ReportNo. 12849-VE Venezuela CEM: Living with Oil (In Two Volumes) Volume I Public Disclosure Authorized June21, 1995 Country Operations Division Country Department 11 Latin America and the Caribbean Region Public Disclosure Authorized .wA. _*. ~ s - -, Public Disclosure Authorized Public Disclosure Authorized COUNTRY DATA SHEET 1993 unless otherwise indicated General Area (squarekilometers) 912,050 Population 20,875,000 Growth Rate from 1980 to 1991 2.6% 1992 2.3% Density (per square kilometer) 21.7 (1991) Social Indicators PopulationCharacteristics Birth Rate (per 1,000 people) 26.9 Death Rate (per 1,000 people) 4.7 Health Infant Mortality (per 1,000 live births) 22.7 Physiciansper 1,000 People 1.7 (1989) Hospital Beds per 1,000 People 2.6 (1992) HouseholeLabor IncomeDistribution HighestQuintile 49.5% Lowest Quintile 4.8% Access to Safe Water Percent of Urban Population 89% Percent of Rural Population 89% Nutrition Calcrie Intake as a Percent of Requirements 99% (1990) Per Capita Protein Intake (grams per day) 62 grams Education Adult Literacy Rate 93% (1992) Primary School Enrollment(percent of relative age group) 92% (1990) Gross DomesticProduct in 1993 Average Annual Growth Rate (%) USS BILLION GDP Shares(%) 1980-85 1985-90 1990-93 GDP at Market Prices $60.0 100.0 -1.4 2.4 5.5 Gross DomesticInvestment $12.2 18.7 -7.0 -4.3 23.1 Gross NationalSavings $ 8.8 14.7 -5.9 -3.7 6.4 Current AccountBalance $-2.2 -3.7 1.5 2.4 -24.9 Exportsof Goods $14.0 23.3 -3.4 5.3 3.6 Importsof Goods $11.1 18.5 -3.3 -13.1 13.8 Rate of Exchange (Bolivarsper US$) End of May, 1995 169.57 Annual Average 1994 148.90 Annual Average 1993 90.86 Annual Average 1992 68.38 LISI OF ACRONYMS ALCASA Aluminiodel Caroni, S.A. (Caroni AluminumCompany) BANAP BancoNacional de Ahorro y Prestamos (NationalBank of Savings and Loans) BAUXIVEN Bauxitade Venezuela (VenezuelanBauxite Company) BCV Banco Centralde Venezuela (CentralBank of Venezuela) BITOR Bitumenesdel Orinoco S.A. (OrinocoBitumen Company) BDT Bank Debit Tax BPD Barrels Per Day CADAFE CompaniaAnonima de Administracionde Fomento Electrico (Electric Company) CAMETRO CompaniaAnonima Metro de Caracas (CaracasMetro Company) CANTV CompaniaAnonima Nacional Telefonos de Venezuela (VenezuelanNational Telephone Company) CAT Corporate Asset Tax CNG CompressedNatural Gas CORDIPLAN Oficina Central de Coordinaciony Planificacion (Central Office of Coordinationand Planning) CPI ConsumerPrice Index CSB Centro Simon Bolivar (Simon Bolivar Center) CVG CorporacionVenezolana de Guayana (VenezuelanGuayana Corporation) CVP CorporacionVenezolana de Petroleo DGSVT Oficina de Transportepor Carretera (Road TransportationBureau) EAP EconomicallyActive Population EDELCA Electrificaciondel Caroni, C.A. (CaromniElectric Company) EERC Electric Energy Regulatory Commission ENELBAR Energia Electricade Barquisimeto (BarquisimetoElectric Company) ENELVEN Energia Electricade Venezuela,C.A. (VenezuelanElectric Company) FESILVEN Venezolanade Ferrosilicio (VenezuelanFerrosilicon Company) FIV Fondo de Inversionesde Venezuela (VenezuelanInvestment Fund) FOGADE Fondo de Garantia de Depositos (DepositGuarantee Fund) FUNDELEC Technical Support Agencyfor the EERC FYIP Five Year InvestmentPlan GDP Gross DomesticProduct GST General Sales and Luxury Tax IESA lstituto de Estudios Superioresen Administracion (Institutefor Graduate Studies in Administration) LIST OF ACRONYMS (Cont'd.) IMF International Monetary Fund INTERALUMINA Interamericana de Alumina, C.A. (Inter-American Aluminum Company) INTEVEP Instituto de Technologia Venezolano de Petroleo (Center for Petroleum Research) IRR Internal Rate of Return ivss Instituto Venezolano de los Seguros Sociales (Venezuelan Social Security Institute) LNG Liquified Natural Gas MOE Ministry of Education MEM Ministry of Energy and Mines MSAS Ministerio de Sanidad y Asistencia Social (Ministry of Health and Social Assistance) OCEPRE Oficina Central de Presupuesto (Central Budget Office) OPEC Organization of Petroleum Exporting Countries PALMAVEN Filial de Petroleos de Venezuela para Fertilizantes y Desarrollo de Cultivos (Venezuelan Fertilizer Company) PAS Public Administration Sector PDVSA Petroleos de Venezuela, S.A. (Venezuelan Petroleum Company) PEQUIVEN Petroquimica de Venezuela, S.A. (Venezuelan Petrochemical Company) RIF Registro de [nformacion Fiscal (Fiscal Information Register) SENIAT Servicio Nacional de Administracion Tributaria (National Tax Administration Service) SIDOR Siderurgica del Orinoco, C.A. (Orinoco Steel Company) SOE State-Owned Enterprise TCF Trillion Cubic Feet TFPG Total Factor Productivity Growth VAT Value Added Tax VENALUM Venezolana de Aluminio (Venezuelan Aluminum Company) VFE Valor Fiscal de Exportacion (Export Reference Price) VIASA Venezolana Internacional de Aviacion, S.A. (Venezuelan International Airline Company) VTV Venezolana de Television (Venezuelan Television Company) VENEZUELA CEM: LIVING WITH OIL CONTENTS Volume I (In two volumes) PREFACE EXECUTIVESUMMARY . ................................... i Chapter 1. Economic Overview 1.A Introduction ................................... 1 11.B Historical Background . .............................. 5 i .B.1 Economic Policy and Performance Before the Oil Shocks . ....................... 6 1.B.2 Economic Policy and Performance in 1973-82: The Oil Shocks .......... ............. 7 1.B.3 Economic Policy and Performance after the Oil Shocks .......... .............. 8 1.B.4 Economic Policy and Performance after 1988: The Reform Years ......................... 8 1=C Political Economy and 1994 Developments ..... ............ 14 Chapter2. The Strategy 2.A Introduction ................................... 16 2.B Stabilization ................................... 22 2.C Growth ................................... 22 2.C.1 GovernmentRevenue ........... .............. 23 2.C.1.1 Non-Oil Taxes ...... .............. 23 2. C. 1.2 Oil Sector Taxation ..... ............ 27 2.C.1.3 Pricing Policy ...... .............. 27 2.C.2 Government Spending ......................... 30 2.D Poverty Reduction ................................. 33 2.E Economic Outlook ................................ 37 2.E.1 Assumptions ................................ 37 2.E.2 Results .. 39 -2- Chapter 3. GovernmentRevenue 3.A Introduction .................................... 46 3.B Main Characteristicsof Fiscal Revenue .................... 46 3.B.1 Oil Revenue Dependency ........ .. ............. 46 3.B.2 Non-OilTaxation .......... .. ............... 47 3.B.3 Relationshipbetween Oil and Non-oil Taxes .... ....... 53 3.B.4 Relationship Between Fiscal Revenues and Expenditures .... 54 3.C Fiscal Policy: Venezuela and Mexico ..................... 56 3.D Recommendations ................................. 58 Chapter4. GovernmentExpenditures 4.A Introduction .................................... 59 4.B Main Causes of Public SpendingInefficiency ................. 59 4. B. 1 The Size of the Public Sector ........ .. ........... 59 4.B.2 Public SpendingTrends and Composition ..... ........ 60 4.B.3 Public AdministrationPerformance ....... .......... 66 4.B.4 Sectoral Performance ......... .. .............. 68 4.C Recommendations........ ......................... 72 Chapter 5. Savings and Investment 5.A Introduction .................................... 74 5.B Main Causes of Low InvestmentReturns ................... 74 5.B. 1 Savingsand Investment:Level and Variability .... ...... 74 5.B.2 Total Factor ProductivityGrowth ...... .. .......... 78 5.B.3 Public Investments .......... .. ............... 78 5.C Recommendations. ................ ............. 86 Chapter 6. New Non-Oil Taxes 6.A Introduction .................................... 87 6.B Changes in the Legal Framework: 1991 and 1992 . .87 6.B.1 The 1991 Reform of the Income Tax . .87 6.B.2 The 1992 Reform of the Tax Code. 89 6.B.3 Impact of the 1991-92Reforms on Revenue and Income Distribution .. 90 6.C The Sosa Plan ................... .............. 92 6.C. 1 The Income Tax Reform Bill . .92 6.C.2 The General Sales (GST) and Luxury Tax Bill . .95 6.C.3 The Bank Debit Tax (BDT) Bill ................. 96 -3- 6.D The VAT and CAT: Strengtheningthe Sosa Plan ............. 97 6.D. 1 Impact of the VAT and CAT on Revenue Collectionand Other Variables ................... 99 6.E Recommendations................................. 103 Chapter 7. Oil Sector InvestmentProgram 7.A Intemational Market Prospects .. 104 7.B The Government's Investment Program ............. 105 7.B. 1 Investmentsin Exploration ...................... 105 7.B.2 Investmentsin Crude Oil, Condensate, and Natural Gas Production ..................... 108 7.B.3 Investments in OrimulsionProduction ............... 109 7.B.4 Investmentsin Refining Operations ................. 110 7.B.5 Investments in the Domestic Market ................ 111 7.B.6 Other Investments ........................... 111 7.C Assessmentof the Proposed Investment Program .... .. ........ 112 7.C. I Investmentsin Exploration, Production, and Refinery ...... 112 7.C.2 Investments in the Domestic Market ................ 112 7.C.3 Investments in Other Areas ....... 112 7.D Recommendations................................ 113 Chapter 8: Oil Sector Legal Framework 8.A Introduction ................................... 115 8.B InternationalChanges in Ownership..................... 115 8.C The Legal Framework of Venezuela's Oil Sector ...... 115 8.D Characteristicsof an Efficient Legal Framework for the Oil Sector ............. .. .. .. .. .. .. .. .. .. 117 8.E Recommendations................................ 118 Chapter