THE OIL SECTOR AND THE PUBLIC BIDDING LAW

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001467 SIPDIS SIPDIS ENERGY FOR CDAY AND ALOCKWOOD NSC FOR JCARDENAS AND JSHRIER E.O. 12958: DECL: 01/12/2017 TAGS: EPET ENRG EINV ECON VE SUBJECT: THE OIL SECTOR AND THE PUBLIC BIDDING LAW REF: CARACAS 1466 Classified By: Acting Economic Counselor Shawn E. Flatt for Reason 1.4 (D) ¶1. (C) SUMMARY: Service companies have long complained that the Public Bidding Law has greatly decreased the effeciency of PDVSA's operations. A legal expert describes the law as "sub-standard" and politicized. Private sector partners in joint venture companies have argued the law does not apply to them but the expert claims that it clearly does. Problems with the bidding law, according to the expert, include the fact that Venezuelan culture does not respect laws in general and an attempt by the BRV to use it to radically change the country's system of production. END SUMMARY -------------- THE VENEZUELAN PUBLIC BIDDING LAW -------------- ¶2. (C) Oil service companies and private sector partners in the new joint venture companies have long complained of the byzantine nature of the Public Bidding Law. Noted consultant and bidding law specialist Oscar Chinea (strictly protect throughout),who helped draft the 1998 version of the bidding law, told Econoffs on July 20 that the current version of the bidding law was "sub-standard" by international standards. For instance, the Venezuelan law only allows 12 days to prepare for a national bid and eight days for an international bid. The international standard is 30 days for a national bid and 45 for an international bid. ¶3. (C) Although contacts have repeatedly told us that joint ventures should not be subject to the law, Chinea's interpretation of the law is that it clearly applies to them as long as PDVSA or one of its affiliates has at least a 50% stake in the entity. He said companies that claim the law does not apply to the joint ventures fail to read article 8, which states that it applies to direct and indirect control of entities by the state. In the case of the joint ventures, Chinea believes they clearly fall under the section regarding indirect control. -------------- WEAKNESSES -------------- ¶4. (C) When asked about problem areas in the current law, Chinea replied a significant problem was that Venezuelan culture does not respect laws. For a variety of motives, some good and some bad, PDVSA and BRV officials have avoided following the law's dictates. In addition, he said the bidding law poses a unique problem for PDVSA because, prior to 2001, it was excluded from the bidding law. As a result, PDVSA officials were accustomed to restricted or closed bids, which were more efficient. Chinea stated PDVSA officials are lobbying for a return to the old system but he believes it would be a grave error. The pre-strike PDVSA had a series of governance and accountability systems that are no longer present. Chinea fears that PDVSA would use a restricted bid system to penalize ethical companies and would use it to reward cooperatives and Chinese companies. ¶5. (C) Finally, Chinea stated the BRV is using the current bid law as a tool to change Venezuela's system of production and to push policies such as social responsibility. He noted the bid law was never intended for either of these purposes. Chinea opined that the USG could bring a case against PDVSA in the WTO since PDVSA is considered to be a commercial entity. As such, it must handle its bids as a normal company would and cannot give preferences to collectives or social responsibility companies. It also cannot use its bids to CARACAS 00001467 002 OF 002 implement government policies. -------------- OPT OUTS -------------- ¶6. (C) When asked to comment on PDVSA Vice President Luis Vierma's recent statements regarding two failed bid rounds for drilling rigs (Reftel),Chinea stated PDVSA is permitted to opt out of using general bids in three circumstances. Under the first provision, it may use direct contracting in the case of an emergency. He stated PDVSA has been known to abuse this provision. A problem arising from poor planning or a lack of planning is not considered to be an emergency. However, PDVSA officials have invoked the provision in the past when they have decided to do something on the spur of the moment or have failed to plan. ¶7. (C) Under the second provision, PDVSA may opt out if it needs a supply of goods for a process. Chinea stated the provision was designed to deal with problems arising from peak production or a breakdown in the supply chain. The provision does not apply to services. Chinea stated the National Assembly is considering the elimination of the provision since it is merely a type of emergency. (NOTE: According to El Universal's report, Vierma appears to have based the second bid round on this provision. END NOTE) ¶8. (C) The final provision allows for selective bidding with at least five parties if a general bid round fails and there is not enough time for a new general round. If the selective bidding fails, PDVSA may go to directed bidding. Firms that participated in the general bid round and were not disqualified must be included in the selective bidding round. FRENCH