Atlas is Shrugging – In Venezuela, the Lights Are Going Out

by Juan Christobal Nagel, Foreign Policy:

Venezuela is, once again, in the throes of a full-blown electricity crisis. Citizens complain of unannounced blackouts are shutting down factories, forcing shopping malls to close early, and otherwise wreaking havoc on an already-sputtering economy. The crisis is so severe that President Nicolás Maduro has curtailed working hours for government workers. Last week he even extended the Holy Week holiday to reduce power usage.

And Venezuelans are preparing for even worse news. Many are anxiously monitoring the dwindling water supply of the enormous Guri dam, which supplies roughly half of the country’s electricity. Experts are predicting that, as soon as next week, water levels will reach such a low level that the turbines will have to be shut down. If that happens, the electricity crisis will turn into a catastrophe.

As Venezuelans await the fate, they must be wondering whether their country’s electricity supply will outlast its incompetent government. Because even though the imminent shutdown of the Guri dam is the result of a drought, it’s the socialist government’s incompetence — manifested in myriad fashions — that is the root cause of the energy crisis.

Drought aside, there are two main reasons for the crisis: excessive electricity consumption and insufficient production. And the root of both of these problems is bad governance: populism, poor planning, inflexible ideology, and overwhelming corruption.

In other words, if you wanted to engineer an electricity crisis, you would do well to follow Maduro’s recipe.In other words, if you wanted to engineer an electricity crisis, you would do well to follow Maduro’s recipe.

Let’s start with Venezuela’s electricity consumption, which is is extremely high by Latin American standards. According to the World Bank, energy usage per capita in Venezuela in 2012 was 40 percent higher than in neighboring Brazil and nearly 200 percent higher than in neighboring Colombia.

Part of the reason is that Venezuela’s oil industry consumes large amounts of electricity. But much of the difference comes from the insanely low prices the country’s consumers pay. Thanks to price controls, a family of five living in an upscale neighborhood with several air conditioners seldom receives electricity bills higher than the equivalent of $1.50 at black-market exchange rates. Meanwhile, many families who live in poor neighborhoods pay nothing at all because their homes are hooked up to the grid illegally. This has both encouraged wasteful electricity usage and left electricity companies starved for cash.

The other major problem is that Venezuela’s generation of power has not kept up with demand. Following both the dictates of his ideology and the temptations of populism, the late Hugo Chávez nationalized the country’s electricity sector in 2007. As a result, for close to ten years, the Venezuelan state has been the country’s sole provider of electricity.

The result of this experiment has been a disaster, with current generation capacity being simply insufficient to provide reliable service. Dozens of generation projects have been announced in the years since the nationalization, but many have fallen prey to corruption and mismanagement. Local investigative journalists allege that the sticker price for these projects far exceeds international norms, and that some plants were never built at all. Some of these allegations were confirmed by an internal government investigation, but the true extent of the corruption is unknown due to a lack of transparency.

One illustrative example has made headlines just this week, when U.S. and Swiss authorities launched probes into Derwick Associates, a Venezuelan firm that builds power plants for the government. No criminal charges have yet been filed, but the firm is being investigated for laundering money and paying bribes to the state-owned oil giant, PDVSA, using international financial institutions.

Venezuelan investigative journalists and bloggers have been on Dewick’s case, finding more examples of bad behavior. They claim that its contracts were overpriced and awarded without public tender, and that the firm passed off used power plants as brand new. Derwick denies all these allegations, claiming that it is being subjected to a “witch hunt.”

Derwick is just one firm, but the saga appears to confirm that much of what ails Venezuela’s electricity sector has to do with massive government corruption. It would be simplistic to say that corruption is the only problem, however. In addition to tackling corruption, sorting out this mess for good would involve undoing the country’s disastrous energy policies — privatizing electricity generation and raising prices.

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