Venezuela industry: Cement business seized

Por Venezuela Real - 14 de Agosto, 2007, 15:37, Categoría: Economía

August 14th 2007

Venezuela’s government has targeted a new sector of the economy for state intervention with the announcement on August 10th that it would expropriate a foreign-owned cement company. With threats of a takeover also having been made to businesses in sectors as diverse as banking, food production and steel, few companies are likely to feel completely safe from heavy-handed government action as long as President Hugo Chávez is in power.
The cement company, Corporación de Cemento Andino, is majority owned by Colombia’s Cementos Argos, which acquired it from Venezuela’s government in 1998 in a privatisation sale for US$81m. On August 3rd, Venezuela’s National Assembly declared the company to be of “public utility and social interest”. This classification is a necessary prerequisite before the state can take over a private firm’s assets in a sector deemed to be strategic.

The National Assembly also declared that cement production and marketing was a priority to meet the government’s housing construction commitments. The government subsequently announced the “forced acquisition” of the cement maker (the first takeover of a Colombian-owned company). There are three other foreign-owned cement companies operating in the market, and, according to the housing minister, this measure ensures that there is a locally owned alternative. Officials say they will create co-operative associations so that the cement plant will become collective property in which its workers will have anownership share.

State’s tentacles get longer

The Cemento Andino nationalisation was not a complete surprise. President Chávez had threatened in April to take over cement makers if they continued to favour export markets and didn’t increase supplies to domestic industry. Further, the government has targeted a number of sectors for nationalisation as part of its drive to implement “21st century socialism” in Venezuela. Early this year it took over the largest telephone company, CANTV, and the biggest electricity generator, Electricidad de Caracas. It has also embarked on a land reform, seizing large tracts of unused land and handing them over to poor farmers.

More recently, the Chávez administration has imposed majority state control over four joint-ventures with foreign oil companies in the Orinoco heavy-oil belt. Through the state-owned oil company Petróleos Venezolanos (PDVSA), it took operational control of the Orinoco projects on May 1st. However, the various foreign partners in the ventures had until June 27th to agree to the contract terms and hand over majority ownership to PDVSA. Two companies that refused the new terms, US-based ConocoPhilips and ExxonMobil, have decided to pull out from their operations in Venezuela altogether.

Compensation uncertainty

The government paid compensation to Verizon Communications (US$572m), the US-based telecommunications company, and to electricity giant AES (also US, US$739m) for the takeover of their holdings in CANTV and Electricidad de Caracas. However, it initially warned that it would not compensate the two oil companies for their Orinoco assets, or for the US$4bn in debt they incurred in establishing the operations. ConocoPhilips said early on that it was set to write off the entire US$4.5bn value of its two Orinoco projects, although both companies are still discussion possible compensation with the government. The government values ConocoPhilips’s investments at around US$3.5bn and ExxonMobil’s at US$800m.

Cementos Argos, for its part, has said that it hopes it will receive a fair price for its assets. It is reportedly seeking US$230m, which would cover the initial purchasing price, improvements to the facility to expand its capacity, and one year of lost profits. (The facility has been in a legal dispute with a former owner since August of 2006.) No arrangements for discussing compensation have been revealed as yet, however.

More threats

In recent months Mr Chávez has also warned that his government might nationalise banks and food producers that do not comply with government regulations, such as mandated credit quotas and interest rates, and price controls for basic food products. Threats to food growers and distributors followed the emergence of shortages of goods such as milk and beef on supermarket shelves, caused, claims the president, by hoarding and speculation, and the refusal by producers to supply goods at the mandated official prices. (Producers, for their part, insist that they lose money if they invest and sell goods at the government controlled prices.) Mr Chávez has also warned a foreign-owned steelmaker that it could be subject to expropriation.

Private companies, and especially foreign-owned businesses, are likely to feel increasingly insecure in light of the latest “forced acquisition”. Indeed, the takeover of Cemento Andino, like the other expropriations and the departure of ExxonMobil and ConocoPhilips, will only increase the legal uncertainty surrounding investment in Venezuela. It will thus discourage foreign direct investors, particularly those that might be looking at the energy sector.

However, inundated with oil export money, this is a risk that the Chávez government is obviously willing to take as it seeks to advance its own brand of socialist revolution.

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