THE FENCE CONTINUES TIGHTENING AROUND THE PRIVATE

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 002535 SIPDIS SIPDIS COMMERCE FOR 4331/MAC/WH/CAMERON E.O. 12958: DECL: 08/24/2016 TAGS: ECON PGOV VE SUBJECT: THE FENCE CONTINUES TIGHTENING AROUND THE PRIVATE SECTOR REF: A. CARACAS 2331 ¶B. CARACAS 1289 ¶C. CARACAS 1067 -------------- Summary -------------- ¶1. (SBU) Two pieces of draconian draft legislation currently in the National Assembly - the Anti-Monopoly and Public Services Draft Laws - manifest the BRV's intention to further restrict and control the private sector. The draft Anti-Monopoly Law proposes replacing the existing anti-trust regulating body, Procompetencia, with a politicized organization that can impose astronomical fines, enact penal sanctions (reportedly exceeding those for manslaughter), authorize wiretaps and seizures, and set corporate profit margins. The Public Services bill contains a very broad and loose definition of public services (it includes slaughterhouses and cell phones, for example),and would allow the state to set rates and exert greater control over private service providers. While the BRV has passed numerous laws over the past few years to corral the private sector, Post's assessment is that these two bills in particular are in the vanguard of the BRV's program for "21st Century Socialism." Going forward, we see little to mitigate the adoption of other measures that ensure a docile and self-censoring private sector and underscore the role of the state (read: Chavez) in the economic life of the country. End summary. -------------- Economic Vision -------------- ¶2. (SBU) The draft Anti-Monopoly Law, in second debate, strives to "protect endogenous, sustainable economic development." It expressly seeks the protection of small and medium businesses (including "Bolivarian business models," such as cooperatives, co-managed companies and social production enterprises - REF B),from "large companies and corporations that harm the endogenous development of the country." The draft calls for "just" (not "free") competition and does not apply to the public sector (including BRV joint ventures). The Public Services Draft Law also favors these business models, and amplifies the control of the state over non-traditional "public services" such as slaughterhouses and cemeteries. -------------- The Anti-Monopoly Bill -------------- ¶3. (SBU) The bill would create the National Anti-Monopoly and Anti-Oligopoly Institute (INANTI) to replace the existing anti-trust agency, ProCompetencia. According to the draft, INANTI's president would be nominated by the Executive, ratified by the National Assembly, and would "be identified with the economic policy of the executive." INANTI would have the ability to open investigations, grant exemptions, enact fines (fine revenue will be part of their budget),and set its own recruitment and salary regulations. Companies whose assets exceed USD 39 million or whose business volume exceeds USD 15 million would have to seek INANTI's "prior authorization" before any merger or action of "economic concentration." In addition, the Institute will acquire some abilities heretofore reserved only for tribunals, such as authorizing/planting wiretaps, carrying out confiscations and CARACAS 00002535 002 OF 003 mandating business closures. -------------- Excessive penalties -------------- ¶4. (SBU) Over the last few years, application of current legislation by ProCompetencia has resulted in an average fine of 1 percent of gross income (in some cases, up to 10 percent). However, the new draft law stipulates a penalty of 35 percent of gross income for a violation, and up to 45 percent for repeated violations. The draft also includes tough penal sanctions for perpetrators, such as a ten-year maximum sentence for participating in a cartel (in contrast, the maximum penalty for manslaughter in Venezuela is six years). The bill, however, does not clearly define the company officer that would be put in jail if a company was found to be in violation of the law. -------------- BRV sets margins, end of chambers -------------- ¶5. (SBU) Perhaps the most alarming article of the bill would give INANTI authority to intervene in the "production, industrialization, and sales" phases of any product that is deemed to be "essential" to the lives of citizens. The BRV would be able to set profit margins for all segments of the production chain, for any product that fits this definition, and non-compliance will result in a fine. Legal experts also believe that the bill could easily be interpreted to ban private sector chamber groups. ¶6. (C) Particularly troubling to the private sector are draft Articles 117, 118 and 119. The first two define "usura" (usury) as obtaining "benefits above the averages provided by Central Bank economic indices," and set penalties of 2-5 years imprisonment for setting price margins or obtaining profits above this average. The third article establishes the same penalties for hoarding that results in shortages and/or increased prices (which affect "economic security.") A similar law was passed in early 2006 for agricultural products. (Comment: A VenAmcham contact told EconCouns that these articles were introduced by deputies not on the Economic Development Committee, and that legislative staff said that this entire bill was being managed from "elsewhere" (not in the committee). The head of the Committee, Ricardo Gutierrez (MVR),reportedly also told VenAmcham members that the concern about hoarding and speculation came from a belief that such activities helped bring down Allende in Chile. End Comment.) -------------- The Public Services Bill -------------- ¶7. (C) The Public Services draft bill would allow the state to regulate traditional public services, such as water, sanitation, and parks, but also includes cemeteries, markets and storage facilities, telephones (land and cell), slaughterhouses, parking lots, banking services, and gas stations, as well as any service the BRV believes will "increase the quality of life." It also requires that rates for services be "in tune with the public's income" and based on principles of "solidarity." The law also contains references to the public paying for services according to their income. The draft creates a National Council on Public Services, chaired by the President and composed of ministers, CARACAS 00002535 003 OF 003 governors' and mayors' association heads, and a representative of the community. The draft legislation calls on Community Councils (Ref C) to "maintain vigilance" over the services and report on infractions. (Note: Some analysts believe that this law is being promoted by BRV hardliners and that even if the bill passes second debate, more pragmatic heads in the Cabinet such as Finance Minister Merentes will kill it (primarily out of concern that it is too unwieldy)). -------------- Private sector strategy -------------- ¶8. (SBU) Private sector companies are alarmed about both bills, but see the Anti-Monopoly legislation as the most pressing (rumors abound it will pass in September). In an Aug 10 Caracas Chamber of Commerce "emergency" meeting, attendees commented that public pressure has backfired in the past, and that a purely technical, behind-the-scenes approach should be taken, also engaging the international community. Representatives from the British and French Embassies (both countries have Bilateral Investment Treaties with the BRV) said they would study the issue. ¶9. (SBU) Legal experts noted that some minds were still open in the National Assembly, and that lobbying should be aggressive. Participants agreed that they should put aside their differences in order to fight this law and one person emphasized the urgency of the issue by calling on the private sector to put "all eggs in one basket." The hope of some in the private sector is that when the Anti-Monopoly bill is taken up again mid-September, the more onerous provisions will be dropped, as existing legislation (Consumer Protection Law) already includes similar stipulations. Their hope is that the NA will realize that the legislation will have a negative effect on investment and could cause companies to move to Mercosur partners. -------------- Comment -------------- ¶10. (SBU) Both bills are clearly geared toward controlling the private sector's earnings and cementing the economic and political portion of Chavez' "21st-Century Socialism." If passed in current form, both pieces of legislation will choke the private sector's ability to maneuver in the Venezuelan economy. At the very least, they represent a Sword of Damocles hanging over the heads of the private sector. Fighting the laws once they are passed is possible, but the probabilities of a favorable ruling from the pro-Chavez judiciary are very slim. There's little hope that Venezuela's international obligations might blunt the most objectionable provisions. While certain Andean Community regulations covered free competition, their legality is now questionable (REF A),and Mercosur does not have any binding norms in this area. Chavez' vision is coming into focus: a "socially-minded" economy in which a "profiteering" private sector has little space to operate unless it is compliant. End comment. 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