Venezuela Infrastructure Report

A shortage of building materials, soaring inflation, ineffective government investment in infrastructure and a populist agenda have combined to cause a crisis in Venezuela. Years of underinvestment across the infrastructure spectrum, especially in affordable housing, have led to an infrastructure disaster.

Severe electricity shortages are hampering economic activity and daily life, a severe shortage in homes is exacerbated by the poor quality of existing housing, protests have taken place about the poor quality of the Caracas metro and the management of Caracas International Airport has been removed. Meanwhile Venezuela's largest port - Puerto Cabello - is reportedly on the brink of collapse.

Most of the problems have been caused by a decision to place the federal government in control of strategic sectors. The nationalisation of the cement sector in 2008, the expropriation of the steel and aluminium industries, the nationalisation of the electricity sector in 2007 and the centralisation of the management of airports and ports has led to mismanagement and inefficiencies.

This is severely delaying investment and creating knock-on effects across the economy. In addition, it is discouraging potential investors who are put off by an inconsistent policy environment, and a capricious President. What little value creation we are expecting over the coming years will be funded by China, which has announced investments in the railways sector, the port of Puerto Cabello and in electricity generating infrastructure. The other source of financing for the country is the Andean Development Bank (CAF) and the Inter-American Development Bank (IDB), both of which have awarded funding for various infrastructure projects over the past year.

Despite this, limited investment has taken place over the past year and we see little upside for 2011. Although pledges have been made by the government, we see little prospect for the effective dispersal of funds due to mismanagement and inefficiency in the Chavez government. For this reason, we are forecasting a severe contraction in real industry value in 2010, of 15.2%, which will continue into 2011, with -0.1% forecast. Indeed, there is little prospect for any meaningful growth over our newly extended forecast period (2011-2020). Despite this, we are forecasting significant nominal value growth due to extremely high inflation in the construction sector, as a result of building materials shortages which have caused prices to soar and supply to become heavily reliant on expensive imports.