VENEZUELA: NATIONALIZED CEMENT COMPANIES GIVE UP

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000361

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E.O. 12958: DECL: 03/20/2019
TAGS: ECON PGOV PREL ETRD EINV VE
SUBJECT: VENEZUELA: NATIONALIZED CEMENT COMPANIES GIVE UP
PAYMENT HOPES

REF: A. 2008 CARACAS 1200

B. 2008 CARACAS 1747

C. 2008 CARACAS 1170

D. 2008 CARACAS 1758

E. CARACAS 307

F. 2008 CARACAS 1209

G. CARACAS 351

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


1. (C) SUMMARY: Former Executive Director of Holcim Venezuela
Louis Beauchemin (protect throughout) told EconOff March 19
that Holcim would seek international arbitration after giving
up hope of payment for its cement operations, nationalized in
August 2008. Holcim, the world's second largest cement
maker, publicly announced on March 23 that it would begin
legal proceedings against Venezuela. Although in public the
government continues to claim it will pay, privately a
Ministry of Energy and Petroleum (MEP) official told
Beauchemin that the MEP has been waiting on a decision from
Chavez for months. After making a pre-election "show" of
nationalizing the cement industry, Chavez's attention has
wandered to other sectors (Ref A). Nationalized cement
companies' operations are already suffering from poor
government management and an inability to obtain dollars at
the official exchange rate. END SUMMARY.

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NATIONALIZATION WITHOUT COMPENSATION EQUALS EXPROPRIATION
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2. (C) Following the Bolivarian Republic of Venezuela's
(GBRV) positive statements to the press prior to the February
15 referendum eliminating term limits, Beauchemin told
Econoff on February 11 that he was cautiously optimistic
Holcim would be paid. MEP Minister and state oil company
(PDVSA) President Rafael Ramirez, had told the Swiss
Ambassador at that time that his ministry was still
evaluating the plants but assured the ambassador that Holcim
could expect prompt payment. In a hallway conversation on
March 17, however, a MEP official told Beauchemin that the
ministry had submitted its final report on Holcim and Lafarge
"months ago" and that the evaluation stage was long over. We
have been waiting on a decision from President Chavez for
months now, the official conceded.


3. (C) Beauchemin told Econoff March 19 that his company has
now abandoned all hope for payment and on March 18 submitted
its third and final "trigger letter" to the MEP prior to
filing its case in the International Center for Settlement of
Investment Disputes (ICSID). On March 23, a company
spokesman announced that it had started legal proceedings
against Venezuela. In a previous conversation Beauchemin
told Econoff Holcim would seek over USD 700 million in
compensation (Ref B). Holcim is avoiding any action that
ICSID arbitrators could interpret as hostile, such as pulling
the Holcim software essential to plant operations. He added
that his contacts in French-owned cement company Lafarge are
just starting their series of "trigger letters", and thus
does not plan to file with the ICSID until this summer.


4. (C) In retrospect, Beauchemin opined, it would have been
better in some respects to follow the CEMEX example and let
the National Guard occupy the Holcim plant rather than agree
to work with a government that had no intention to pay (Ref
C). He said the televised National Guard occupation will
likely strengthen the CEMEX case in the ICSID. Beauchemin
added that Holcim's team of lawyers believe the company would
be more likely to get paid if it is the first of the three
cement companies to reach an ICSID settlement. The company
is concerned the GBRV will be unable to come up with the
roughly USD 1.6 billion it may owe for all three companies.

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COMPANY OPERATIONS SUFFERING UNDER GOVERNMENT MANAGEMENT
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5. (C) Beauchemin noted that the GBRV's nationalization of
the cement industry had the surprising effect of dramatically

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increasing Holcim's share of the market. He said CEMEX and
Lafarge production has dropped substantially, as most of
their plant managers have quit or been removed. Holcim's
plant staff remained, which has allowed it to maintain its
production levels. Unfortunately, the GBRV failed, as he
anticipated they would, to conduct essential, annual
maintenance in early 2009. He is unsure how long the GBRV
will be able to keep production at current levels due to lack
of maintenance.


6. (C) Beauchemin lamented that while skilled plant operators
remain, there is no longer anyone at the helm of the company.
There is still, theoretically, a five member transition team
leading the company formerly know as Holcim (the new name has
yet to be determined.) He said that three of the five
members of the team were career politicians who asked to move
on to other jobs. In early February, the GBRV replaced them
with "even more radical Chavistas with no experience in the
industry." Although the MEP added all three to the payroll,
they have yet to report for work.


7. (C) Additionally, the nationalized companies in the
industry face a surprising problem with the currency control
regime. Along with the majority of privately owned
companies, they are unable to obtain dollars at the official
exchange rate (Ref D). According to Beauchemin,
government-owned companies are not allowed to obtain dollars
using the "parallel" or non-official exchange rate (Ref E).
Beauchemin explained that it would create a scandal if it
came out that even government-owned companies cannot get
dollars at the official exchange rate of 2.15 Bolivars to 1
USD for essential production inputs. He said that because
Venezuelan exchange control agency (CADIVI) is not granting
the nationalized cement companies' requests for dollars, the
companies are secretly contracting with third parties who
give them dollars at "bad rates" such as 8 Bolivars to 1 USD.
The chosen third parties give kickbacks to ensure the
continuation of their relationship with new cement company
managers.

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COMMENT
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8. (C) Chavez focused on multi-national cement companies to
prove his dedication to solving the housing crisis (Ref F) in
the run-up to the state and local elections in November.
Post-election, he has shown no interest in the industry and
appears to have little incentive to make good on the payment
agreements. It is in the GBRV's interest to let the
resulting international arbitration cases drag on for years
while the government reaps any profits from the nationalized
operations. In addition to valid concerns of nationalization
(Ref G),most companies face increasingly severe problems
with obtaining dollars at the official exchange rate. If
government-controlled companies are not immune to problems
with the currency control regime, there is little hope for US
companies awaiting billions of dollars from CADIVI.

CAULFIELD