Argentina now faces the risk of a default with China over dams

The conflict that paralyzes the construction of the Santa Cruz dams threatens to become a new chapter in Argentina's long series of financial defaults. A risk that threatens Martin Guzman just as he tries to close a deal with the IMF that would help to restore the damage from the country's deteriorating reputation in international markets.

The simultaneous construction of the Kirchner and Cepernic dams, the largest water project in the region, was caught between the halting of the works due to lack of financing and the debt owed to Chinese banks due to the failure to meet deadlines.

The consortium Represas Patagonia SA, in charge of the construction of the hydroelectric plants, is composed of China Gezhouba Group Company Limited, Electroingeniería e Hidrocuyo S.A.

The project was conceived with a financing commitment from three Chinese commercial banks: China Development Bank Corporation (CDB), Industrial and Commercial Bank of China Limited (ICBC) and Bank of China Limited, which granted a loan worth U$ 4,7 billion over 15 years, with the first five years of grace, and a rate of 3.8 percent plus Libor rate. U$ 1.5 billion have been disbursed from the total amount.

The contract was signed with China at the end of 2018. The plan agreed during the government of Cristina Kirchner stipulated a loan of U$ 4.7 billion over 15 years, with the first five years of grace, with the idea that the works would be completed in that period and the start-up of both dams would guarantee the repayment starting on the sixth year. But in the middle, the Argentine government changed the rules.

The plan agreed during the government of Cristina Kirchner stipulated that the works be completed within five years of grace. According to this roadmap, the commissioning of both dams guaranteed repayment capacity from the sixth year on. But in the middle of the process, the Argentine government changed the rules.

As soon as the government of Mauricio Macri took over, the works were halted, while former Energy Minister Juan Jose Aranguren was put in charge of preparing a comprehensive review of the project that took two years, or almost half of the grace period.

The Macri Government then quickly engaged in a name change. The dams were renamed Condor Cliff and La Barrancosa.

Therefore, it was only in the second half of 2017 that a new version of the project was agreed upon with the companies, which projected a longer timeframe for the completion of the works. Also, the agreement included a reduction in installed power and the incorporation of a high voltage transport line from Santa Cruz to Buenos Aires.

However, that project was never signed. Macri and Aranguren never signed the updates to the contract. As a result, in 2018, Chinese banks stopped turning over committed funds, with only 36% of total credit delivered.

When Alberto Fernandez took over, the negotiation with the Chinese banks was transferred to the Secretariat of Strategic Affairs, and Gustavo Belize took charge. There was no progress in that negotiation, but the works were resumed in a very slow pace with funds unused during the Macri Government that remained in reserve.

In April 2021, the dams showed an advance of only 21.8 percent, according to Cabinet Chief Santiago Cafiero, during his last visit to congress. The Nestor Kirchner hydroelectric plant was at 19.3%; the Jorge Cepernic plant was at 27.1%, and the high-voltage line at 6.5%.

Again, the name change process was fast to take place: with a DNU (Argentina's Urgency Decree) that bears the signature of the entire national cabinet, the dams regained their Kirchnerist names: Kirchner and Cepernic.

But the works are still blocked, now also by the effect of internal energy-related projects. "Martin Guzman is dealing with the Chinese banks," a source linked with the negotiations told LPO.

The minister hopes to sign an addendum in the short term sealing a restructuring of the financial terms of the contract. "For that, the state is going to commit resources," another main player in the negotiations told LPO.

The urgency of the Ministry of Economy to resolve an issue that normally should not attract their attention is understood: the agreements signed with China include a cross default clause or rule. This implies that, when a project is cancelled, as revealed exclusively by LPO, other projects with funding from that source could be cancelled as well, such as the entire railway modernization plan.