VENEZUELAN CEMENT INDUSTRY HEADED TO INTERNATIONAL

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001747

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MMALLOY
COMMERCE FOR 4431/MAC/WH/JLAO

E.O. 12958: DECL: 12/17/2018
TAGS: ECON PGOV PREL ETRD KHLS PTER VE
SUBJECT: VENEZUELAN CEMENT INDUSTRY HEADED TO INTERNATIONAL
ARBITRATION

REF: A. CARACAS 1690

B. CARACAS 1393

Classified By: Economic Counselor Darnall Steuart for reasons 1.4
(b) and (d).


1. (C) SUMMARY: Cement companies Holcim and Lafarge are
expected to soon join Cemex at the International Center for
Settlement of Investment Disputes (ICSID) after giving up
hope of compensation for their nationalized operations in
Venezuela. According to a Holcim executive, the company was
reluctant to take this step as it estimates that
international arbitration will take a minimum of three years
and it may or may not recover its USD 700 million investment.
Holcim believes there is currently no incentive for the
Venezuelan government to pay for its growing list of
nationalized companies. The forecast for the Venezuelan
cement industry in 2009 is that production will fall as the
government fails to invest in maintenance. Corruption will
increase as the government continues to give jobs to its
cronies and awards contracts for kickbacks. END SUMMARY

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ICSID THE ONLY OPTION AS GOVERNMENT WILL NOT PAY
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2. (C) On December 15, Holcim Executive Louis Beauchemin
(strictly protect throughout) told Econoffs that his company
did everything it could to avoid international arbitration.
The last thing Holcim's Swiss Headquarters wanted was a fight
with the Government of the Bolivarian Republic of Venezuela
(GBRV). After the GBRV missed yet another deadline in
November to reach a final agreement, however, Holcim
instructed its team of international arbitration lawyers in
New York to begin laying the ground work for an ICSID case to
be ready by early January. In spite of a strong reluctance
to abandon a thirty-year relationship with Venezuela,
Beauchemin said his headquarters is finally convinced that
international arbitration is the only hope for payment. In a
best case scenario, the company expects to spend at least
three million in lawyers fees over three years, and hopes to
obtain roughly USD 700 million in compensation from the GBRV.


3. (C) Beauchemin said the Swiss President will formally
appeal to the GBRV on Holcim's behalf by December 19, but he
is doubtful this will have any impact based on Lafarge's
experience with a similar plea by the French government. He
added that his contacts at Lafarge tell him they will be
joining Holcim and Cemex (ref A) at ICSID in the near future
as they have also concluded that, in spite of recent
statements to the press to the contrary, the GBRV has no
intention of paying. Holcim has started backing up its
operating systems and transferring data to Brazil, as
Beauchemin recommended that Holcim pull the plug on its
proprietary software in January. This would force its
Venezuelan plants and financial systems to go to "manual",
which is almost unheard of in large-scale plants and will
cause production to drop. Cemex' production has already
dropped significantly since nationalization, he added.


4. (C) Beauchemin believes the GBRV's decision to avoid
paying for nationalized companies is only logical. In
today's financial markets, he opined, a risky bet like
Venezuela has little chance of securing loans. Under these
conditions, the disapproval of the international financial
community in the short term is irrelevant. This, he
believes, encourages governments like Venezuela and Ecuador
to act irresponsibly as they have nothing to lose.


5. (C) Beauchemin said that fortunately, the GBRV took over
the industry at the best possible time for Holcim. In August
2008, Holcim, Cemex and Lafarge's Venezuelan operations were
worth much more than they are today. Consequently, he said
there are indications the GBRV is trying to develop the case
that it did not actually take possession of the companies
until after their values had dropped. Beauchemin said he has
a recent government report which states that Cemex workers
spontaneously seized Cemex plants on August 18, 2008.
Although the claim will be very easy to refute given the
televised coverage of the National Guard's seizure of the
plants, Beauchemin believes the GBRV has excellent lawyers
who will do their best to prove all three of the companies
still had control of their own operations until the end of

2008. The longer Holcim and Lafarge wait to resort to ICSID,
Beauchemin added, the stronger the GBRV's case becomes on

CARACAS 00001747 002 OF 002


this point.

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INDUSTRY PREPARING FOR NATIONALIZATION FOR OVER A YEAR
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6. (C) Since 2007 when Chavez first mentioned an interest in
nationalizing the cement industry, Beauchemin said all three
major companies in the sector started preparing. He stated
that the Cemex and Lafarge response was to stop all
investment and to conduct only essential maintenance. Holcim
continued to maintain its plants but took the precaution of
creating a parallel, or shell company, within Venezuela with
no assets. Holcim then took out a USD 20 million loan at a
Venezuelan bank. When the company was nationalized in August
2008, the GBRV immediately seized the USD 10 million Holcim
had in cash but also inherited the USD 20 million loan.
Beauchemin said the other two multinationals likely took
similar steps to cut their losses as any nationalization
threat in Venezuela has to be taken seriously. (NOTE:
Beauchemin is working at Holcim's shell company through
December 19 when he will depart Venezuela for a position in
Colombia, as he believes the GBRV will "PNG" him following
delivery this week of a "trigger letter" for ICSID
arbitration. END NOTE.)

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NO MAINTENANCE PLUS CORRUPTION EQUALS FALLING PRODUCTION
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7. (C) Beauchemin stated that his industry contacts believe
Venezuelan Vice President Carrizalez will be replaced in the
next few weeks. The current transition team members know the
new Vice President will replace them with his friends, which
Beauchemin said is leading them to take full advantage of
their positions while they last. The Holcim transition team
is canceling long-standing Holcim contracts and awarding them
to their friends for kickbacks as quickly as they can. In
one example, in a "cost cutting measure" the Holcim
transition team negotiated a new contract with a "cheaper"
customs broker that caused Holcim's customs fees to go from
an average of USD 2,300 a month to USD 65,000. In a further
example, Beauchemin said that mid-level transition team
members negotiated a contract with a new law firm, even
though Holcim had a long-standing contract with a prestigious
firm. When the head of the transition team found out, he
made the mid-level executives cancel the deal, as he had
already cut a side deal with a different law firm.


8. (C) In addition to everyday corruption, the company
formerly known as Holcim (the new name has yet to be
determined) is already showing signs that it has no intention
of maintaining plant machinery. Beauchemin said that if
Holcim were still in charge, it would take the majority of
the USD 100 million he projects Holcim will make in Venezuela
this year and re-invest it in the maintenance program. He
noted that Holcim Venezuela should currently be preparing to
hire hundreds of contractors and have approximately 1,000
replacement parts on hand for an annual plant maintenance
project in February. Unfortunately, he said, the company has
procured 30 of the 1,000 required parts and has no apparent
plan to hire the contractors. He believes production will
fall quickly without plant maintenance, as items such as
bricks for the kilns are only good for a maximum of one and a
half years and should be replaced annually.

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COMMENT
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9. (C) A company like Holcim, if it ever returns to
Venezuela, will likely find little remains of its investment
once government officials divide the spoils among themselves.
The cement nationalizations are yet more evidence of the
current government's lack of foresight. Developing a long
list of cases in the ICSID will over time only hurt
Venezuela's standing with foreign investors and capital
markets. In the short term, however, nationalizations
without timely compensation give Chavez all the benefits of
the milk while putting off payment indefinitely for the cow.
CAULFIELD