It’s electricity Margarita needs

I haven't even moved to Margarita (about 15 years to go) and already I must ask my readers to bear with me because, once again, I just have to write about something related to the Island. I believe my reasons will be understood.  

This week we witnessed in the press the first skirmish resulting from the privatization of the electricity sector of Margarita, a process I have always, publicly, held as fundamentally flawed. Of course, the system broke down and the submarine cable, 22 years old and never really maintained, refused to cooperate with the new owners.

By sheer coincidence, this week I saw the publication of a series of impressive photos showing the advance of the construction of the power lines to Brazil and read about the new government's commitment to reinitiate in 10 to 14 weeks, the privatization of other electricity companies, hoping that way to raise more funds.

I will not only repeat myself I will also do it shamelessly by quoting from my own articles. There is no "I told you so" intentions but just the need to show that all the current issues were well known, at that time. In February 98, in an article named electricity to Brazil I wrote: 

"I am convinced that if we are to invest in transmission lines, Margarita for one, is probably much more deserving than Brazil. I simply don’t understand how and why an important pole of development for the country such as Margarita is being forced into more expensive generation systems such as, for example, the time-worn idea of a gas pipeline from the mainline to the island, while we are simultaneously developing mega-projects in order to export power to Brazil.

You don’t have to be an expert in environmental affairs to suspect that a 217 Km. suspended power line which must be supported by 512 towers, each of them 36 meters high, spread out through environmentally sensitive areas such as the Canaima National Park, the Imataca Forest Reserve and the Southern Protection Zone of the State of Bolívar, must have serious implications. It is not enough to assert that there will be special care taken to camouflage the towers in order to reduce contrast with the horizon.

I propose that we study the possibility of a swap. A new power distribution system for Margarita, via suspended lines and or submarine cables, in exchange for a gas pipeline (underground) to Brazil. The latter can then build it’s own power plants wherever and whenever it sees fit."

This line of reasoning had its origin in an article published June 1997 and where I, with some vehemence expressed:  "I would consider it unjust if the Island of Margarita ended up paying the highest tariffs in the world for its energy just to satisfy the need to offer an acceptable return to an investor who would not only be required to invest serious amounts of resources in an expansion and investment plan, but also to maximize the income for CADAFE, FIV or any other state entity."

Then I wrote about 4 articles more up until September 1998 when SENE was finally privatized and the results were (for me) much worse than expected. Again I quote myself "If Cadafe and FIV say they would have been happy with the base price of US$ 35 million, why then, will they 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" 

Although I had wanted that the concession had been sold for 1 US$ so as to obtain more reasonable rates, as a remedy I suggested in that article that at least the US$ 55 million premium be retained by the island" for the submarine cable, a new pipeline of potable water, or any other need. But, that was not to be.

In response to the government's euphoria I also wrote " 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!” - And that is, to the tune of a minimum US$ 700 Million, what they are announcing now.

Today we can still try to mend it or at least, not make it worse. First of all, reading that the current owner of SENE is interested in the gas pipe to Margarita, let's make it perfectly clear to him that the island, as the rest of the country, is not interested in gas per se but inexpensive electricity and that in Venezuela, until now, this has meant hydro electricity. If gas is finally imposed Margarita should at least request a supply contract of gas, valid for 50 years, and at a price equal to marginal cost.

An alternative is for Margarita to have first recourse over the new funds the government will receive from the new privatization in order to recover the full US$ 90 million that was diverted from the island, and to help pay for the submarine cable that should have been put in place before privatizing in Margarita. And of course, renegotiate the whole tariff structure.

Daily Journal, Caracas, July 6, 1999

http://suombudsmanelectrico.blogspot.com/1999/07/its-electricity-margarita-needs.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.

Su ombudsman electrico

Pay now and pray for the light

Over the years, the nation’s public sector has slowly but surely built up a relatively widespread infrastructure base. This was evidently financed basically by income from petroleum sales. Among these infrastructure systems we can find the Nueva Esparta State power and energy system (SENE). Today’s cash crunch has forced the government to study the possible sale of SENE by its owner, i.e. the Venezuelan Investment Fund (FIV), hoping thereby to recoup its investment.

SENE’s value today, as a power concession, is based more on the cash flows that are derived from the tariffs, than on the value of a bunch of electrical baggage. As a result of this, the FIV, in its role as seller, is interested in proving to potential buyers that there is a real possibility of charging high tariffs for its electricity.

FIV’s spokesmen have pegged SENE’s value in the market at US$ 100 million. Should this actually be the final value of the sale/purchase transaction, the island’s population, industry and commerce, whether they like it or not, will have to repay the investment, including corresponding dividends, by way of increased tariffs. The same happened with CANTV. Today’s high phone bills are a direct result of the elevated price paid the government by the investors that acquired the communications monopoly.

In the case of the Margarita power system, we must add the investments that are urgently required in order to provide satisfactory service to users on the island to the initial investment. The result is evident; a horrifyingly high electricity bill.

Any privatization of a public service should be aimed at insuring that a continuous and acceptable service is made available to its users, at a reasonable cost. On the contrary, the SENE privatization looks like a totally different concept, one in which the sale is used cover up ulterior fiscal necessities. This is clearly evidenced by the fact that the allocation will be made to that bidder that “offers the highest price, on strictly cash terms and without any financing from the Venezuelan State”.

On the FIV’s Web Page on the Internet, the agency declares that: “As far as the supply of primary energy to the before mentioned Island is concerned, the Economic Cabinet has decided that the winning bidder must present the National Executive, after the public bid, and no later than six months after the same, with an investment plan detailing the minimum cost associated with the delivery of the service, which must in turn reflect the tariffs to be applied”.

The above declaration, could in the layman’s terms be interpreted as saying “Pay us now and let us know within six months what you are going to do with regards to the Islands needs”. As such it would confirm the existing fiscal voracity and the general indifference of authorities with Margarita’s well being. I am one of the most arduous defenders of privatization around, and therefore I hereby express my most vehement protest.

In this same context, another example of fiscal voracity related to the Island’s needs is the gas pipeline. This alternative was never designed to include the possibility whereby the owner of the gas (Corpoven) would have to lay the pipeline in order to insure sales of the gas to Margarita. On the contrary, this alternative was always based on the scheme whereby the island was to pay for the pipeline in order to acquire the “right” to purchase the gas (nice guys, what?). Most assuredly, as instructed by the IMF, the price of this gas is to be pegged to international market levels.

Everyone is well aware that the energy problems on the Island must be solved, and quickly. I have been one of the victims of burnt-out compressors, rotten food in my refrigerator, etc, and therefore am among the first to assert that the costliest service is the bad one or worse, the one you don’t receive at all. However, I do believe that celerity is not incompatible with intelligence.

Before allowing the Venezuelan State to get rid of SENE and therefore of a responsibility, which it had taken upon itself voluntarily in the first place, in the search for political benefit, Nueva Esparta should request authorities to lay a submarine cable that would allow it to purchase cheap hydroelectric power from Edelca. This it is done in most other parts of the country, even in more remote areas such as the State of Zulia. We had also planned to do the same with exports of power to Brazil and Colombia. Why, then, not Margarita?

As a minimum, the Island should try to ensure that all income raised by the sale of SENE should be deposited in an escrow account aimed at financing sorely needed investments on the Island.