Trapping Investors in Venezuela

The foreign investors that come to Venezuela generally do so to tap into the enormous rates of return to be had in the country's energy sector. With one of the world's largest oil reserves and a government craving the technology and the capital to extract it, the South American country is rife with opportunity.

However, such high returns also come with extremely large risks: an overbearing regulatory regime, no judicial protection, a government that puts politics above business, and rulers that frequently seem to act on a whim.

Much of Venezuela's oil sector is, to put it frankly, in diapers. According to the U.S. Energy Information Agency, in 2012, Venezuela had 212 billion barrels of oil in proven reserves. This is only topped by Saudi Arabia's 267 billion barrels. Yet, much of this wealth remains untapped.

Whereas Saudi Arabia pumps almost 12 billion barrels of oil per day, Venezuela is only pumping a fifth of that amount. The gigantic Orinoco oil belt in southeastern Venezuela, which holds much of the country's reserves, is not being exploited to its full capacity.

This unfulfilled potential also lurks in other areas of the economy. For example, Venezuela has the largest proven reserves of natural gas in South America, and yet it exports none of it. Much of this has to do with lack of technology. For example, neighboring Trinidad and Tobago -- which has opened up to foreign firms that brought with them significant technological advances -- is a natural gas exporting powerhouse.

Since high oil prices would more than enough cover production costs, the returns on investing in oil are there for the taking -- provided you get on the government's good side. In hyper-politicized, revolutionary Venezuela, the only institution left standing is the presidency itself.  If you get in the strongman's good graces, he will be willing to give you assets and a juicy partnership. This ensures that the courts will do your bidding, you will have no labor problems to speak of, and you will not be hassled by regulators.

This, however, comes with a huge caveat. Similarly to being in business with the mob, things can change on a dime. When you're in the good graces of the people in power, things are very, very good. When you're out of favor, you end up "sleeping with the fishes."

ConocoPhillips learned this the hard way.

In 2007, ConocoPhillips -- then a partner of state oil giant PDVSA in exploiting the Orinoco oil belt -- found it had fallen out of the good graces of the ruling clique. Then-President Hugo Chávez nationalized the company's assets without suitable compensation, so ConocoPhillips decided to sue Venezuela in the World Bank's International Center for Settlement of Investment Disputes (ICSID), an international court that handles these issues.

The three-judge panel ruled against Venezuela, deciding that Venezuela had indeed seized ConocoPhillips' assets without due compensation. Curiously, it based its ruling solely on an obscure International Treaty Venezuela signed with the Netherlands in 1991 which said, roughly, that any Dutch national could bring claims regarding nationalization to the ICSID unilaterally. Luckily for ConocoPhillips, it had transferred its stakes in the joint venture to its Dutch subsidiaries a few years prior to the seizure of its assets, so this obscure treaty protected it.

In its ruling, the panel observed that Venezuelan law does not allow for international arbitration practices, but that the Netherlands treaty does. The damages phase for Venezuela is ongoing, and legal scholars have stated that any assets Venezuela holds in member countries could be used to pay for damages. Venezuela stands to lose much from this process.

Whether it was luck or strategy, an obscure investment treaty from 1991 was the only thing that saved ConocoPhillips -- and that speaks volumes about the risks facing foreign investors in Venezuela. Venezuela's laws are so arcane that investors require an international tribunal to protect them; internal legislation does nothing to protect foreign investors from being expropriated. Venezuela is the country with the second largest haul of cases brought before the ICSID for precisely that reason. Venezuela is not happy about this, and it has made it clear that, from now on, anyone interested in investing in the country will have subject themselves to the country's notoriously corrupt courts. It has also repeatedly denounced the Netherlands treaty, and withdrawn from the ICSID.

Venezuela needs foreign investment, and it gets very little of it. Without foreign investment, Venezuela will not fully realize its potential and its economy will miss out on a chance for significant growth -- this at a time when the country is suffering painful shortages. By the time production ramps up, oil prices may have reverted to the mean, and Venezuela will have lost a significant opportunity. In order to change this, it needs rules that protect investors' assets. It needs to see foreign investors as partners and welcome them instead of leaving them out in the cold.

If Venezuela's rulers do not get this into their heads, investing in the country will remain an extremely risky endeavor.

Juan Nagel is the Venezuela blogger for Transitions, co-editor of Caracas Chronicles, and author of Blogging the Revolution. Read the rest of his posts here.



The African Statistics Smackdown, Continued

When I published my book on African economic statistics earlier this year, I never expected it would ruffle quite so many feathers. Last week, Foreign Policy published a story about the latest chapter in this lamentable epic. After the United Nations Economic Commission on Africa (UNECA) invited me to present my research on African statistical capacity, other presenters withdrew their names in a boycott led, notably, by Pali Lehohla, the statistician-general of Statistics South Africa -- leading me to be dropped from the conference. But rather than engage with my ideas, Lehohla and his self-proclaimed union of "African Statisticians" seem to be focused on attacking me rather than the issue at hand. It's ultimately a self-defeating campaign.

I can understand why any statistician would take exception to having the validity of his or her numbers dissected in the public. In Poor Numbers I take a close look at how African economies have been measured in the past, and extrapolate from that what we really know about income and growth in sub-Saharan Africa. The short answer: a lot less than we like to think. The data are unreliable and potentially seriously misleading. It's all too easy to imagine how that conclusion came off as threatening to some of my African colleagues who are responsible for generating these questionable numbers on the economic performance of their countries.

But that still doesn't explain the vitriol with which my research has been greeted by some civil servants in South Africa and Zambia recently. They've accused me of acting as a "hired gun" for foreign powers and have claimed that I didn't do my own research. It's been hard to keep up with the outrageous allegations and defamations spread by Lehohla -- something that I find hard to square with his public role as a guardian of national statistics, which are supposed to be based on objective information.

One intriguing aspect of the whole affair is that the Zambians and the South Africans accuse me of contradictory sins. Pali Lehohla's allegation that I haven't done my research stands in stark contrast to the position of his Zambian counterpart, who wrote a reaction to my book making exactly the opposite argument. Lehohla's problem is that I have done my research and that I have done it well. Neither Pali Lehohla nor the Zambian statistical office has come up with any factual basis for disagreeing with the diagnosis I present in my book. The IMF's Regional Outlook Reports for Africa team, as well as UNECA and AfDB, actually carried out replication studies on the comparable statistics in African countries, and confirmed the pattern that I found. Meanwhile, the World Bank's Chief Economist for Africa published an article affirming my research on what he calls "Africa's statistical tragedy."

Instead of accepting the validity of my research, Lehohla has also accused me of "failing to reference any of the work already being done by Africans." That is false. Not only do I cite a number of such sources, I have also published an article with Magnus Ebo Duncan at Ghana Statistical Services in the African Statistical Journal, and continue to work with statisticians working in Africa. Lehohla knows this, and so does Dimitri Sanga (whom I reference) of UNECA, who is cited as disagreeing with my work in FP. But both Sanga and the Director of UNECA have quoted my analysis affirmatively and approvingly elsewhere. Lehohla claims that some "African" consensus decision was made last April to oppose my book after a conference in Vancouver. Yet I wasn't invited to present my work at UNECA until last week, and this invitation was revoked only after Lehohla's disgraceful intervention.

This squabble is not limited to academic journals: It may have real, serious consequences. Because Lehohla has put reality aside and devoted himself to "stopping Jerven in his tracks" before I "[hijack] the African statistical agenda," there is a real danger that good initiatives may be suspended and cancelled. Any observer of this debate is likely to draw two conclusions. One: the quality of African statistics is a problem. Two: some of the leaders seem to react very aggressively rather than doing something about it. When Bill Gates read Poor Numbers he concluded that it was time to invest in better GDP statistics. But is it likely that he and others will allocate more resources to the officials that seek to censor public debate? I fear that the public statements made by Lehohla and his supporters may serve to confirm to skeptic observers that statistical offices are part of the problem and not the solution.

Poor Numbers makes an unprecedented argument for investing in the statistical capacity of African countries. Why would Lehohla and his silent supporters go against this? The answer is simple: Pali Lehohla and his counterparts are doing well in the current system. Any change to the status quo in the political economy of statistics in Africa is considered a threat.

Meanwhile, I still think any effort to provide the public with better statistics must engage with statistical offices and their interests. I worry that while there is an increasing demand for evidence for policy, we forego the opportunity to invest in accountability. I think it is a mistake to think of data as a technocratic search for facts. It must be viewed as an exercise in building institutions. For all the recent talk of institution-building and governance in development circles, there has been a surprising gap in analyzing the statistics off which all other initiatives are based. My work aims to set this imbalance right. It is frustrating when other agendas stand in the way of such an exchange. In the meantime, I take some comfort from the many expressions of support that have been relayed to me. I hope, when the dust settles, that we are ready for a free and open debate where all parties feel able to take part.

Morten Jerven is an economic historian teaching at Simor Frasier University. Earlier this year, he published his first book, Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It.