Mercedes De Freitas has been directing Transparencia Venezuela for more than two decades. Her experience has made her one of the most authoritative voices on corruption networks, institutional capture, and risks for investment in opaque environments. In this exclusive interview, we address the Venezuelan case with an emphasis on China’s role, the lessons learned from recent experience, and the minimum conditions for attracting transparent investment.
Mercedes, thank you very much for this interview. To begin with, how would you describe the evolution of corruption in Venezuela in recent years, particularly in the context of alliances with powers such as China?
More than evolution, it was institutional regression over the last 26 years. Venezuela went from having a worrying level of administrative and political corruption to the establishment of a network of large-scale transnational corruption directed from the highest levels of government, using the structure of the state as its platform, and which forged a symbiotic relationship with illicit economies and criminal groups. For us, this transition began in 2003 with the approval of exchange controls and price controls and their respective agencies: Cadivi–Cencoex and Sundecop–Sundde. These two instruments went from being risks to becoming incentives for corruption, both controlled and directed by the national executive branch. They were and are the instruments and channels of the greatest corruption known in Venezuela and possibly in the world.
To take advantage of these incentives for corruption, independent public authorities and critical society were hindered. Obstacles were reduced in two ways: one, through direct control of public or private authorities; and the other, through repression and closure of those who resisted or represented some form of uncontrolled power, such as political parties, trade unions, human rights organizations, the media and journalists, and the private sector. Large-scale illicit business required impunity, that is, control over the justice system and a reduction in the functions of the comptroller’s office; it required flexibility in contracting and public finance systems; so, from a captured parliament, laws were changed to render public process requirements ineffective, as well as to threaten and reduce independent civil society and the free press for being an obstacle to corrupt networks.
The relationship between China and Venezuela grew stronger while the separation of powers, the federal and decentralized system, the rule of law, fiscal transparency, and civil, political, and economic rights were undermined. While Latin America was passing laws on access to public information, Venezuela was formalizing opacity with laws, installing a policy of “communicational hegemony,” and closing or expropriating media outlets.
Although relations between China and Venezuela grew closer starting in 2000 under Hugo Chávez’s government, they accelerated in 2007 with the creation of the China-Venezuela Joint Fund (FCCV), which formalized the mechanism for loans and investments, although the massive flows occurred between 2010 and 2017. The exchanges resulted in loans of more than $62 billion and investments exceeding $6 billion, conditional on the participation of Chinese companies as contractors, suppliers of inputs and labor; on the repayment of loans with future oil shipments; and on confidentiality clauses. This large amount of resources promised economic and social development for Venezuela, investment in megaprojects, and increased production. But none of this came to fruition. Instead, it granted immense economic power to the rulers who were concentrating all political power.
But during those years, exorbitant amounts of resources also entered the country due to high oil prices, so much so that in 2008 and 2011, Special Contribution Laws on Extraordinary and Exorbitant Hydrocarbon Prices were passed. It was a decade of huge revenues that left no development, no productive capacity, and no solid foundations for growth and equity. On the contrary, the country is full of unfinished projects, graveyards of discarded goods purchased without criteria and without maintenance, and all this gave rise to the gigantic unsustainable debt that has kept Venezuela in default since 2017 and in an undeclared selective default, which today amounts to US$164 billion, with China still being the largest creditor.
Alliances were formed with China in the geopolitical arena, and technological support was provided to impose censorship and citizen surveillance mechanisms, promote themselves as great allies for geopolitical purposes, and spread illiberal narratives.
Transparencia Venezuela has documented cases of transnational corruption. What patterns recur in relations with China: state-owned companies, opaque agreements, lack of competitive bidding, etc.?
The exchanges took place in a context of weak controls, discretion, and considerable economic power for the authorities in the executive branch. This was possible thanks to the powers of the President of the Republic in matters of international relations; the favorable vote of the National Assembly, which was dominated by the ruling party; the exclusions in the Public Procurement Law of acquisitions and contracts that eliminated bidding for works or services covered by international agreements between governments; the violation of macro-fiscal rules with the creation of extra-budgetary funds that, breaking the unity of the treasury, received and managed funds from China and oil profits with total opacity; the management of debt by multiple entities outside the National Public Credit Office; and the absence of accountability for project results.
The confidentiality and secrecy conditions proposed by China for granting the loans were a common element with the Venezuelan authorities. In joint projects, only state-owned companies that had been politicized and stripped of minimum standards of good corporate governance participated on behalf of Venezuela. The most important of these, Petróleos de Venezuela S.A., but also Corpoelec, Ferrominera, and Cantv, are some of the companies that participated in failed projects paid for with overpricing and are now being investigated by the justice systems of 29 countries.
In the agreements between Venezuela and China, what have been the main gaps in public information or control mechanisms?
This is not just about agreements between Venezuela and China: opacity in Venezuela has been state policy for several decades, including everything related to the management of state assets, budget documents, debt operations, and public-private partnerships. That is why, in the Open Budget Survey that assesses budget transparency, Venezuela has scored zero out of a maximum of 100 points in evaluations since 2017.
With regard to formal control mechanisms, the Comptroller General’s Office was stripped of financial and human resources and taken over by authorities loyal to President Chávez through appointments that never complied with constitutional provisions. The National Assembly has had a pro-government majority except during the 2016–2020 term, when it was overruled by the other branches of government that had already been co-opted.
Civil society efforts to exercise control were countered by harassment of the media, persecution of activists, and laws that closed civic space.
No matter how much organizations and the media published research findings that exposed corruption and its dramatic effects on the lives of Venezuelans, there wasn’t, and there isn’t still, a public authority that dares to open cases and punish irregularities; on the contrary, daring to do so is criminalized.
Thinking about a possible economic reopening, what would be the key warnings to avoid repeating opaque schemes like those experienced in the past?
Well, Venezuela needs to create a whole new state structure. But in terms of investments, there are three principles that must be considered:
- Definition of investment criteria, conditions, and processes for foreign and domestic investment, ensuring equitable treatment, stability in the rules, respect for property rights, priority and key investment sectors, types of investors, investor relations, and clear responsibilities; as well as the participation of the State, separating its roles as investment promoter, entrepreneur, and regulator into different bodies.
- Transparency to build and maintain trust. This means banning confidentiality clauses in all public procurement; simplifying processes; and strengthening the investment promotion agency with highly skilled professional teams. This requires the creation of a civil service recruitment system with rigorous technical selection processes. Open government will need to be incorporated throughout the state; but in the area of investment, we dream of an open information system with active transparency, which makes requests for information unnecessary and ensures that data is available. Transparencia Venezuela has proposed the creation of a Single Registry of Foreign Investments in open data format, which includes all elements of the investment. Leverage digital technologies to ensure active transparency and accountability.
A key decision is to approve transparency regarding the ultimate beneficiaries of companies and projects. This is essential to reduce the risks of conflicts of interest and prevent the concealment of beneficial owners.
Transparency involves anti-corruption and accountability systems, as well as compliance with macro-fiscal and budgetary rules, among others.
Sustainability of investments and debt. Avoid loans tied to conditions that are contrary to transparency, free competition, equality before the law for economic agents, and human rights.
Improve the governance of state-owned enterprises, where ESG commitments could serve as a benchmark and, in the extractive sector, EITI sets important minimum standards to be met.
The task in legal matters is important and urgent, and must be based on principles of transparency and anti-corruption. Among others:
- Reform the Organic Law on Public Sector Financial Management.
- Repeal the Constitutional Anti-Blocking Law for National Development and the Guarantee of Human Rights.
- Eliminate public financial entities that are outside the control of the National Public Credit Office, the Treasury, the National Assembly, and the Comptroller General of the Republic.
- Reform current foreign investment regulations (Constitutional Law on Productive Foreign Investment No. 41,310 of December 29, 2017) to attract constructive capital: eliminate restrictions, disincentives, excessive red tape, discretionary control of “social responsibility,” and the state monopoly on strategic sectors.
- Reform the Procurement Law.
- Reform the Law on the Comptroller General of the Republic.
- Reform the Law on Transparency and Access to Information of Public Interest.
- Reform the Anti-Corruption Law to incorporate regulations on nepotism, revolving doors, gift-giving to officials, and other practices that generate conflicts of interest.
- Pass a law on lobbying.
What type of contract or legal arrangement has been frequently used to conceal irregularities or improper transfers of resources, especially in the oil sector?
In the past: bilateral agreements with confidentiality clauses; state of emergency and economic emergency, which empower the president to make decisions on all matters relating to public financial administration without oversight by Parliament or the Comptroller’s Office. In 2018, internal regulations were approved at PDVSA for decision-making without parliamentary oversight.
Another opaque practice has been turnkey contracts, where the successful bidder is responsible for everything from project design to delivery of the work, goods, or services ready for use.
In 2020, the Constitutional Anti-Blockade Law for National Development and the Guarantee of Human Rights was passed, establishing the concentration of power in the president and secret actions, thereby eliminating guarantees of transparency and accountability.
At PDVSA, there are several public-private partnerships that are carried out under conditions of confidentiality, protected by the Anti-Blockade Law and internal regulations from 2018.
Recently, the State of Emergency Decree is one of the measures that suspends guarantees.
In particular, what role has the Venezuelan oil industry—especially PDVSA and its subsidiaries—played in opaque relations with China? What lessons can be drawn from these agreements in terms of transparency and oversight?
In the hydrocarbons sector, more than 100 agreements have been signed, receiving financing of some US$25 billion, including the formation of seven joint ventures, of which only two are operating, well below the promised production capacity. In addition, in the last year, two oil fields were granted in concession to Chinese companies without any details of the agreement being disclosed.
There were projects announced that received funding but never got off the ground or made minimal progress, such as a company producing machinery and engineering equipment for the oil sector; the Cabruta Refinery, in partnership with Sinopec, which promised to process heavy and extra-heavy crude oil from the Orinoco Oil Belt and become one of the largest in Latin America: the agreement was signed, the joint venture was created, and it remained a project; a petrochemical complex; the Batalla de Santa Inés Refinery; and refineries in Asia.
Another case that illustrates this relationship is the seizure of three ships (very large crude carriers, or VLCCs: the Junín, the Boyacá, and the Carabobo) that originally belonged to CV Shipping Pte Ltd, a joint venture between PDVSA and PetroChina (a subsidiary of China National Petroleum Corp – CNPC), based in Singapore and created in 2008. Faced with losses, PetroChina asked a Singapore court to liquidate the joint venture (CV Shipping). To offset the accumulated debt, PetroChina took full control of the three ships.
Internal and external controls were dismantled. Failures have gone unpunished.
Are there documented cases where a lack of transparency in agreements with China has led to quantifiable losses for the country?
Yes. Transparencia Venezuela documented failed projects that received 19.6 billion in the electricity, transportation, water, housing, agri-food, and telecommunications sectors, in addition to those mentioned in the hydrocarbons sector.
Thermal power plants, bus factory, appliance factory, telephone factory, railways, rice production and processing.
The debt has been a heavy burden on society in general, because payments have constrained public spending on essential goods and services. It has also been a burden on PDVSA, as resources were not invested in the company, which has had to hand over a large part of its production and participation in joint ventures, as in the case of Sinovensa.
None of these scandals were investigated by the Comptroller General or the Attorney General’s Office.
In a scenario of institutional recovery, what would be the three minimum guarantees that should be required before signing new agreements with China or any other international actor?
Choose from the options mentioned in question 4.
Based on your experience, which models or countries could serve as a reference for opening up to foreign investment without falling into corruption schemes?
The experiences of Chile, Costa Rica, the Nordic countries, and South Korea should be studied. But also the US and Canada, which have been very successful in attracting investment.
What role could organized civil society play in a process of economic reopening with transparency standards?
Proposing the investment model that we briefly describe in question 4.
Monitoring, following up, and demanding complete and verifiable information from the State on investments, indebtedness, and the transfer of public assets: specifically on who the ultimate beneficiaries of the participating companies are, the origin of the funds, the expected results, and the economic, environmental, and social impacts (in terms of progress in human rights).
Investigating opaque investments, especially those suspected of being linked to money laundering activities or whose intermediaries seek the acquisition of critical assets by actors who could be promoting the strategic agenda of authoritarian governments; and, if there are grounds to do so, report them.
Implementing internal integrity governance systems that include policies on transparency, anti-bribery, respect for human rights, and environmental protection.
Being alert to disinformation practices, which means rigorously evaluating sources and relying on existing verification and fact-checking programs.
Strengthening the exchange and knowledge of experiences in Latin American countries to monitor vulnerabilities to state capture and demand the application of democratic governance standards.
“Translating” the complexity of the oil business into terms that allow for real understanding by the public.
Finally, what would be your message to investors, academics, or policymakers who view Venezuela as a potential future opportunity?
The possibility of Venezuela emerging from the systemic crisis we are experiencing will require international support and the participation of large investors, but only if relationships based on respect, equity, and transparency are established. Without this, we would be repeating the mistakes that destroyed a country with enormous resources and comparative advantages, where only illicit and corrupt economies have profited.
The views expressed by Mercedes De Freitas are of her personal ownership and responsibility, and do not necessarily reflect the position of PDVSA Ad Hoc.
