Toledo's Broken Promises

Peru and Privatization: 'Just Say No'

Peru protests
Peruvian soldiers stand guard in Arequipa, southern Peru, June 18, 2002, after Peruvian President Alejandro Toledo's government declared a month-long state of emergency and authorized the military to use force to restore order in southern Peru (Photo: AFP).

President Alejandro Toledo’s administration was forced to suspend the sale of two electric companies in southern Peru after violent protests rocked the region for nearly five days. Demonstrations June 14-19 in the southern highland city of Arequipa left two people dead and hundreds injured and arrested, and caused nearly US$100 million in damages. The government declared a state of emergency, putting the military in charge, and imposed a nighttime curfew in the city.

As the protests spread to neighboring cities, the government named a high-level commission to negotiate with Arequipa Mayor Juan Manuel Guillén and civil-society leaders supporting the protests. The commission, headed by retired Arequipa Archbishop Fernando Vargas Ruíz de Somocurcio, included Vice President Raúl Diez Canseco.

The commission reached an agreement with Guillén and leaders of the Arequipa Broad Civic Front (FACA) on June 19, suspending the privatization of the two companies, Egasa and Egesur. The agreement calls for the courts to decide whether the central government has the right to privatize assets in Arequipa, a ruling that could take up to three months.

The protests began the day the government sold the utility companies to Belgium’s Tractebel for $167 million. The company has stated that it respects the agreement and will wait for the court’s decision before taking any action. The five-point “Declaration of Arequipa” also called for an end to the demonstrations and a public apology from the government for statements deemed “offensive” to the people of Arequipa. The agreement specifically mentioned comments by the interior and justice ministers.

Toledo was the first to ask forgiveness, sending an open letter to Arequipa in which he apologized for breaking his campaign promise not to privatize the two companies. The president added that during the campaign he never imagined that he would confront such a devastated economy, “which is the reason that all the promises made during the electoral period have not been carried out, despite our honest desire to do so.”

Interior Minister Fernando Rospigliosi resigned immediately after the agreement was made public, saying he disagreed with it. He was replaced by his vice minister, Gino Costa, who headed the National Penitentiary Institute during the transitional government of President Valentín Paniagua (2000-01). Ricardo Vega Llona, who had recently been appointed to head ProInversión, a newly created privatization agency, also quit, but then agreed to stay in his post at least until July 28.

The crisis, the worst that Toledo has faced since taking office 11 months ago, reflects the fragility of democracy in Peru and other South American countries that have been unable to meet the growing demands of their overwhelmingly poor populations. According to former Guatemalan Foreign Minister Eduardo Stein, who played a key role as head of the Organization of American States’ electoral mission during Peru’s fraud-riddled 2000 elections, Toledo’s problems are not unique. “The frustration is palpable across the hemisphere, where people want recently elected democratic governments to produce immediate solutions, like manna from heaven. This simply will not happen,” he said.

“If this very Latin American tendency to reject everything becomes the overwhelming sentiment in Peru, what will it matter if there is a change of president? The next person will also be unable to produce the results the people want,” Stein said.

Recent events in Ecuador, Argentina, and to some extent, Venezuela support Stein’s warning. Ecuadorean President Jamil Mahuad was sacked in January 2000 amid protests by indigenous groups and mid-level military officers partly sparked by his harsh economic measures.

Argentine President Fernando de la Rúa resigned in December, swamped by an unending string of economic debacles. Argentina’s presidency changed hands four times in less than two weeks, and incumbent President Eduardo Duhalde continues to face daily protests. In Venezuela, where opposition to President Hugo Chávez has grown as the country’s financial woes have deepened, discontent with government economic policies contributed to a failed coup in April.

Toledo is attempting to follow some of the same steps taken by Mahuad and de la Rúa, particularly agreements reached with the International Monetary Fund (IMF). The privatization of Egasa and Egesur was part of the government’s strategy to meet objectives set with the IMF in February. The government agreed to bring in $700 million this year and nearly $1 billion next year through privatizations.

Suspicion was raised by the fact that Tractebel was the only bidder for the two utilities, although single-bidder deals are not illegal under Peruvian law. Authorities in Arequipa claim that the two utilities are worth more than twice the $167-million price tag. Arequipa residents had protested the privatization plan since it was announced in April. They had called for the government to hold off on the sale until after November, when the presidents of newly created regional governments will be elected.

Guillén said that local residents were not opposed to privatization, but to “the authoritarian way in which the government was carrying out the process.” Government officials never fully explained why they were going ahead with the sale. Instead, Toledo and his ministers repeatedly said that nothing would change the economic course they had set for the country.

Opponents of the privatization, such as Rep. Javier Diez Canseco, charged that the sale of Egasa and Egesur lacked transparency. “The government never explained or proved to the country how it reached the sale prices, what the rates or investment would be, and what would happen to workers” after the companies were sold, he said.

Under state management, the companies had been profitable. Egasa had sales of more than $50 million and profits of $14 million last year. During the bidding process, ProInversión advertised the company as “healthy and profitable.” In a country where 54.8 percent of the population lives in poverty, the fear of lost jobs and higher utility rates made the Arequipa protests inevitable.

Toledo has been dogged by protests since shortly after his inauguration, mainly by people demanding that he fulfill his campaign promises. The National Police has registered nearly 500 protests nationwide this year. The last major protest, a nationwide strike against privatization, came just one month before the June 14 riots in Arequipa. The strike, initially called by FACA, was supported by other defense fronts and unions around the country.

According to Giovanna Peñaflor, head of the Imasen polling company, the government should encourage national debate on its economic policies and the measures needed to reduce the poverty affecting the majority of Peru’s 26.6 million people. “The poor have a great deal to say about how to deal with poverty, how social programs should work, and decisions that affect the country’s future and their own,”
she said.

David Lovatón Palacios, an analyst at the nongovernmental Legal Defense Institute, said that while the government has the right to privatize state-run companies, the public must also have a say. “The government, like any government in the world, has the right to make decisions on issues like privatization and does not have to call a referendum on every decision. At the same time, the public has the right to oversee and express its opinion about the process,” he said.

According to more than 50 polls taken since September, Peruvians’ priorities are jobs and better wages. Although Toledo’s main campaign pledge was to create more jobs, unemployment has increased from 9.3 percent to 10 percent in urban areas since he took office.

According to the National Household Survey on living conditions and poverty carried out last year by the National Statistics and Information Institute (INEI), 24.4 percent of Peruvians live in extreme poverty, surviving on less than $1 a day.  The survey found that poverty increased by 1.4 percent between 2000 and last year and by 7.1 percent since 1997, while extreme poverty rose by 4.5 percent in the last two years.

The protests in the south carry a heavy political price for Toledo, whose popularity was already faltering. According to a recent survey by the Datum polling company, the president’s approval rating, which stood at 60 percent last August, has fallen to only
15.7 percent.