An election run on gas
Can Bolivia's new President deliver on his promise to nationalize natural resources?
Daphne Eviatar, FORTUNE

(FORTUNE) - He has been described as the next Che Guevara, the next Hugo Chavez, the next Fidel Castro. Evo Morales, a former coca growers' union leader and the new President of Bolivia, has pledged to nationalize his country's oil and gas industry, redistribute privately owned land, and decriminalize the coca leaf, a staple of Bolivian indigenous culture as well as the prime ingredient in the manufacturing of cocaine.

That platform and his charisma won him the support of Bolivia's majority indigenous population while striking fear in the hearts of oil executives and U.S. policymakers. But it's not clear that as President, Morales will be able to live up to many of the promises he made as a candidate. And for Bolivia, which has the second-largest natural-gas reserves in South America, that may be where the real danger lies.

Morales won a resounding victory in the Dec. 18 election, garnering far more support than expected in a field crowded with eight candidates. The depth of that support was evident on a November campaign swing through the province of Cochabamba. As a caravan of cars and trucks waved the Wiphala—the rainbow-colored flag symbolizing 500 years of indigenous resistance to foreign colonizers—Morales and his band of supporters stopped in one pueblo after another whose mud walls had been painted with the blue and white slogans of the Movement for the Advancement of Socialism, or MAS, Morales's party. The candidate told cheering crowds of farmers dressed in traditional 18th-century peasant garb that "what our ancestors have fought for is what we're fighting for: land for the people and nationalization of our natural resources. It's a nightmare for the North Americans."

In an interview at his campaign headquarters in La Paz, Morales, a 46-year-old Aymara Indian who speaks with simplicity and charm, sounded somewhat tamer. Although he insisted that Bolivia must "recuperate our natural resources so they are in our hands and no one can tell us how to use them," he added, "We would never try to take the private property of any company or person." Nationalization of the oil and gas industry, then, means not outright expropriation but forcing a shift to new contracts that grant Bolivia ownership of its reserves and state control over whom companies can sell to and at what price. It also means a fifty-fifty split on profits with oil companies, something Carlos Mesa, the former President, tried to accomplish, at least on some gas fields. That not only angered foreign gas companies, which under the old law paid 18% royalties and no taxes on production, but also failed to satisfy thousands of protesters who last summer filled the streets of La Paz and clashed with police, objecting that Mesa's reforms of the oil industry didn't go far enough. Mesa was driven out of office—the second Bolivian President forced out in as many years.

That's precisely the sort of pressure Morales will face. The big issue in this campaign, and for the past few years in Bolivia, has been the structure of the oil and gas industry. Although Bolivia had only about five trillion cubic feet of proven reserves in 1996, after privatization of the industry and major investments by foreign companies it now has about 54 trillion cubic feet. In 2003, Bolivians, angry at not getting their fair share of the benefits, launched the guerra del gas. Beginning with a two-week strike in El Alto—a rapidly growing city of brick and mud houses that cling to the Andean mountains surrounding La Paz, most of which don't have running water, let alone gas hookups—people blocked roads and choked off supplies of food and fuel to La Paz. The army killed more than 60 protesters, and President Gonzalo Sanchez de Lozada was forced to flee. Although the conflict's spark was a government decision to export gas via a pipeline through Chile, Bolivia's age-old enemy, the underlying cause was a growing anger that the benefits of Bolivia's booming gas industry were enriching foreign companies and weren't reaching the vast majority of Bolivians.

Indeed, despite Bolivia's wealth of natural resources (including silver, gold, tin, and lumber) and its fealty to the World Bank and the IMF's reform agenda in the 1980s and '90s, Bolivians now earn on average less than their grandparents did. Today, with a growing indigenous-rights movement sweeping Latin America, the indigenous of Bolivia, who make up 65% of the population, are determined to take back the natural resources they see as rightfully theirs and address a historical grievance that stretches back to the Spanish conquest.

That's why Morales, who will be Bolivia's first indigenous President, seems to many a great hope. But he isn't in a position to fully satisfy his supporters. For one thing, his party did not win control of the senate. He also knows that expropriating foreign property will provoke a slew of claims in international arbitration that could cost Bolivia billions of dollars. Already most of the major oil companies invested in Bolivia—including Repsol, Total, British Gas, Exxon Mobil, and Pan American Energy—have threatened to sue based on the new hydrocarbons law passed by the last government. Most companies have agreed to wait and see what a new government does, but they aren't likely to tolerate major changes.

"Gas has become an instrument of populism, which just got out of hand," says Carlos Alberto Lopez, spokesman for Bolivia's hydrocarbons chamber, which represents the major oil and gas companies invested in the country. "Since that's happened, the sector has been mired in complete uncertainty." Indeed, it's not clear what the law is now, since the latest hydrocarbons legislation was written under a government forced out of power, and the current government has yet to issue regulations implementing it. So far, companies are paying the new 32% non-deductible tax on production under protest.

The conflict isn't only about oil and gas. Land ownership is another divisive issue. Under Bolivian law unproductive land can be expropriated and redistributed by the government, and Morales has pledged to enforce that. But how the government defines whether the land is meeting its "social and economic function" is controversial, especially in Santa Cruz, the nation's wealthiest province, where latifundistas own large estates, and oil and agricultural businesses are concentrated. "MAS talks about nationalization of land," says Rosendo Barbery Paz, president of Unagro, a leading sugar and alcohol manufacturer in Santa Cruz. "That's caused a lot of worry." Carlos Rojas, director of Bolivia's association of soybean producers, agrees: "We don't accept Mr. Morales's policy about land."

Bolivian campesinos are also angry that under pressure from the U.S., the government has pursued a cocaeradication policy that even the World Bank acknowledges has increased poverty. But for all his rhetoric about coca being critical to indigenous culture, Morales isn't likely to do much about it. If he stops complying with the program, the U.S. would probably withdraw financial support. It would also be required by law to vote against Bolivia in any applications for loans from the World Bank, the IMF, or the Inter-American Development Bank, to which Bolivia is already heavily indebted.

"I don't think much will change," says Abel Mamani, president of Fejuve, the association of neighborhood organizations in El Alto that organized the protests that helped bring down the last two Presidents. "There are a lot of expectations being created, but in reality there will not be much done. I'm not worried so much about whoever becomes the next government. I'm worried about what's going to happen when people realize there's not going to be a big change. The people will take to the streets." That could make it difficult for Morales to stay in power, as it was for his predecessors, creating even more uncertainty for this fledgling South American democracy.


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