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