January 12, 2007

Venezuela’s Chavez May Use Heavy Hand In Nationalization

Filed under: Venezuela — rdrutherford @ 2:23 am

Venezuela’s Chavez May Use Heavy Hand In Nationalization
Dow Jones Newswires – January 11, 2007 7:38 AM ET

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(This article was originally published Wednesday)
By Raul Gallegos
CARACAS (Dow Jones)–Venezuelan President Hugo Chavez has vowed to nationalize companies in key sectors of the economy but few know how he will do it. Will he offer company owners a carrot or a stick? Many fear he will use both.

In his bid to control strategic telecommunications and power sectors, observers say, the president will likely take a heavy-handed approach to negotiating a price.

Ministers and lawmakers say Chavez will negotiate with company shareholders and will respect their rights, but offer few details about how this will happen.

Chavez announced Monday he will change the face of Venezuela’s economy by nationalizing CA Nacional Telefonos de Venezuela (VNT), or CANTV, the country’s top telecom, power utilities not already in state hands, and gain control of upstream production of extra-heavy oil and the refineries handling its preliminary processing.

He reiterated those plans again Wednesday, after he was sworn in for a second-six year term as president, vowing to consolidate a “socialist” revolution. He added that natural gas operations should also come under state control.

The fallout for CANTV and Electricidad de Caracas (ELDAY), or EDC, the biggest power utility in the country servicing the Caracas metropolitan area, was swift and severe. Shares of CANTV in New York plunged an accumulated 38% over the first two sessions of the week. Locally, the shares plunged at the open Tuesday, prompting regulators to impose a 48-hour trading halt on them. They did the same with EDC after its shares lost a fifth of their value on the Caracas stock exchange.

CANTV’s ADRs bounced back 15% to $14 Wednesday on news that the government would provide some form of compensation.

The U.S.’s Verizon Communications (VZ) has a 28.5% controlling stake in CANTV, while AES Corp. (AES), also of the U.S., controls EDC.

In the Orinoco river basin, six firms – Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Statoil (STO), Conoco Phillips (COP), Total (TOT) and BP Plc (BP) – have invested billions of dollars in the extra-heavy oil upgraders. They have already held off from taking Venezuela to court over a continuing contract overhaul, not to mention tax hikes in 2004 and 2005 that went against original contract terms.

For Ricardo Sanguino, head of the congressional finance commission, Chavez could create a special nationalization law that will give him the needed legal framework for company takeovers, but he insists no strategy has been defined yet.

“We will respect the shareholder rights of all the companies the state moves to nationalize,” Sanguino said. “We will negotiate.”

Sanguino’s remarks and those of other officials seem to indicate Chavez will sit at the negotiating table but with a strong law to back his claim on company assets.

Most legal analysts believe the president has three main options to gain control of big companies: He can negotiate a sale with shareholders, he can expropriate the shares or the company’s assets, or he can pass a nationalization law for “strategic sectors” and then offer owners a price.

The leftist leader insisted this week that congress will give him “the mother of all revolutionary laws,” suggesting he will have almost unlimited freedom to tinker with Venezuela’s legal framework.

“He will tailor a law to his needs to nationalize the companies and will then negotiate under his own terms,” said a former minister who was involved in the nationalization of the oil industry and CANTV’s sale much later, and who declined to be named.

Critics point out the president likes to have an ace in his sleeve before he makes such moves.

Venezuela has a long history with nationalization laws. The oil-rich nation enacted one for the oil and gas industries during the 1970’s. Congress also approved a nationalization law for the steel sector in 1974. In all cases, the government sought to negotiate prices with those companies involved.

Chavez might prove a tough negotiator, observers note, but he certainly has the money to cover a spending binge.

Over the past few years, the president has amassed more than $50 billion in several funds, including the central bank’s foreign reserve holdings, and could comfortably buy several large companies.

Money aside, some critics argue CANTV’s nationalization will likely be long, costly and could even fail in the end.

“I’m betting they won’t do it in the end once they realize how hard the process can be,” said Roberto Smith, an opposition politician who oversaw CANTV’s privatization process in the early 1990’s.

Smith notes Chavez will have to pay shareholders for the operating concession and for the assets of a company that remains one of the most profitable in the country.

“If they manage to nationalize it somehow, the company will become a failure in two year’s time,” Smith predicted.

How effectively Chavez’s government will be at running the new state-controlled firms is another question on people’s minds.

The Chavez administration has developed a reputation over the years for managerial inefficiency.

On his watch, state-oil firm Petroleos de Venezuela (PVZ.YY) has seen its production capacity decline from about 3.3 million barrels a day to some 1.6 million b/d, according to industry estimates, which don’t include output from joint-ventures with foreign firms. Chavez has tapped PdVSA’s cash-flow to fund social programs, depriving the company of investment capital.

PdVSA’s once-vaunted culture of meritocracy and operational autonomy have been replaced by what Chavez now calls PdVSA’s “revolutionary” orientation and its employees’ allegiance to leftist ideals.

The president’s team has also failed to advance in its ambitious housing plan for the poor, failing to meet housing targets every year since Chavez took power in 1999.

Efficiency aside, Chavez has made clear these moves are simply a fraction of what is still to come as he steers the country to a “new socialist system.”


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