Over at Caracas Chronicles, they’re perplexed by a deal just signed to build a combined-cycle gas turbine power plant in Cumaná, Venezuela. The Spanish contractors, Iberdrola and Elecnor, want to charge €1.45 billion to build two 500-MW plants. The cronologistas caraqueños have done some digging, and found that €1,450 per megawatt is a lot to charge for a CCGT installation. The closest was a €1,225/megawatt project in Algeria. The highest that I knew of before they started investigating was a UAE project that came in around €890.
They conclude corruption. Are they correct?
Well … maybe. But to be fair, I suspect not.
Venezuela, you see, maintains exchange controls. Official transactions need to be made at the approved exchange rate. On the one hand, this shouldn’t bother the contractors all that much: they’re getting paid in euros, and the price of imported equipment is the price of imported equipment regardless of the denomination. The problem, however, is that the relative price of all of their domestically-sourced inputs will be much higher.
Think of it this way. Imagine you imported €1000 worth of machinery to Venezuela in 2004, after paying Venezuelan tariffs (around 20 percent) and taxes. In that same year, a manufacturing worker cost €7,388 to employ for a year at the official exchange rate. You could buy a worker-year for 7 units of machinery. By the middle of 2009, after several years of high inflation in Venezuela, that same worker cost €12,720 to employ — a worker-year now cost you the equivalent of 13 units of machinery. Unless you figured out a way to use half as much labor as you did in 2004, your labor costs (in euros) have just doubled. (All data comes from the Banco Central de Venezuela.)
In fact, the same problem applies for all domestic inputs. According to the Venezuela central bank, the bolívar cost of construction materials (including taxes) rose 230% between 2004 and the middle of 2009, while the official exchange rate remained the same. That’s going to further drive up your costs.
If it turns out that the Bolivarian Republic has agreed to let the contractors use the parallel exchange rate to purchase bolívares, then this analysis goes out the window. But if the contractors have to use the same exchange rate as everyone else when buying local inputs, then the price that they are charging for the plant seems entirely reasonable ... even without taking into account the political and economic risk. (Will PDVSA pay everything up-front? Will inflation in Venezuela accelerate? Will there be labor trouble?)
In other words, unless the contract exempts the Spanish companies from exchange controls, then I doubt that there is much corruption to be seen in this case. Bad economic management yes, corruption no.
Does anyone have more details about the contracts?
Comments