Guaranteed - 100% artificial

Several years ago, on a bottle which contained a liquid of dubious quality, I saw a promotional phrase displayed with obvious pride which spelled out “Guaranteed 100% Artificial”. I remember having thought of this slogan, which converted a negative argument into a positive one by a total and shameless acceptance of the it’s failings, as a marketing masterpiece.

However, that was many years ago. Since then, our politicians have provided several examples of the application of this marketing strategy, proving that they have taken its development to new heights. This week, I got the impression that I am being taken for a ride again.

Obviously, something must be done about Venezuela’s foreign debt. The point is, why do we have make such a jolly occasion out of a relatively sad affair, something like joining a funeral procession in New Orleans.

There has been much ado about the development of a new strategy for the management of this debt. Among the incredible advantages we have achieved, through the efforts of our financial magicians, the following have been readily bandied about:

“Above all, the country would manage to establish a yield curve similar to those in other countries which would allow for future issues of debt instruments....”. Splendid! Imagine, we would now have our very own yield curve! Just what the doctor ordered for Venezuela at this moment! There is no doubt in my mind that this would pave the way for new, and possibly indiscriminate, indebtedness.

“In addition, Venezuela would attain savings due to the elimination of the requirement for collateral as is the case for the Brady bonds already issued...”. Part of the external debt was guaranteed by low yielding bonds which in one way or another reduced the country’s net indebtedness. Once these collateral bonds are released, the government is free to use the funds for other “productive” expenses. This means that our national debt will be increased, bringing our net indebtedness up to the level of our gross indebtedness.

The new bond issue, which if successful could top US$ 1 billion, would carry an estimated spread over the US Treasury Bill rate of “only” 3.5%. The former is today approximately 6.5%, which bring the total annual rate to about 10%. This should technically be marvelous for a country “which has in the past had to issue Brady Bonds which carried interest rates with spreads of up to 6.5% over the US Treasury Bill rates”. I’m not about to discuss the cost to the Nation of previous issues. May those responsible for these transactions defend themselves. One thing is a 6.5% spread (if this is indeed the case, which I doubt) established for instruments with relatively short maturities. Another, totally different, is tying into a 3.5% spread over a whopping 30-year period. The favorite tool used to calculate the “savings” for the Nation is based on analysis of the present value of money, i.e. the value of a dollar today versus the value of a dollar tomorrow. Beware, these are the very same tools that were used to argue Venezuela into the current debt crisis in the first place.

A simple initial calculation would indicate that Venezuela would undertake interest payments over a 30 year period of US$ 1.085 billion in excess of what the United States would pay for a similar US$ 1 billion issue. If we were to extend this calculation to include the cost of accumulated interest at the full 10% per annum, the value of this interest payment differential would explode to US$ 6.368 billion. 

Politicians used to blame international bankers for our high levels of debt. One President even stated that he had been mislead by them. Today international banks are the men in the white hats. On the other hand, bank analysts consider Venezuela worthless one day and worth billions for 30 years the next. Seems like nobody can make up his mind.

We have been told that another advantage of this new financial strategy is that the country’s debt profile will be changed. The new 30-year bond issue will give future budgets some “breathing room”. This means the pressure to reduce government spending and streamline its bureaucracy will have been effectively trashed. I can almost hear the following dialogue in the back rooms of several ministries: “Well boys, enough of the critiques of our sons who lament not being able to go to Disney World or to a University abroad like we did because we have misspent our oil income and, on top of it all, have increased the country’s indebtedness. Let’s change the signals! We’ll postpone the payment of our external debt and lay it square on the backs of our grandchildren. You know what they say, “if it’s the same we are not cheating” (“lo que es igual no es trampa”).

Finally, I wish to make my own contribution, however small and humble, to the science of successful marketing of dubious results. The next time there is a general strike in Venezuela, I suggest the headlines should read: “Bravo! This strike is a healthy indication of social and economic development in Venezuela”. We all know that only well-developed countries such as France, England and the United States can afford a nation-wide strike.

A good lesson on how not to win at tourism

Tourism on our beautiful Island of Margarita has been harshly battered over the last few months. There are many factors that contribute to this situation, but I would like to specifically shed light on three of them since these have a common denominator: The problems could have been solved by more coherent official intervention.

The first factor refers to the administration of hotels by the official entities responsible for the management of assets recuperated during the recent financial sector crisis. The concentration of the supply side of the equation in the hands of a few players, without apparently requiring a minimum return on occupied rooms, has totally altered the structure of the hotel industry on the Island. 

As a result, Margarita has today abandoned the possibility of applying a sophisticated marketing strategy so aptly illustrated by the slogan “The Best Kept Secret in The Caribbean”. Instead, it has been introduced to the world of cheap-package tourism based on three elements, low rates, lower rates and lowest rates.

This strategy is outright dense In an petroleum-based nation like ours, where the local currency tends to revalue, making it difficult to compete. This is occurring today; we have had a relatively stable exchange rate for the last year while local inflation has burned underneath. There are islands in the Caribbean with less attractive infrastructure and landscapes that are applying tariff structures five or ten times higher than those actually in force in Margarita.

Having seen the immense dedication Pro-Competencia gave the Pepsi-Coca Cola fiasco, a case of obvious magnitude and importance but in which the dispute was between a few shareholders, it surprises me no end that they have not found it necessary to intervene in the hotel market in Margarita. The subtle control the government exerts over such a high percentage of hotel rooms definitely affects free competition. The sheer fact that it has placed rooms on the market at rates that barely cover variable costs, without requiring either returns or recovery of capital investment, raises the possibility of an anti-dumping suit.

The government could easily have avoided this sad situation should it have insured that the management contracts were awarded to various hotel operators and, among other things, required a return on each room occupancy. The fact is that the market has been seriously damaged and as a result the State has less possibilities of recuperating its investments.

The second problem which could have been avoided by timely and intelligent government intervention, was caused by the cancellation of Viasa’s flights to Margarita. Routine flights between Europe and Margarita fed hotel room demand and allowed tourists to travel directly, and to then pick and choose among hotels at their whim.

Charter flights, even though very welcome, have the disadvantage of transferring the act of selecting hotel accommodation in the country of origin. In this sense, the foreign tour operator is in a win-win situation as far as tariff negotiations is concerned. In other words, the lion’s share of the package paid by the tourist is allocated to the air-fare while little is left to cover the hotel room.

It is inconceivable that, knowing the vital importance of these flights to Margarita, the government did not ensure the immediate entry of other carriers to substitute Viasa’s canceled flights from Europe to Margarita. This can only be explained in terms of indolence and/or incapacity.

Finally, I’d like to comment on the issue of energy supply to the Island. There is no doubt that lack of regular supply of electricity seriously affects the tourism industry anywhere. I’m sure that, given the right type governmental intervention, the Island would be benefitting from an abundant supply of energy.

In this sense, it is surprising that resources were not made available to Edelca to finance the installation of an additional transmission line to the Island. That would allow Margarita access to Venezuela’s vast availability of hydroelectric power.

I don’t understand what is holding officials back from recuperating the tourism industry in our beloved Margarita. It seems that the entire official sector has dedicated all its energy to the debate on casinos and bingos. When will they realize that the development of tourism is not merely a game!

Per Kurowski

It just must get smaller

Last week, the Minister of Finance declared that “there will be no modification to the sales tax simply to comply with the requests of the business community”. Immediately thereafter, he stated that “when tax evasion is reduced ... we could think of reducing the percentage of the sales tax”. There is no doubt that the official sector has become expert at applying the “divide and conquer” formula.

The desire to reduce sales tax levels is completely normal and common, typical of tax payers world-wide. The reduction of sales tax levels doesn’t only benefit the business community. On the contrary, given the progressive nature of this tax, the salaried workers are normally the ones who benefit most from this reduction. In this context, to divide Venezuelans into businessmen on one side and workers on the other seems out of place.

Another such “division” is between income earners that actually pay their taxes and those that don’t. This would imply that the payment of taxes in Venezuela is simply the result of individual social responsibility and not as in other countries, the result of the existence of an efficient tax collection entity which is perceived as severe but just.

Normally, a State would not even have the right to apply new taxes in the face of such a deplorably poor and inefficient collection process. If it does, instead of complying with its duty as promoter of justice, it is merely promoting just the opposite. Evidently, there is a dose of truth as far as its final implication is concerned, when the Minister declares that there is a possibility that our taxes will be reduced if and when our neighbor pays his. This, however, does not imply that we must become the collector of our neighbor’s taxes. This function is still exclusively in the hands of the States.

This discussion, however, is totally irrelevant in Venezuela. Since the State enjoys unrestricted use of “our” oil income which, by the way, is obtained through the use of a fiscal collection system that is so efficient that we don’t even notice it, it should not collect one more cent. The Venezuelan State is so immense for a country with a population of 20 million, that it is difficult for even the shrewdest of politicians to hide it.

These declarations, which point toward the probable lack of fiscal pressure in Venezuela, were written in the midst of the negotiation and signing of the centralized public administration labor contract framework which will benefit seven hundred and fifty (750,000) workers. For those who worry about the State’s capacity to efficiently manage such a large public sector, an olive branch is offered; the labor contract upholds advancement by merit and awards benefits for individual achievement and for fulfillment of duties as a public servant.

In reality, these comments are simply variations of old and well-known themes. Subjecting this article’s readers to another version of the Venezuelan tragedy is not meant to be an expression of refined sadism, but is unfortunately the result of the identification of new threats that block the development of solid public opinion that would demand, for the benefit of all, a real reduction in the size of the Venezuelan State.

One of these threats comes from international multilateral entities. After much insistence on the necessity of reducing the role of the State in favor of the private sector, the message has now been increasingly oriented towards the need to improve the efficiency of the state. That is to say, there seems to be no need to reduce the size of the State. What it should be, is more efficient. This position, which is obviously logical when applied to the efficiency of a State which has already been reduced in size, will unfortunately simply be an excuse for our pro-bureaucracy politicians to maintain, or even increase, the size of our public sector.

The second threat is endogenous, much more subtle and therefore much more dangerous. The theory that the problems facing the administration of the public sector in Venezuela are based not on its size but on the will, capacity and affection for the country of its leaders has resurfaced as an issue around one particular pre-candidacy for the next presidential elections. This is evidently based in turn on this official’s excellent and admirable administrative achievements at a local level. We are again beginning to feel the first consequences when debates about the qualities of the pre-candidates bring up discussion about the merits of having solid political party administration experience versus the merits of political independence based on administrative capacity and personal integrity.

For someone convinced of the fact that even Bill Gates, reborn as Simón Bolívar (in other words, Mandrake The Magician) could not efficiently manage a country in which the State is as omnipresent as it is in Venezuela in the long run, these new theories are undoubtedly distressing.

Personally, and in order to be able to give unconditional support, I will have to continue my search for a candidate with a less developed ego who recognizes that the future of our beloved country depends more on the dismantling of official bureaucracy than on its great will and capacity for work.

Per Kurowski