Wednesday, January 10, 2007

Taking over CANTV: A good idea? 

This past Monday Chavez set off a firestorm of controversy when he said that the principal Venezuelan telecommunications company, CANTV, would be nationalized. He based the desire for nationalization on the fact that CANTV used to be a state owned company until it was privatized in the early 1990s and that according to Chavez CANTV is a “strategic” companies.

Without a doubt Chavez, coming off a huge electoral victory, has the political capital to take bold actions. The question is the, what precisely does Chavez mean when he refers to nationalizing CANTV and would it be beneficial for Venezuela?

Chavez himself didn’t explicitly say what he meant by “nationalization” so we can only try to guess what he meant. Traditionally, when people hear the word “nationalize” they think of a government seizing or confiscating private companies without paying compensation. Given Chavez’s leftist credentials and rhetoric this is probably what many think he will do with CANTV.

However, if we examine this situation further we can see that scenario is very unlikely. Two important facts need to be kept in mind. First, Venezuela has a significant number of assets in the United States, not the least of which is the large petroleum company, Citgo. Second, CANTV is partially owned by the U.S. telecommunications company Verizon and its outstanding stock, which trades on U.S. exchanges, is owned by people all over the world.

What this means is that if the Venezuelan government were to attempt to seize CANTV without compensating its current owners they would be stepping on a lot of toes, outraging some powerful American interests, and would be vulnerable to being sued in U.S. courts and having their valuable assets there seized. If Venezuela were planning on confiscating CANTV the logical thing to do would have been to divest themselves of all their assets in the U.S., like Citgo, so they would have nothing to lose. As it stands now, if they nationalize CANTV without compensation they will just lose assets in the U.S. of at least an equal value and will get no gain from the nationalization.

For those reasons, a seizure of CANTV is highly unlikely. If Venezuela proceeds with its nationalization plans it will almost certainly compensate its current owners(this has now been confirmed by the government here). The most recent valuation of CANTV that I have seen put it at about $1 billion so that is more or less what they would have to pay for it. Now, the Venezuelan government certainly has far more than $1 billion just laying around which it could use to make this purchase. The question is what would Venezuela gain by purchasing CANTV and would it be worth spending that amount of money?

First, lets take on the national security angle which is what the “strategic” industry term implies. Does having foreign nationals own, equip, and effectively run a Venezuelan telecommunications company pose a threat to Venezuela? The answer I think is only to a limited extent and the act of nationalization itself wouldn’t solve that problem.

Venezuela could be concerned that with the company being technically run by others they have no secure communications. Also, by being dependent on technology from the U.S., for example, they are vulnerable to the U.S. in the future being unwilling to service that equipment and supply replacement parts as happened to Cuba and Nicaragua.

While those are legitimate concerns nationalization doesn’t effect them. For example, communications by government officials and the military do indeed need to be secured. But to do that those groups of people should be using completely separate communication networks set up with technical assistance from countries with experience in this such as Cuba, Russia, or China. If Chavez is talking to Fidel Castro over regular CANTV phones that is insane to begin with. You can bet Bush doesn’t call Tony Blair using MCI or T-mobile.

As far as losing access to replacement parts and maintenance that will be an issue irrespective of who owns CANTV. Venezuela itself doesn’t make telecommunications equipment so it has to buy it from someone. Most likely CANTV’s systems are set up using American equipment so they would be vulnerable to a cutoff from the U.S. But that will be the case even after a nationalization unless they undertake the very expensive proposition of buying all new equipment from some other country. Further, there is no country which can guarantee that they will never cut them off and those that are least likely to cut them off for political reasons, such as China, would probably be selling them an inferior product. Unless Venezuela undertakes the time consuming, difficult, and expensive project of creating its own telecommunication equipment industry there is really no way to eliminate this vulnerability.

So nationalizing CANTV really makes no sense on national security grounds. Communications that truly need to be secure should be over separate networks built by a trusted source and for the national communications network there is really no way to avoid buying the equipment from some foreign source. Security is therefore not a reason for the Venezuelan government to buy CANTV.

The next thing to consider is whether there are valid economic reasons for wanting to purchase CANTV. If Venezuela spends $1 billion to purchase CANTV what is the country getting in return or what would it have that it doesn’t already have?

Of course, if the government buys CANTV then Venezuela will have a big, efficient, comprehensive telecommunications company that employs thousands of people and allows Venezuelans to easily communicate amongst themselves. Thing is, Venezuela already has a big, efficient, comprehensive telecommunications company that employs thousands of people. So the Venezuelan economy will have gained nothing, there won’t be even a little blip upwards. Please also note, I am not even bringing up the fact that historically speaking state run companies have been run less efficiently than private ones and have often sustained financial losses while offering inferior service.

To see this a little more carefully lets think about some of the alternative uses that $1 billion could be put to. If it was invested in building and equipping a refrigerator factory look at what Venezuela would gain: it could have a new factory creating new goods that could be consumed domestically and exported, new technology, and thousands of new jobs creating new value for the Venezuelan economy. Of course, the refrigerator factory could fail, lose money, and go out of business or need additional subsidies. But that is equally true of CANTV – there are no guarantees it will be well run. At least in the case of the refrigerator factory if it works Venezuela will have something valuable that creates more wealth. Even if the government does a good job of running CANTV Venezuela just winds up with what it already has, there is no new economic activity. Clearly Venezuela has better uses for its money than buying CANTV.

The last argument that would probably be made in favor of nationalization is that if the government owns it then all the profits would accrue to Venezuela and wouldn’t get paid out to gringo (or rich Venezuelan) shareholders. That is, if CANTV made $100 million in profits last year now those profits would accrue to the Venezuelan government which means that Venezuela would have $100 million more.

But even that is not what it seems. First, there is no guarantee those profits would still be earned. If the management of the company deteriorates those profits might disappear. Also, as a state owned company there would probably be pressure to reduce its rates and add service so that profit margins would be reduced (incidentally, if the issue with CANTV is that people think its rates are too high those rates can be regulated by the government – that happens to private telecommunications companies all over the world). More importantly, the refrigerator factory I mentioned above could also earn high profits and it has the added benefit of creating new economic activity and new jobs at the same time. Finally, if the goal is for the Venezuelan government to simply invest money and make a profit it could instead just pay off some of its foreign debt and save money on interest payments – that would be probably a 10% rate of return and it is guaranteed with no risk at all.

Having gone through this it is clear that Venezuela gains little or nothing from nationalizing CANTV. It won’t be more secure. Economic activity won’t be increased. And its not even the best potential use of its money. When thought through the nationalization of CANTV simply makes no sense.

This is not to say there aren’t nationalizations or government buyouts of foreign firms that make sense. For example, last year the Venezuelan government bought a majority stake in the joint oil ventures producing in Venezuela’s marginal oil fields. The reason was that the private companies controlled the accounting operations of those joint ventures and were using that control to inflate costs, which the Venezuelans were contractually obliged to pay, and therefore fleecing Venezuela of billions of dollars annually. So the specifics of that case made it a very good idea for the Venezuelan government to up its stake in those companies as the country now gets billions in extra revenue.

The moral of that story is these situations need to be evaluated on a case by case basis. Having done that in the case of CANTV we can see it really doesn’t benefit Venezuela to take over the company. Interestingly, Chavez didn’t revisit this issue during his inauguration today. Plus he does have a history of “thinking out loud” and floating some ideas which are never implemented, most likely because he later finds them flawed. Hopefully that will be the case here before valuable resources with alternative uses are wasted.


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