Study by Amigos da Terra warns investors
Methodology is based on credit rating agencies approach
Technical, legal, social and environmental uncertainties increase financial risks to investors and creditors of Rio Madeira Dam Complex, in the Brazilian Amazon, says report published today by the NGO Amigos da Terra – Amazônia Brasileira. According to Gustavo Pimentel, Eco-Finance Manager, “we attempted to analyze all information available using methodology similar to that of credit rating agencies, where different aspects of the project were translated into the level financial risks”.
The construction risk is one of the most material, as it has been for all hydroelectrical plants in the Amazon: “The possibility of delays, cost overrun and quality sub-performance are analyzed along with their respective impacts”, says the study.
The legal weakness of the preliminary license and, consequently, of the construction license, may result in postponement of the project, delaying the energy delivery. The study argues that the main weaknesses are related to the area of influence (much smaller than needed to be studied) and the disapproving recommendation report by Ibama’s environmental agency experts, released in March 2007. There is already a civil lawsuit by the Public Prosecution Office challenging the legality of the licensing.
Other factors that may affect cost and construction timeline are the fee for environmental compensation, which is still undefined; the size of population to be displaced and its impact on indigenous lands.
Secondly, taking off the transmission line from the terms of reference to speed up the power plants license may backfire: “Now there is a risk of having two large power plants in the middle of the Amazon disconnected from the consumption centers in the southeast. The transmission line to Araraquara (state of São Paulo) does not have a defined path, nor any terms of reference for the Environmental Impact Assessment. Its license will take years to come, and nobody can predict when the works will be complete” claimed Pimentel.
Amigos da Terra has been engaging with banks and pension funds about the study conclusions. “No creditor would like to enter this deal to lose money. Everybody we talk to is worried about the project’s financial risks. The beneficiaries of Petros and Funcef pension funds should be very concerned, as their pensions may be at stake”, argues Pimentel.
The economist, who has worked for banks such as ABN AMRO, Unibanco and SR Rating cites a paradox: “If banks want to invest on Rio Madeira they better do it through their foundations, donating the money, because the probability of not having their loans repaid is very high.”
Download the complete study here.