From horizontal to vertical

“Venezuela does its chances of attracting foreign investment no favours when it presents a divided front on policy”

As a man of Caribbean parentage, I can relate to a laid back approach to life. Yet even I was sorely tested when trying to get urgent information from a certain Venezuelan company. If this was anything to go by, it could be a long time before the country ever gets its electricity sector in order.

It is now a year since the government hinted at the possibility of privatization as a move to aid the country’s troubled electricity market. It was at the beginning of last year that energy minister Alàƒ­ Rodriguez said: “There will be private investment in transmission and distribution and we will study projects for new generation in various parts of the country.”

With this news, US energy secretary Bill Richardson said the US “was very interested in investing in Venezuela’s gas and electricity sector”.

And so the wait began. In May, the hints were ‘firmed up’ when Antonio Giner, president of the Venezuela Investment Fund (FIV) announced that several electricity utilities would be privatized in 1999. “Enelco, Enerven and Enelbar will be privatized this year,” he said. The move was expected to generate $700 million.

Six months passed and still no privatization. There was minor progress in August when a new electricity law was enacted. The law permits private sector participation in all areas of the power industry although with exceptions.

The next announcement came in October. This time Rodriguez said that the privatization would go ahead, but in a revised form. When asked whether the already heavily indebted electricity companies could expect to obtain financing through international markets Rodriguez said that the situation “must be analyzed very carefully.”

Meanwhile the sector continued to crumble. The country has experienced widespread blackouts and brownouts due to a combination of rapid demand growth and under-investment. Forecasts show that the situation is likely to worsen.

In January a top energy official said the state-owned companies would need about $600 million in critical investments this year to maintain service to their customers. Yet Venezuela does its chances of attracting foreign investment no favours when it presents a divided front on policy. While FIV wants the sector sell-offs to begin as soon as possible, the Energy and Mines Ministry is urging a delay at least until 2001. The Ministry wants to implement a new electricity law before any sales take place. The law would call for the separation of generation, transmission and distribution activities into separate vertical businesses in order to encourage a free market.

This makes sense but what happens in the meantime? The country has paved the way for exploiting its vast gas reserves with legislation which allows foreign and domestic investors to explore, develop and transport gas. The next logical move is to build new, more efficient gas turbine combined cycle plants.

But the money will have to come from somewhere, and investment is desperately needed if these and other deferred maintenance projects are to ever get off the ground. Victor Poleo, head of the Energy and Mines Ministry said: “We are looking at ways to fund these [power] projects. Some of the money will come from bond issues or other kinds of debt.”

Last month, Venezuela made its debut in the euro capital market with a euro500 million bond issue. The country is hoping to profit from emerging markets’ improving credit outlook. Following a successful issue, a day earlier, Mexico had been put on a positive watch by Moody’s Investors and could be upgraded to investment grade soon. For Venezuela, however, Standard & Poor’s said it saw no improvement in the country’s creditworthiness. Venezuela is the second most risky Latin American sovereign borrower after Ecuador.

And so, the investment outlook looks bleak; the electricity sector policy remains uncertain; demand continues to outstrip supply – despite massive over capacity – and still, we wait.

While I can relate to a laid back attitude, sometimes there is a need for urgency – something I am not sure that Venezuela is capable of. There is also a difference between being laid back and ‘horizontal’. How long it will take the country to get its electricity businesses to the ‘vertical’ position we will never know. The only certainty is that it will probably be longer than any timetable put forward.

Junior Isles,
Managing Editor

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