The Devil's Excrement

I talked about this last night, Petkoff picked up on it
too:

Failing grade in Housing by Teodoro Petkoff in Tal Cual

Yesterday the President complained, not without bitterness,
of the slow progress of the plan to build houses. It is not the first time that
he refers to this matter, in the same terms of complaining. Because in this
area the failure of the Chavez administration is clamorous. Chávez, whose personalistic
conception of power makes him aspire to hand himself the keys to each house,
said that he would have to reach the age of Methuselah in order to fulfill that
purpose, the development of which is going, in his own words at the” speed of a
tortoise” Not that long ago he assured us that 120 thousand homes would be
built this year, among other things, thanks to the help of the Chinese. Well,
it is known that a Chinese mission came and after learning about the market,
they told him that it was silly to import prefabricated houses from China, that
he had to forget about it, because we have here in Venezuela an enormous
building capacity which is idle as well as high technical levels and all he had
to do was to lean on the private sector.

He was also told, not without some sarcasm
that if he continued to believe in “self-construction” and the “coops” he was
going to end , like them in their own countries, shooting the supposed
beneficiaries (Even though the term is used metaphorically). In other words, he
was told: you have here the ability to do it, use it.

What is true is that in the first semester 10.120 homes were
completed, 8.4% of the 120 thousand offered for this year and it is obvious
that, with the same methodology, it is very improbable that the goal can be
met. For the seventh consecutive year, what used to be routine for the previous
Governments (delivering each year between 60 and 90 thousand homes) the limping
chavista administration can not place one brick over the next. Moreover, there
is a conceptual problem. For the President, overcoming the drama of the housing
deficit consists simply in building houses and apartments.

That is why the Government got rid
of very early of the team that Josefina Baldo was directing in Conavi, whose
conception pointed to emphasizing the rehabilitation and humanization of the
popular barrio areas, taking advantage, it works in that case, of the enormous
potential for self-construction and cooperation that exists in the barrios, to
repair homes, give them complete public services (with emphasis in garbage
collection and sewage), creating community public services, transform in the
end , the habitat, in order to increase the quality of life of the poorest
sectors. This included an important inventory job to give title over the
property of the land and the shacks to its current inhabitants. All of this was
left in the nebula of the bureaucratic guerilla and what could have been a
truly revolutionary housing policy was discarded, to repeat the traditional
patterns, which rely exclusively on the construction of houses and apartments.
Here, however, with the bunch of useless (and thieves) that populate the civil
service, they can’t get any work done.

However, the blame is not on the blind people but on those that hit them with
the stick.

So, Mr. Bush greets Sumate President Maria Corina Machado and it brings the worst in some Chavista leaders:

Minister of Justice Chacon: “She is a CIA chip”, “I warn that she will be a Presidential candiadte” “She signed the Carmona decree”

Minister of Justice, whatever happened to presumption of innocence, political freedom and prrofs? Do they mean anything to you?

Foreign Minsiter Rodriguez: “Bush meeting her is a provocation”

Will he say the same when Zapatero meets her in two weeks?

Deputy Cilia Flores: “We should revoke her nationality”

We should revoke your right to say anything.

National Assembly President Maduro: “Bush met Maria Corina Machado to create chaos in Venezuela””Maria Corina Machado is a fugitive of Venezuelan justice”

You are right, we have enough chaos with you guys. By theway, she is no
fugitive, she has no prohibition to leave the country. But I know, it
sounds so good to be able to say it.

.

For the
second time in two weeks, President Chavez has become exasperated by the lack
of execution on his projects. Two weeks ago, Chavez was handing out funding for
projects and twice he had to correct himself because he was making
announcements from the notes given to him which were incorrect. He praised the
projects of a Governor who had no projects that day and he pointed out that
they were giving funds to a Mayor from opposition party Acción Democrática, who
took offense at being told that and publicly corrected the President. Chavez
was visibly upset that day and publicly commented that those around him could
not even give him the right information.

Today it
was the turn for “Mision Vivienda” Chavez’ housing program, which Chavez said
would build 120,000 housing units in 2005,
which would be four times more housing units that the Chavze Government has
been able to build in any given year.

Unfortunately,
housing units can not be invented and the Mision Vivienda is so far a failure, with only 10,000 units
being built in the first five months of the year, less than 8% of the
goal.  Chavez said today that he was
declaring this Mision in an emergency and he said he would accept no excuses.

This is
not new; the infamous program to eliminate poverty has not even been presented.
In contrast with many programs like the alphabetization or other misiones, the
housing program can be measured. Those around Chavze made promises that are not
materializing. The approval of the mortgage bill has not been the panacea that
was promised as prices are high for those than can have access to the cheaper
rates and there are too many rules to be eligible with some of them conflicting
with each other.

I think
that it is good that Chavez is noticing the problem and trying to do something
about it. He surrounds himself with people who only suck up to him and have
little managerial experience. But he is also to blame; he likes to invent too
many new grandiose projects leaving many things aside and doing little follow
up or without the competent managers around him to do the follow up.

In the
case of the housing project, it was a newspaper reporter who took the time to
find out how many exactly had been built and published the results. Other
projects are more difficult to quantify or people forget the goals, but in this
case, there may be a lesson for the Chavez administration going forward: They
have been governing for seven years and Chavez popularity rides more on the
back of expectations than accomplishments. These same polls also indicate that
people are getting restless, realizing that Chavez has been in power long enough
to stop blaming the past.  It is time to deliver;
Chavez seems to be getting that message now.

Things we did NOT hear today:

Chief Justice of the US Supreme Court Rehnquist: “Now that I wanted to go to Margarita, I might not be able to get a visa”

MVR Deputy Iris Varela: “I think Maria Corina and George looked very good together”

US State Department: We will extradite Posada Carriles even if these guys gave us no documentation”

Fidel Castro: “If the US sends Posada Carriles to Venezuela, I will extradite Shakur to the US, even if they send me no documentation”

Venezuelan Chief Justice Mora: “If I don’t get a visa, who will go with my kids to Disneyworld this summer”

Maria Corina Machado: “This guy is really weird and he made a pass”

Hugo Chavez: “I never said I wanted to break relations with the us”. Uups, sorry we did hear that

Minister of Oil Ramirez: “I prefer to work with the Chinese and the Brazilians rather than the Americans, they are all about goodwill, they don’t care about profits”

Miss Venezuela and Miss Universe contestant Monica Spear: “Jeez, they rebuilt my body, but forgot to rebuild my brain”

VP Jose Vicente Rangel: “You could never even come close to imagine what a mess PDVSA is in”

Primero Justicia Julio Borges: “They picked me, because the other guys were doing a very good job as Mayors, I was expendable”

MVR Deputy Nicolas Maduro: “I wish Maria Corina was my girlfriend, Celia is just too loud”

COPEI President: “We were going to have a meeting of the party, but nobody came”

MAS President: “We had a meeting of the party, but nobody came”

MVR President: “We don’t have meetings of the party, Chavez may come”

French President Jacques Chirac: “Merde!”

Hugo Chavez: ” I was not missing, I was misplaced”

Last week, in the testimony of the Minister of Energy there was a phrase that criticized the fact that in the old PDVSA the objective was to maximize the value of the company to the shareholder which is the State, rather than maximizing the value of the natural resource for the same State.

I have pondered about that sentence over and over in the last few days, but to tell you the truth, I am not sure that there really is a difference between the two. In fact, the first statement is much clearer and well defined to me than the second. There are three contributions to the Government by the production of oil. The first is the royalty; every barrel exported pays a royalty tax directly to the Government, which depends on the type of oil. Later, PDVSA pays taxes on the earnings it has for the year based on quaterly estimates and pays it also pays dividends to the owner, which is also the State. I am sure you could write a complicated algorithm that would tell you how to maximize the total, but the business is more complicated than that and I think the Minister’s  words are very empty, they are simply political rhetoric.

The PDVSA strategy, circa 1997-1998

The PDVSA strategy that was being carried out in the mid 90’s has to be understood in its context: PDVSA wanted to maximize its earnings (and thus contributiosn to the State), given its finite resources for investment purposes. It could have decided to leave things as they were, continue producing what it was producing with its own investment capabilities. This was the lowest return path for the Government and for the company. Why? Because PDVSA was exploiting a large number of old fields that needed heavy investments to keep them going, but were fields past their peak production levels. The margin for exploiting those fields was much lower than for the newer fields. This implied lower profits and thus lower earnings, lower taxes and lower dividends for the Government. All of this for the same level of investment.

The oil opening, the “Apertura”

This was the origin of the oil opening: Take those fields; sell the right to exploit them at a price to mostly  foreign or Venezuelan companies, which paid over US$ 2 billion in the 1997 round of the opening. If it was such a sweet deal, how come some fields received no bids in the public auction? Even more interesting is that these paymenst seem to have been forgotten.

Of course, this presupposes that the strategy that the PDVSA Board had at the time of producing six million barrels of oil a day was “correct”. At the time, Chavez and his supporters were highly critical of it, but the latest plan by PDVSA is to produce 5 million barrels, so you can not say that one or the other was trying to get the highest price for the natural resource for the shareholder.

In fact, what about giving away gasoline in Venezuela? Gasoline is currently 20 cents a gallon, what right do current Venezuelans have over future generations to waste away gasoline at these prices?

As usual I digress.

With the oil opening, the Government gets the same amount in royalties, PDVSA does not have to invest any of its own funds and the company that bought the rights has to pay taxes on its profits. Yes, the Government gets fewer dividends, but in theory, it gets more dividends and more profits because it is investing those funds elsewhere, in more profitable, higher margin projects. Notice that I said “in theory”, because such investments are not being done today

The oil partnerships

.The oil partnerships in the Orinoco heavy crude belt are a totally different strategy. At the time, the question was, Venezuela has some gizillion barrels of heavy oil in the Orinoco Oil Belt, can we get any of it out and make a profit?

Recall that oil was at $15 per barrel of WTI, when this question was being posed. What was proposed then, was to upgrade these heavy crudes to make synthetic fuels. There was only one country in the world which was offering similar projects, Canada, which was charging 1% royalties until a certain benchmark in production was reached. Venezuela offered a similar deal for partnerships with PDVSA itself. This is where Sincor, Cerro Negro, Petrozuata and Hamaca were born.

These deals were funded with either publicly traded bonds or bank loans. The owners of the projects were forced to offer a guarantee for the bonds until the projects reached certain production benchmarks. Moreover, all of the bonds were “sinking fund” whereby bondholders are paid part of the capital partially at the same time they get the interest. In this way, part of the risk gets diluted with the passage of time.

Why all the complication? Easy, the price of oil was low, the projects had not been proven, and not everyone was convinced they would make money. It was not high tech, but it was not “proven tech” either.. Even today, with WTI at US$ 50, the bonds for most of these projects which mature in 2009 offer a yield to maturity of 8%. Obviously they are not as risk free as the Government makes it look (Although the Government itself is now creating part of the risk with rules changes and noise)

Perhaps somebody should have thought then about a sliding royalty. (I haven’t heard anyone mention it now either, it is just a thought of I have had). Maybe it would have made more sense to say, the partnerships will pay 1% for x years, after that 16.6% over the first billion dollars of production per year, 30% over the next half billion and son on and so forth. Nobody imagined oil prices would get this high. Nobody proposed a sliding scale, nobody has. All we have is these accusations and unilateral decisions.

Conclusions

In the end, I think that PDVSA’s purpose should be to maximize profit and dividends for the shareholders (The “people”!). PDVSA should also be a motor of growth for the country. To do that it has to establish an adequate level of borrowing and devote that to those projects with the highest profit margins. Lower margin projects should be sold to the highest bidder, if it is in the interest of the country. Heavy oil projects should be promoted given that the country has such ample reserves.

What does not make sense is to have a company with US$ 40 billion in sales have almost zero debt if such debt can help the company increase both profits and revenues. PDVSA has less than US$ 100 million in debt, zero for all practical purposes. This is certainly without justification.

PDVSA should also not cancel existing projects because the profits are small, such as Orimulsion, of such projects already exist. If they create substantial amount of jobs. Who cares?

In the end, the starndard of living of a large fraction of Venezuelans will not improve until there is real sustained growth in the economy. PDVSA is a perfect engine for such growth, but is not being used that way. It may sound really “neat” to have PDVSA give all the funds to social programs, but if doing that is simply taking capital away from the company you are simply killing the golden goose in the long run. In the end, seeing PDVSA as a commercial enterprise tells you exactly what you can or can not do, what you should and should not do. It can be run as a not for profit organization, giving away all of its profits, but it can not be run as a “for loss” organization, because it does not make sense to give to the Venezuelans of today, taking away from those of the next generations.

In the end, I still don’t know what “maximizing the value of the natural resource means”. It could mean increasing the price of gasoline. It could mean producing less oil to save for the future at higher prices, something this Government claims not to be doing, and it could mean only producing a certain type of project, something which is not happening. I still think PDVSA should maximize royalties and profits (And thus taxes and dividends). I can’t think of any other strategy that may benefit the average Venezuelan. The rest is simple rhetoric.

Quotes from Hugo Chavez about the partners in the heavy crude partnerships who have suddenly become the bad guys (Taken from Friday’s Tal Cual):

March 20^th. 2002:

“I was telling the President of Total and the Vice-President of Statoil, that they should be given a trophy, because they decided to start a project when it was claimed-it was 1998-that the devil had arrived to Venezuela. The devil was me, I was candidate Chavez, I was going to destroy all this, I was not going to recognize the contracts of the oil opening, I was going to disavow the agreements of Venezuela. However, they either have a very clear intelligence, or they have a courage that is devil proof, and because of this we have to congratulate them.

I am sure that they always knew that what this project is to make Venezuela a more decent country (sic).

Then, this is Venezuela’s reality, a country, a revolutionary Government, a legitimate Government that respects agreements, compromises and not only respects them, it backs them and I am here to confirm it and ratify it.

Thus, I am very interested in that you-Total Fina Elf and Statoil-and many other companies, together with us advance the gas project, not only in the Delta Platform, but also over there or right next to here the Paria project and even further the development of Venezuela.

Hugo Chavez, France, March 9^th. 2005:

“We have decided that Total will go to from 200,000 to 400,000 barrels a day, doubling its production with an investment of a few million dollars. With Venezuela’s technology and allied with companies like Total, we extracting heavy oils and extra heavy oils from the Orinoco oil belt, taking it to the Jose terminal and transforming it in what we call nectar, oil that is worth gold and which it is sold anywhere in the world as synthetic oil.

Total has understood what the new Venezuelan legislation is about, with a new royalty payment”

Last week, the National Assembly approved the Tourism Law, a bill aimed at promoting tourism in Venezuela. Among other things, the Bill compels banks to devote a fixed amount of their loan portfolio to tourism projects. This amount will be set at between 2% and 7% of the loan portfolio of private commercial banks and 12% of that of Government owned banks.

While I disagree with forcing banks to devote a fixed percentage of their loans to a particular area (with this, compulsory lending goes up to 35% of the portfolio), I can not disagree with the goal of turning Venezuela into an attractive tourist destination.

But what is being done with one hand appears to be destroyed by the other. In a strange interpretation of reciprocity, the National Civil Aviation Institute suspended the initiation of flights by American Airlines affiliate American Eagle to Margarita Island in Eastern Venezuela. The reason? The US’ FAA lowered the category of Venezuela’s aviation many years ago, because it did not satisfy the technical and training requirements of that Administration. The main impact of lowering Venezuela’s category is that no new Venezuela airline can begin flying to the US until the minimum requirements are again satisfied. It has been eight years (before Chavez!) since Venezuela was lowered in category and in that time the country has failed to pass the requirements to have the higher category reinstated. Because of that, American Eagle, will not be able to begin its flights between San Juan, Puerto Rico and the island of Margarita.

Who do you think loses with this political decision? I would bet if it were any country other than the US, no retaliation would be made. In fact, Panama decided not to extradite Posada Carriles to Venezuela four years ago and nothing happened between the two countries. other silly emotional decision that damages the country’s credibility.

Yesterday there was some confusion when the US Government rejected the request by Venezuela to arrest Posada Capriles, essentially the US Government said that Venezuela had not supported the case and reiterated that Venezuela had yet to request the extradition of Posada Capriles. Some newswires carried the news as “US rejects extradition” and too many loudmouths of the Chavez administration criticized the action.

But today the situation is quite clear. First, there is the press release by the Venezuelan Embassy in the US, which leaves no doubt as to the status of the request and makes quite clear that despite all of the noise, protests and criticisms, Venezuela has yet to request the extradition:

1.- The Embassy of the Bolivarian Republic of Venezuela in Washington, D.C. received this afternoon a diplomatic note from the U.S. Department of State concerning the request for preventative arrest with the purpose of extradition of Mr. Luis Posada Carriles. This request, which U.S. authorities have denied, was presented when clear evidence emerged that Mr. Posada was in the United States. The request for Mr. Posada’s arrest was a preventative nature, made while the Government of Venezuela compiled the necessary documentary and legal documentation necessary for a formal extradition request.

2.- According to the note sent to the Embassy of Venezuela, the denial of the request for preventative detention does not prevent Venezuela from formally requesting extradition of Mr. Posada, a Venezuela citizen, pursuant to the Extradition Treaty in force between the two countries.

Even today the Vice-president says that the extradition request “still stands”, despite the fact that it has yet to exist. Just part of the charade, when he was prompted by the reporters about the fact that no request existed he said that the request has 700 pages and the Venezuelan Government ahs two months to present it. In fact, the Vice-Minister of Interior Relations said today that it will not be until Tuesday when the formal extradition request is presented by the Venezuelan Government.

I have been told by a good source that Chavez said in private that he did not want Posada Carriles extradited to Venezuela. According to this report Chavez said something like “I don’t want that old man here, imagine he may die and I would be blamed for it”. Thus, like so much of this Government this is just hot air for political gain, nothing else. I still think the US should extradite Posada to Venezuela, but I am not sure whether they will or not.