Free Enterprise System, Practical Inter-American Cooperation: An American Energy Community

By The Honorable L. Ronald Scheman

International cooperation is always difficult and contentious. The Americas have been no exception. With populism on the rise and contagion from the spreading economic recession severely threatening economic development the opportunity for innovation is ripe. Some enticing precedents exist. It pays to look closely at history and Europe.

Shortly after the end of World War II, the nations of Europe agreed to experiment with a limited, highly focused joint effort for practical collaboration with the European Coal and Steel Community. The effort became the building block for generating confidence among the European nations long torn by rivalries and war. The architects of the effort, Jean Monnet and Robert Schumann, set the basis for a regime by which the coal and steel resources of Europe would be managed on a common basis in order to assure access to all community nations. Jean Monnet clearly acknowledged that, “Europe will not be built all at once, or as a single whole: It will be built by concrete achievements which first create de facto solidarity.” To achieve this, he continued, required a pragmatic approach. “Attitudes must be changed … Words are not enough. Only … action on an essential point can change the present static situation.”

While the situation in the Americas is unquestionably different from Europe, the impediments to cooperation lodged in geographic barriers and limited financial resources are equally challenging. The Organization of American States (OAS), the hemisphere’s political forum, has done admirable work in human rights but its achievements in advancing development cooperation are negligible. A new approach rooted in more pragmatic, functional collaboration is essential. T he sharply focused European agreement points the way. And the challenge of global energy needs provides the opportunity.

The goal of creating jobs and promoting economic growth in all the American countries lies in the rich energy resources of the hemisphere. For the U.S., the value is clear. The proclaimed goal of achieving energy independence cannot be achieved by the United States alone. Still, it can be achieved in cooperation with all of the Americas. It also opens the path to reduce the hemisphere’s seemingly intractable poverty that generates immigration and narcotics problems for all.

For Latin America the benefits are even more important. Our hemisphere has both energy rich and energy poor countries. While the Andean nations, Brazil and Canada boast of prodigious resources, Central America and the Caribbean are disadvantaged. An energy initiative can stimulate in vestment not only in traditional energy resources but in the region’s abundant capabilities in solar, wind and biomass renewable energy.

For the energy rich countries of South America, an energy initiative will attract investment in manufacturing and downstream value added production that will create jobs. With inevitable rising energy costs, the supply chain t hat allowed the transport of raw materials from Brazil to China to produce goods to transport to Los Angeles and still be competitive will be coming to an end. The efficiency of producing goods in Latin America using Latin American energy and raw materials to produce value added products close to their source is the supply chain of the future. This was the pattern in the last century that impelled the U.S. economy in places such as Pittsburgh. Environmental and energy trends will see that pattern reemerge. No company that invests in manufacturing in Latin America will have worries about importing raw materials or a source of energy. Even China and Iran are conscious of its importance with their increasing forays into the region.

The goal to overcome the asymmetry of energy resources and achieve balanced development among the American nations requires overcoming several very specific and complex problems. A long-term plan for the Americas to achieve energy security must address the scale of the market by integration and the interconnection of power grids, the adoption o f policies to harmonize legislation and taxation affecting different types of energy sources and reshaping the physical and economic infrastructure t o provide generating and transmission networks. Most important is a secure means of sustainable finance.

Inter-American cooperation for energy is the ideal sector for private-public sector collaboration. Finance for investment has been severely curtailed in the past by indiscriminate, erratic and often corrupt government intervention. Even without such obstacles, the problem of finance is huge for s mall governments with meager tax bases. In contrast, pooling resources and relying on the asset value of the resources to be extracted opens far more prolific sources of finance. A hemispheric energy community would have the ability without requiring significant government resources by issuing bonds securitized by energy revenues to provide financing for the construction of dams, gas pipelines, integrating power grids and expanding distribution in rural electrification programs. Financing from a hemispheric authority could be provided for countries short on fossil fuels to develop alternative renew able sources such as hydroelectric, geothermal , solar and biomass out of the common energy fund as well as to promote energy diffusion and conservation initiatives. Energy, traditionally financed by market-based finance securitized by the energy resources themselves, can finance its investments with bonds secured by energy resources.

While the international financial institutions such as the Inter-American Development Bank could have a supportive role, they have limited capacity to provide the amount of financing necessary to achieve these objectives. The banks have diffuse mandates and can only use a small portion of their resources for these purposes. A more focused and dedicated approach is needed. An American Energy Community dedicated exclusively to this purpose would provide a strong impetus for comprehensive, balanced development of t he energy resources of the Americas.

The major work of the authority governing the community would be to address the legal, institutional and administrative barriers to competitive production and distribution. The Authority could create a comprehensive framework for nondiscriminatory energy investment and the integrated networks, analogous to what the Europeans did in the 1950s. This means facilitating exchanges of power based on reciprocal and nondiscriminatory treatment and market access no matter where an energy facility is located. An American Energy Community could provide a major impetus to sensible coherent energy policy including:

* Issue bonds for specific projects with mechanisms to securitize its obligations without calling on governmental guarantees

* Provide finance to develop each nation’s most economic sources of supply such a s hydroelectric, LNG or nuclear plants, or to help finance energy conservation measures

* Improve electric distribution by integrating standards, regulatory frameworks, and power distribution

* Provide a consistent regulatory framework to provide incentives for rural electrification and to assure a level playing field for all types of energy generation and distribution.

* Eliminate barriers and subsidies that undermine cross border trade and impede expanding capacity to provide access to energy to all sectors, especially in rural areas.

* Set up payment mechanisms to facilitate inter-company exchanges, thereby obviating current obstacles whereby payments are often required in advance, with uncertainty and delays in clearing payments.

* Maintain a continuing energy inventory of all types of potential energy sources such as geothermal, hydro, solar, wind, biomass and other renewable sources.

The rich endowment o f natural resources of the Americas constitutes an ex citing pillar for practical co operation for development throughout the America s. It is not only in the national interests of the United States but of the entire democratic world to develop the energy resources of the Americas. Whether it is to strengthen democratic institutions, protect our environment or stem illegal immigration and drug traffic, the achievement of these goals is far more feasible and less costly among countries that are prospering from their rich endowment. Tapping the natural energy endowment of the Americas will release even greater quantities of human energy. Increasing prosperity will feed on itself as investors look to the Americas for stability and energy security. President Chavez of Venezuela attempted to take advantage of the obvious need b y promoting his own version of an American Energy Community when energy prices were high. While a unilateral effort by the United States may be suspect, a multi-lateral energy commission integrating sustainable finance from global markets may be just what the countries of the Americas need to jump start genuine collaboration.

Just as the European Coal and Steel Community played a vital role as a catalyst for the European Union so can a new American Energy Community joining public and private sectors fuel pragmatic, functional cooperation that builds confidence among all nations. Working together on a specific, solvable problem to tap the great energy wealth of our hemisphere can enable the United States, Canada and Latin America not only to put us squarely on a road to energy independence, it can provide the spark to galvanize a new sense of purpose among the American nations. It will be an incubator for practical experience of the American nations working together on specific, solvable problems that are urgent national priorities for each country. There is no better way to generate confidence than to build on practical, achievable objectives.

About the author: This article is from Winter 0f 2009 The Ethical Standard of The Free Enterprise Foundation. Ronald Scheman, presently Chairman and CEO of iMalls Global, Inc. has a distinguished career dealing with inter-American issues spanning both private and public sector. He was the U.S. Executive Director of the Inter-American Development Bank (IDB) from 1993-1 998, a presidential appointment, and was director general of the Organization of American States’ Inter-American Agency for Cooperation and Development (2000-2004). Most recently he was senior adviser to Kissinger McLarty Associates, in Washington, D. C. In the private sector he served as advisor to many governments and corporations as chairman of the International Finance Practice of the law firm, Greenberg Traurig (1998 –2000); prior to that as senior partner in his own law firm, Heller, Rosenblatt & Scheman and with Coudert Brothers. He served as president and CEO of the investment banking firm of Porter International from 1970-1975.He has served on the boards of several corporations and foundations including the Charles E. Smith Companies, and is a former president of the Washington Foreign Law Society , and former vice president of the American Foreign Law Association.

He also served on the board of the Pan American Development Foundation (chairman), The America’s Endowment (p resident), Due Process of Law Foundation, Inter-American Bar Foundation (treasurer), the Inter-American Management Education Foundation (president), the International Foundation for Electoral Systems, the Americas Fund for Independent Universities. In the 1960s, he received numerous awards for his efforts pioneering credit to small business and micro-enterprise loans as a means to accelerate economic development and open economic opportunity for lower income groups.

Mr. Scheman is the author of several books including Greater America, The Inter-American Dilemma, and The Alliance for Progress in Retrospect. He is co- author of The Foundations of Freedom and has written extensively on issues of international finance and Latin America in journal articles and op-ed columns.

He is a graduate of Dartmouth College (BA) and Yale L aw School (JD) and attended the National Law School of Brazil. He is fluent in Spanish and Portuguese. He is admitted to the Bar in New York and Washington, D.C.

Go to Winter 2009 Ethical Standard from Free Enterprise System page 34.