Changing Balance Of Power May Unlock

Venezuela's Markets

Hilary Kramer

Forbes

3:35 p.m. CDT, September 26, 2013

I consider Venezuela the most special of environments - filled with spirited, talented

professionals spanning from academia to medicine to communications and, of course,

technological innovators and entrepreneurs. The country is also one of the most naturally

beautiful countries in the world. I am honored to have spent a decade working on projects

and investments in Venezuela as well as exploring the countryside with its jungles,

mountains and impressive rivers. This visceral affection for the country has also brought

me into speculation mode with every twist and turn of the political and economic changes.

Today is clearly no exception and recently I had the opportunity - amongst numerous

travels to Africa, Central Asia, the Caucuses and Europe - to stop in my old stomping

ground, Caracas, and learn about the up and coming companies as well as conflicts

brewing around them.

While it seems a lifetime ago, there was a moment in the late 1990s when Caracas was the

home of one of the most vibrant securities markets in the Latin world and the cousins now

leading the charge to keep Venezuela's lights on and lines of capital open were still

studying business at college in Boston.

Those of us who remember the glory days of investing freely in world-class companies like

Corimon, CanTV and Banco Provincial do not need to be told that in the post-Chavez

world it is nearly impossible to get direct access to the Venezuelan economy, which at $382

billion in annual GDP is only slightly smaller than South Africa's but has been so starved

that the market now turns over barely $750,000 a day.

State oil producer PDVSA, which generates an estimated 95% of the country's exports and

supports more than a third of all economic activity, still has dollar bonds on the market, but

the gigantic company is still considered so closely tied to government caprice that its debt

is considered a trade instrument. Fights with rating agencies over transparency and payment

practices have left the company's credit rating deep in "junk" territory and daring investors

demand 12.5% in interest - a full 3 points above coupon - to even look at this paper.

But while a decade of nationalization and scorn for the rights of minority investors has left

Venezuelan industry hungry for capital and local infrastructure running - sometimes

literally - on oil fumes, there are signs of new approaches emerging to bridge the divide and

solve the problems.

Given the dearth of more formal instruments, these next-generation ventures and their

commercial partners are probably the best way global capital can get involved with one of

the 30 biggest economies on the planet and not get directly into bed with PDVSA and the

emerging post-Chavez government. It is possible to operate here. You just have to know

how to play the game.

The young men trying to open Venezuela for business are an example of how playing the

system can change the game and deliver better outcomes for investors, international

conglomerates and the Venezuelan people. Alejandro Betancourt Lopez and Pedro Trebbau

Lopez were raised in one of Caracas' oldest families and educated in U.S. business schools.

Their company, Derwick Associates, builds power plants.

While Venezuela is blessed with some of the world's richest petroleum reserves, its aging

power grid has never kept up with modern demand for electricity and remains subject to

frequent, catastrophic blackouts. Just last week, 70% of the country - 21 million people -

lost power for as long as three hours after a transmission line failed. Political sabotage was

blamed but the sheer load on the system makes it more vulnerable than it would be

otherwise.

And while Venezuela is blessed with a dynamic, ambitious, entrepreneurial population,

modern industry still stops in the absence of power. Factories lost half a day. Offices idled.

Schools sent the kids home. Hospitals were forced to allocate emergency generation

capacity on a triage basis or else leave patients in the dark.

Multiply that afternoon by months and years and it's hard to create sustainable growth. But

because Chavez made Venezuela infamous for seizing whatever international assets were

available and attractive, the world's power plant conglomerates are less than willing to

work with the country.

Power plants are complex and expensive. GE , Rolls Royce, Sumitomo, Bechtel: none want

to front the $100 million bill to build one for Venezuela when there's no guarantee the

government will pay - and, even when it does, the overhead costs of dealing with

Venezuela's contracting agency are enormous. Very few smaller entities can take on those

billing challenges or accept such a high level of risk.

But Derwick Associates has the reputation in both the U.S. and Venezuela to make all the

entities involved in building a power plant move together. On project after project, Derwick

Associates know-how, experience and, yes, political connections makes it possible for the

company to secure the permits, put together competitive bids and then keep all the

contractors moving until the plant is done and the lights come on.

So far they've done it 11 times in 3 and a half years and added enough power to the

Venezuelan grid to take care of well over 800,000 households, or about 10% of the

population. The twelfth plant should be online shortly. As a humanitarian and a fan of

economic development, I think it's great. As a friend of the Venezuelan people and an

investor who remembers Caracas in the boom years, I think it's incredibly exciting.

Derwick plants do incorporate gas turbines and other heavy hardware from GE, Pratt &

Whitney and other global industrial manufacturers. Often, these companies are unwilling to

deal directly with Caracas because of the risky political environment - and the potentially

risk alienating U.S. military contacts when tension between the countries was at its highest.

These companies, however, are perfectly happy to make a third-party sale. Either way, the

Venezuelan grid continues to improve instead of simply deteriorating.

And instead of simply paying GE or Siemens hundreds of millions of dollars to fix the

country and then leave, the core expertise on display here is 100% Venezuelan. The Lopez

family could have stayed in the United States after college, but they thought it was

important to come home - their great-grandfather was Hermógenes López, the former

president of Venezuela - and enrich their country.

Yes, working in Venezuela meant working with Hugo Chavez. But Chavez wanted to keep

the lights on too. When Chavez came to power, barely 33 megawatts of electrical

generation capacity had been added to the grid in the previous decade and the situation was,

if anything, even more substandard than today. The smallest of the plants that Derwick has

built opened up 22 megawatts and, incidentally, created 1,100 jobs. The largest so far is

over 10 times that size and vastly more efficient.

The bureaucracy in Caracas is famously corrupt. It does, however, require that all

companies that contract with government-owned companies must receive approval from the

Registro Nacional de Contratista (the National Contractor Registry). That requires an audit

from a major auditing firm. That requirement, coupled with the American-educated

principals at Derwick Associates understanding the value of running a clean company, led

the company to hire RSM International. I was relieved to find that RSM International,

determined that the company won its contracts legitimately and did not pad its costs with

money that ultimately belongs to the Venezuelan people.

If anything, the people are basking in the public works that Derwick builds - often by

necessity as trucks need to reach remote villages and workers need modern housing -

wherever they go. Soccer fields and convent schools are nice PR, but clean water, paved

roads and above all electric power are the keys to modern economic life for millions of

Venezuelans in inland Venezuela, historically one of the poorest regions in South America.

As yet U.S.-based investors still can't invest directly in Derwick Associates or any other

Venezuelan company. But in this case, instead of making me wistful, it's exciting. We're

almost back to where we were 15 years ago as GE and UTX and other supply partners

tiptoe back into the country. As they go, the stocks will follow.