VENEZUELA: WHAT TO EXPECT WHEN YOU ARE EXPECTING

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000741

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E.O. 12958: DECL: 06/12/2019
TAGS: ECON PGOV PREL ETRD EINV VE
SUBJECT: VENEZUELA: WHAT TO EXPECT WHEN YOU ARE EXPECTING
NATIONALIZATION

REF: A. CARACAS 690

B. 2008 CARACAS 1393

C. CARACAS 592

D. CARACAS 644

E. CARACAS 725

F. CARACAS 433

G. 2008 CARACAS 1754

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


1. (C) SUMMARY: The experience of Swiss cement company
Holcim may offer insight into what U.S. companies with
recently nationalized interests in Venezuela can expect from
the Venezuelan government over the coming months. In the
Holcim case, a model the Government of the Bolivarian
Republic of Venezuela (GBRV) seems to be following with a few
notable exceptions (Ref A),the GBRV claims repeatedly that
it will pay, but under unacceptable conditions, which include
a demand for a four-year payment period with no interest. As
the months go by and the impact of government ownership
becomes clear with a marked drop in productivity, many
production statistics have simply disappeared. If the Holcim
case study is any guide, U.S. companies have little to look
forward to in their negotiations with the GBRV. END SUMMARY.

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GBRV ONCE AGAIN CLAIMS IT WILL PAY, WITH A FEW CATCHES
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2. (C) Former Holcim Venezuela Executive Director Louis
Beauchemin (strictly protect throughout) told Econoff June 10
that he received a surprise phone call in late May from
government-owned petroleum company, PDVSA, lead negotiator
Eulogio Del Pino. After sporadic negotiations since August
2008 when the GBRV nationalized multinational cement
companies Holcim, Lefarge and Cemex (Ref B),Del Pino told
Beauchemin that the GBRV now "wants to come to an agreement
quickly with both Lefarge and Holcim."


3. (C) During the conversation, Del Pino and Beauchemin
agreed that the baseline for new negotiations would be the
contract completed, but never signed, in September 2008.
Beauchemin told Econoff that the September contract,
negotiated shortly before the GBRV seemed to lose all
interest in the cement industry, was balanced and one that
Holcim could live with. During the call, Beauchemin reminded
Del Pino that Holcim was no longer interested in retaining 15
percent of Holcim Venezuela, and instead wanted to sell 100
percent of the company to the GBRV. Del Pino agreed, and
concluded the conversation saying he would have PDVSA's team
of lawyers update the September contract and forward it to
Holcim the first week in June.


4. (C) Although the revised contract arrived on schedule,
Beauchemin said, contrary to Del Pino's statements, the June
2009 contract had little in common with the September 2008
contract. It contained multiple new "deal breaking"
provisions that further convinced Beauchemin that "Holcim
will never get paid." Holcim's New York law firm sent
PDVSA's New York law firm a letter of protest the first week
in June, but had not received a response as of June 10.
Beauchemin said he believes similar provisions are now in the
GBRV template for all contracts it plans to negotiate with
the growing list of nationalized companies (Refs C, D, E and
F). He believes Argentine steel company Sidor agreed to
something resembling the following "absurd" provisions in
order to receive partial payment for its nationalized
Venezuelan operations (Ref A).

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I'D GLADLY PAY YOU TUESDAY.............
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5. (C) The June 2009 GBRV-proposed contract stipulates that
Holcim will receive 35 percent of the agreed sales price upon
signature of the contract, but will be paid the remaining
funds over the next four years with no interest on the
outstanding amount. Beauchemin noted that even if Holcim
believed the GBRV would actually make payments over four
years, the "no interest" clause, which would cost Holcim
millions, was particularly irritating as Holcim had conceded
USD 40 million in dividends to the GBRV as a good-will
gesture during previous negotiations. Beauchemin said that

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if the GBRV had offered 50 percent up front with payment of
the full amount (approximately USD 650 million after dropping
the dividend claim) within the next 18 months, Holcim would
have accepted rather than continue its costly international
arbitration suit that will not have its first hearing until
the end of 2010. Additionally, he emphasized, the provisions
detailed below would have to be eliminated or substantially
modified to reach an agreement.


6. (C) Beauchemin said the new contract goes on to specify
that all issues related to Holcim Venezuela will henceforth
fall under the jurisdiction of Venezuelan courts. The
contract would force Holcim to withdraw its claim at the
World Bank's International Center for Investment Disputes
(ICSID) prior to the first GBRV payment and strip Holcim of
its right to resort to the ICSID in the future. An
additional clause states that any future environmental,
"social," or labor claims the GBRV might choose to make would
stop all GBRV payment until the issue is resolved to GBRV
satisfaction in Venezuelan courts.


7. (C) In another interesting twist to the new contract, the
GBRV removes all mention of PDVSA as the party responsible
for making payment. Beauchemin said that Del Pino explained
that while he could put PDVSA back on the new contract, it
would still not make the payments as PDVSA is "overextended"
and could not offer Holcim a dime. Instead, the contract
lists the responsible party as a GBRV institute which falls
under the authority of the new, Diosdado Cabello-led Ministry
of Public Works and Housing (Ref G). (Note: Beauchemin
could not recall the institute's name, but it may be the
National Institute of Housing. End Note.) When Beauchemin
asked Holcim lawyers why the Ministry itself was not listed
as the payer, his legal counsel explained that if the GBRV
listed a ministry as responsible for payment, when (not if)
the GBRV defaults on the payments, the country itself would
be considered to be in default. Counsel advised Beauchemin
that the GBRV's many institutes, while wholly government
owned and operated, are legally independent of the government
and thus offer a fig leaf to hide behind when the GBRV
defaults.

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INDUSTRY PRODUCTION DATA DISAPPEARS
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8. (C) Beauchemin understands from his industry contacts that
Lefarge and Cemex are currently experiencing serious
"technical difficulties" and that their production has
dropped significantly. The only support for these claims is
anecdotal evidence from former clients who tell him they
cannot get enough product, as there is no longer any hard
production data. The GBRV stopped updating its cement
figures in December 2008. Most employees who would have been
willing to share data informally with Beauchemin have left
the country. Beauchemin added that the GBRV is currently
paying Holcim USD 200,000 per month to keep Holcim from
pulling the plug on its proprietary software, essential to
plant operations. The GBRV is paying Cemex as well to keep
the Cemex operating software running. Unfortunately for
Lefarge, he said, which unlike the other two companies housed
its servers and operating systems in Venezuela, the GBRV
seized the Lefarge systems along with the rest of its
operations.

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COMMENT
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9. (C) If the Holcim case study is any guide, U.S. companies
in the agriculture and oil services sectors are in for
difficult negotiations with the Venezuelan government.
Beauchemin indicated that Stanford-educated lead PDVSA
negotiator Del Pino is "very good" but "very overextended,"
as Beauchemin believes Del Pino is nearly the only person in
the GBRV capable of handling complex negotiations with
multinationals. Unfortunately, the list of negotiations Del
Pino will have to conduct with nationalized companies is
growing longer by the day. In fact, representatives from
U.S. energy companies nationalized in the past month have
reported to Post that Del Pino was unavailable to meet with
them because he was traveling internationally in an attempt
to raise money for PDVSA. If negotiations fail, the GBRV
will place the blame squarely with the companies. As

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Beauchemin pointed out, however, the GBRV might fool some in
Venezuela, but "financial institutions and the international
press will never buy it."

CAULFIELD