Monday, August 25, 2003

PDVSA: the once and future Queen (IV and last)
The little magic black box of Chavez
Sunday August 24, 2003

On August 3 a surprising note in El Universal announced that PDVSA Finance was showing signs of doing better, and perhaps dragging up the credit rating of PDVSA. This note was based on a report from Bear, Stearns and Co. on that subsidiary of the state oil monopoly of Venezuela, PDVSA.

One can wonder if the financial Wall Street guys read the local press in Venezuela.

The same day , El Universal reported that the PDVSA president, highly questioned Ali Rodriguez, was confirming that the people that had been fired during the strike would not be re-hired no matter what. Furthermore, the contractors that had supported the strike would be forbidden to do any business with PDVSA. Well, Mr. Rodriguez certainly has the right to protect himself from future strikes that the fired workers could create if they were re-hired. But if one uses a little bit more of business acumen, Mr. Rodriguez is not thinking for the well being of the company. Why did these contractors go on strike to begin with? Could some have been forced to go on strike? Can they be replaced locally? In other words, we have a case of cutting off the nose to spite the face. This type of attitude can only result in an increase in the production costs for PDVSA at least until some healthy competition among providers can be recreated.

But these optimistic reports from Wall Street are perhaps missing other details. The firing of more than half of the PDVSA workers is not going unchallenged in courts. Preliminary rulings seem to indicate that the government will have to pay due compensation to most of them. El Nacional o July 13 was not afraid to title its economy section with the debt of PDVSA to its oil workers, somewhere on the other side of 300 million dollars. And as long as PDVSA refuses to reach a settlement that debt is speedily increasing. Not to mention that some practices could be punishable with fines such as seizing the contents of the PDVSA savings system; these funds final destination seems to be the mystery “du jour”. In the now insane revenge seeking of the government outright robbery is a valid weapon. But someday that money will have to be shelled out.

However it seems that the government is having other creative ideas besides trying to get revenge on its former employees in spite of the courts leaning toward the fired workers. A resurrected subsidiary of PDVSA, CVP, Corporacion Venezolana de Petroleos, would be in charge of administering and investing directly a very significant portion of the oil income. CVP used to be the state oil company before nationalization. After nationalization, all oil companies were eventually united under the PDVSA holding.

What does this hare brained scheme implies? Well, according to an El Universal article on August 13 , CVP would be responsible to build a significant amount of public projects, in particular for popular housing. The beauty of the scheme is that eventually perhaps 50% of the PDVSA dividends might go through CVP for it to spend at will. No approbation by the National Assembly would be required, making it, one supposes, a discretionary item in the National Budget. No formal consulting with Venezuela governors would be necessary as CVP would contract the works as the central administration sees fit. In other words Chavez will be able to distribute these moneys to whoever political ally he wants, regardless of the real needs of the country. The revenge on the elected opposition officials would be complete. Decentralization would be a thing of the past. A way to violate the federal clauses of the constitution would have been found. Corruption would be even more difficult to check. Not to mention that the investment for growth in PDVSA would further be jeopardized. CVP, the magical little black box of Chavez.

One does wonder really what criteria do Wall Street finance companies use to assess risks. These days PDVSA might show signs of putting some order in its accounting and production. That the production is at a lower level is not too much a problem, but the criteria of the management to conduct business and the necessary transparency that is required in the process should give pause to anyone. The secrecy within the company, the contempt vis-a-vis adverse law decision in a revenge bent management, the gone business autonomy and the lack of planning for the future investments necessary to sustain oil production cannot bode well for the future of PDVSA.

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