Having fallen so low, Venezuela should take that golden opportunity to try reach the stars.

Moisés Naím and Francisco Toro describe well the utter current horrors of Venezuela in “Venezuela’s suicide: Lessons from a failed state” Foreign Affairs, December 2018.  But they conclude in that: 

“Even if opposition forces—or a U.S.-led armed attack—somehow managed to replace Maduro with an entirely new government, the agenda would be daunting. 

A successor regime would need to reduce the enormous role the military plays in all areas of the public sector. It would have to start from scratch in restoring basic services in health care, education, and law enforcement. 

It would have to rebuild the oil industry and stimulate growth in other economic sectors. It would need to get rid of the drug dealers, prison racketeers, predatory miners, wealthy criminal financiers, and extortionists who have latched on to every part of the state. 

And it would have to make all these changes in the context of a toxic, anarchic political environment and a grave economic crisis.”

That mission impossible sounding reads like placing all responsibility on the government to fix it all by going back and repeat, this time differently, all that got Venezuela to where it is today.

That to me is unacceptable. After all the blood, sweat and tears Venezuela has had to spill during the last decades, it really deserves a brand new future.

Here are eight tweets that imbed my action plan and dreams for my country.

"So Venezuelans can eat, quickly, PDVSA must be handed over in payment in full to all Venezuela’s creditors quickly, so they put that junk to work quickly, so they can recover some money quickly, and so as to pay us citizens, not the government, royalties quickly"

“Let then the government tax those oil revenues received by the citizens (like with 10%), so that those in government are clear about who they work for, and let what the citizens have left, then flow through the market and help oil the economy of Venezuela.”

“The result will be a different and better Venezuela, freed from those oil revenue distributing profiteers that have always found ways to keep more for themselves or their crony friends. No longer will Venezuelans have to live in somebody else’s business”

“New government debt should be contracted only to help pay for investments needed by its core infrastructure; Guri’s hydroelectric dams and central transmission lines. Privatizations should be designed to provide good and low priced services to the public ” 

“Expropriated properties should be returned to original owners, and all efforts made to recover what has been stolen the last 20 years, including by paying a bounty on any money recovered.”

“The government employees should be reduced to a fraction of their current number. With their individual share of oil revenues, and not having to go to work, most of them would anyhow be better off than today”

“The government’s initially ultra low revenues should be used almost exclusively for law enforcement (not military spending). Make Venezuela’s streets safe again, and Venezuela’s citizens, including returning migrants, will take care of the rest”.

“The best way to eradicate forever that economic human rights violation of giving away gasoline domestically, would be to have all citizens to participate in the revenues generated by the sale in Venezuela of gasoline at international prices”

These tweets are not just based on current realities. In 1974, as a 24 years old recently graduated MBA, I was appointed to be the first diversification manager in the Venezuelan Investment Fund that was being created to manage the oil revenues from the oil boom of those days. I resigned after only two weeks, the same day my desk arrived, already convinced by outside pressures exerted, that oil revenues redistribution profiteers would never allow the Fund to have the independence needed.

Three decades later, as an Executive Director of the World Bank 2002-04, a chair that Moisés Naím had also occupied before me, during and after the Iraq war I tried to push for an oil revenue sharing scheme as best I could. No luck, the crony statism interest of concentrating these revenues in the hands governments, were they could be more easily exploited, proved much too strong for me. 

Now Venezuela has a golden opportunity to free itself from the most malignant part of its oil curse, the excessive concentration of power in its government. I pray it is able to keep away any neo-redistribution profiteers. Let us make sure that having fallen this low we Venezuelans will aim for the stars… that way we will, as the Chinese saying goes, at least reach higher than if aiming at something seemingly more reachable.

“Venezuela would need to get rid of [all] who have latched on to every part of the state.”  What better way than assuring there is much less to latch on?

Here are some of the articles I've written and that relate to my desires about Venezuela’s future.

https://www.carnegiecouncil.org/publications/archive/policy_innovations/commentary/000083

https://perkurowski.blogspot.com/2012/03/my-tax-paradise.html

https://perkurowski.blogspot.com/2017/06/a-simple-but-complex-question-from.html

http://unsustainabledebtsustainability.blogspot.com/2006/05/debt-sustainability-analysis-sdl.html
https://theoilcurse.blogspot.com/2015/07/cidhdenunciasoas.html

http://theoilcurse.blogspot.com/2016/05/the-last-thing-venezuela-needs-is-to.html

Hit in the head by the SENECA sale

On Tuesday, September 14th, the power system of the State of Nueva Esparta, SENECA, was finally privatized. The Venezuelan Investment Fund (FIV) and Cadafe, both representing the Nation in this case, had established a base price for the sale of US$ 35 million. The price finally paid by the winning bidder was US$ 90 million, awarding the sellers a premium of US$ 55 million.

There is no doubt that this is a great achievement and it would be very selfish not to congratulate those involved in this transaction for a job well done. Evidently, this privatization bodes well for the supply of electricity for the State and in this sense its population can celebrate the happening.

I have, however, postulated time after time the thesis that the privatization of a public service company should be aimed at improving the service while minimizing the cost of the same for its users, and not at maximizing the central government’s income. It is in this sense, then, that I express the following reservations with regards to this particular transaction. I am not criticizing the privatization SENECA per se, but am raising the flag with regards to the ‘morning after’.

Evidently, should the SENECA have been sold for US$1, the tariffs for electricity required in order to amortize the investment would have been much lower.

Today’s financial community has awarded Republic of Venezuela long term debt a tax and project risk free return of over 20% per annum. In this sense, it would not be exaggerated to say that SENECA’s buyers will expect a return of at least 20% on their own investment.

This implies that Margarita will have to come up with US$ 18 million (i.e. 20% of US$ 90 million) every year and that this flow must come from the tariffs paid by the end users of the service. In tourism terms, this is like paying for a small brand new five star hotel every year. 

To this amount, we must also add the outlays represented by salaries, new investment, purchase of electricity and taxes.

It could very well be that this annual toll of US$ 18 million for the right to liberate itself from Cadafe’s management is actually a great deal for Margarita. However, since Cadafe and the FIV obtained US$ 90 million for the privatized entity while projecting tariffs on a base price of US$ 35 million, there is room for the following questions:

First: Who, if anyone, went overboard when promising potential investors what future tariff levels were to be paid by Margarita’s population? Who calculated these tariffs? Did they make a mistake? If so, was it made on purpose or was it simply incompetence? It is obvious that if the tariffs offered in the bid documents had been lower, the investors would not have put a premium of US$ 55 million on the table.

It bothers me to no end to be treated as a moron by public officials. When they maintain that they obtained this premium simply due to the excellence of their management of the transaction, I feel they are sticking their tongues out at all of us. Why then didn’t they establish a base price of US$ 25 million? The premium would then have been US$ 65 million instead of US$ 55 million. Why didn’t they offer an even higher tariff structure and obtain, say, US$ 120 million instead of US$ 90 million?

We obviously understand the laughter and back slapping by State officials. We can almost hear them say “Marvelous. We have gotten rid of the responsibility of the supply of power to the island. 

On top of this, we have received a front-end tax payment of US$ 90 million on top of all the other taxes we will be able to charge in the future! Nobody was the wiser for it! What a deal! Let’s do the next one!”

Second: If Cadafe and FIV say they would have been happy with the base price of US$ 35 million, why then, will the take the US$ 55 million premium away from the island? We must remember that the entire US$ 90 million, and specially the premium of US$ 55 million, will be ultimately footed by Margarita’s population.

Immediately after the sale, one official celebrated the event by saying he felt like Sammy Sosa of the baseball Chicago Cubs when he hit home run No. 61. As a user of the electrical system in Margarita, I felt more like I had been hit in the head by the very same baseball.

I suggest we analyze the possibility that the US$ 55 million premium by retained by the island. This would at least assuage some of the pain caused to my head by the falling baseball. Some direct benefit for the island could then be gleaned from the affair, for example, another pipeline for potable water. Evidently, if the entire US$ 90 million were left on the island, so much the better.

In summary, there is no doubt that as Venezuelan’s we should all be applauding the success of the privatization of SENE in the face of tough times. However, as an assimilated Margariteño, I find it difficult to celebrate since its cost, a mortgage of US$ 90 million, has been placed directly on the island’s shoulders.

Legalizing preferential treatment

Article 13 of the Privatization Law contemplates preferential treatment for certain parties participating in the privatization processes. Among these is the clause that allows workers of privatized entities to acquire up to 20% of the shares. That should be considered normal from all points of view. 

But the law also establishes the possibility of awarding certain preference to “Entities domiciled in the Federal Entity in which the asset or activity to be privatized is located..”. This does not seem to make sense.

The idea that any entity, by the sole virtue of being domiciled in any given State, should be entitled to preferential treatment is not understandable. 

On top of being unconstitutional as far as it is discriminatory and violates economic freedom, it could seriously and adversely affect the Nation’s income from privatizations.

The preferential treatment referred to is described according to Article 14 of the Law as the “possibility of equaling the offer presented by the winning bidder in the privatization process”. 

In the case of the workers, this means that they must pay the same price as that tabled by the final investors.

In the case of the parties domiciled in the same Federal Entity as is the privatized asset and that are interested in acquiring 100% of the latter the story differs. 

The “preferential treatment” means that they can quietly fan themselves while watching the process from the sidelines, and if the price is right take control of the privatized asset at the expense of non-domiciled parties, without paying one Bolívar more and without the expense of going through a formal round of bidding. 

This does not seem rational or fair if you consider that this merely reduces the number of bidders who formally go through the usually tough bid preparation process (which normally tends to maximize the results of the bid) and that only non-domiciled interested parties must do so.

To maximize the results of a bid process, it is important to have the maximum number of bidders come to the table and that all of them have been sufficiently motivated. Only interested and motivated parties would agree to run the inherent risk that their bid could possibly be on the high side and result in a bad deal.

It is not easy to interest and motivate participation in a card game with marked cards. Unfortunately this can easily happen when preferential treatment is awarded the “local boys” to the detriment of foreign investors or Venezuelan investors from other States. 

On top of this, think of the negative effect on the credibility of the process should this “preferential treatment” be used by “foreign” entities to perpetrate fraud by establishing suitable “local” fronts.

The “preferential treatment” is not obligatory. The Law states that “Preferential rights may be awarded..”. The mere possibility of preferential treatment, however, should be a source of preoccupation and difficulty for, say, the Venezuelan Investment Fund. 

It would not be surprising if the Directors of the Fund are continually faced with the conflict created by their desire to comply with their duties of maximizing income generated by privatization on one hand (i.e. safeguarding national patrimony), and the continuous vociferation of local groups (whether bona-fide or Trojan), all vying for supposed preferential rights, on the other.

A formal legal complaint has been recently introduced in the corresponding courts by Drs. Fredrik Kurowski and Santiago Cabrera on behalf of a firm interested in the privatization of Fesilven. (Dr. Fredrik Kurowski is the brother of the undersigned and so more that simple coincidence must be acknowledged).

This legal process requests that, in the specific case of the privatization of Fesilven, no “preferential treatment” as discussed above be awarded by the Venezuelan Investment Fund. Obviously, this firm considers that only the clear definition of this situation prior to the actual bid date will allow them to be sufficiently motivated in order to proceed with the expensive due diligence and analysis required.

It would make sense to believe that other interested investors must harbor the same concerns, whether they are domiciled on another continent or simply on the other side of the Orinoco River.

Hopefully this legal process, initiated by an entity that is evidently demonstrating its confidence in the country’s development through its will to invest in the latter, produces rapid results. 

They would only be for the good of foreign and national investors, the managers of the privatization process, the Directors of the Venezuelan Investment Fund and, last but not least, of the country as a whole.

Pequiven, Sidor – double standard?

During the last few weeks, we have been informed about the national petrochemical industry’s (Pequiven) ambitious ten-year investment plan which calls for outlays of US$ 8.3 billion.

Investments for the first three years are estimated to be US$ 1.53 billion. During this same period, Pequiven’s cash flow is projected to be US$ 680 million. The question that immediately arises is how to fund the resulting deficit during the years 1998, 1999 and 2000 which comes to US$ 850 million. To begin with, a bridge loan is to be negotiated with its head office, PDVSA. In addition, the idea is to exonerate Pequiven from the debt limits imposed on it by the Organic Law of Public Credit.

The press notes that accompany the news describe the debate relative to whether this investment plan should be implemented with the participation of the private sector (evidently without giving up government control) or if, on the contrary, the Nation should reserve for itself the totality of the shares in Pequiven and fund this growth with debt and State funds.

This debate is depressing. It is a clear indication that we have made few inroads into the identification of a horizon for the future of our country. I’ll explain what I mean.

Why is it that while the country is trying with great difficulty to come to terms with the privatization process, for example Sidor, in other corners of the official bureaucracy, someone is brazenly developing investment plans for a whopping US$ 8.3 billion?

In the meantime, where is the Nation’s financial management? Pequiven’s projects admittedly will yield returns of between 9% and 12% in dollar terms. This seems like a meager result for project risk, specially when compared with the returns in excess of 9% being offered by the Republic to the 30-year bond holders, presumably without risk.

A few weeks ago, the press published what seemed to be a scolding by a government official, stating that since the flow of funds received from the National Government has stopped, “FIV’s teat has dried out”. This has made it impossible for the FIV to continue subsidizing the power sector in order to accelerate privatization of the latter, which simply “requires a sufficiently attractive tariff structure” (i.e., an expensive one).

Going back to the cash flow for the next three years of US$ 680 million that Pequiven maintains it will generate, the following questions arise: Who establishes the country’s investment priorities? Can the management of a State-owned company allocate the firm’s entire cash flow into eternity to perpetuate its growth? Is it possible that Pequiven’s investment plan, with its dubious returns, is more important that, for example, insuring power supply at reasonable cost for the Island of Margarita, or even more imperative, ensuring that the country’s youth receive decent physical and spiritual nourishment?

In spite of the multiple accolades awarded Venezuela by the International Monetary Fund (which frequently and justifiably are not understood the common citizen), there are rumors circulating that the IMF is slightly preoccupied with the disorganization in entities responsible for the management of the country’s economy, Cordiplan among them. In view of the apparent institutional vacuum in which Pequiven’s investment plan is being hatched, it is important that we join the IMF in its preoccupation.

And while we are at it, we should strive to avoid the tragic results which normally result when a public (or private) entity is allowed to fall back on bridge loans, “while the situation is being defined”.

Unfortunately, we are much too inclined to allow transitory patches to quietly convert into permanent fixtures.

Hopefully, we will not have to ask the Central Government (as we have done so many times before) to assume an immense amount of Pequiven debt a few years down the line in order to facilitate its privatization. Hopefully, Pequiven’s investment plan will contribute heavily and positively to the country’s future development and well being, and that these uncomfortable feelings will be proven to be unjustified.