtaken Colombia as the world's top cocaine producer, increasing the likelihood of drug-related violence increasing in the three-year outlook.

President Morales’ government is currently working on a new electricity draft law imposing contractual changes on the sector. According to a preliminary version of the law, firms that operate in the country will have to migrate to a new contractual framework in which state-run power firm ENDE will demand a minimum 60 percent share. Although President Morales lost his two-thirds majority in Congress in early January 2012, the draft bill is likely to pass as its approval only requires a simple majority. An EA source indicated that the passage of the law may be completed as soon as May 1, 2012. The likely affected companies include Spain's Grupo Red Electrica and Iberdrola, Israel's Inkia Holdings and the US's Tenaska.

The draft bill also states that firms operating in the sector will be required to invest a percentage of their profits in the sector's development. The exact percentage will be established by the National Electricity Agency ANE. President Morales' decision to step up the state's control over the electricity sector is consistent with his policy of targeting firms privatized by previous governments. In May 2010 power plants - two thermal (Guaracachi and Valle Hermoso) and one hydro (Corani) - privatized in 1996 were nationalized and returned to ENDE. The target now is power transmission, with 73 percent of the national grid held by Spain's Teletransportadora de Electricidad (TDE), which is owned by Grupo Red Electrica. TDE currently has net assets worth $230 million in Bolivia.

As the government intends to control the electricity supply chain, it will seek majority control of six power distribution companies and cooperatives, none of which were previously state-owned. This includes the Cooperativa Rural de Electricidad (CRE) in Santa Cruz, ElectroPaz in La Paz and Elfeo in Oruro (both 57 percent owned by Iberdrola of Spain) and Sepsa in Potosi and Villazon. A string of hydroelectric plants operated by Cobee (Inkia Holdings) in La Paz will, with six other thermal and hydro plants at Guabira, SDB, Synergia, Hidrobol (Tenaska), Bulo Bulo and Rio Electrico), are likely to be required to become minority partners in joint ventures with ENDE.

The government justifies this intervention by declaring that nationalization will solve the current electricity blackouts. Severe power outages occurred in seven regions and major cities during a heat wave at the end of 2011. However, the government is unlikely to fulfil these plans, as it lacks the funds needed to finance the investments the sector needs.

Carlos Cardenas is Deputy Head of Latin America Forecasting at UK-based specialist intelligence company Exclusive Analysis.