That we suffer under the thumb of neoliberalism is mostly a self-serving myth created by statism fans.

In its simplest form neoliberalism represents a belief in that free markets will do better for all, or at least for most, than government with its central planning. 

So many failures have been attributed to neoliberalism and its bad intents that it takes too long to explain them all. In this respect I will here refer briefly to only two aspects that have been sold as neoliberalism, but that in reality are quite far from it, namely financial deregulation and privatizations.

Bank regulations: In 1988 the Basel Committee for Banking Supervision, for the purpose of setting the capital requirements for banks, decided that the risk weight of the Sovereign, meaning the central government was 0%, while that of We the People was 100%. That meant banks would be allowed to leverage more their equity when lending to the public sector than when lending to the private sector; which meant banks could earn higher expected risk adjusted returns on equity when lending to the public sector than when lending to the private sector; which meant banks would lend more to the public sector than to the private sector; which de facto meant that regulators believed the public sector could make better use of bank credit than the private sector. 

That principle is still well and alive today. How it has anything to do with neoliberalism, with financial deregulation and not with financial missregulation, is beyond my comprehension.

For instance those who attribute the financial meltdown of 2007‑8 to neoliberalism must ignore completely the decisive role that bank regulations played in distorting the allocation of credit to the real economy. It suffices to understand the definite role regulations played in the subprime mess and in the excessive lending for instance to Greece. Those regulations basically decreed inequality.

Privatization: Many or perhaps most of the privatizations of public services were allocated, not to those who offered to provide those services in the cheapest and best way, but to those who offered to pay the government the most for the rights. That in all essence signified the government collecting taxes in advance, leaving the citizens to repay these by mean of higher tariffs. How that has anything to do with neoliberalism, is beyond my comprehension.

Why have so many swallowed the myth of neoliberalism? One reason is that the world has too uncritically accepted using the term of crony capitalism, when most of the deviations it suffers are the direct consequence of crony statism.

Greece: Cash revenue maximizing privatization of public services, creates very onerous mortgages

The saddest part with the oncoming privatizations of public services in Greece, is that these will most certainly be awarded on the basis of who pays the most, usually a function of governments agreeing on very high tariffs; and not on the basis of who can best help Greece build up its competitiveness… like for instance based on who offer the lowest tariffs.

As one from South-America (Venezuela) I have seen this tragic mistake being done over and over again, only in order to please the short-term interests of governments and creditors.

I guarantee you that all cash-revenue-maximizing-privatizations of public services, create very onerous mortgages, which when these are impossible to serve by the citizens, create all kind of dangers and problems.

Here is an extract from an Op-Ed I wrote in 1997, titled “Hidden taxation through privatization” and that can help explain my point.

“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 neoliberalism, 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 case of Greece, the short-sighted appetite of creditors)

The creditors should know that what the buyers of those privatized services expect, are financial returns way higher than what they as creditors will obtain on their refinanced loans.

You are a bank creditor of someone delinquent on a mortgage against a house that earns you very low interests... and you allow that mortgage to be increased, for instance by a credit-card company charging much higher interest rates? It does not sound very smart!

Lost in the water of globalization

I have just returned from a trip to Central America (October 2000) during which I noted that an important issue in the debate on how to improve public services like water and power was the awarding of concessions to international water companies. I thought at that moment, not without some sadness, how some cultures that hundreds of years ago were expert at building and managing their aqueducts have today simply given up even trying.

Having three daughters of different ages, I have several times had to watch a movie aimed at adolescents called Clueless (in fact, it’s a great movie, and I might be using my daughters just as an excuse). In this movie a young girl tries to pass the exam for her driver’s license. After being severely reprimanded by her instructor for not knowing how to park her vehicle, she curtly answers back with the excuse that valet parking could be had everywhere. I feel that today many of us react in the same way to the difficulty of improving our public services and making them more efficient: “why try so hard when foreign investors can do it?” 

Evidently it is very often necessary to invest a considerable amount of resources or advanced technological know-how in order to offer an efficient and economically viable public service to the end user. In these cases a country may not have any alternative but to call on international investors and offer them a deal. However, in those cases where the only thing that is required to make a project go forward is good administration and a sound strategy for creating and maintaining relationships with users, specifically addressing issues such as quality and tariffs, it is difficult to condone the lack of desire to find a local solution to a local problem. One asks simply where we stand on our ambitions as a nation. 

You may ask what, for example, the administration of water systems or the distribution of power has to so with being a nation. The answer is probably “directly—nothing.” However, building a nation is not easy and requires at a minimum that its society learn how to resolve certain problems on its own. Taking the easy way out and simply calling in foreign assistance in order to solve problems in the water or power sectors could be compared to parents doing their child’s homework to insure a good grade while at the same time not allowing the child to learn how to do thing on his or her own.

Much of the pressure that creates the conditions for the sale of concessions of public services to multinational companies comes from multilateral agencies. You know the saying, “Do not give a man a fish, but teach him instead how to fish”? On occasion I ask myself whether these agencies “are not really asking developing countries to sell their fish-rods and their oceans. 

In Venezuela, we are close to renewing our efforts to privatize certain public services. In this sense, I feel it is important to ask ourselves without any inferiority complex, whether international investors should or should not have access to these services at all. I make reference to complexes simply because I feel many of us suffer from a “globalization insufficiency” complex that now exceeds that of the ardent nationalism that affected us a few decades ago.

What should we do then, in order to insure that national interests are always present in the privatizations that loom in the future? Above everything else, it is important to recognize that the way the privatization process is designed will either attract or scare away national investors. For example, if in the case of the privatization of a power distribution network the state wishes to obtain a large price for selling the utility which it has owned, a price which must then be passed on to the customers of the network itself, the total costs involved will be so high that they will automatically disqualify or discourage any local investor. If on the contrary, use of the power-generation assets were awarded on the basis of who offers to charge the end user the lowest possible rate, local investors would have a better chance of participating. 

Finally as no one is prophet in his own land, looking for foreign support I wish to make reference to a declaration I heard by David Montgomery, Viscount of Alamein, son of Field Marshall Montgomery (Monty) and the new British Ambassador to Mexico. He maintained that he simply could not understand why Argentina had sold all its public utilities to foreign investors. I do not understand it either, but what I am sure of is that unless we wish to lose our country in the waters of globalization, we must define with utmost clarity some strategic borders, and I don’t mean just our geographical ones. 

How depressing! With so much to be gained from globalization, why do they have to do it the wrong way, and why do they have to start doing it wrong just here and now?

Translated from El Universal, Caracas, October 27, 2000

As published in "Voice and Noise", 2006

Not much added value to the value added tax on Margarita Island

If there is anything that has to do with economics that has been proven with absolute clarity over the last few decades is the unsurpassable capacity of the Venezuelan State to misspend its resources. 

In this sense, an recipe for getting ourselves out of this inherited economic disaster that begins with the transfer of additional resources to the government is utterly incomprehensible to me, and I am a fierce enemy of all new taxation, even more so when we are talking about the Value Added Tax (IVA) that does not provide even the slightest redistribution of income.

However, in the case of the Island of Margarita, I refuse to spend much of my energy in protesting the recently decreed VAT. My reasons? As the say in local argot, what’s one more stripe for a tiger?

In Venezuela today, tourism is the only sector that promises the potential of creating so many externally competitive and productive jobs. The Dominican Republic’s income from tourism during last year was in the neighborhood of US$ 2.5 billion. There is no question that today we should be rallying the entire country around a National Plan for Tourism, centered principally in Margarita.

But no! In September of last year, instead of investing in a submarine cable to Margarita from the mainland so as to be able to supply the island with cheap energy (a public service of utmost importance to tourism), the latter divested in tourism when it blithely sent the US$ 60 million obtained from the privatization of its power company to the National Treasury. Margarita’s hotels often spend more for power than they do in covering its payroll.

A real plan to promote tourism on the island would focus everyone on finding solutions for getting water to the island’s population and hotels cheaply and securely. This could, for example, be done either by installing a new pipeline under the sea from the mainland financed by multilateral entities or by offering to supply free or cheap gas which would permit the fueling of desalination plants that would not be ruinously expensive. Today, all we see are plans to install gas lines so as to be able to sell gas to the island at international prices.

Anyone that had a real interest in promoting tourism on Margarita would not allow the Bolivar to overvalue to the point that the only tourism promoted is the international tourism of Venezuelans.

Anyone that had a real interest in promoting tourism on Margarita would have offered fuel at marginal cost to all international flights that come from more that 1,000 kilometers away, that carry 100 tourists that will stay for over one week. In Europe, for every 100 units paid for gasoline by the consumer, only 10 goes to the producer of the same. I am sure that each barrel “given as a gift to tourism” would be economically more beneficial to the country than its direct sale.

More investment in Margarita would create more jobs. Instead, mediocre advisors recommend the application of the VAT for Margarita in the name of anti-national national solidarity and based on minor issues that only promote equality downwards. Even some representatives of the private sector applaud the application of another tax.

But all is not lost. On this marvelous island, where the ingenuity and genes of its native and assimilated population are put to work full time to confront all this adversity with spunk and elan, new promotional strategies are being designed and produced on a daily basis.

We are all aware of the fiscal pressures imposed on the European tourist at home. A new attraction is now being developed in Margarita; a new variant of adventure tourism called Fiscal Tourism.

Today, thanks to the VAT, Margarita can offer the European Tourist the tropical and liberating experience of being able to participate in tax evasion. Very soon, merchants on Margarita will offer Evasion Receipts, which will most surely be souvenirs, competing directly with any of the dried and lacquered fish sold at any souvenir shop in the Caribbean. 

Local groups are studying the possibility of raffling a citation by the SENIAT among every 5,000 tourists. It must be exciting for any German from Stuttgart to be able to frame and hang this citation from the tax authorities. This is much better than trophies such as the head of an African antelope no matter how wide its horns may be.

For Heaven’s sake, let us create some added value on the island before we think of taxing it!

http://ourcaribbean.blogspot.com/1999/05/not-much-added-value-to-tax-on.html

The telecom ombudsman

As we rapidly approach the next millennium, there is no doubt that the Internet world with all its communication, information and commerce facets, will most surely evolve into one of the most important elements in the development of any country. The way we can take advantage of it will depend on how it is commercially regulated.

In Venezuela we are at a crossroads. Either we allow access to the Internet to be the main business, to the benefit of the telecommunication companies and the national government who ultimately issues the corresponding concessions, or we allow the users, our children and future entrepreneurs to capitalize on the opportunities by way of free and cheap access.

Recent efforts at privatization seem to not have favored the end users of the services. 

CANTV was sold on the basis that it generated high income for the Nation and expectations of high returns for the investors. Evidently, the only outcome of this equation are high tariffs. Likewise, Margarita knows more than well that the price to be paid for success in the sale of its power sector is just that, high tariffs.

The State, due to conflicts of interests, frequently cannot adequately manage its role as representative or defender of the public’s rights, as in this case, those of the end users. It is precisely because of this that all around the world, the figure of the Ombudsman becomes important. 

The Ombudsman is an independent, capable and responsible person. Adequately provided with the resources necessary to fulfill his role, he dedicates his time to the users interest.

One prime example of this is the TIO in Australia. Its initials come from the words Telecommunications, Industry and Ombudsman and it is an independent entity established in 1993 to help solve disputes between the telecommunications companies and the small users both residential and commercial. As of 1997 it has also been entrusted the processing of complaints about Internet services.

TIO’s service is free, but it only intervenes after the user has initially tried to solve its disputes directly with the purveyor of the service. It’s authority includes the investigation of matters relative to billing, service cuts, mobile service, access to the Internet, privacy, operator and directory assistance, public phones and basic telephone service.

Today TIO processes about 1,200 complaints per week. Approximately 95% of these cases are solved within 48 hours and only 0.05% of these end up in court. As do most arbitrage processes, the TIO does not analyze cases from a strictly legalistic viewpoint but rather on the base of merit and reasonability.

The costs incurred by TIO are covered by all of the telecommunications companies depending on the number of complaints raised against them.

In spite of all this success, however, and to the detriment of all Australian users, aspects related to tariffs are unfortunately out of TIO’s jurisdiction. 

I am convinced that in order to truly comply with his role of defender of the rights of the users of public services, the Ombudsman must be involved in the process of establishment of tariffs. Evidently, this role in tariff fixation must be based on reasonability, and not on the blocking of tariff increases which are necessary in order to continue to guarantee an adequate service.

How wonderful it would be to see the incorporation of the figure of the Ombudsman of Telecommunications to help with our own privatization efforts. He could most certainly help insure that the awarding of concessions does not result in a penalty for future users. 

Likewise, his support of the inclusion of norms and regulations in the concession agreements that would guarantee a good level of service as of day one would save us a lot of the grief we are shouldering today.

An Ombudsman would be most welcome in what has up to now been a negotiated process strictly between telecommunications companies and the nation. If the players do not accept this, we should require it of the Constituent Assembly.

In closing, I remind the users of cellular phone services in Venezuela, that tariffs in Israel, for example, are 10 times lower than theirs. The explanation? In Israel, the concessions were awarded to those operators who offered to install the most lines and the lowest tariffs. In Venezuela the concessions are awarded to those that offer the best deal for the taxman.

Bashing the consumer

Once again we are in the midst of a debate about the allocation of a concession for a cellular telephone operation. One part of this debate is relative to whether the law to be applied in this case is the Telecommunications Law of 1941 or the Concessions Law of 1994.

As usual, most of the arguments are a direct function of the commercial interest involved. In this particular case, however, it is even more surprising to find that the General Director of the National Telecommunications Commission (CONATEL) is of the opinion that neither of the two apply, holding the singular view instead that cellular communications are not to be classified a public service.

Again, as is tradition, the debate does not cover the entire communicational spectrum. Once again, the end user of the service is conspicuously absent.

In 1991 Israel bid and allocated a cellular telephone concession to the investor that offered the most amount of lines and agreed to charge the lowest tariff. In Venezuela, however, concessions and privatizations are designed to maximize the income for the State. Results come fast and hard. Recent calculations support the fact that one minute of cellular communications in Venezuela costs ten times what it costs in Israel.

Quality and low tariffs for public services such as electricity, water, communications and transportation are some of the critical elements that must be present in order to maintain the country’s competitiveness. This fact should be taken into consideration by entities such as Fedecamaras and other influential groups that, like any court jester, have in the past applauded a privatization process that must, for all intents and purposes, be classified as fiscally oriented.

The Telecommunications Law, as no other, is evidence of this trend. There is absolutely no mention whatsoever of any obligation or duty of an operator or carrier to provide a good public service at a reasonable tariff. What’s more, when the moment comes to address the regulation of tariffs, apart from the fact that the Law calls for respect for existing agreements, it establishes with utmost clarity that any regulation must consider the “interests of the National fiscal system”.

Don’t think that the Concessions Law is much different. While it logically states that “the concessionaire must be allowed to obtain sufficient income to cover costs and that is fair and equitable”, there is no mention about the need, or even the intent, to structure the concession in such as was so as to minimize the cost to the end user of the service to be offered.

It is high time that we begin to differentiate in a more rational manner between sane economic policies and those that, simply because they are being applied to what has been loosely classified as a “market”, are believed to be the quick road to an economic miracle and are consequently implemented indiscriminately. Much care must be taken when a “market” simply does not exist. This is specially true in the case of public services, which are mostly structured as monopolies, public or private.

Public service companies traditionally offer workers employment stability and therefore also pay salaries that are below the average. Recently, faced with the threat of a national strike, a representative of the national monopoly identified by the initials CANTV, expressed surprise, arguing that the latter was paying salaries over and above the national average. Without wishing to belittle the individual aspirations of its workforce, I remember asking myself who had authorized CANTV to pay its employees salaries above the national average, probably at the expense of a higher tariff for the service offered.

The government, as well as many of the Presidential hopefulls, has announced a new wave of privatizations, specifically in the energy sector. As a result, it is of utmost importance that they remember that a high price obtained for the sale of a publicly owned company like SIDOR is beneficial for everyone, while a high price obtained from the sale or concession of a public service is simply a tax paid in advance to the State, which all of us must then repay via unnecessarily high tariffs for per secula seculorum.

I have read about the supposed “advantage” of tendering and allocating a few megahertz (50 to be exact) at which any investor must then throw an additional US$ 200 million in project development funding. First of all, Conatel hopes to land a US$ 180 million windfall. Then the State wishes to obtain US$ 325 million in income taxes and US$ 470 million in sales taxes between now and the year 2009.

In other words, the tariff structure needed to award the investor a “fair and equitable” income must contemplate not only the US$ 200 million development cost, but also the payment to the State of US$ 975 million. Where the dickens does this leave the end user?

Daily Journal, Caracas, November 11, 1998

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.

The taxes we have to pay

It is time for payment of income taxes and I have just complied with my duty as a citizen. I must admit that compared to what I would have paid elsewhere, I personally did not have to pay an exaggerated amount of tax. Why is it then, that I am not satisfied? Could it be that it is because I am being eaten away inside by a suspicion, already bordering on certainty, that my country would be better off had I not paid taxes at all?

On the same day I finished struggling through my tax forms, I read in the press about PDVSA´s fiscal contribution for 1997. This contribution amounted to all the Bolivares in the world. Upon cranking the numbers on my calculator which went into an exponential mode, I found that this boils down to a contribution per capita of Bs. 200,000 for every Venezuelan citizen, rich and poor, young and old.

I imagine that in the international world of taxation, these Bs. 200,000, which translate to US$ 400 per year, don’t qualify for a position at the top of the list. If, however, they are expressed in terms of some of the public services offered, these figures are numbing.

Every retired Venezuelan, those we hold dear to our hearts and affectionately refer to as “los viejitos”, is due to receive Bs. 50,000 per month in retirement pay. Using the technology provided for by modern accounting, i.e. re-expression, we can affirm that every Venezuelan, rich and poor, young and old have contributed, via the cession of his or her portion of oil income, an equivalent of 4 months of retirement pay to the nation’s coffers. These figures would undoubtedly qualify us, as taxpayers, for mention in the Guinness World Book of Records.

All of this is before we even get into what we all pay in sales tax, (VAT) which by law must not be specified in the final sales price of any product. This only hides even further the magnitude of the buyer’s contribution to the above mentioned coffers. Is this restriction due simply to bad conscience or to outright hooliganism? I will let others decide.

And all of this before we include the other hidden taxes such as the sky high telephone rates we must pay because the nation has sold concessions at elevated prices in order to raise fresh resources. Authorities (in this case Conatel) have already gone on record as stating that during the next bid for a concession of a cellular phone system, we “must not commit the same mistake of selling it cheaply, in obvious detriment of the interests of the State. We must try to get more than US$ 100 million for it”. Obviously, those US$ 100 million must be repaid by the end user, by way of higher tariffs. Obviously, nobody has considered the right of the common citizen to be able to communicate economically. One of these days it will occur to someone to announce the letting of a concession for pure air.

And all of this before we include the hidden taxes represented by the abominable public services we receive.

And all of this before we include the immense contribution of a healthy portion of the physicians, professors, teachers and other professionals that work and comply with their obligations, earning pay that is well below what it should be.

And all of this before the contribution of companies in the form of taxes on assets, which must be paid whether the company is in the black or in the red and which ultimately find their way to the final consumer.

And all this before we consider the astronomic taxes incurred due to a string of devaluations, the impact of which is proven when we see that never, before or after Columbus, has the public sector been so large in comparison to the private sector. The essence of any neo-liberal model is the reduction of the influence of the public sector on the economy. The tropicalized interpretation of this model by our government officials has allowed them to get rid of all that has become obsolete, that is causing them problems or even worse, that requires investment. It seems that their dream is to keep all fiscal income but without any of the corresponding obligations.

This series of inexhaustible fiscal contributions, voluntary and involuntary, evident and occult, is justified by the threat that, should we not pay up, we will have a monster deficit, inflation will eat us alive, and along with these two specters the big bad wolf will get us as well. Ladies and Gentlemen, inflation has been around for many years and the wolf has been here for some time. It seems to me he is dressed up as the taxman.

Venezuela’s problem cannot be found on the fiscal contribution side of the coin. Venezuela’s problem is found, with crystal clarity, on the fiscal spending side. This is why, by paying my income tax, I could be causing damage to my country. Something like giving drugs to an addict. Something like giving an alcoholic a bottle of rum. Something like treason.

The next time you see a dirty, tattered and hungry child abandoned in the streets without hope, remember that he has also contributed Bs. 200,000 to the Venezuelan State in 1997

PS. Fast forward: My tax paradise (nothing as powerful against tax havens than tax heavens)

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.

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.