June 10, 2008

What Primero Justicia Wants, Part I: Oil and energy

Katy says: This is the first of a series of wonkish posts on the specific proposals of Venezuela's opposition political parties.

We start off with Caracas Chronicles' exclusive excerpt of Primero Justicia's platform. These proposals were approved last October in an Ideological Congress, but the final version has not yet been made public.

These posts are translated summaries of the original document. The original version is available from me, via email.

Full disclosure, for those of you who don't know: I'm a member of Primero Justicia and I helped edit the platform document. However, my goal in writing these posts is not to advocate this or any party. Rather, it is a way of adding something to an ongoing debate regarding opposition political parties.

The diagnosis.-

Any analysis of Venezuela's problems, any solution put forward, should probably begin with oil. Oil is not only the source of our wealth, it is also one of the reasons the country is so ... Venezuelan. Oil has shaped our culture, our cities, our government and our way of life in ways ordinary Venezuelans do not yet fully grasp.

The current model is just a rehash of the one that reached its nadir in the 1970s. It sees oil as the source of needed rents and not much more. People at the top use oil as a tool to advance their personal interests, and matters of the State boil down to a struggle for oil rents.

Primero Justicia's proposal seeks to change the way society relates to oil wealth by limiting the State's discretion in the distribution of oil rents. The main basis of their philosophy is that as oil belongs more and more to the State, it belongs to Venezuelans less and less.

Their platform recognizes that Venezuelans, ever since Gómez, have been living under a collective illusion that oil resources are "public" when, in fact, they have always been "state-owned." The two are quite different. Since their main proposals (and, in fact, the party's name) deal with justice, they view increased involvement by the public in the oil industry as a matter of justice, of exercising a Constitutional right.

The platform regrets that the country is not taking advantage of all its oil-producing potential. It laments our decreased production capacity, where the lack of investment in our industry means we lose markets to our competitors. It expresses outrage at the continued involvement of politicians in making technical decisions within PDVSA, and the blurring of the line between the State's regulatory and productive functions.

This translates into the oil industry's transformation from a source of wealth for the country into a tool in a complicated political game. The constant giveaways to friendly foreign countries means the industry is used as a diplomatic sledgehammer instead of a source of wealth for Venezuelans.

Due to Chávez's new legal framework, public and private investment have dried up. The industry is now smaller, less safe, more damaging to the environment and, in general, in much worse shape than it should be.

The proposals.-

Primero Justicia's proposals for the oil industry can be summed up in a single sentence: making oil a source of prosperity for current and future generations.

The key proposal is the separation of the State's regulatory and productive functions. Under this vision, the State would set volumes of production according to different criteria (OPEC quotas, market realities, etc.), while PDVSA would simply be one of the State's companies in charge of implementing these measures, a company that generates rents in the most efficient way possible in order to maximize the value of the company for the shareholders - which would now include all Venezuelans. They believe the people making the political decisions should not be the ones carrying them out.

In order for this to work, they want to create a separate regulatory office. This would be a technical, semi-autonomous body in charge of making sure that the State's decisions regarding oil are carried out by PDVSA and all other oil companies in the country in the most efficient way possible. By separating the policy-making, regulatory and productive functions of the State, the party believes the incentives in the industry will be brought into line with what most benefits Venezuelans and help us make significant progress in preventing the further encroachment of corruption.

In order to change the way Venezuelans relate to the State, Primero Justicia proposes that part of the State's oil income go directly to individual health funds, retirement funds and workers' compensation funds (it is not clear in what proportion, nor what strings would be attached). The idea is that by limiting the State's role as an "intermediary" between the goose that lays the golden eggs and the goose's rightful owners, the perverse incentives that breed corruption will diminish. The party proposes using the oil development funds of Alaska and Norway as blueprints for these individualized accounts.

As part of this reorganization scheme, Primero Justicia also proposes that Venezuelans be given shares of PDVSA and all other state-owned oil companies. This, by the way, does not mean the State would relinquish its role as majority shareholder, but it would imply that citizens not only have a direct stake in the company's financial well-being, but that oil companies would be required to meet national and international rules regarding transparency and accountability. TO my knowledge, it is the first political party of significance in Venezuela advocating such a scheme.

In order to carry out these proposals, the party advocates changing existing legislation thoroughly, although it also highlights the importance of consensus wherever feasible. Flexible business models should be allowed, under the strict supervision of the State, in order to take advantage of the market's changing conditions.

The party believe that laws should increasingly allow private companies - both foreign and domestic - to participate in the business. They propose changing articles 9 and 22 of the country's Organic Hydrocarbons Law. They favor flexible royalties to be used for the development of less profitable areas of the oil business.

The party comes out in favor of a significant increase in production, a proposal that should not be controversial given how PDVSA's own expansion plans promise a significant expansion as well. It is also firmly against giving oil to our neighbors in conditions more favorable than the market suggests.

The party adopts a somewhat skeptical stance regarding OPEC, which is seen as both a tool for development as well as a potential harm to our sovereignty. While they advocate staying in the cartel because it serves Venezuela's interests, they believe we should adopt a more aggressive position within the cartel. They believe our policy toward OPEC should reflect the need to develop our industry, increase our capacity and open new markets for Venezuela's oil, considering our country's unique geographical position and the average quality of Venezuelan oil.

They also favor fair prices that compensate the necessary investment in the industry but also preserve our oil's value in the medium- and long-run. In other words, PJ is concerned that when prices are too high they hurt us in the long run, because they damage the economies of the people buying our oil and increase the incentive to develop alternative sources of energy.

Other proposals include strengthening PDVSA's research and development capacity, investing in technology and increasing research associations between the industry and universities. They favor policies that help create a significant private oil sector in Venezuela, by favoring domestic contract firms and creating oil-based clusters where knowledge and technology can flow more freely.

Moreover, they favor policies for the development of the natural gas and electricity industries. These involve recognizing the need for investment and the opening up of these sectors to private capital.

Finally, PJ emphatically favors changing the way our internal energy markets work. In other words, they don't believe Venezuelans should get cheap gas regardless of their income level. They believe that the current system is regressive, because it subsidizes the consumption of energy by rich Venezuelans. The solution they propose is the elimination of subsidies to rich Venezuelans and a gradual shift to a system of progressive, sustainable and explicit subsidies to poor Venezuelans.