The Fonden Papers part III: Why is there so little impact, when so much money was spent?

August 31, 2011

When you look at the Fonden Papers, the first question that comes to mind is: How is it that despite spending US$ 9 billion (Fonden) and US$ 2.2 billion (Chinese Fund) in 2010 alone, a huge number compared to the budget, it has so little impact on the economy, public works, visibility and the like?

The answer is simple, these are supposed to be development projects, but in the end the whole process has been perverted by ideology, lack of economic understanding and Hugo Chavez’ whims. And I bet it is those whims that delay and divert money, insuring that the few thing that could generate growth and development are not finished on time.

The problem is how the money is spent. As Quico in Caracas Chronicles has shown, the top four areas over the five years of Fonden expenditures got 70% of the money. Energy and oil was number one, Transport and Communications was two, Defense was three and Cuba was number four.

On Energy and Oil, there is the weird fact that PDVSA contributes to Fonden and then Fonden turns around and gives the money back to PDVSA. This sounds so weird that it’s fishy, but let’s assume these are bona fide PDVSA projects. The problem is that it’s well-known how few jobs these petrochemical/oil projects generate and in the end, it is a zero sum game, PDVSA gave money to Fonden which goes back to a company that is not investing what it should anyway.

Then, there is Defense. Most of the projects are about importing gizmos and toys, which simply give something to do to our military, but truly contribute little to the economy and development.

Cuba is number four, but it obviously contributes little to the Venezuelan economy.

Then there was Transport and Communications, a typical area that contributes to the economy. There are railroads and subway systems, but I decided to pick on a Chinese Fund project that I thought I could follow: The highway of the Autopista de Oriente between Las Lapas and El Guapo, line 1 under the Vice-Presidency under the Chinese Fund. This project for a 33 KM. piece of highway came to US$ 143 million, or US$ 4.3 million per Kilometer, which I have no clue if it is reasonable or not, in terms of price. You can see the stretch of road we are talking about in the map below, it is the one labelled number 3.

The earliest reference I can find to this part of the road was this Radio Mundial link, in which then Governor, now Deputy Diosdado Cabello (he was ousted by Capriles in an election) says that next week (this was Nov 24th. 2007!) they will name the winner of the bidding for the project. Cabello gloats, that once this part is done, they will build beyond El Guapo to Playa Pintada to complete the whole highway in his state.

A few months later in May 2008, the Agencia Bolivariana de Noticias carried an item (now not found on that website) saying that the Las Lapas-El Guapo road would be funded by the Chinese Fund and would be ready in two years (That would have made it May 2010, 15 months ago)

Except that this picture is from the construction of the road in October 2010, less than a year ago:

In fact, close to four years after the the announcement of the winning bid, the road appears to be about half completed, because in March of this year, for the Carnival holidays, the Government allowed cars to flow through the 15 Kilometers of only one side of the highway that was ready. In fact, I asked a friend who confirms that the road has yet to be completed to El Guapo.

The Vice-President, Elias Jaua actually opened this half of half the road, saying the money had been approved for the whole road (something that happened  already in May 2008, three years earlier) and that by Christmas 2011, these 15 Kilometers of the highway would be finished and then, they would complete the road all the way to El Guapo.

Thus, the two year 33 Km. project is now two years behind schedule and after four years, only 15 Km. of the 33 Km tranche. will have been completed.

Clearly, execution is not this Government’s forte.

But it is more than that. This Government loves to make announcements and clearly the money is not even there. When Diosdado Cabello announced a company had been chosen to build the project, there was no money for it. It was only six months later when the money was found thanks to the Chinese Fund. The rest, since then, is unknown to me. I have no idea why it has been delayed so much. If execution speed goes as badly as it has gone so far, it will take at least four more years to complete the remaining 18 Kms. to El Guapo. That is eight years or four times the original estimate!

And this shows why there is so little economic impact. Projects are drawn out for years, badly executed and the money is not being spent in the right areas, because the Chavista Government prioritizes ideology (Defense, Cuba) over investment projects that generate jobs or infrastructure. And even when they have these projects, after twelve years in power, they have not found a way to be effective and efficient. And I am ignoring corruption!

Just think, the Caracas-la Guaira highway, about the length of the first part of the Las Lapas-El Guapo road, was started on December 1950 and inaugurated on December 1953. But at the time, this was truly an engineering feat, with huge viaducts and an imposing grade, the Las Lapas to El Guapo highway is mostly flat and has little engineering novelty.

I hope the readers will look at the Fonden papers and find one project to study in their area of expertise, this way we can all pool our expertise and dissect how much waste these discretionary funds represent.

I will publish any material you send on the subject!

12 Responses to “The Fonden Papers part III: Why is there so little impact, when so much money was spent?”

  1. Juan Cristóbal Nagel Says:

    I wonder how strong a case any opposition government would have to say to the Chinese: “Sorry, the money you lent us was stolen, and you didn’t keep track of it. We won’t honor these loans.”

  2. lemmy caution Says:

    According to german wikipedia the costs to build a kilometer of highway (and ours are really good) is about 4 to 6 millon Euro in easy terrain without bridges and tunels. If you take all costs including noise protection, complex auditing, greenspace they talk about a whopping 26,8 Dollar per kilometer! Though this stuff is probably much more costly in Germany than in Venezuela. If the terrain isn’t too dificult, a price of 4 millon dolar per kilometer might be reasonable, maybe a bit too low and way too low if they don’t finish on time.

  3. moctavio Says:

    Lack of Planning, organization, unions…so many reasons… time is not money there.

  4. pookeye Says:

    I dont get it, if they really hired the chinese to build the roads, would it be significantly faster? I mean, when I was in china, they finish roads within months.. and i mean they are at it like 24 hours a day.. i’ve never seen a city get built so fast.. 3 years later, totally changed, 3 years later another overhaul… i mean.. why is it taking forever for venezuela to build infrastructure..

  5. island canuck Says:

    Talking about Chinese equipment 2 or 3 of the new generators installed here in Margarita are not working because of “factory defects”.

    I have heard they are Chinese but have no proof of that.

  6. Alejandro Says:

    This is what i dread, as they seek execution and delivery they will militarize or stalinize society. Last week construction equipment imported from China was shown from the “Paseo Los Proceres” in a very militaristic fashion. Probably they all believe that this new phase needs time, and its the army and the people the chosen to do so.

    Fascism believes in the transformational value of the army and thus war.

    Great blog Miguel.

  7. Ira Says:

    Is it just me, or does that piece of road in the photo look like a rollercaster and totally off-grade?

  8. bobthebuilder Says:

    In the UK the average cost per km is between $10m (1 lane in each direction) & $16m (2 lanes in each direction): (Column 37W)

    The costs are probably slightly more now since UK construction costs are increasing and these figures were given in parliament 5 years ago. UK labour & construction costs may be more than Venezuela due to numerous planning, health & safety legislation hurdles etc. but the figures still leave the intriguing possibility that the Autopista project isn’t costing enough!

    It leaves me wondering about a crucial question in understanding value for money: what standard will this road be built to? The proof will likely be when it starts to crumble at the first sight of rain. But then Chavez doesn’t care about that as there’s no one to scrutinize the lifetime costs and he just wants to show off something shiny and new.

    • NorskeDiv Says:

      Problem is, this start of this road will be ruined horse track by the time they finish the end. So it is much better to open each short little stretch while the asphalt is still cooling. At no point will this whole highway look new, just sections. The upshot is you can track kilometer markers by the trash left behind from each of the 20 grand openings.

  9. guest Says:

    This project for a 33 KM. piece of highway came to US$ 143 million, or US$ 4.3 million per Kilometer, which I have no clue if it is reasonable or not, in terms of price.

    This is a document called “Highway Construction Costs” from the Washington State Department of Transportation from 2005:

    Click to access HighwayConstructionCosts2005.pdf

    According to that, the price varies wildly depending on the conditions (e.g., number of bridges and tunnels required). It goes from $1 million per mile ($0.6MM/km) to $6 million ($3.75MM/km) on regular roads without bridges or any special requirements. Of course, these are US numbers, using US labor and wage laws, US material costs, and for roads designed to withstand US weather.

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