Venezuelan oil haven demands public procurement caution

March 23, 2015

Venezuela has long been a source of huge profits for foreign companies, but recent economic turmoil is pushing many of them to halt or significantly slow operations in the country. Led by Hugo Chávez’s handpicked successor, President Nicolás Maduro, Venezuela is battling an inflation rate of over 63 percent. This is causing shortages of food and many household goods, and led to violent street protests in the first half of 2014.

The soaring rate of inflation has significantly impacted production costs, which multinational corporations can no longer cover. This has led to substantial losses, particularly as the companies have been unable to raise prices on their products due to government-imposed price controls.

The Venezuelan Government handles all official foreign-currency transactions and has blocked or delayed payment of funds owed to many foreign companies. As a result, multinationals such as Ford, Colgate-Palmolive, Alitalia, Goodyear, Coca-Cola and Dana Holding Corporation have been forced to revalue their assets in the country.

Like his predecessor, President Maduro has not held back when it comes to fiery rhetoric. Couching the recent economic turmoil in terms of a United States-led ‘economic war’, he has warned multinational companies that ‘any company that is abandoned will be taken over by the working class leading to the seizure of emptied facilities’.

There is much speculation in Venezuela about how the country’s oil reserves – the largest in the world – could provide support during this testing time. According to Oil & Gas Journal, overall oil production has declined in recent years, with the country recording approximately 298 billion barrels of proven oil reserves at the start of 2014. Venezuela also hosts billions of barrels of extra-heavy crude oil and bitumen deposits in its Orinoco heavy oil belt, but much of this resource requires additional capital to bring it to market.

In an effort to obtain support for measures to back oil prices, President Maduro began an international tour of Asia and Russia in January. He reportedly secured Russian shares of joint ventures in the Orinoco heavy oil belt and promised a 15 percent wage and pensions increase, before announcing emergency measures to relax currency restrictions on importers of key goods.

In the meantime, oil firms from the United States have persevered with legal action against Venezuela, calling the country before the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). This is despite Venezuela’s withdrawal from the ICSID Convention in January 2012.

For example, following Caracas’ refusal to approve oil firm Harvest Natural Resources’ proposed sale of a remaining 20.4 percent stake in oil joint venture Petrodelta, Houston-based Harvest affiliates HNR Finance and Harvest Vinccler filed a request before ICSID on 15 January 2015. The request has since been withdrawn.

In a similar fashion, multinational companies have been claiming compensation after their projects were acquired under late President Chávez, who led a wave of nationalisation in sectors such as oil, electricity and steel. It has been estimated that Maduro and his predecessor have nationalised at least 1190 businesses since 1999, and Exxon Mobil was awarded US$1.6 billion in a 9 October 2014 ruling for assets seized in 2007.

State of corruption

A growing number of Venezuelans no longer believe in the ‘21st Century Socialism’ that was championed by Chávez. Venezuela’s rule of law and its desired principle of equality have been weakened by the current socioeconomic state of the Bolivarian nation, the notable decrease in civil liberties and security, and the systemic corruption and lack of transparency.

Prior to his death, Chávez declared the elimination of government corruption as one of his administration’s top three goals. His various anti-corruption initiatives included:

  • Venezuela’s ratification of the United Nations Convention against Corruption, the OAS Inter-American Convention against Corruption, and the United Nations Convention against Transnational Organised Crime
  • enforcing the Ley contra La Corrupción (Law against Corruption), the Ley Orgánica del Poder Ciudadano (Organic Law of Citizen Power), and the Ley de Contrataciones Públicas (Public Procurement Law)
  • launching national organisations that focused on anti-corruption, such as the Poder Ciudadano – Consejo Moral Republicano (Citizens Power branch headed by the Moral Council of the Republic), which covered the Fiscalía General de la República (General Public Prosecutor), the Contraloría General de la República (Comptroller of the Republic), and the Defensoría del Pueblo (Human Rights Ombudsman).

However, the government’s interventionism and political use of certain agencies to investigate and lock down the opposition discredited the institutions and any anti-corruption initiatives undertaken. As a result, during Chávez’s time in power, government corruption became widespread. The oft-cited example of Manuel Rosales, a former presidential candidate and mayor of Maracaibo, is one among several whereby corruption charges were used to eliminate political opponents.

In November 2013, Maduro was granted the power to pass decrees under the National Assembly’s control for a period of 12 months. Known as the ‘Enabling Law’, the aim of the legislation was to ‘ensure access of Venezuelans to goods and services by fighting corruption, usury, money laundering and the economic war’ because ‘with corruption, socialism isn’t possible’.

The opposition denounced the move as ‘judicial corruption’, but on the last day of the enabling period Maduro enacted three regulations specifically addressing corruption, comprising:

  • amendments to the Law against Corruption, which included the sanctioning of international bribery and no statute of limitations for crimes against public property
  • creation of a national anti-corruption body, Ley del Cuerpo Nacional Contra la Corrupción, which was made up of police officials and specialised anti-corruption prosecutors reporting directly to the Presidency
  • amendments to the Public Procurement Law that simplified administrative procedures and introduced monitoring of the use of public funds.

Venezuela regularly ranks in international studies as one of the most corrupt countries not only in Latin America, but also worldwide. Corruption in the country takes many forms, from motorists bribing traffic police to allegations of bribery and kickbacks in the allocation of government contracts. The customs system and the administration of foreign exchange (CADIVI) are also notoriously corrupt.

Due diligence studies report that the most prominent red flag revealed when conducting business in Venezuela is corruption in public procurement. But avoiding public business to avoid corruption is not the answer, as government interventionism in strategic markets is inevitable.

The following situations require caution:

  • direct-assigned bids (non-public) (general public tenders carry less risk)
  • if a government bid is out of line with market price
  • when a company gets a government contract outside the bidding process (unless faced with an absolutely unique product line with no competitive product, which is rare)
  • if the government is somehow forcing negotiations.

 

The early-February expansion of the Venezuela Defense of Human Rights and Civil Society Act of 2014 to family members of sanctioned Venezuelan officials shows that the deterioration of diplomatic relations between the United States and Venezuela is unlikely to be restored in the short term. Backed by regional support, the recent shift in relations between the United States and Cuba – Venezuela’s main ally – may facilitate reconciliation with the Bolivarian state.

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