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September 20, 2014

Largest consumer of state money left out

Friday, March 28, 2014

Electricity: the big elephant in the room

In the long-awaited announcement of subsidy cuts for public utilities, there was a big elephant in the room: what about electricity?

Of all the public utilities, electricity subsidies, which mostly benefit those living and working in Buenos Aires City and its suburbs, are what costs the government the most money. And it is the subsidy that is in most evident need of change after more than a decade in which rates have been practically frozen.

Almost two-thirds of residents in the Greater Buenos Aires area have not seen their electricity rates increase since 2001.

For now though, the government has made it clear it will not touch them.

It was a curious choice. After all, the cheaper rate that those in Greater Buenos Aires pay for their electricity has long been a source of anger in the rest of the provinces, since it appears to provide a clear case of the government providing a subsidy to those who are actually better off.

Last year, the government’s spending on energy subsidies far outweighed other economic subsidies, receiving 84.4 billion pesos, a 47 percent increase from 2012. The largest recipient of these subsidies is the wholesale power sector regulator, Cammesa, which received a total 33.9 billion pesos, while state-owned Enarsa received around 31.2 billion pesos, according to an analysis by the non-profit Argentine Association of Budget and Public Finance Administration (ASAP).

Learing a lesson?

The last time the government went on a subsidy-cutting spree was in 2011, shortly after President Cristina Fernández de Kirchner won reelection by a landslide and vowed to pursue a policy of “fine tuning.”

Part of that effort involved taking out subsidies from those who least needed them.

As a first step, the government began removing subsidies from certain commercial sectors, including casinos and oil companies, followed by gated neighbourhoods and homes in the most expensive neighbourhoods of Buenos Aires City and its suburbs.

The shock was too great. Many took to the streets, saying the government could not simply remove subsidies in one fell swoop.

The most frequent complaint? The new electricity bills. From one day to the next, residents of the most expensive neighbourhoods in Buenos Aires saw their electricity bills soar as much as five times. In monetary terms, the increases in natural gas and water services were tiny in comparison.

The shock at the new bills led to street protests and ultimately the government deciding to shelve efforts to continue with the cuts, apparently unwilling to pay the political cost they would have entailed.

In this latest effort, the government seems to have learned its lesson. Cuts will be gradual and will only involve a large monetary burden for the wealthiest.

Blackout effects

The issue of subsidies took the spotlight again last year, when Fernández de Kirchner replaced key members of her Cabinet in November and appeared ready to launch a new cost-cutting effort.

Yet the government appeared to backtrack on what seemed to be an imminent move after widespread blackouts hit Greater Buenos Aires in December and January, affecting 152,000 customers, or as many as 600,000 people.

The power outages led to street protests and general complaints about the poor state of the power sector, making any potential subsidy cuts more controversial.

At a time when the government is locked in tense negotiations with unions over annual wage hikes, it seems that it is choosing to postpone dealing with the most controversial subsidy — and the one that will involve taking out the biggest chunk from consumers’ pockets.

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