Lights Out in Caracas

By MARY ANASTASIA O'GRADY
February 5, 2007

Venezuela's congress didn't sing the Internationale last week when it granted President Hugo Chávez the power to rule by decree in a ceremony on Caracas's historic Plaza Bolivar. But it did pledge unwavering allegiance to a socialist revolution that rivals the Paris Commune. It was the moment Venezuelans had been dreading for years: the official installation of the dictatorship.

Mr. Chávez had asked congress for the power to rule by decree because, he said, "it is necessary to draw up the mother of all revolutionary laws, especially in the area of economics." Now that he can govern unchallenged, the first order of business under the new rules, he says, will be to seize control of the largest private electricity company in the country (Electricidad de Caracas), the privately held oil operations in the Orinoco Belt, and the country's largest telephone company, known by its Spanish initials as CANTV. This is shades of Cuba 1960, and if things go according to plan, it won't be long before Caracas could start looking like Havana.

Venezuelans have been watching their democracy slowly suffocate for seven years now. The militarized government has methodically gobbled up institutional independence; it has bribed where it couldn't bully; it has sowed hateful class envy. Each valiant effort by democrats to hold ground and salvage civility sapped a shrinking supply of fortitude.

Thoroughly frustrated by a rigged system, opponents called for a boycott of the congressional elections in December 2005. An abstention rate of 75% to 80% confirmed widespread dislike for the president. But the few who showed up gave Mr. Chávez's sympathizers 100% of the congressional seats. That's how the president, "reelected" in December 2006 in a process that was neither free nor fair, managed to get the legislative branch to hand him dictatorial powers. One Venezuelan newspaper captured popular opinion last week with the headline "Heil Hugo."

Comparisons between Mr. Chávez and Europe's 20th-century dictatorships are natural but they overstate the Venezuelan president's management skills. At least Mussolini made the trains run on time. Mr. Chávez, on the other hand, seems to possess a reverse Midas touch. Under his leadership the country has soaring murder rates, double-digit inflation, food shortages, oil-field depletion and a massive brain drain. Petroleum prices are coming off all-time highs but a Jan. 25 Economist Intelligence Unit briefing referred to Venezuela's "difficult economic climate," as well as "unattractive" labor markets and "severely distorted" financial markets. The most high-profile infrastructure news in the past seven years has been the collapse of one of the country's busiest bridges.

The more likely fate of Venezuela under Mr. Chávez is that of Cuba, once the third-richest country in Latin America and now so poor and backward that it would take a major economic upgrade to qualify it as a banana republic. Sadly, this is where Venezuela seems to be heading.

Much has been made of the threat to seize private property in the Orinoco oil fields, and to be sure this is a serious matter. Oil companies tend to yield to tyrants and Venezuela is likely to get away with a lot, even though it badly needs private-sector technology. But the oil industry is not the only one getting pummeled. An equally alarming assault on property rights is the promised expropriation of the most reliable supplier of electricity in the country: Electricidad de Caracas (EDC), now owned by the U.S. company AES.

EDC is not only a well-run, private-sector enterprise. It is also a symbol of the entrepreneurial ambition of Venezuelans before the 1973 oil boom that changed the psyche of the nation. The company was founded by a young engineer named Ricardo Zuloaga, who read about hydroelectric transmission in a scientific journal in 1891, spent years raising capital, traveled to Europe to acquire the necessary equipment and, once back in Venezuela, transported it on mules to build the plant. EDC began supplying electricity to Caraqueños only about one year after the Niagara Falls electric plant started up in the U.S.

EDC remains Caracas's power supplier today and is one of the few things that still work in the country. But that could soon change. The government doesn't have a very good record of running utilities. In 2006, according to the Venezuelan daily El Universal, the state-owned electric company Cadafe, which supplies most of the rest of the county, was responsible for 70 of the 92 major power outages that affected Venezuelan electricity users. Other state-owned generation, transmission and distribution facilities were responsible for a majority of the remaining 22 failures. EDC, which both generates and distributes electricity, experienced only three major outages last year.

Things got so bad halfway through 2006 that, according to a report in the July 21 issue of the economic newsletter VenEconomia, there was a spate of protests -- some violent -- against the headquarters of Cadafe and its subsidiaries for the increasing frequency of power failures. VenEconomia commented on "the incomprehensible paradox" of Cadafe's performance in a country with abundant energy sources.

The explanation is simple: There has been serious underinvestment in power generation and transmission at Cadafe during Mr. Chávez's tenure. "From 2001 to 2005 Cadafe completed barely 24% of its investment objectives at a time when it registered millions of dollars in operational losses," VenEconomia noted. Meanwhile, energy demand increased 9% per year nationwide since 2003, and in some areas of the country demand jumped by as much as 20% per year over the same period. Though Cadafe had been budgeted more than $2 billion in government funds, VenEconomia said, the company warned that the new thermal generation projects would take between two and three years to complete.

When AES bought EDC in a hostile takeover in 1999, investors were already bailing out of Venezuelan assets due to the shadow Mr. Chávez was casting on his country. AES thought it got a bargain. But it may turn out to have overpaid. The Venezuelan government has still not said how it will value the company, but it is doubtful that investors will receive the market price.

The real losers in this deal are likely to be the people of Caracas. They will not only have to suffer all the tribulations of a state-owned electric company; they will also be living in an environment where investors have been driven away.