From 2007 to 2010, Venezuela has spent more than $23 billion on expropriations, acquisitions, and the creation of companies that follow the socialist production model. Is it working? You decide.

What’s Next Venezuela brings you an exclusive interview with Venezuelan Economist Richard K. Obuchi, project coordinator and co-author of the study, Management in the Red: An Evaluation of the Performance of 16 State Companies and General Results of the Socialist Production Model. To reach their conclusions, Mr. Obuchi and two other experts from Caracas’ Institute for Higher Studies in Management (the leading business school in Venezuela) looked at the evolution of domestic and foreign companies – including U.S.-food giant Cargill – that have been expropriated by the Chávez government.

Q. Your book provides an in-depth analysis of the performance and productivity of 16 companies expropriated by the Chávez government. What are the main findings of the book?

While each case study is different, they all share certain characteristics such as: the implementation of a new management model once the company is intervened; the establishment of a community relations program; the integration of the companies with other government programs like the so-called “misiones” or missions; and the development of marketing objectives that favor the public’s access to low-cost products over the sustainability of the projects.

Regarding performance, the two most widely shared aspects are: (1) production is below the established goals and (2) employee benefits are subject to the availability of resources from the Executive branch.

A sample of the study’s conclusions regarding the effectiveness of public policies includes the following:

• Four years after they were expropriated, Inveval[1] and Invepal’s[2] production was close to 15% and 20% capacity, respectively; in addition, between 2006 and 2008, Invepal reported an average loss of 15 million Bs.F.
• In the case of Venirauto[3], despite public announcements of minimum production goals of 4,000 and 10,000 units for 2007 and 2008 respectively, according to press reports, the company produced only 2,017 units between 2006 and May 2009.
• Regarding the sugar refinery Central Azucarera Sucre, after an investment of close to 17 million Bs.F., the refinery produced 5,050 tons of sugar during the 2008 harvest, which constituted 0.63% of the domestic demand. Moreover, production cost was 4.8 Bs.F. per kilogram, while the retail price was 1.61 Bs.F. per kilogram. In other words, a total loss of more than 16 million Bs.F.
• The citrus processing plant Roberto Bastardo – which processed a maximum of 13,000 tons of oranges per year from the 70s to the 90s – processed only 1,700 tons of oranges during the 2009 harvest, after an investment of 4.4 million Bs.F. (in 2007).
• In March 2009, U.S.-based Cargill’s rice processing plant was expropriated allegedly because 70% of its production was not paddy-type rice (according to law stipulations). The strange element here is that the plant was only equipped to process parboiled rice. After its expropriation, 100% of the rice produced there is still paddy-type rice.

Q. Have the nationalization policies promoted by President Chávez been successful in advancing Venezuela’s economy?

In order to evaluate the success of the intervention policies, we compared the stated objectives of the nationalized companies to their results. To implement its policies of expropriation, nationalization and land acquisitions as well as to change the established laws, the central government’s main argument has been the well-being of the Venezuelan people. Specifically, the government has pursued goals such as endogenous development, food security and sovereignty, and labor stability. When one looks at these three measuring sticks, it is clear that State-run companies are falling short of meeting their objectives or even previously established levels of production.

Endogenous development: the growth rate in a year period of oil and non-oil activities, in terms of GDP, has been gradually decreasing since 2004. In fact, in 2009, the negative GDP growth rates (oil: -7.22% and non-oil: -2.04%) made Venezuela one of the countries with the worst economic performance that year. In addition, between 2003 and 2008, the non-oil GDP growth rate was much smaller than the gross domestic demand, which reflects the national production network’s incompetence in responding to the needs of the growing population, having to increasingly turn to imports. The bad performance of the Venezuelan economy suggests not only that the national economy is still highly dependent on oil, but also that the country’s general economic structure shows signs of widespread deterioration.

Food security and sovereignty: the national agricultural production does not exceed 10% of the country’s total production of goods and services (the World Bank places it at 4% for 2005). According to the National Institute of Statistics or “INE,”, in 2009, 9.9% of non-oil imports correspond to agricultural and vegetable goods, and 6.1% correspond to agri-food industry goods, which is why food imports amount to 16% of non-oil imports. Despite the high levels of imports, the amount of available food has not met the Venezuelan people’s demands. Particularly between the end of 2006 and 2008, the official shortage indicator registered an increase, which was attributed to the period of time of shortages of basic goods. In response, the government decided to resort to measures such as price fixing, the creation of Pdval, making basic necessity goods duty free, and increasing food imports. It is worth highlighting that, in spite of the measures adopted by President Chávez, the shortages index is still growing.

Labor stability: since 2004, the unemployment rate has been steadily decreasing until it reached 7.5% in late 2009. However, unemployment reached 8.1% in May 2010. On the other hand, the percentage of informal workers (which has been decreasing since 2003) remains above 40% and real wages have had a negative growth rate – that is, annual wage increases have not been enough to remedy the impact of inflation on the wallets of the Venezuelan people. Even though the government insists it has been effective in keeping the labor market stable, workers’ reactions are indicative of the serious problems the country is facing in this arena: only in 2009, the number of public demonstrations grew 105.81% in comparison to those registered in 2008; and, in particular, protests in favor of labor rights and the right to work represented close to 26% of the total number of protests in 2008, and 37% of those in 2009. Many of these demonstrations took place in government-owned companies.

In summary, national production has been decreasing, the price of goods has been constantly increasing, shortages of basic products have been recorded, and most recently there has been a decrease in the employment figures. This reality is in sharp contrast with what the State hopes to achieve with its economic policies.

Q. Some have blamed the nationalization of certain economic sectors – such as agriculture and coffee – as the determining factor in Venezuela’s food shortages. Do you agree?

The main observation regarding the performance of the 16 government-owned companies that were analyzed as part of this study is that their productions levels are below the set targets. This is due to factors such as the lack of access to raw materials, lack of financial resources for operations, errors in planning, and the bureaucratic and/or administrative red tape. In the end, when we add up all these factors, companies face a sustainability problem and thus a negative impact in the delivery of basic goods and services.

Despite the importance of the food sector, the national agricultural production does not make up more than 10% of the country’s total production (the World Bank places it at 4% for 2005). In the current GDP measurement, agricultural production is included in the “Other” category. While the production volume increased to an average of 6.4% for the period between 2004 and 2009, the volume of retail sales of food increased to an average of 17% for the same period, a higher scale than that of the production.

Regardless of the growth in the domestic demand for basic goods, the fact is that the interventionist measures implemented by the Central Government – which have deterred private investments – and the low production levels of the State-owned companies have had a negative impact on the domestic supply of products and, therefore, have generated shortages.

Venezuela registered a period of basic goods shortages, particularly food, between late 2006 and 2008. During that period of time, national statistics show an increase in the shortages of sugar, meat, powdered milk, chicken, eggs, rice, corn flower, sardines and vegetables.

Given that food production increases at a substantially lower rate than that of sales to consumers, an important number of basic goods have to be imported. In 2006, 2007 and 2008, food import registered growth rates of 36.8%, 26.2% and 41.9% respectively. The President himself has acknowledged that approximately 70% of food consumption in Venezuela relies on imports.

Q. Many foreign companies, including U.S. firms, which have been adversely affected by Mr. Chávez’s nationalization policy, have filed arbitration claims against Venezuela seeking compensation. Does the Venezuelan government have the resources to compensate all foreign companies with legitimate claims?

In Venezuela, the chances of receiving a reasonable compensation are subject to various factors – contingent upon the fiscal revenue and, therefore, to the price of oil in the international market- that seldom lead to a relatively favorable and timely outcome.

The magnitude of the national income generated from the oil sector in the last few years has enabled the Venezuelan government to nationalize companies and implement new initiatives without compromising, in the short term, the flow of government spending in other sectors. A $1 increase in the average yearly price per oil barrel generates the Venezuelan government approximately US$ 400 million in additional revenues.

In theory, such resources would allow the Venezuelan government to pay for all acquisition costs. However, not all expropriations are created equal. Many factors are considered, including a company’s foreign property assets in sectors of international interest. Those companies seem to have an advantage over others in getting compensation from the State. On the contrary, domestic companies with assets in sectors of local interest face unfavorable conditions in receiving compensation.

When it comes to compensation, how do domestic companies fare compared to foreign ones?

Cases such as that of Sidor and Banco de Venezuela, as well as in the nationalization agreements of Cantv and electric sector companies – where compensation was relatively reasonable although not necessarily timely – dealt, for the most part, with property assets of foreign companies. These nationalizations garnered a lot of attention from the international community due to the actors, importance of the sectors, and the value of the assets involved in the transactions. Companies from countries in which the Venezuelan government has a geopolitical interest are better protected against the threat of expropriation. In contrast, companies that turn to international arbitration, such as Cemex and Exxon, have a low probability of reaching an agreement with the national government.

In the case of nationalizations of companies with domestic property assets, of sectors of relatively little importance in the international arena or of relatively low value, there has been a long or, at times, non-existent negotiation process with the government. That is the case in the taking over of agricultural land, agro-industrial installations or factories.  The government seems less worried about expropriating or negotiating a compensation agreement with national companies that cannot seek an international arbitration and whose nationalization has purely domestic implications. The companies that face a higher risk of expropriation are those in sectors that are crucial to advancing the government’s political agenda.

Q.  How have the expropriations policies of the Venezuelan government affected foreign investment in the country?

Eight years ago, the World Bank began publishing Doing Business – an annual report that measures the level of ease of doing business in several countries. The 2010 Doing Business studied 183 world economies, including 32 in Latin America and the Caribbean. According to the data, Venezuela is among the 10 worst places to do business in the world, and has the worst record in Latin America and the Caribbean.

The difficulties in doing business in Venezuela are present during the lifecycle of any company. In the first place, the average time it takes to start a business is 141 days, while the average in the rest of Latin America and the Caribbean is 61.7 days. In order to export goods from Venezuela, a company needs eight different documents that take an average of 49 days to be processed; the cost of exporting goods is approximately $2,590 per container. Imports take an average of 71 days to reach their destination; imports require nine documents and cost close to $2,868 per container. These numbers are quite different than those from other countries in the region.

In Panama, the region’s leading country in this arena, companies need only nine days, three documents and to pay an average cost of US $729 per container for its exports. Imports take nine days to reach their destination; only four documents are required, and the cost per container is US$879.

In case of bankruptcy, the average time required to close down a company in Venezuela is four years, while in the rest of the region, the average time is 3.3 years.