Archive for May 9th, 2005

May 9, 2005

I have been holding off talking about Chavez’ proposal for co-management because there are few details about the proposed schemes for this project (There are actually two different ones). Basically, Chavez wants to have any company declared of national importance or social interest to be expropriated by the Government. The company would then be capitalized by the Government and part of the ownership given to a cooperative of the workers via a soft loan.

So far, two companies have been expropriated, one is an agreement with the owners and a fourth one, a state owned aluminum company is under co-management. The way in which the two companies were expropriated outright, violates article 115 of the Constitution that states that in order to expropriate there has to be a final decision by a Court and “opportune payment and just indemnization” has to be made. Neither of these two was done on these two cases.


So far, the Government has expropriated two companies: Venepal and the Fabrica Nacional de Valvulas, which are respectively a paper company and a valve company. Venepal was a publicly traded company which had to declare bankruptcy in part due to political problems, when a Deputy from the National Assembly threatened to expropriate one of its plants a couple of years ago. This stopped the banks from lending the company any more money. And they were right! The Government not only expropriated the company, but paid nothing to the creditors, who by law should have received compensation.


Venepal had basically two businesses, it produced pulp from sugar cane and owned a forest and it would manufacture paper products such as notebooks, toilet paper, etc. The company suffered a lot during the overvaluation of the currency in 1999-2002 as its products stopped being competitive in Colombia and foreign products began coming in. Management took too long in deciding to streamline operations and the company went under. Paper is a difficult business everywhere in the world. You have to be on your toes to adapt, cut costs and it is very cyclical. This is what Venepal’s main competitor did here in Venezuela. The workers that are taking over Venepal’s plants are the same ones that the company had when it went under and they have opened all of the plants. Thus, the chances of success are somewhat limited. Right off the bat, the workers have to give those that make minimum salary a 26% salary increase decreed by Chávez himself.


I know little about the valve company; just know that its owners shut it down in 2002 because they were losing too much money.


What I do find incredible is that the third case is a complex arrangement with a textile company and its owners. Venezuela had a thriving textile industry until the Chinese and maquiladoras in Mexico drove them out of business. The problem? There were many, but cheaper salaries and a rigid labor legislation made it impossible for Venezuelans to compete. In fact, Mexican legislation is equally bad within Mexico, part of the reason maquiladoras were created. A third factor was technology; most plants are heavily automated and the level of automation continues to increase every year. I understand that by now even the maquiladoras are having a hard time competing with China.


Now, in the case of the textile company, the owners, the Mishkin family, will contribute their plants and land, and I understand some know-how, in exchange for 51% of the company and the Government will provide the money. Given my preamble, you can imagine that I think this is such a sweet deal for the owners. They have an asset that is not giving them any return, they can’t sell, they can’t do anything with, they don’t want to put any money into it, but they find a Government that wants to give them money in exchange for 49% ownership. What’s the worst case? You end up with nothing valuable, much like it was a month ago.


The amazing thing is that all of this is done without any feasibility studies, valuations or expert opinions let’s just do it and see if anything good happens. As Petkoff says in today Tal Cual Editorial, which I have translated below, this is likely to just generate frustration and disappointment in the workers that are being sold the idea today. Even if the companies manage to survive, barely getting along, they will end up owing money and the company is unlikely to be profitable enough to give them much dividends.


According to the Tal Cual Editorial, the Mishkin’s built all these plants by borrowing from the Government and they have never repaid their loans. I can’t vouch for that, but I doubt Petkoff would dare say it without having some specific knowledge about the case.


This is simply another Chavez economic pet project that will likely end up badly. As was the case in the IVth. Republic, it is the state that is using and wasting resources to jump start enterprises of dubious future and prospects. It is the state that is overextending itself beyond its reach. Chavez said yesterday that the money the Government has is not enough, maybe he has not learned the lesson: The state can not do it all, that is why you need a private sector. Of course, the lesson will not be learned until oil prices go down. And to those that don’t think oil prices will drop, it really does not matter, if they go up to $100, Chavez will spend $100 and there will still be a day of reckoning, nothing goes up in a straight line forever. Ever.


To complete this discussion about co-management here is Petkoff’s take on the issue


Chavista Congestion ((In Spanish co-management is co-gestion, thus the play on words) by Teodoro Petkoff


The truth is that Chavez is in the end quite gullible. Any salesman of refrigerators in the North Pole is capable of tying him up and swindle him by simply rubbing his ego the right way. With the idea of co-management, which is interesting and of which there are important experiences in some countries, especially in Germany, some sneaky people have figured out how to live off the President. It is simply enough to have a bankrupt company and suggest it to him as an experimental field for a co-management experience, for him to jump in without finding out its viability. And behind him, his whole team, that will have no qualms in believing that the boss has just given birth to a new brilliant idea.


The recent case of Hilanderias Tinaquillo, a textile company,  gives us a chance for more than one reflection. This company was part of the famous textile conglomerate-in more than one way- of Leon Mishkin, who reciprocated to Carlos Andres Perez in very generous fashion the dollar denominated loans that were given him via the Corporacion Venezolana de Guayana and which were never paid.

The factory has been around for 25 years, but it has been closed for a long time. One can imagine without difficulty that its machinery is not only obsolete, but that it will have difficulties measuring up to its competitors in an area, like Venezuelan textiles, which has almost extinguished.


-Why did the company shut down?

-Does the Government know that the loan it received was never paid?

-What happened to that multi million dollar debt, one time held by the CVF holding, registered in the books of the Fondo de Inversiones de Venezuela and we are sure in those of its successor Bandes?
Has there been a technical evaluation of the machinery to know to what degree it is operational?

-Was the shortage of national raw materials (cotton), especially if it happens to be long fiber, which, contrasting to what Chávez has said with his usual improvisation, has never had a significant level of production in Venezuela-without taking into account that today the national production of cotton is at its lowest point ever?

-Will we import then, cotton, to give life to a project which has no viability?


But the heirs of Mishkin must be dancing on one foot. They had spent more than twenty years trying to get rid of that white elephant, without paying anything back to the state and now they have managed their objective.


Of course, there is no way to revive that corpse. The textile industry is literally finished, a victim, what an irony! of the untenable Chinese competition.


The workers that embark themselves in this project will soon be stuck.


The state will cover the losses and the Mishkins will have kept if not the goat, at least their coins (Reference to a popular Venezuelan song). Co-Management is a potentially fertile idea (the true one, not this caricature that the adecos invented, with union leaders transformed into the millionaire director of State owned companies) and of delicate and careful implementation, but if it is applied in the case of Tinaquillo or with the utopian delirium of Alcasa, it will be a terrible failure, that will discredit perhaps forever the experiences of worker participation in the management of companies.