21 de mayo de 1998

Treading deeper into red

As we all know by now, PDVSA has recently managed to successfully float a bond issue for US$ 1.8 billion in the international financial markets. Mr. Giusti, its President, as well as some external market analysts maintain that PDVSA’s asset base is immense while its debt load is relatively small. According to all of them, the company should be in a position to use more leverage.

As a Venezuelan citizen, father of three other Venezuelan citizens and therefore, at least in theory, a minority shareholder of PDVSA, I must admit that rarely have declarations by “people in the know” caused me so much anguish.

Venezuela used to be the target of the international financial community due to the existence of vast oil sector assets and reserves that ranked us among the wealthy nations of the world. This resulted in the contracting of loans that ultimately resulted in our overbearing external debt load. These resources have been poorly managed and have definitely not contributed to the well being of the country.

Should PDVSA now go out and contract debt and issue liens or mortgages on our petroleum assets without insuring that the resources obtained thereby are used to repay debt previously acquired, we are condemning the country to total ruin.

Evidently we all know about the fiscal bind we are in as a consequence of the fall in world oil prices. It is easy to argue in favor of new indebtedness as a transitory way of squaring our national accounts when the alternatives are 1) inflation as a result of fiscal deficits or 2) deepening recession due to an effort to balance the before-mentioned fiscal accounts.

What is not, and cannot, be permissible is to allow PDVSA to take over roles corresponding specifically to the Ministry of Finance and the Central Bank. The nation also cannot allow the evasion, via PDVSA, of the few instruments still in place, which allow us to control national debt levels.

Until now, I figured there was a great national consensus about the need to keep PDVSA’s balance sheet basically free of liabilities. The evidence seemed to be there. To begin with, PDVSA’s current debt doesn’t reach US$ 4 billion. On top of this, the Oil Opening was justified on the basis of a lack of resources available in PDVSA for future expansion. Evidently, the company’s debt capacity was not taken into account then.

We can also clearly remember that during all the restructuring processes undertaken by Venezuela in the past and which finally resulted in the Brady Bond issues, any alternative which was to involve PDVSA’s assets in one way or another as a basis for the restructuring was rejected outright.

We feel that something seems to have changed. From one day to the next, we are told that an offshore company, PDV Finance, has been set up to facilitate the assignation of accounts receivable or to undertake factoring transactions. At the same time, we understand that Mr. Giusti has expressed his surprise at PDVSA’s capacity for leverage. This cannot possibly surprise anybody expect those that have never even contemplated it.

We remember that a few months back, when the Brady Bond swap came to light, we were witnesses to the debate related to the application of the Law of Public Credit. For a smaller amount, many protested the fact that Congress was not properly and directly consulted. Today’s silence, then, is outright baffling.

I sincerely hope, for the sake of my country, that things have really not changed radically and that someone has not decided to take the stick to the PDVSA piñata.

Some analysts have gone on record as saying that PDVSA qualifies for loans at lower interest rates, and that the country therefore has a good deal going. I remind these analysts, however, that the true final cost of any debt transaction depends on what the resources are actually used for. In this sense, our governments have been masters at converting even the most generous loans into expensive ones through sheer wastefulness.

I remind those that console themselves with the fact that the resources made available by this new debt are aimed exclusively at covering PDVSA internal requirements how fungible these resources really are. For example, the US$ 2 billion raised by the oil opening, which should theoretically have been applied towards PDVSA’s investment program, were really spent on our central “dis-administration’s” unproductive payrolls. If this permeability becomes a habit, we are merely allowing them to dig all of us deeper into the hole.

Therefore, as a Venezuelan, I also remind Mr. Giusti and his other co-Directors that their function is to be the custodians of Venezuela’s riches. Their function is not to raise the specter of generous credit lines and basically act as a croupier or as a Maecenas to the government of turn.

In the Daily Journal, Caracas, May 21, 1998

14 de mayo de 1998

Learning to appreciate

It is absolutely incredible. There is no anthropologist who understands it. Ours is a nation that dedicates serious effort to the art of national, religious, pagan and other such festivities. However, there is absolutely no mention of any holiday, not even a minor municipal one somewhere out in the wilds of Venezuela, to celebrate what undoubtedly must be the most important single object for the nation, its reserves of black gold.

The magazine Debates IESA recently published an article in which, precisely to create food for thought and debate, I tackle the subject of oil. I forward the possibility that our usual habit of labeling oil as something bad and disagreeable, to the point of actually calling what in most other nations would be considered to be God’s gift, the devil’s excrement, is simply part of an intelligent plot to cover up mistakes and avoid a severe audit of accounts.

While oil income continues to be considered “dirty” and has not been channeled through our pockets as ordinary citizens in order to avoid soiling or corrupting us, we will not give any importance to the efficiency with which the administrators to which we have delegated the task of handling these resources actually go about it. It would be another story, however, if this oil income would be considered squeaky clean and be the object of devout attention every Sunday at mass.

I ask you to reflect on the value of an educational program that would instill in even the poorest child the need to a) thank God for the Bs. 200,000 of oil income that would correspond to every single Venezuelan citizen (and which all of us have subrogated to the government in 1997), and b) to assume direct responsibility for its clean and correct administration.

Tongue in cheek aside, I am an economist and have a Master’s Degree in Business Administration. During my career if have learned, and taught, the basic precept that the most important step required in order to develop a solution to a problem is the clear identification of the resources you have on hand. Here, the opposite seems true. Colleagues, social planning gurus, VIPs and other such well-intentioned people seem to insist on preaching a model based on the theory that Venezuela should try to ignore its oil income. Something like supposing we decide that we should really be leaving the oil underground and immediately thereafter begin praying one hundred “ceteris paribus” to compensate for the fact that we continue pumping it anyhow.

Our oil income continues to exist, and all the efforts being undertaken under the umbrella of the oil sector opening seem to be aimed an increasing the same. In light of this reality, I propose in my article the thesis that maybe the best model for Venezuela is exactly a rentist one.

Many people would label this as heresy, but I steadfastly maintain that in my opinion, a rentist model has nothing to do with having a laid back attitude or being a vagabond. On the contrary. A rentist model obligates us not only to save, but also to develop solid characters in order to assume the responsible management of our wealth to the benefit of future generations.

For example, experts from multilateral agencies and, of course, politicians thirsting for more resources to spend, seem to be basing their advice on models which are closer to being sado-masochistic than macro-economic. They advise us to completely ignore the horrifying experience we have been subjected to by our State administrators and to continue, in the name of fiscal deficit reduction, to pump more and more resources into our leaky fiscal system.

In stark contrast to this, we can well imagine the simple wisdom of the rentist model often used in the private sector and which motivates the owner of a company to cut off his capital contributions and avoid future indebtedness at all cost should his manager prove to be a useless failure after having misused the company’s resources.

I think, therefore, that an honest and simple application of a rentist model would allow us to identify with more clarity the true comparative advantages upon which to base Venezuela’s real development and which would in turn generate employment commensurate with our reality as an oil producing country.

Maybe then we could escape the mortal trap we have fallen into as a country by assuming that in order to initiate development we must substitute the traditional mix of incentives such as low prices for energy, communications and fertilizers with a salary structure almost comparative to a banana republic.

Certainly, it is not ethical to be poor rentists and to throw out our income in order to work with the sweat of our brows. It would be ethical and logical to simply become excellent rentists.

In the Daily Journal, Caracas, May 14, 1998

4 de mayo de 1998

The Petroleum Ombusdam Revisited

Almost one year ago, I published an articled titled “The Petroleum Ombudsman”. In this article I raised the need to institutionalize the figure of a qualified entity that could satisfy the requirements of the Venezuelan citizens of objective and independent information and analysis related to the country’s oil industry.

At that time, my observations were initially driven by a desire to know what effects on the industry the vast restructuring of PDVSA’s organization would have. In my opinion, there was a risk of centralization of the company.

Today, upon reviewing the myriad of questions PDVSA’s actions have raised in the Venezuelan society over the past year, I am even more convinced that the matter of the ombudsman for the petroluem sector must pass from being a mere suggestion to being an outright and urgent requirement. Let us see some examples:

The Oil Opening was justified by a lack of availability of resources to continue PDVSA’s investment plans. All of the funds raised by the opening, however, went directly into the Nation’s fiscal coffers. Who can explain that?

Without the slightest remorse, the National Executive requested that PDVSA withhold or delay payment of its obligations to local suppliers in an effort to further fight inflationary pressures, thereby becoming just another poor payer. Could this have been the beginning of an interesting swap aimed at sending Mr. Guisti to the Central Bank in return for Dr. Casas?

We are continually bombarded by adds in the press, selling courses and seminars to be dictated by an educational affiliate denominated PDVSA Cied. One single session, from 8 AM to 5 PM costs Bs. 300,000, an evident divorce from the economic realities of the country. When was PDVSA authorized by the country to expand its scope of activities in this manner?

Everyone has been made aware of the dangers of lead in gasoline. The solution for this seems to be of lesser importance than the revamping of an immense amount of service stations which, in addition to dispensing gasoline, are also to sell snacks. Who establishes investment priorities?

If any market is to be considered a captive client for PDVSA, it should be the Venezuelan one. I find it difficult to visualize a supertanker from the gulf trying to pass gasoline through our port authorities with the aim of selling me the concept “Put a camel in your tank”. If this is so, and if PDVSA truly is short of resources, on what basis can they announce a plan to invest US$ 800 million over the next nine years in order to improve their service station network. Why aren’t these resources invested in countries who’s markets we should be conquering?

And while we are talking of PDV, how much did the changes in image and the marketing of a new logo and trademark cost us?

And speaking of logos and trademarks, I haven’t seen any of the large oil companies now coming into Venezuela to participate in the local markets make these changes in order to compete in our environment. In a world of global markets, global coherence would seem to be important. We are all aware of the PDVSA’s important participation in the US markets through its holdings in the CITGO network. Why, then, don’t we support this trademark and market it in Venezuela as well?

By raising these questions, I don’t wish to give the impression that I argue in favor of the Petroleum Ombudsman only to supervise PDVSA. It is also important to note that this office could also launch a vigorous defense of the industry’s interests at times when fiscal pressures are brought to bear by the National Executive. These pressures could ultimately lead to further indebtedness and/or endanger our goose of the golden eggs in many other ways.

If anyone still harbors doubts as to the need for the office of this ombudsman, it should be enough to reflect on the confusion and ado created by the question as to whether PDVSA has or has not legally complied with is fiscal obligations.

PDVSA is a State owned company, headed by Directors and Management designated by the State. We should therefore be able to expect a certain confidence an adherence by the same with the norms handed down by the State. If this were not so, it would seem to indicate a much more serious problem, one that cannot be solved merely by establishing a special SENIAT office within PDVSA.

In the Daily Journal May 4, 1998