b. Planning, finance and institutional arrangements at regional level

As proposed in Section l.c, the analysis of MIDP includes considerations on regional planning and project identification, the role of finance and the regional organizations and institutional arrangements and decision rules.

MIDP has three main characteristics. First, all the projects should contribute to regional integration. Second, in order to reinforce integration, the mechanism encourages coordination and cooperation among members in project design and financing. Third, it adopted a flexible and pragmatic financing mechanism based on different modalities.

Regional planning and project identification

As mentioned earlier, the regional dimension is a key feature of MIDP and the projects included in this mechanism are oriented to strengthen cooperation and to encourage regional integration, complementarity and connectivity among member countries.

In fact, all MIDP projects must take into account priorities defined by governments and boost regional integration. MIDP includes projects involving at least two member countries, national projects that contribute to regional initiatives and projects that develop regional public goods. Coordination among member countries of MIDP is essential to harmonize projects in order to avoid duplicate efforts.

Projects are divided into two categories corresponding to social and economic axis. The latter accounts for 95% of MIDP’s portfolio (transport 76.7%, energy 18%, and social axis 5%).

Projects related to physical integration in Mesoamerica represent US$2.4 billion and are divided in three categories: transport, energy and telecommunications (Table 10.6). The goal of the first category - US$1.9 billion in 2013 which accounted for 76.7% of total MIDP investment — is to develop an efficient multimodal regional transport system. These projects are designed, proposed and executed by the Technical Transport Commission.

One of the most important components of this category is RICAM, which aims to improve competitiveness by connecting producers and consumers with distribution and shipping centers. As shown in Figure 10.4, RICAM includes the Atlantic Corridor, the Pacific Corridor, Inter-Oceanic Logistics Corridors, the Caribbean Tourism Corridor and supplementary roads and connections. It is important to mention that RICAM goes further than connecting roads; it is a regional road network that includes common rules on speed limits, modernization of border crossing points and the implementation of the Mesoamerican Procedure for International Goods Traffic (TIM in Spanish).'"

The main goal of energy projects (18.1% of total investment) is to develop a regional electric market (see Box 10.1) and the last category aims to improve telecommunications in the region.

TABLE 10.6 MIDP projects related to physical integration

Source. SELA (2014) and MIDP.

FIGURE 10.4 International Network of Mesoamerican Highways (RICAM). Source: MIDP.

Box 10.1 Central America: towards a regional electricity market

Even when energy experts are well aware of the Central American experience in the creation of a regional electricity market, the main features of the process have largely gone unnoticed to the integration literature. With a total population of almost 43 million and six countries, Central America offers quite interesting properties for integrating national electricity systems: power generation is subject to internal economies of scale, distances among national markets are not an obstacle for electricity transport and the Central America energy matrix combines a variety of sources: Costa Rica and Panama rely on hydroelectricity whereas the other four countries (Nicaragua, Honduras, El Salvador and Guatemala) have thermal generation and are heavily dependent on oil imports. The early steps of electricity exchanges date back to the mid-1970s when a bilateral project between Nicaragua and Honduras interconnected both countries. Since then similar projects developed thereby successfully linking each of the six countries. Even when modest in relative and absolute terms, bilateral exchanges of electricity took place. National regulators and policy makers began a dialogue aimed at coordinating its different national plans and met regularly.

The great leap forward was the creation Regional Electricity Market (MER) in 1996. Formally, MER is a plurilateral treaty composed of three elements: a regional regulatory body, a regional operator in charge of coordinating exchanges and the creation of a Network Regional Enterprise (EPR) that owns the regional transmission line. The Enterprise is owned by national electricity operators and ENDESA - the Spanish National Electricity Company. Colombia and Mexico joined EPR in 2005 and 2008, respectively. EPR is a key ingredient of the 1996 Treaty because it implies the deployment of a truly regional infrastructure: a longitudinal 1800 km 230 KV line from Panama to Guatemala furnished with 28 connecting spots. The project - so-called SIEPAC - started in 2007 and was completed in December 2014 at a cost of US$500 million. Given the co-existence of MER and the national systems, MER was conceived as the "seventh market". The nine national partners and IDB and CAF provided the finance. ECLAC and the regional banks were heavily involved with technical assistance. The infrastructure that is now available reduces transport costs, transmission charges and eases the interconnection of the national systems. During the past two decades, the Central American electricity market has proved its viability though it is still operating below its full potential.

As shown in Figure 10.5, electricity exports represent barely less than 2% of regional generation whereas 15 years ago peaked more than 5% -Guatemala exported 14% of its generation to El Salvador in 2000. There are several reasons that explain the meager use of interconnections. First,

FIGURE 10.5 Exports/total generation.

Source: ECLAC (2014).

there are significant differences in the economic design of the six countries. Guatemala, El Salvador, Nicaragua and Panama apply a decentralized model -generation, transport and distribution are allocated to separate private and public providers. Costa Rica and Honduras are national integrated monopolies. Thus, the pricing mechanism and the planning principles are difficult to accommodate under the same framework. Second, despite the formal creation of MER since 1996, regulatory design took a long time. The lack of firm and established rules has undermined the confidence in the ability of MER bodies to effectively run the system. Third, as a result, electricity trading has been restricted to the spot market. Firm delivery wholesale contracts have been infrequent since national regulators avoid to compromise domestic generation in forward foreign transactions. Finally, given the shortcomings of the regional market, national authorities have given priority to energy security through autonomous systems. Foreign sources and the regional market are still viewed as a full back resource that complements the domestic system.

What is the likely future of Central American electricity market? Will it move forward to a fully integrated system or will it remain as a shallow spot market? Along the past 40 years, the sub-region has gradually made progress aimed at a deeper integration. SIEPAC reveals a substantial degree of political commitments, institutional resources and a significant amount of capital investment aimed at interconnecting domestic systems. Now that the SIEPAC project has been completed, MER has been able to set the different pieces together. The scene seems ready to go for the final assault. However, a key challenge is still pending: new additions to generation have to be aimed at the regional market. Therefore, MER regulators should provide clear signals and incentives compatible with that goal. At the same time, it is necessary to design mechanisms to ensure the viability of long-term firm contracts for wholesale clients. There are many obstacles to be overcome. If Central American countries converged to a similar model of sector organization, there would be more chances of speeding up the integration process.

Finance, project execution and the role of regional banks

One of the main challenges of physical integration initiatives is to stimulate coherence between regional goals and national interests and priorities in order to reduce the bias towards projects that require minimal coordination.

In terms of finance, the approach chosen by MIDP solves some problems faced by other initiatives related to physical integration: when regional and national objectives are not fully aligned, there is a regional mechanism to finance projects or to stimulate member countries to prioritize investments and/or to execute projects simultaneously. This mechanism includes technical cooperation for project design and different types of financing schemes (Direccion Ejecutiva del Proyecto Mesoamerica, 2013).

Contrary to FOCEM, there are not fixed contributions from member countries but the financing mechanism is flexible and regional entities can obtain resources and thus increase available funds. The pragmatic approach adopted by MIDP includes different modalities to finance projects:

• • Sum of national financial sources according to coordinated regional objectives (e.g., many RICAM projects).
• • Regional financing: Projects financed by technical cooperation programs managed by regional institutions.
• • Creation of regional entities: For example, in the case of SIEPAC, a regional firm was created by public companies of member countries and ENDESA to manage funds and non-refundable resources from multilateral financial institutions.

Regional financial institutions play a key role in MIDP. First, by participating in the GTI they help to define projects and actions. Second, they provide financial resources and contribute to obtain additional funds through the Promotion and Finance Commission (CPF for its Spanish acronym). Third, they provide technical assistance. Until 2013 they invested US$20 million in technical cooperation related to physical integration. CABEI is the main source of financing for infrastructure projects, followed by the IDB, the Brazilian Development Bank (BNDES for its Spanish acronym), CAF and the Yucatan Fund (a trust fund created by the Mexican government to finance infrastructure projects in Central America and the Caribbean). However, technical studies and institutional strengthening projects are financed mainly by the IDB and CAF (Direccion Ejecutiva del Proyecto Mesoamerica, 2013).

Institutional arrangements

MIDP is organized on an inter-government basis and supported by regional bodies that have either a coordination or regulatory role. The main institution is the Presidential Summit. The Executive Committee, composed of national delegates, is responsible for planning, coordination and monitoring MIDP projects, but these projects are proposed, designed, approved and executed by Technical Commissions composed by Ministers of Finance of member countries (or their representatives) (Figure 10.6).

In sum, MIDP has helped to boost physical integration in Central America. The Initiative has been able to develop a mechanism for coordinating national decisions and regional goals: project selection and financial tools are focused on connectivity infrastructure.

FIGURE 10.6 MIDP institutional design.

Source: Authors’ elaboration.