The interim Country Assistance Strategy (CAS) for Venezuela (December 2002), points out four areas of reform that are the most critical for poverty reduction:
- macroeconomic stability,
- sustainable economic diversification and competitiveness,
- environmentally and socially sustainable development, and
- good governance.
In the interim CAS it was noted that IFC would focus its efforts to help sustain core private sector activities under the current difficult investment climate, by providing financial support to projects that have positive fiscal and/or foreign exchange earning impacts and remain robust under difficult country circumstances. In the near term, this would include projects in the hydrocarbons sector, with increasing focus on diversifying the economy in the medium-term.
The World Bank Group (WBG) Management Response to the Extractive Industries Review (EIR) highlights that WBG’s financing support in the oil & gas sector will continue to focus on private investment, with a strong emphasis on local and smaller players as well as on gas projects. Through the project IFC will provide access to capital to VOG, a local oil and gas company seeking to expand its operations in Venezuela, facilitating the emergence of the company as an important local participant in the oil and gas sector. Although Venezuela has the largest oil and gas reserves in Latin America, the sector is dominated by the state oil company PDVSA and foreign companies. Local private companies are at an early stage of development. VOG, with the support of its largest shareholder, Vinccler C.A., a successful Venezuelan construction company, is well-positioned to expand its participation in the oil & gas business. The project will also support the development of Venezuela’s domestic gas resources, the gas production from the East Falcon Unit will contribute to decreasing the natural gas shortage in western Venezuela. Finally IFC will also support VOG’s efforts to strengthen its environmental and social policies and activities.
IFC plans to monitor the developmental impact of employment, payments made by VOG to local and federal governments, and the ability of the company to successfully deliver its social development programs, such as preventive health care.
- Environmental and Social Benefits
The WBG Management Response to the EIR emphasizes the importance of mitigating environmental and social risk. IFC’s involvement in this project will be aligned with this objective by enhancing the company’s efforts towards improved environmental and social management. The company’s senior management is committed to environmental and social issues, and expressed its intention to leverage IFC’s knowledge in these areas to strengthen the company’s efforts. IFC is considering a Technical Assistance Project to enhance and formalize the company’s environmental, social, health and safety management systems. The project will have a positive environmental impact as the gas production from the East Falcon Unit will displace oil currently being burned at refinery and petrochemical complexes.
- Benefits to the Community
VOG has developed a social program to support the local community. The social aspects of the project are managed by a committee that includes VOG’s management from headquarters and staff from the East Falcon Unit. The committee assesses and reviews all social programs with respect to sustainability and priority with the local communities. Recently, VOG has been supporting local communities through the provision of supplies to local schools, the distribution of medicines, and the provision of financial aid for local housing repairs. VOG has requested IFC’s assistance in developing a strategy to step up its efforts and help ensure that its community program is coherent and aimed at sustainable impacts. During appraisal IFC met with local representatives who indicated their support for the project. VOG currently provides direct employment to about 39 persons, 35 of them Venezuelan nationals. VOG expects to increase its personnel to 62 by 2005, over 75% of whom will be located at the East Falcon Unit fields.
Petrofalcon is already disclosing the amount of income tax paid in Venezuela through its audited annual financial statements (available to the public at www.sedar.com).
- Benefits to the Government
The project will be a source of tax revenues to both the federal and local governments. According to IFC base case calculations using World Bank oil price forecasts, approximately US$8 million per year will accrue to the government in the form of income tax and US$0.8 million will accrue to the municipalities in the form of municipal tax.
- Governance Context
The World Bank Group CAS for Venezuela identifies weak governance, inefficient public sector expenditures and general economic mismanagement as part of the causes leading to a poor economic performance during the last years. To improve governance, the World Bank Group CAS suggests the country should focus on critical areas that include rationalizing the administrative structure; enhancing the efficiency of the civil service; deepening the decentralization process; expanding access to justice; and combating corruption. With regards to transparency in the hydrocarbons sector, the Venezuelan government presents a better track record. PDVSA (the national oil & gas company), discloses in the Form 20-F filed with the SEC (available to the public at www.sec.gov /edgar) the amount of payments to the government in the form of production tax, income tax and dividends. The financial data presented in the form is taken from PDVSA’s audited consolidated financial statements. Venezuela is in the process of concluding an Article IV consultation with the IMF.
The revenues contributed from this project to the federal government are very small with respect to the total revenues of the Venezuelan government. Given IFC’s role and developmental impact and benefits from the project, to the community and local government, relative to governance risk related to the benefits from this transaction, IFC believes this is a project in which it should invest.
