Luis Enrique Berrizbeitia Executive Vice President

1. Conference on Energy in South America Luis Enrique Berrizbeitia Executive Vice President The Center for Latin American Issues George Washington University March 2002 1

2. Contents • Economic development in Latin America:a brief comment • why growth and development have not been sustainable • updating the development model • the importance of integration for competitiveness. • Prospects for energy market integration in Latin America • potential benefits • relevant issues • progress toward energy market integration 2

3. Why growth and development have not been sustainable in Latin America • Reforms have been mainly focused on macroeconomics, not enough on microeconomics • Continued dependence on natural resources and external savings • excessive vulnerability to external shocks • Growth has not been sustained nor sufficient, and income distribution remains very inequitable • Not enough attention has been paid to social and environmental issues • Weak institutions 3

4. The evolving development model • Necessary to preserve and improve on the progress achieved though macroeconomic and structural reforms, but also to focus increasingly on the microeconomic aspects of development • achieve a better balance between the economic basis of development, and its social, environmental and institutional dimensions • attain higher levels of sustained growth and development • improve income distribution • reduce poverty 4

5. Focusing on the micro-dimensions of development • Greater productivity and competitiveness • infrastructure • ICTs • SMEs • Increase investment in human capital • education • pension reform • Protection, promotion and development of environmental resources • mitigation of environmental risks • development of sustainable “green markets” • Institutional development • improve the quality and efficiency of response to social needs • strengthen the mechanisms of democratic governance • improve economic and social management • physical & economic integration • domestic savings • globalization • public health services • unemployment coverage 5

6. The importance of integration for competitiveness • Economies of scale derived from large integrated markets reduce costs and promote competition • Generates new business and investment opportunities and strengthens regional economic players • Helps protect the region from the volatility of globalization • Facilitates competitive insertion into global markets • Increases trade and promotes intra-regional development of technology and service sectors Integration improves the region’s competitiveness 6

7. Leadership role in promoting integration in South America • Infrastructure • Energy markets • Financial markets • Environmental markets • Logistics for competitiveness • Commercial integration

8. Benefits of energy market integration • Contributes to optimize the use of existing hydro/thermal capacity • compensates for variations in hydrological and climatic cycles • takes advantage of differing demand patterns across time zones • Contributes to compensate for large differences in energy resource endowment • promotes increased intra-regional trade in energy • Improves the region’s overall competitiveness • lowers costs and promotes competition in energy generation • improves the quality and reliability of electric power services 8

9. Benefits of energy market integration • Creates new opportunities for intra-regional technological development and trade in energy services • Helps drive the integration of natural gas markets • Generates measurable environmental benefits • can improve r.o.i. through “Kyoto” mechanisms (cdm) 9

10. Relevant issue for energy market integration in Latin America • Greater homogeneity of energy policies across countries • regional vs. national policy orientation • market driven vs. planning orientation • private vs. public sector roles • adequate investment climate • regulatory compatibility • Harmonization of regulatory criteria • separation of generation/transmission/distribution • transparent pricing mechanisms based on LTMC, including transmission costs and pricing • transparent anddirect subsidies where needed • joint or harmonized power and gas market regulation 10

11. Progress toward energy market integration in Latin America • Use existing fora to intensify exchanges among key players, including the private sector: • potential and benefits of market-based integration • harmonization of policies and regulations • fora include: OLADE/CIER/CAF/CAN/MERCOSUR/ IIRSA/FTAA • Build upon existing infrastructure to evolve from opportunity exchanges to market integration • more intensive use of existing interconnections • binational hydroelectric dams (Itaipú, Yaciretá, Salto Grande) • Aim toward firm policy commitments and specific but realistic objectives 11

12. Existing interconnections in South America 12

13. Progress toward energy market integration in Latin America • Power integration projects with highest short-term economic potential • Colombia- Ecuador (220KV) • Ecuador-Peru (220KV) • Argentina-Brasil (several at 500KV) • strengthening Venezuela-Colombia (two at 230KV) • Natural gas integration projects • Colombia –Venezuela (under analysis) • Greater potential for gas market integration in MERCOSUR • Andean agreement on regional interconnection of power systems and energy interchanges • Colombia-Ecuador-Perú-Venezuela (observer status) • Bilateral agreement: MEM (Ven.) - Termotasajero (Col.) 13

14. CAF and the energy sector (at Dec. 31, 2001) • Total portfolio: $ 6.5 billion • Infrastructure portfolio: $ 4.3 billion • Energy portfolio: $ 1.2 billion • Electricity portfolio: $ 1.0 billion • Approvals, electricity projects: $ 1,4 billion • Number of electricity projects: 27 • CAF is currently well positioned to play a catalytic role in promoting energy market integration in South America, on account of its mandate, its strong regional position, its leadership role in IIRSA, its partnership with CIER and OLADE and its close relations with regional authorities. 14

15. CAF’s MISSION SUSTAINABLE DEVELOPMENT REGIONAL INTEGRATION Asummary overview of CAF SHAREHOLDER COUNTRIES: YEAR: 2002 • PRODUCTS AND SERVICES: • Loans and co-financing • Investment banking services • Non-Financial services • CLIENTS: • Public and Private Sector 16 countries 5 Andean CAF´S INDICATORS MAIN SOURCE OF MULTILATERAL FINANCING FOR ANDEAN CONTRIES WB -21% Total Approvals 2001: US$ MM 5.637 IAFB -25% CAF 54% 15

16. Corporación Andina de Fomento www.caf.com 16 /marzo2002