Changing Balance Of Power May Unlock Venezuela's Markets

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Taken down article. Forbes.


  • 1. 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.

2. 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. 3. 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 Hermgenes Lpez, 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 4. 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.