Brazil's All-In Bet on Amazon Dams Jeopardizes Economic Growth

Michael Smith, Bloomberg Markets Magazine
Wednesday, April 11, 2012

Jose Carlos Arara puts a tarnished 38-caliber revolver into his waistband. It’s a sweltering, mid- November morning in the Brazilian Amazon rain forest, and the 31-year-old Indian chief walks through the jungle to check on his tribe’s yuca crop.

Assassins are hunting Arara, police say, because he opposes plans to build the world’s third-largest hydroelectric dam across the Xingu River, 2,300 kilometers north of Sao Paulo. The Xingu flows halfway across the country from Brazil’s western grain belt to the heart of the Amazon, and the 116 members of his tribe, the Araras, depend on the river for fishing, transport and drinking water.

Two armed policemen escort Arara whenever he leaves the 25,000-hectare (62,000-acre) Xingu Big Bend Arara Indian Reservation, Bloomberg Markets magazine reports in its May issue. The bodyguards don’t protect Arara inside the reservation, so he carries a gun.

“This dam has made it impossible to live a normal life,” he says. The dam -- called Belo Monte, which means Beautiful Hill in Portuguese -- will divert the Xingu, depriving the tribe of the waterway it needs to survive, Arara says. “So much sacrifice,” he says. “And for what?”

Dilma Rousseff, a Workers’ Party member who won Brazil’s presidency in 2010, says that the country needs more electricity and that the best way to get it is by damming rivers in the Amazon. Brazil’s gross domestic product grew 51 percent from 2002 to 2011.

Massive Buildup

And the country needs to increase generation by 55 percent by 2020 to keep up with demand, according to the government’s Energy Research Agency.

Rousseff has been working on a massive buildup of power plants since her predecessor, Luiz Inacio Lula da Silva, named her energy minister in 2003. Now, Brazil is spending 167.4 billion reais ($93 billion) to build 20 hydroelectric plants in the Amazon, with power lines to faraway cities.

The projects would flood swaths of rain forest 107 times the size of Manhattan. The country has plans to build about 20 more dams in the Amazon.

“We are seeing the realization of a project of critical importance -- I would say strategic importance -- for Brazil: the return of investment in hydroelectric plants,” Rousseff said in July at Santo Antonio, a 2.5-kilometer-long (1.6-mile-long) dam rising above the Madeira River in the western Amazon. “A work of this size is what will guarantee energy for our country to continue to grow.”

World Cup

Big dams -- especially Belo Monte -- are at the center of a debate over Brazil’s quest to become a developed nation. Rousseff, following policy pushed by Lula, says the government’s role is to lead and bankroll economic development.

Brazil is financing 1.6 trillion reais for constructing dams and improving roads, railways, ports, oil rigs and refineries, as well as building stadiums for the 2014 World Cup and August 2016 Summer Olympics in Rio de Janeiro.

“Brazil grew in the past, sure, but in a very unequal way,” Rousseff said at Santo Antonio. “We want a different kind of development, and this project is the fruit of that. It creates jobs and redistributes income.”

That policy pits the government against the communities that stand in the way of the dams -- and against those who want to protect the world’s largest rain forest from further damage. The conflict is inflamed because companies that were Rousseff’s biggest campaign contributors are doing the construction.

High Stakes

At stake is the health of Brazil’s economy -- one that investors worldwide have increased bets on since the start of Lula’s first term in 2003. The government is borrowing to finance all of the work, and federal debt soared 29 percent to 2.24 trillion reais from the end of 2008 to the end of 2011.

The annual deficit jumped 89 percent from 2008 to 2011, to 108 billion reais.

Until now, Brazil could afford the spending. But Brazil’s economic surge is abating; the government reported in March that GDP grew 2.7 percent in 2011 -- the second-lowest rate since 2003. Brazilian government local currency bonds yielded an average 10 percent as of March 12, five times more than the average cost of U.S. debt, which pays 2 percent to bondholders.

With the economy starting to slow as mega-spending on dams accelerates, Brazil’s decade-long boom may turn into a crawl.

“There are the major issues of how you fund it and the economic consequences,” says Ricardo Hausmann, director of the Center for International Development at Harvard University and a former chief economist at the Inter-American Development Bank. “It may lead to significant distortions in the economy.”

17-Story Concrete Wall

A visit to the Jirau hydroelectric plant site two hours up the Madeira from Santo Antonio shows the scale of Rousseff’s undertaking. On a mid-December morning, thousands of people work in 95-degree-Fahrenheit (35-degree-Celsius) heat in a trench carved across the river bed.

Flanked by berms of earth that keep the river out, they’re building a 17-story wall of concrete that will house dozens of electricity turbines big enough to drive a freight train through. Excavators as high as a three-story house fill dump trucks with boulders, near a crew of welders suspended beneath steel reinforcement bars 46 meters high.

Brazil is pouring money into big dams because they can generate electricity more cheaply and pollute less than plants fueled by natural gas or coal, says Mauricio Tolmasquim, president of Brazil’s Energy Research Agency.

“What matters is not the high cost of building hydroelectric plants, but that over the long run they’re cheaper than other forms of generation,” he says.

Sapping Funds

Scores of economists, engineers and biologists in Brazil disagree with that view. Dams such as Belo Monte, which will cost 25.8 billion reais, sap funds from needed repairs of crumbling roads and overcrowded railways and ports that slow the movement of Brazil’s people and goods, says Felipe Salto, an economist at Tendencias Consultoria Integrada in Sao Paulo.

“Are these energy projects the best way to invest in infrastructure in the 21st century?” asks Salto, who specializes in public finance. “How should development be promoted in a sustainable way? This government hasn’t really answered these questions.”

The mega-dam construction will do more harm than good to Brazil, according to a September 2009 report by an independent team of 40 economists, anthropologists, engineers and biologists. It will damage the environment, force thousands of people off their land and require increasing taxpayer subsidies, the report concluded.

Overhauling Existing Plants

Brazil could slash demand for electricity by overhauling existing power plants and distribution grids and building solar, sugar cane and wind plants, says Pedro Bara, an energy specialist for World Wildlife Fund Inc.’s office in Sao Paulo. Sugar cane-based power plants alone would generate as much electricity as three Belo Montes, he says.

Tolmasquim says the country is already taking those steps, but it also needs the dams.

Belo Monte is being built by a group of state-controlled power companies, with below-market-rate loans funded by the Treasury. Taxpayers will have to pay down the debt for decades, says Celio Bermann, a University of Sao Paulo engineering professor and specialist in hydroelectric plants who worked on the 2009 report.

“There are so many reasons why these dams just don’t make sense,” says Bermann, who says he and the other experts did their research for no compensation as a public service.

Sebastiao dos Santos has already paid a large price for the Belo Monte project: the loss of his home. Santos, 66, a farmer who lives along the Xingu, watched as giant earthmovers destroyed his land to make way for the dam’s access road.

Evicting Families

The owners of Belo Monte are evicting 5,000 families who live in the path of construction. Santos refuses to leave. One hot November evening, he leads his donkey past the pile of rubble that was once his home, walking deep into the jungle to the small tent where he sleeps. He vows to hold out.

“It doesn’t matter what I do anyway,” he says. “There is nothing that will stop this thing because there’s too much money in it.”

The construction companies ruining Santos’ farm helped finance Rousseff’s campaign. Five companies -- Grupo Andrade Gutierrez SA, Camargo Correa SA, Queiroz Galvao SA, Grupo OAS and Odebrecht SA -- gave 45 million reais to the Workers’ Party for Rousseff’s 2010 campaign, or a third of all contributions, Brazilian election records show.

Shortly after Rousseff’s election, on Feb. 18, 2011, Belo Monte’s owners signed a contract hiring the companies.

‘A Huge Profit’

The five companies and five smaller contractors will reap a total of 25.8 billion reais during seven years of construction. The builders aren’t interested in whether Belo Monte makes economic sense, Bermann says.

“All they care about is making back the money they put into the campaign at a huge profit,” Bermann says.

Gioconda Bretas, a spokeswoman for the Planning Ministry, says the Belo Monte contracts were bid competitively and transparently. No company has been accused of wrongdoing.

Andrade Gutierrez and Odebrecht, both based in Sao Paulo, said in statements that all of the campaign contributions were legal and that the companies did nothing improper. Camargo Correa, OAS and Queiroz Galvao declined to comment.

Jose Santos and his family say that regardless of which firms received the contracts, Belo Monte will wipe their farm and home right off the map.

After he checks the smooth, tan cacao fruit hanging from the green-and-white branches of his thin trees, Santos, 45, a wiry man with thickly calloused hands, walks down a broad ravine and looks up at a ridge above his orchard.

‘My Life’s Work’

“That’s how high the water will be, way up there,” Santos says. “All of this -- my land, my house, my life’s work -- will be taken by the water.”

Reservoirs behind the 20 new dams in the Amazon will flood a total of 6,376 square kilometers (2,462 square miles) of land, according to government data. The lakes will cover trees and underbrush with water, and as these decompose, they’ll produce methane, a gas that spurs global warming at 25 times the rate of carbon dioxide, according to the 2009 report on Belo Monte.

Belo Monte will destroy sections of the most biologically diverse rain forest on Earth, drying up breeding ground for rare tropical fish and turtles and flooding habitat for the endangered white-cheeked spider monkey, according to Berkeley, California-based International Rivers.

‘Huge Scale’

“We’re talking about devastation and human rights violations on a huge scale in an extremely fragile ecosystem,” says Zachary Hurwitz, the nongovernmental organization’s policy coordinator.

The Samuel Dam reservoir, in the Brazilian Amazon near Bolivia, shows how hydroelectric plants effectively produce methane factories. Iremar Ferreira, who runs a nonprofit group protesting construction of the Jirau and Santo Antonio dams, walks along the stagnant, mosquito-infested reservoir behind the dam, surveying the damage.

Rotting tree trunks stick out of the water all the way to the horizon, two decades after the dam was built.

“This is the nightmare that awaits us,” he says. “So much destruction for so little gain.”

Back on the banks of the Xingu River, Arara walks to a bluff and points to three women from his tribe washing clothes on flat rocks along the river bank. Children splash in the water under an intense sun. Two men paddle dugout canoes toward a cove where they fish for piranha with weighted nets.

Led Demonstrations

Once Belo Monte is finished, most of the river water will be diverted into the dam’s power turbines. Arara, a stocky man with an eloquence and charisma that belie his fourth-grade education, led demonstrations that spurred the federal government in 2008 to set aside protected land for his tribe.

In 2011, police told Arara that his efforts could cost him his life. They said paid assassins they couldn’t identify were seeking to find him when he left his reservation.

“Some people want me dead, and around here, that’s no joke,” Arara says.

A few kilometers away from Arara’s reservation, bulldozers are knocking down the 20-meter-high jungle canopy to clear a main access route for trucks, workers and equipment to build Belo Monte. Engineers plan a 7,100-meter-long dam that will hold back a reservoir covering jungle, farms and villages.

The dam will channel the Xingu into a man-made canal stretching 20 kilometers through what once were cattle ranches, farms and homes, leading to another dam. The project will flood 503 square kilometers.

Big Bend

When Belo Monte is completed in 2019, it will be capable of generating 11,233 megawatts of energy, enough to light 18 million homes. It will generate only a third of capacity on average because of swings in river levels.

Hundreds of people are spread along the 100-kilometer stretch of the Xingu that will be diverted, known as Big Bend, including the Arara and Juruna Indian tribes.

“How will we live?” Arara asks. “Everything we are about depends on this river.”

Some Amazon residents are losing their homes not to bulldozers or flooding but to another rising phenomenon: land grabbing. Because so much land will be destroyed by the dams, the tracts that remain, where displaced people will have to move, are rising in value.

Alenucia dos Santos lost her small wooden shack in June 2010 when a tattoo-covered man with a menacing stare visited her home late one night. He threatened to slash her to death with a machete if she didn’t give up her farm, according to federal prosecutors.

Moved to Slum

Four months later, the man said he’d shoot her, so Santos abandoned her home, moving to a slum reeking of sewage.

“They are criminals,” says Santos, 58, walking through the jungle to visit her former land, protected by a friend with a rifle. “I am terrified because anyone can kill you out here. I’ve lost what took me a lifetime to build.” (The three Santos families losing their homes are unrelated.)

Erwin Krautler, a Roman Catholic bishop in Altamira, the city closest to Belo Monte, says others, including himself, have received death threats because of the dam. The bishop says he’s in danger for challenging the construction. Two armed bodyguards now shadow him wherever he goes, as they did one Sunday in late November, after celebrating Mass.

‘Worst Dreams’

“Never in my worst dreams did I think Belo Monte would be approved because it’s so, so destructive,” says Krautler, 72, sitting near the altar in the Altamira Cathedral. His bodyguards watch the church door, handguns bulging under their T-shirts. “What rules here is money. The government is just steamrolling over people to get it done.”

Brazilian officials say they hear the complaints and are trying to lessen environmental and community damage. Engineers designed Belo Monte, Jirau and Santo Antonio to use the smallest reservoirs possible to decrease flooding, the owners of the dams say.

Belo Monte’s owner, Norte Energia SA, a consortium controlled by state-owned power utilities, says it will pay a total of 3.2 billion reais to compensate people who lose homes and businesses.

That won’t be nearly enough to allow farmers to remain in the area, Krautler says. The cost of living has soared so much that families won’t be able to buy land or homes nearby, he says.

Heavy Lifters

On the western edge of the Amazon jungle, logging crews are gutting the rain forest in an attempt to diminish pollution, says Edson dos Santos, Santo Antonio’s engineering coordinator. Behind the Santo Antonio Dam, workers use heavy lifters to move giant logs from felled Brazilian walnut trees onto a truck.

“The plan is to remove as much of the jungle as possible to prevent methane from being generated,” Santos says. “We are going out of our way to lessen the impact.”

Santos walks by the base of the Santo Antonio Dam, inside a massive pit along the riverbed. Half the dam is finished, and river water roars though steel gates. He looks at the concrete rising above him, where 20,000 men and women work, often at night under spotlights, to finish the dam ahead of schedule.

“Look at this: It’s a marvelous project,” Santos says. “They’re giving us everything it takes to get it done fast.”

Two hours away, Alessandro Valente directs a crew of 15 men working on the wall of concrete reinforcing bars at the Jirau dam.

‘Something Brazil Needs’

“I know this is something Brazil needs, and no expense is being spared,” Valente says.

The rush to build means the dams cost far more than original estimates. Santo Antonio will cost 16 billion reais, 68 percent more than initial cost projections, according to the dam’s owners.

The companies building the Jirau Dam, France’s GDF Suez (GSZ) SA and Brazilian state company Centrais Eletricas Brasileiras SA (ELET6), boosted construction cost estimates to 12 billion reais, from 8.7 billion reais, after the government ordered more turbines added. Belo Monte’s owners have boosted cost estimates by 36 percent in three years, and the construction is just starting.

Brazilian taxpayers can only wait to see if Rousseff’s all- in bet on Amazon dams helps or hurts the nation. Arara, Krautler and thousands of others have already felt the damage. That’s why Arara risks his life to fight Belo Monte.

“The stakes are very high,” he says. “When the dam is built, the river will be gone, and so will our livelihood.”

What’s not clear is whether their loss will be an overall gain for Brazil’s economy -- or the start of a downward spiral of dislocation, debt and environmental devastation.