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.

Energy in Venezuela

The local press has recently published articles referring to the presentation by the National Executive to the National Energy Commission of a document which will lay out the plans to finally eliminate Venezuela’s rentist mentality. This means, basically, that increases in tariffs and prices of fuel are around the corner.

It seems clear that this document, in addition to establishing the bases for justifying new sources of income for the central government, will once again promote the thesis that the principal rentists of Venezuelan society are the common citizens, not its politicians and governors.

The identity card debacle is still fresh in our minds. This is a classic example of parasitic behavior. The Government was ready to dish out a macro-investment of US$ 500 million to solve the problems with our national identification system rather than putting just a little bit of effort into developing realistic and sane administration of the latter.

One of the main arguments used in the aforementioned document has to do with efficient use of our natural resources. The gist of the matter is that we are basically to forego the comparative advantages given us by nature in the form of abundant oil, gas and hydroelectric energy. Faced with high utility bills, companies and citizens alike must learn how to optimize and make more efficient use of these resources. The prime example of inefficient use of energy the authors of the document could come up with is that the Venezuelan aluminum and steel industry uses three time the amount of energy used in Japan.

This logic does not necessarily make sense, since Venezuela has abundant energy resources while Japan does not. The mix of production inputs such as capital, raw material and labor are usually established according to the conditions in each country. Surely most people would much rather see our comparative advantages be biased in favor of cheap energy rather than on cheap wages. It seems we don’t see eye to eye with the current or previous Governments on this.

On top of this both the aluminum and the steel industry have been managed by the State. Could it not be possible that this supposed inefficiency in the use of energy resources be related more than anything else to poor government administration?

The final blow was the publication in the press (on the same day the news of the document broke) of the invitation to prequalify for the privatization process of the power generation system of the State of Nueva Esparta. The basic terms of the invitation clearly stipulates that 100% of the shares will be sold to the highest bidder, on a strictly cash basis and without financing by the Venezuelan State.

This undoubtedly means that the power generation system will be allocated to the candidate who guarantees maximum income for the Central Government (which basically means charging higher rates to insure a return) rather than to the bidder that offers the Margariteño the best service and the lowest tariffs. Again, as far as I can see, this is just another example of the parasitic fiscal planning that has cost Venezuela immense amounts of financial resources and time. Why should Margarita pay tariffs that are higher than the in the rest of the country and might even be higher that what Venezuela will charge Brazil and Colombia for our exports of electricity? This makes no sense either.

For example, the implications of drastic increases in electricity rates for the hotel industry are horrible. A hotel needs a supply of abundant and continuous energy and there are preciously few ways to increase efficiency unless there is an unlimited amount of capital available which, for example, would allow for the importation of efficient but costly airconditioners. Today, faced with depressed room rates due to a flood of state owned supply and the lack of steady transportation due to Viasa’s exit, Margarita’s tourism industry simply does not have these resources.

Finally, as a sweetener, the Government most generously promises to limit its fiscal appetite to levels established by export values. This implies that it is it’s intention to at least not take undue advantage of the monopolistic conditions that tend to skew prices. We will live, eternally gratified with the hope that our average Venezolano will not one day pay more for each kilowatt of power than the average citizen in Tokyo.

Hidden Taxation Through Privatization

In moments of light headedness I often tell my friends of my recent nightmare during which my father-in-law, in a gesture of love, gave his daughter and three grand-daughters important packages of shares in CANTV. As a result of this gift, my wife and three daughters, obviously utilizing my already diminished cash flow, dedicate immense amounts of time and effort to the making of phone calls with the firm hope of receiving a dividend from the company. The conflict of interest exemplified by this nightmare, that is to say, the opposite expectations harbored by the consumer of a public service who wants an inexpensive service and the investor who wishes for increased returns, has been ignored in debates over privatization by a State avid for extraordinary income.

In 1991, when Israel awarded concessions to cellular telephone companies, the criteria for these tender awards was the selection of the operator that offered the best and most inexpensive service to the consumer. In Venezuela, however, the sale of public service companies or the letting of concessions for public service operations are based on the maximization of income for the State by means of a kind of tax, payable in advance, and which will be repaid by the consumer year after year through increased tariffs. The results are there for all to see. In Venezuela, the cost per minute of the cellular telephone service is over ten times that in Israel.

Nobody can or should oppose the theory that the State, through privatization, must transfer to the private sector the relative responsibility for its public services. However, when this transfer is made by maximizing the sales price with the principal intention of filling the State’s coffers, we are effectively confronted by a new and strange version of tropical neoliberalization, invented not to serve the needs of the population, but merely to satisfy the insatiable appetite of the state public sector for income” …(or in this case the short-sighted appetite of creditors)

Personally I would not be undergoing monthly taxation by means of excessively high telephone tariffs should the politicians and policy makers have shown less greed during the run-up to the privatization of the CANTV. On top of this, my payments are not classified as “taxes” (and as such they are hidden), allowing politicians to happily continue maintaining the absurd thesis that Venezuela is a country with low taxation. 

In the future it may be interesting to study the management by politicians of the tremendous conflict of interest they have created for themselves. This conflict arises from the fact that on one hand they must comply with promises made to their electorate with respect to low tariffs while on the other hand they have ably served as marketing agents for the sale of CANTV shares, trying convincing whomever would listen of the immense advantages and characteristics of these shares as profitable investments. 

Being a firm believer in the saying that “music paid for in advance cannot not be heard” (musica paga no suena), I cannot but worry about the future prospects of the investment made by the shareholders.

I sincerely hope that some of the concepts relative to the privatization of public services will be revised. For example, I would consider it totally 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 by paying an excessive price for his incursion into the local energetic sector. It would not be logical for the state of Zulia to have access to relatively cheap energy just because it happened to be the beneficiary of investments in truncal transmission facilities, while the “poor” Island of Margarita, having been previously abandoned to is fate, must now pay tariffs in accordance to today’s replacement cost of its infrastructure (or worse). We should be looking for certain social-regional justice when it comes to public services and utilities.

To avoid any confusion, I must make emphasis of the fact that my comments are aimed specifically at the privatization of entities that provide public services, i.e. communication, electricity, water, etc.. In cases such as Sidor, for example, it is logical for the State to strive towards the maximization of its income. In the same breath, however, I would also say that it is equally or more important for this income not be misspent.

It is important to note that this article has been written now for a few months. Due to the cowardice of its author, who did not wish to be branded as a party-poop during the collective euphoria of the CANTV days, its publication has been deliberately delayed. I remind all my friends at the Stock Exchange, whom in effect I am indirectly labeling as employees of SENIAT, of the fact that, while the human qualities of Robin Hood are still being debated on, there is no doubt left by history with regards to those of his contemporary, that famous tax collector, the Sheriff of Nottingham.

Daily Journal, Caracas, June 19, 1997

Traducción:

PRIVATIZAR SERVICIOS PUBLICOS - ¿UN IMPUESTO OCULTO?

Economía Hoy, 28 de Julio de 1998

A mis amigos, en broma y en serio, les comento sobre una reciente pesadilla en la cual el abuelo cariñosamente le regaló a sus nietas, mis hijas, unas acciones de la CANTV, con el resultado de que ellas, utilizando mi menguado flujo de caja, ahora se dedican durante todo el día a efectuar llamadas con la firme esperanza de cobrar un dividendo. El conflicto de interés al cual apunto, es decir, por un lado el consumidor de un servicio público que desea un servicio eficiente y barato y por el otro lado el inversionista que requiere un rendimiento, ha sido muy ignorado en Venezuela.

Cuando en 1991 se otorgaron las concesiones a las empresas de telefonía celular en Israel, el criterio de adjudicación consistía en seleccionar la empresa que ofrecía el mejor y mas barato servicio al consumidor. En Venezuela las ventas de empresas de servicios públicos o de concesiones similares se fundamentan en la maximización del ingreso del Estado, logrado mediante una especie de cobro de impuestos por adelantado, el cual será repagado por el consumidor año tras año por la vía de tarifas altas. Los resultados están a la vista, en Venezuela el costo por minuto de la telefonía celular supera en mas de diez veces el costo prevaleciente en Israel.

No hay razón para oponerse a que el Estado, por vía de la privatización, transfiera al sector privado la responsabilidad relativa a la prestación de un servicio público. No obstante, cuando la anterior transferencia se efectúa para enriquecer al Estado, al maximizar el precio de venta, nos enfrentamos a una nueva y extraña versión de un neoliberalismo tropical, inventado no para servir las necesidades de los ciudadanos, sino para satisfacer los inagotables requerimientos de ingresos de un sector político estatal.

Hoy, como consecuencia de la venta de CANTV, estamos cancelando mensualmente altos impuestos al pagar tarifas telefónicas superiores a las necesarias de no existir los políticos o el fisco demostrado tanta avaricia en el momento de la privatización. Para colmo, nuestros pagos ni siquiera aparecen registrados como impuestos que son, permitiéndole así a los políticos seguir sosteniendo la absurda tesis de que Venezuela es un país con una baja presión tributaria.

En estos momentos se acaba de anunciar la próxima privatización del Sistema Eléctrico de Margarita (SENE). Entre los anuncios se menciona un incremento de tarifa del 20% para 1999 y una "tarifa especial" para los temporadistas. Por cuanto soy temporadista y sospecho que una "tarifa especial" no se trata de algo bueno sino de algo muy costoso (los políticos han aprendido mucho de los vendedores de tiempo compartido), protesto este nuevo impuesto.

Supuestamente el 29 de este mes anunciaran el Precio Base del SENE, precio mínimo al cual habrán de otorgar la concesión eléctrica de Margarita por 50 años. A los que tienen un interés en Margarita les conviene recordar que por cada dólar que indique tal precio habrá por parte del inversionista la exigencia de un rendimiento y para el usuario la consecuencia de una mayor tarifa. La relación es muy sencilla. Si suponemos que no se hubiese incluido la promesa de un aumento del 20% para 1998 es muy posible que un inversionista pudiese seguir interesado en acometer las inversiones necesarias para que Margarita tenga un buen servicio de luz pero por supuesto tendría que ofrecer un menor precio al Estado.

Alguien puede protestar que el Estado no tiene derecho de vender estos activos por nada. No estoy seguro. La verdad es que los activos eléctricos de Margarita fueron financiados por los ingresos del Estado (principalmente los petroleros) por voluntad propia del Estado y como resultado de la gestión política de distribución de ingresos que se había aceptado. En estos momentos en que el Estado de hecho se esta librando de la responsabilidad de darle servicio eléctrico a Margarita, el que además trate de cobrar por esto me parece mas que exagerado.

Es mas, para el caso de Margarita, antes de que la Isla acepte que el Estado se desentienda de su futuro eléctrico (lo cual de todas formas le habrá de convenir a la Isla) debería exigirle a éste que asuma la responsabilidad de construir un nuevo cable submarino para así asegurar que la Isla también pueda usar energía hidroeléctrica a un precio razonable, tal como se le permite a lugares mas distantes como el Zulia o se le quiere permitir a Brasil.

Muchos de los problemas aquí mencionados surgen de haber encargado de las privatizaciones de los servicios públicos a un ente como el Fondo de Inversiones de Venezuela cuyo objetivo natural debe ser el de maximizar los ingresos. Lástima que el FIV termine logrando sus objetivos en los casos equivocados.

  

Finalmente desearía comentar sobre la incomoda situación en que se ha colocado el Estado cuando por un lado existe la obligación política de ofrecer tarifas razonables a los electores y por el otro se ha dejado rastros de publicidad que han pregonado a los cuatro vientos (no necesariamente con permiso de la Comisión Nacional de Valores) las inmensas bondades de estas inversiones. De ser cierto el dicho "música paga no suena" o lo que es igual, "impuesto cobrado y gastado no rinde", no le auguro las mejores posibilidades a los inversionistas.

Para evitar cualquier malentendido debo precisar que estos comentarios se refieren a la privatización de empresas proveedoras de servicios públicos. Para el caso de empresas como Sidor, es lógico que el Estado haya buscado maximizar sus ingresos.