A peek into the oxymoronic economic models of XXIst. Century Socialism

June 5, 2009

After ten years in power you would think that Hugo Chavez would have at least learned a little bit about how the world works. But it is clear that he while he does not like capitalism, there is no concrete alternative behind his vaporous XXIst. Century Socialism.

As an example, I was quite dismayed when I first saw the financial report for Electricidad de Caracas for 2008. While I was quite sure that the company would go downhill fast after its nationalization (It was already deteriorating due to the freeze in tariffs), I was surprised at the speed at which the destruction of value in the company is taking place.

Not that I really understand the financials anyway. I mean, a company that sent a press release talking about its shareholders meeting took place on May 31st., can’t be too careful about its financials either. It ahs since been fixed, but I keep a copy as a souvenir of the robolution.

Reviewing the financial statements, the first thing that surprises you is that despite energy sales being the same, price per GWH being roughly constant, revenues for the company went down from US$ 1.01 billion in 2007 to US$ 851 million, a 15.7% drop which as far as I can tell has no reasonable explanation. But this is  a revolution, so I move forward and I find that “operational expenses” went down from 681.4 million US$ to 648.8 million US$, surprising given that the number of workers went up from 2816 to 3427, an increase that seemed to have little impact, I guess the revolution is stingy with the “working” people.

I finally get to the capitalist line and find that Electricidad de Caracas went from earning 60.8 million in 2007 to losing US$ 140.4 million in 2008. It turns out that margins, which had been in the upper 30%+ range, dropped to only 23.75% last year. But even more worrisome, margins dropped to only 15.07% in the last quarter of 2008.

Why you may ask?

Well, a number of reasons. First, Electricidad de Caracas had to increase its purchases of electricity by 25% in 2008, no explanation given. But even more interesting it also includes the cost of buying back a bond expiring in 2014 at an outrageusly high price and issuing a new one almost three times larger (including corruption profits for both).

But then Chavez says that such concepts as profits are simply a capitalistic invention and are irrevlevant. Except that Electricidad de Caracas, which had revenues (i.e. energy sales) of only 851 million dollars, owes US$ 681 million dollars (in US$) of the new fangled-corruption bond and has to come up with at least US$ 55.8 million every year to pay the interest, together with investment, maintenance and the like. At the rate they are going by 2010, there may not be money for either.

But then, just to assure us that the robolution has no clue, the Head of Corpolec tells us that the only reason Electricidad de Caracas lost money was because those damned capitalists were not investing. Except that there is no evidence whatsoever that anything has changed. According to the financial statements, there was no change in operating expenses, no increase in capital equipment, so Mr. Hipolito has no clue.

But it gets worse, he actually says that because of this operating costs were above normal, but they were actually smaller by 1.99%! and until the revolution says so, if the number is less than, it means that it was smaller. Of course, then we are told that some Spanish Group will build a new plant for US$ 2.1 billion. I guess this plant will go right next to the Trans-Amazonic pipeline. By the way, what ever happened to that?

What is clear, is that this capitalistic concept that there is no such thing as a free lunch is still alien to XXIst. Century Socialism. At the rate EDC is going, in two or three years, it will no longer be able to service ts debt, let alone invest in the future. Sound familiar? It’s the PDVSA model, except there is nothing to nationalize  here to push the collapse forward into the future.

And since we are talking about PDVSA, the absence of a model or a plan other “than Hugo wishes to do something”, was ratified this week when it was learned that capo di tutti capi Hugo Chavez, had given a Russian consortium some tracts of the heavy crude oil field Carabobo I. You may say, nothing wrong with that, he is the President after all, no?

Except that PDVSA opened a bidding process last year, inviting all oil companies in the world, to participate in these projects of which they would be allowed to own up to 40%. The process was to have been culminated in April, but you know, we did have a referendum that distracted us, so it had been postponed till August 14th.

So, the other 18 oil companies which paid US$ 3 million to participate in the process are asking themselves what they have to do to get ahead in the line.  Easy, join the buddy group, its like the mafia, but among nations, the Brazilians did it, now the Russians, what are they waiting for? It will help if nobody complains in your country, just ask the Argentineans.

But what this shows is that the concept of an economic model for XXIst Century Socialism is simply oxymoronic. There is none, beyond a plan to have oil prices be higher in the future.

The rest will depend on whether (or not) the moods are whims of Don Hugo Corleone Chavez favor you or not.

12 Responses to “A peek into the oxymoronic economic models of XXIst. Century Socialism”

  1. Mr Danger Says:

    Watch out, hysterical Chavez worshipper Calvin Tucker over at 21st century socialism is going to be very upset by this!


  2. […] A peek into the oxymoronic economic models of XXIst. Century Socialism […]

  3. moctavio Says:

    Descifrado says Chavez approved a billion 2012 and a billion 2014 with 7% coupon, they would have to yield 16% with current prices, which means they would drop inmediately in price. If it comes out, I would go long 2010, people would feel more confident that the 2010 will be paid..

  4. Andromeda Says:

    Miguel, any news on the upcoming venezuelan bond sale?

  5. moctavio Says:

    Read the link on the bond. It can lose money, but it needs to ahve money to pay debt and keep the infrastructure running, at this rate in two or three years, there will be no investment and who will pay the bond which is in dollars.

  6. GeronL Says:

    what the heck is a “corruption bond”? and I suppose a state-run industry like the electric company can lose money forever as long as there are people paying taxes.

    Viva um… very little left to viva

  7. Megalops Says:

    12.88%? Yeah sure! It may well be that EDC outsourced those calculations (energy balances) to either INE or CICPC.

  8. moctavio Says:

    No, that could affect earnings, but not sales. According to the report energy sales were up and price per KWh was slightly down, how can revenues be down? They claim losses were 12.88%

  9. Megalops Says:

    Sales declining? Simple. Energy losses were in the vicinity of 18% back in 2005, while AES was still managing EDC. Acceptable levels (technical losses) should be in the 7 to 8% range for both, transmission and distribution (international benchmark). Those losses are included or covered by the tariffs approved by the regulator. The difference, 10% is attributable to theft, no only in “barrios”, but also everywhere else. There has always been a “business” (corruption) ran by EDC contractors: You want to pay less? Contractors can do the trick by “fixing” the meters. The meter tampering business is obviously illegal.

    Nowadays, I would not be surprised if EDC reports total losses in the 35% to 45% range. That is how and why revenues can be down caeteris paribus.

    I am assuming new management knows how to operate EDC’s accounting system, which is particularly complex.

  10. moctavio Says:

    Yes million of course, corrected. Nice mistake, could it be in the end it will be like that anyway.

  11. gustavo coronel Says:

    Great post, Miguel. Demolishing… two item:
    interest payment of EDC must be $55.8 million, not billion..?
    Second, the blocks to the Rusians were given “by mistake”. Apparently the Gaceta, la pagapeos, will be modified.

  12. Mama Pancha Says:

    oil has increased 58% this year and is breaking $70 … so far so good for Hugo. You saw the Goldman Sachs call today on some oil companies?.. BUY. Then there’s the issue with Israel and Iran … it seems Israel is not seeing eye-to-eye with Washington and may go it alone. You know what that will do to oil prices.


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