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Cablegate: 2005 Investment Climate Statement for Venezuela

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS CARACAS 000790

SIPDIS


STATE FOR EB/IFD/OIA
STATE PLEASE PASS TO USTR
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON KTDB ETRD PGOV VE OPIC USTR
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT FOR VENEZUELA

REF: 04 STATE 250356

1. (U) Per Reftel, the 2005 Investment Climate Statement for
Venezuela is presented below.

2. (U)
2005 Investment Climate Statement for Venezuela

Contents
A. Openness to Foreign Investment

A.1 The New Constitution
A.2 Legal Framework: Decree 2095
A.3 Limitations under Decree 2095
A.4 Areas Covered by Special Laws
A.5 Hydrocarbons
A.6 Natural gas
A.7 Electric Power
A.8 Domestic Retail Fuels Market
A.9 Mining
A.10 Telecommunications
A.11 Banking
A.12 Insurance
A.13 Privatization
A.14 Capital Outflow Policy

B. Conversion and Transfer Policies

C. Expropriation and Compensation

D. Dispute Settlement

E. Investment Incentives and Performance Requirements

E.1 Investment Incentives
E.2 Performance Requirements

F. Right to Private Ownership and Establishment

G. Protection of Property Rights

G.1 Real Property Rights
G.2 Intellectual Property Rights
G.3 Patents and Trademarks
G.4 Copyrights

H. Transparency of the Regulatory System

H.1 Legal Environment
H.2 Tax Treatment of Foreign-Owned Firms

I. Efficient Capital Markets and Portfolio Investment

I.1 Capital Markets
I.2 Credit Markets

J. Political Violence

K. Corruption

L. Bilateral Investment Agreements

M. OPIC and Other Investment Insurance Programs

N. Labor

O. Foreign Trade Zones/Free Ports

P. Foreign Direct Investment

Statement

---------------------------------
A. Openness to Foreign Investment
---------------------------------

Venezuela officially encourages foreign investment and
provides equal treatment to local and foreign companies

though the overall environment is in fact considerably less
welcoming. Capital repatriation is allowed (subject to
exchange control restrictions described below) and there are
few formal restrictions on investments except for several
sectors that are reserved to the State or Venezuelan
nationals such as oil production, and hydropower generation
(with some exceptions).

Venezuela's economic performance had been negative for
several consecutive years until 2004 when the economy showed
sharp growth, though admittedly from a much lower base. GDP
in 2004 expanded by 17.2 percent. Considering, however, that
real GDP decreased by 7.6 percent in 2003 and by 8.9 percent
in 2002, a large percentage of the strong expansion can be
attributed more to the lower starting point rather than to
organic growth. Inflation for 2004 was 19.2 percent and is
expected to reach 15 percent in 2005. A strong recovery in
global oil prices, increased tax revenue collections, and a
strong overall economic recovery have been positive
developments.

Statements by President Hugo Chavez and other Venezuelan
officials about the need to adopt a new non-capitalist
economic model (what President Chavez calls "Socialism of the
21st Century"), the takeover by individuals of some rural
lands and an aggressive adoption of a "land reform" program
at the state and national levels, the passage of legislation
which has expanded the Supreme Court, with the subsequent
appointment of judges on what observers consider a political
basis rather than merit, and a sudden shift in petroleum
royalty policies have been negative developments. The
Venezuelan government has also sought to promote an
increasing state presence in areas of the economy previously
left to private enterprise. The most prominent is its
"Mercal" chain of food stores aimed at low income
Venezuelans, which is supplied by state purchases of
commodities. Other areas that the Venezuelan state is
reentering include civil aviation, telecommunications, cement
production, paper manufacturing, and sugar refining.

In early 2003, President Chavez created an Exchange
Administration Board (CADIVI) to regulate the purchase and
sale of foreign currency. At first, CADIVI was unable to
process foreign currency requests efficiently and was only
supplying currency to about 15-20 percent of approved
authorizations. Over time, the system has improved, and the
supply of foreign currency reached a level of approximately
$15 billion in 2004, or 55 percent of approved
authorizations. A number of goods have also been added to
the list of imports eligible for foreign exchange including
intangibles such as services and the repatriation of capital,
which totaled $1.5 billion at the end of the third quarter.
There continue to be delays with pre-inspection companies
thereby increasing storage costs. Although the number of
approvals has increased sharply, the backlog in liquidations
puts significant constraints on imports which accounted for
68.5 percent of requests, followed by private foreign debt
with 12.5 percent and foreign investments with 8.6 percent.
Exchange control authorities have repeatedly said that the
exchange control system will be eased but will remain a
permanent long-term mechanism. As of now, the system remains
highly discretionary and subject to sudden changes in its
application.

In terms of direct foreign investment, a number of projects
are under development or in pre-engineering stages, mainly in
oil and gas or large infrastructure projects. The former are
governed by either the Hydrocarbons or Gaseous Hydrocarbons
laws (see section A5). These involve varying kinds of
contractual relationships with state oil corporation
Petrleos de Venezuela (PDVSA). As regards the latter, the
preferred venture scheme has become sovereign deals or
contracts between state corporations. Power, several road
and railroad projects and the expansion of some production
facilities for basic industry seem to be the main areas where
there are projects in the pipeline. However, most of these
projects have very little if any private participation at all.

-- A.1 The 1999 Constitution

The Venezuelan Constitution of 1999 treats private capital

investment as a means of promoting the development of the
national economy. Article No. 299 of the Constitution
recognizes private enterprise as a factor for creating
sources of employment and local added value, as well as
raising the standard of living of the population, within a
framework of free competition. The Constitution reserves
certain strategic sectors for the State such as oil activity
and hydropower generation.

Article 301 of the Constitution adopts international
standards for the treatment of private capital, with equal
treatment of local and foreign capital. As well, as a member
of the Andean Community, Venezuela has accepted the
application of the Andean Decisions, although examples can be
found of non-compliance.

-- A.2 Legal Framework: Decree 2095

Decree 2095 (1992) establishes the legal framework for
foreign investment in Venezuela. This Decree implemented
Andean Pact Decisions 291 and 292 and significantly expanded
foreign investment opportunities in Venezuela by lifting most
restrictions on foreign participation in the economy. Most
sectors of Venezuela's economy, except those specifically
noted, are open to foreign participation. Article 13 of the
Decree explicitly guarantees that foreign investors will have
the same rights and obligations as national investors "except
as provided for in special laws and limitations contained in
this Decree."

Under Decree 2095, foreign investors need only register with
the Superintendent of Foreign Investment (SIEX) within 60
days of the date a new investment is made. (The exception to
this general rule is the Security and Defense Law, which
provides that foreigners cannot own property in certain
border regions or near military installations and basic
industries without written authorization of the President
through the Ministry of Defense.) Foreign companies may
generally open offices in Venezuela without prior
authorization from SIEX as long as they do not engage in
certain sales or business activities that would require
registration. No prior authorization is required for
technical assistance, transfer of technology, or
trademark-use agreements, provided they are not contrary to
existing legal provisions. Shares of foreign companies may
be sold publicly.

Decree 2095 also guarantees foreign investors the right to
repatriate 100 percent of profits and capital, including
proceeds from the sale of shares or liquidation of the
company, and allows for unrestricted reinvestment of profits.
Foreign exchange is, however, still subject to government
exchange controls.

Joint ventures and wholly owned subsidiaries of foreign
companies are treated in the same way as Venezuelan firms.
Only registration of the venture with SIEX is required.
Decree 2095 imposes no limits on the amount of dividends,
reinvestment, or repatriation. (The foreign exchange regime,
however, has significantly affected such transfers.)

-- A.3 Limitations under Decree 2095

Decree 2095 reserves three areas of economic activity to
"national companies": television, newspapers, and
professional services that are regulated by national laws. A
"national company" (as defined in Article 1 of Andean Pact
Decision 291) is a company in which Venezuelan nationals hold
more than 80 percent of the equity. Foreign capital is
therefore restricted to a maximum of 19.9 percent in
enterprises engaged in radio, television, Spanish-language
newspapers, and professional services subject to licensing
legislation (e.g., law, architecture, engineering, medicine,
veterinary medicine, dentistry, economics, public accounting,
psychology, pharmacy, and management). Foreign professionals
are free to work in Venezuela without restriction, but must
first revalidate their title at a Venezuelan university.
This is not required for consulting services under contract
for a specific project. The Investment Promotion and
Protection Law of October 1999 maintained these exceptions
and reserved sectors.

-- A.4 Areas Covered by Special Laws

The sectors that are regulated by "special laws" that
supplement the Constitution include hydrocarbons, natural
gas, iron ore, mining, telecommunications, broadcasting,
banking, mortgages, and insurance.

-- A.5 Hydrocarbons

Venezuela's vast reserves make oil and gas is leading sector
in terms of attracting foreign investment. However, foreign
investment is restricted in the petroleum sector. The 2001
Hydrocarbons Law reserves exploration and production, as well
as "gathering" and initial transportation and storage of
hydrocarbons to the state. Under this regime, primary
activities must be carried out directly by the state, by a
100 percent state-owned company such as Petroleos de
Venezuela (PDVSA), or by a joint venture company with more
than 50 percent of the shares held by the state. The 2001
law does, however, leave new refining ventures open to
private investment as well as commercialization activities,
under a license and permit regime.

The Hydrocarbons Law mandated an increase in royalty payments
from 16.67 percent to 30 percent, with the possibility of a
reduction to 20 percent for heavy crude projects. It also
stipulated that any arbitration proceedings would henceforth
be in domestic not international venues. No projects have
yet been negotiated under this law.

The Hydrocarbons Law did not specifically grandfather
contracts executed under earlier legislation: i.e., the 33
operating service contracts awarded for "marginal" or
inactive oilfields in three rounds in the 1990's; the
exploration and production profit-sharing agreements awarded
in 1996; and the four so-called "Strategic Associations,"
joint ventures formed in the 1990's to extract and upgrade
Venezuela's extra heavy oil. The Venezuelan Government
argued in 2001 that no such provision was necessary because
retroactive application of legislative provisions is
forbidden by constitutional mandate. In October 2004, the
Government unilaterally eliminated a nine-year royalty
holiday ceded to the Strategic Associations, arguing that
this was allowable under earlier hydrocarbons legislation.

The oil sector suffered two years of negative growth in 2002
and 2003 with a 14.2 percent contraction in 2002 and 2.1
percent in 2003 The sharp decrease was due to a two-month
national strike from December 2003-February 2003 that brought
production to a complete halt. In an effort to restart
operations in the oil industry, the Chavez Government
dismissed over 18,000 striking employees, many in management
positions, of which only a small percentage have been
rehired. However, oil GDP increased by 18.6 percent by the
third quarter of 2004 in comparison with the same period in
2003.

The Chavez administration has played a price hawk role in
OPEC. It has also begun promoting the regional development
and integration of state energy companies under the name of
"Petroamerica." Petroamerica would be divided into Petrosur
comprising the Southern Cone, Petrocaribe comprising the
Caribbean nations and Petroandina comprising the Andean
nations. The stated purpose of the strategy is to gain
strength in international markets by eliminating trade
barriers, increasing the refining infrastructure and reducing
costs.

--A.6 Natural gas

Venezuela has vast untapped natural gas reserves, estimated
as the eighth largest in the world, and is promoting greater
use of natural gas domestically as a clean and more
cost-efficient energy source. Venezuela would like to take
advantage of its reserves and geographic location to export
natural gas to regional markets including the U.S.
The 1999 Gaseous Hydrocarbons Law offers more liberal terms
than are available to petroleum investors, and Venezuela's
government has sought foreign investment to develop offshore
natural gas deposits near the Orinoco delta.


The 1999 Gaseous Hydrocarbons Law opened the entire natural
gas sector to private investment, both domestic and foreign.
The law created a licensing system for exploration and
production of Venezuela's non-associated natural gas reserves
regulated by the Ministry of Energy and Mines. Natural gas
that is produced in association with crude oil production
remains subject to the Hydrocarbons Law. The state retains
ownership of all natural gas "in situ", but PDVSA involvement
is not required for gas development projects. Complete
vertical integration of the gas business from wellhead to
consumer is prohibited.

In 2001, Venezuela held its first commercial auction of
concessions for natural gas not associated with petroleum
production and successfully awarded six of eleven onshore
areas it offered to bidders. In 2003 and 2003, the
government licensed three exploration and development blocks
in the "Deltana Platform," located in waters contiguous to
Venezuela's boundary with Trinidad and Tobago. Talks
continue over the development of the Mariscal Sucre offshore
natural gas project, which would involve the development of
an LNG facility in Guiria in the Paria Peninsula. Venezuela
also recently signed an agreement with Colombia that
envisions the construction of a natural gas pipeline, which
initially would bring Colombian gas to Venezuela but which
could later be expanded to send Venezuelan gas to Central
America. Finally, more private investor interest is
anticipated for future gas rounds as Venezuela focuses on
export oriented natural gas projects and promising off-shore
exploration areas.

--A.7 Electric power

Electric power production requires intensive investments in
all stages - generation, transmission, and distribution. In
Venezuela, the area that is most in need of investment is
generation since approximately 70 percent of country's
generation capacity is concentrated in hydro stations located
in a single river basin. A drought during 2000, 2001, and
2002 raised serious concerns and highlighted the need to
increase and balance generation to mitigate the consequences
of droughts and grid deficiencies. Investments in hydropower
generation continue however, with the incorporation of
Caruachi, a 2,280 MW dam, and plans to build Tocoma, which
will supply an additional 2,160 MW to the system.

Although approximately 98 percent of the national territory
receives electric service, transmission is an area that also
requires intensive capital investments. Venezuela's
transmission assets were developed between the 1960's and
80's. While maintenance has generally been adequate,
population growth has outpaced upgrades creating transmission
bottlenecks particularly in the central region of the country.

A legal framework has also been crafted to regulate the
sector. Its implementation, however, has been stalled mainly
over concerns about the ability of CADAFE (the national power
utility) to un-bundle activities and honor contracts. CADAFE
is involved in generation, transmission, and distribution of
electricity and is often accused of having serious management
issues and very high non-technical (commercial) losses.

-- A.8 Mining

The mining law of 1999 consolidates the provisions of the
1945 mining law with subsequent mining decrees and encourages
greater private sector participation in mining activities.
The mining law created the National Institute for Geology and
Mining (INGEOMIN), which serves as a national information
center to gather and disseminate technical and scientific
data for the mining industry. The law established an
inter-ministerial commission to coordinate the mining
sector's development between the Ministries of Energy and
Mines (now the Ministry of Heavy Industry and Mining),
Environment, Defense, Finance, and Planning. It also called
for a "one-stop shopping" to be created within that
commission to expedite concession authorization procedures.

The 1999 law maintained the basic concession terms of the
1945 law. Venezuela's concessions remain mineral-specific,

and have a maximum 20-year authorization, which can be
extended for an additional 20 years. The law lengthened
slightly the exploration period from 3 years to 4 years, and
the development period from 4 to 7 years.

The mining law also changed the mining sector's tax
structure. The 1945 mining law required a small one-time
exploration tax: a surface tax of 40 centavos per hectare for
alluvial deposits and one Bolivar per hectare on veins and
strata deposits and a layered royalty rate. The surface tax
could not be adjusted for inflation because a fixed amount
was written into the 1945 law and over time has become
negligible.

The legalization of small and medium size mining operations
has been viewed as a positive step toward the modernization
of the sector and as a way to enforce environmental standards
often violated by illegal small miners. The law,
nevertheless, has been criticized for its high and variable
royalties. A critical issue is a provision of Title VII that
allows an exploitation tax of anywhere between 1 percent and
3 percent.

Individual mining firms have faced significant problems, and
government officials have made comments suggesting that a
generalized review of existing mining contracts may take
place.

-- A.9 Telecommunications

President Chavez signed the Telecommunications Organic Law in
2000, replacing the antiquated 1940's era law and setting the
stage for significant levels of new investment in the sector.
The new law, coupled with a national telecommunications plan
developed by the national telecommunications commission
(CONATEL), and the November 2000 expiration of the monopoly
held by CANTV on basic telephony, created a favorable climate
for telecommunications investors.

Between 2000 and 2003, Venezuela received over US$3 billion
in investments in the telecommunications sector. Figures for
2004 have not been released but are estimated to be near the
levels of 2003, which stood at 237 million and were the
lowest they have been since the opening of the sector to
private investment.

Venezuela has one of the leading wireless telephony markets
in the region. Three major companies share the market: CANTV
(originally state-owned, now largely privatized and 28% owned
by Verizon); Telcel, (recently sold by Bellsouth to
Telefonica of Spain); and Digitel (formerly a subsidiary of
Italy's TIM group but being acquired by CANTV). Higher
investment levels are expected in 2005 to reflect these
acquisitions, estimated at US$1.3 billion for Telcel and
US$450 million for Digitel.

EDELCA, a national utility involved in power generation and
transmission and subsidiary of state-owned industrial giant,
Corporacion Venezolana de Guayana (CVG), has formed a
telecommunications company, CVG Telecom, using its existing
fiber-optic capabilities and rights of way. According to the
government, EDELCA's fiber optic capacity covers
approximately 70 percent of its grid and is interconnected to
those of Colombia and Brazil. This company, it is suggested,
would eventually compete with Venezuela's privately owned
telecommunications providers.

-- A.10 Banking

A 1994 Banking Law (Gazette No. 4641 of 1993) opened
Venezuela's banking and financial services sectors to 100
percent foreign ownership. Foreign banks may enter the
Venezuelan market in one of three ways: acquisition of shares
of existing commercial banks or other financial institutions;
creation of a new bank or other financial institution
wholly-owned by foreign banks or investors; establishment of
a branch of a foreign bank or financial institution. In
2001, President Chavez passed a new Banking Law as part of
the package of enabling laws. This law regulates all banks
with the exception of four state-owned banks.

Applications for entry into the banking sector are submitted
to the Bank Superintendency, which must seek an opinion from
the Central Bank before granting authorization. The
government can take into account "economic and financial
conditions, general and local" (Article 11 of the Banking
Law) and insist on reciprocity (Article 106 of the Banking
Law) when deciding on an application for entry, but it has
generally not used those powers.

Total bank assets increased from US$ 23 billion at the end of
2003 to US$ 25.7 billion in October 2004. Since late 1996,
seventeen banks have received authorization to become
universal banks. Citibank is currently the only U.S. bank
operating branches in Venezuela.

In 2001 a Merger Law was passed, aimed at strengthening the
financial sector by allowing stronger banks to acquire weaker
institutions. Since the law was passed, 13 mergers have
occurred reducing the number of small banks by twenty. By
November 2004, the Venezuelan financial system consisted of
17 universal banks; 15 commercial banks; 2 development banks,
5 investment banks; 2 mortgage banks; 1 leasing company; 3
savings and loan associations; 2 money market funds; 4
special law-regulated banks. Of the 51 financial institutions
43 are private and 8 are national entities.

The banking system is increasingly required to direct credit
to borrowers in accordance with government requirements such
as the imposition of a minimum amount of lending to be made
to small businesses and farmers and a cap on mortgage
interest rates.

-- A.11 Insurance

Venezuela's Insurance and reinsurance sector was opened to
100 percent foreign ownership in 1994. A subsequent decree
passed on November 2001 (Official Gazette No. 5.553)
establishes rules for contracts as the basis for insurance
activity, detailing rights and obligations to guarantee
equilibrium and protect customers. Foreign investors may
acquire shares of an existing insurance or reinsurance
company or create an entirely new company. Applications for
entry into the sector are submitted to the Insurance
Superintendency for authorization. Foreign insurance
companies are prohibited from offering insurance contracts
fulfilled outside of Venezuela, unless the premiums become
part of the net worth of an insurance company operating
within Venezuela.

-- A.12 Privatization

The GOV has a Privatization Law (Gazette No. 5199 of 1997),
which allows for the privatization of public assets. A
number of assets were bundled and earmarked for privatization
in the early and mid 90s. From 1990-1998 FIV, the Investment
Fund of Venezuela, the entity in charge of selling the assets
and later renamed the Economic and Social Development Bank
(BANDES), privatized over 40 entities and generated cash
receipts of nearly $4.8 billion. Foreign investors purchased
stakes in the telecommunications, electricity, steel, sugar
refining, tourism, dairy, cement and aviation sectors.

The Chavez Administration has shifted its policy away from
selling a large portfolio of assets toward forming strategic
alliances, particularly in the form of contracts with
state-owned enterprises of other countries. Participation in
strategic associations regarding state owned entities is
coordinated and administered by BANDES. Although it has not
rolled back any privatizations, the Government of Venezuela
has created new state enterprises in aviation and
telecommunication--areas from which the state had previously
exited.

-----------------------------------
B. Conversion and Transfer Policies
-----------------------------------

Foreign investors in capital markets and foreign direct
investment projects are guaranteed the right to repatriate
dividends and capital under the Constitution. However, the
Law Governing the Foreign Exchange System (Gazette No. 4897

of 1995) permits the executive branch to intervene in the
foreign exchange market "when national interests so dictate."
After a steep decline in the value of the national currency
(the Bolivar) following a two-month general strike that
brought oil production to a near standstill, the Central Bank
of Venezuela halted trade in Bolivars on January 22, 2003.
President Chavez announced the creation of an Exchange
Administration Board (CADIVI) on February 5, 2003 to regulate
the purchase and sale of foreign currency. During much of
2003, CADIVI was unable to process requests for authorization
of foreign exchange in an efficient and timely manner and
only supplied $3.6 billion or approximately two months worth
of transactions. There has been significant improvement over
time. The supply of foreign currency reached a level of
approximately $15 billion in 2004, or 55 percent of approved
authorizations.

A new CADIVI resolution allows importers to ship products
without pre-approval by the government. There continue to be
delays with pre-inspection companies, which increases storage
costs. Although the number of currency certificate approvals
has increased sharply, operating with a 50 percent backlog in
liquidations puts significant constraints on imports which
accounted for 68.5 percent of requests, followed by private
foreign debt with 12.5 percent and foreign investments with
8.6 percent. Exchange control authorities have repeatedly
said that the exchange control system will be eased but will
remain a permanent long-term mechanism. Nonetheless, the
quasi-legal parallel market remains an important source of
foreign exchange.

A number of goods have also been added to the list of imports
eligible for foreign exchange including intangibles such as
services and the repatriation of capital, which totaled $1.5
billion at the end of the third quarter. Decree 2095
guarantees foreign investors the right to repatriate 100
percent of profits and capital, including proceeds from the
sale of shares or liquidation of the company, and allows for
unrestricted reinvestment of profits. Legislation is pending
in the National Assembly that would impose criminal penalties
for financial transactions made outside of CADIVI's channels.
This is a subject of significant concern within the business
community given the discretionary and irregular nature of
CADIVI approvals.

---------------------------------
C. Expropriation and Compensation
---------------------------------

There have been several cases which raise significant issues
of expropriation and/or serious impairment of the value of
foreign investments in the Venezuelan state. One case
relates to INTESA, a joint venture formed between Science
Applications International Corporation (SAIC), a U.S.
company, and Venezuela's national oil corporation PDVSA, to
provide information technology services to PDVSA. PDVSA
provided INTESA with a five-year service contract that it
decided not to renew in 2002. INTESA continued to provide
services under a provisional agreement while the parties
discussed termination of the joint venture. The national
strike then intervened in December 2002. The national
government took over INTESA claiming the firm had not allowed
non-striking PDVSA personnel to restart operations by denying
access to key control systems. SAIC 's interest had been
insured by the Overseas Private Investment Corporation (OPIC)
which determined in July 2004 that an expropriation had
occurred. It paid compensation to SAIC and has in turn
sought repayment from PDVSA.

Another case is related to a joint venture between Williams,
a U.S. corporation, and Canada's Enbridge Corporation to
operate an oil-loading terminal in Venezuela's Jose
Industrial Complex. Venezuelan authorities seized control
of the facility in December 2002 during the national strike,
claiming that the terminal was of strategic importance and
that the company, which had declared force majeure, had
joined the strike. PDVSA subsequently refused to negotiate
compensation for the termination of the contract. The matter
is currently before an international arbitration panel and a
ruling is expected shortly.

President Chavez has recently issued a controversial decree
aimed at expropriating idle land for agricultural purposes as
part of the agrarian reform spelled out in a 2001 law. The
decree sets up a commission to inspect farmland and decide
whether or not to expropriate the land holdings based on a
finding that the land is not being put to adequate use or
that the owner is unable to show legal title to the land. If
ownership can be proved, compensation is to be provided.
However, land titles in Venezuela are not always clearly
documented, and there are serious concerns regarding the
process and the amount of discretion granted to the
investigating authorities. In March 2005, the Venezuelan
Government nationalized nearly half of the 13,000 hectare
British-owned El-Charcote cattle ranch in the central
Venezuelan state of Cojedes.

A 1998 land census found that 60 percent of all Venezuelan
farmland was owned by less than 1 percent of the population.
The census also noted that over 80 percent of the farmland
redistributed during a 1960 land reform had returned to large
landowners. More than 80 percent of Venezuela's population
lives in rural areas.

---------------------
D. Dispute Settlement
---------------------

Venezuela's legal system is accessible to foreign entities
seeking to resolve investment disputes. While the legal
system is often slow, inefficient, and has been accused of
corruption and politicization, foreign entities have not
generally been discriminated against in legal proceedings.
While not common, Venezuelan law allows the filing of
criminal charges in some commercial disputes.

Decree 2095 allows for the arbitration of disputes as
"provided by domestic law." The Commercial Arbitration Law
(Gazette No. 36,430 of 1998) eliminated the previous
requirement for judicial approval of arbitration.
Arbitration agreements involving national or international
firms can be automatically binding.

The Commercial Arbitration Law also allows state enterprises
to subject themselves to arbitration in contracts with
private commercial entities, but requires that they first
obtain the approval of the "competent statutory body," as
well as the "written authorization" of the responsible
minister. In the case of PDVSA, for example, the Ministry
of Energy and Mines issued a blanket written authorization in
1998 which allows the company to enter into such arbitration
agreements, as it deems convenient or necessary. However,
the 2001 Hydrocarbons Law prohibits PDVSA from entering into
agreements providing for international arbitration.

--------------------------------------------- --------
E. Investment Incentives and Performance Requirements
--------------------------------------------- --------

-- E.1 Investment Incentives

Investment incentives take the form of tax credits, income
and wholesale tax exemptions, exemption from customs duties,
and some tax rebates for selected sectors in the economy.
Incentives to encourage production for the export market are
available to both domestic and foreign companies.

Article 45 of the Value-Added Tax Law (Gazette No. 5341 of
1999) gives the tax agency, SENIAT, the authority to grant
investors exemption from VAT levies if they are engaged in
new industrial projects in the pre-operative stages of
development. The exemption can last up to five years or
until the pre-operating period terminates, with the
possibility of extensions.

Exporters may make use of special customs procedures aimed
principally at raising the competitiveness of non-traditional
exports by the suspension or refund of duties on imports that
local producers incorporate into their export production.
Mechanisms include temporary admission for inward processing,
drawback, and replenishment of inventories, in-bond
warehousing, and refund of the wholesale tax. The drawback

mechanism has been accused of being lengthy, and bureaucratic.

Decree 1217 (Gazette No. 35,907 of 1996) updated the norms
for debt-for-equity swaps to provide incentives for new
direct foreign investment entities and reduce Venezuela's
external debt stock. The decree expanded the use of this
instrument for a wide range of sectors: agriculture;
industrial production or high technology services;
petrochemical, coal, processed wood, wood pulp and its
byproducts production; production and acquisition of capital
goods and services; tourism; and construction of houses,
medical facilities, or other structures related to social
welfare interests.

-- E.2 Performance Requirements

In any enterprise with more than 10 workers, foreign
employees are restricted to 10 percent of the work force, and
Venezuelan law limits foreign employee salaries to 20 percent
of the payroll. The state oil company, PDVSA, seeks to
maximize local content and hiring in its negotiations with
foreign hydrocarbon investors.

--------------------------------------------- --
F. Right to Private Ownership and Establishment
--------------------------------------------- --

There are no legal limits on foreign ownership, except as
noted in Decree 2095 and in "special laws" (see above).

--------------------------------
G. Protection of Property Rights
--------------------------------

-- G.1 Real Property Rights

Foreign investors may pursue property claims through
Venezuela's legal system. While the legal system's
procedures are lengthy, judgments are uneven, and allegations
of corruption and politicization are common, there is little
evidence that the legal system discriminates against foreign
investors.

-- G.2 Intellectual Property Rights

Venezuela is a member of the World Intellectual Property
Organization (WIPO). It is also a signatory to the Berne
Convention for the Protection of Literary and Artistic Works,
the Geneva Phonograms Convention, the Universal Copyright
Convention, and the Paris Convention for the Protection of
Industrial Property. Through Andean Community Decision 486,
Venezuela has ratified the provisions of the WTO Agreement on
Trade-Related Aspects of Intellectual Property Rights
(TRIPS).

The Venezuelan Industrial Property Office (SAPI) leaves much
room for improvement, and its actions and occasional publicly
stated antagonism towards IPR often draw criticism from IPR
advocates and rights holders. Protection of IPR is also
hindered by the lack of adequate resources for the Venezuelan
copyright and trademark enforcement police (COMANPI) and for
the special IPR prosecutor's office. Venezuela's tax agency
SENIAT is promoting several measures to fight piracy in an
effort to reduce tax evasion, including a new anti-piracy law
and the introduction of a tax on street vendors. According
to industry representatives, SENIAT seems to be a promising
enforcement entity due to its better technical and financial
capabilities.

Unfortunately, pirated software, music and movies remain
readily available throughout the country. In the 2003 Annual
Review, Venezuela remained on USTR's Special 301 "Watch List."

-- G.3 Patents and Trademarks

Venezuela provides the legal framework for patent and
trademark protection through Andean Community Decision 486
and the 1955 National Industrial Property Law. Andean
Community Decision 486 takes major steps towards bringing
Venezuela into WTO TRIPS compliance. However, without
corresponding local laws, Venezuela is not completely TRIPS

compliant. Andean Community Decision 345 covers patent
protection for plant varieties.

U.S. companies remain concerned about the impact of the
Andean Tribunal's 2002 interpretation of Articles 14 and 21
of Decision 486, which do not allow for the patenting of
"second-use" products. Under pressure from the Andean
Community and in line with some changes in leadership at
SAPI, Venezuela has revoked previously issued patents. No
patents were awarded in 2004 to imported pharmaceutical
products. Since 2002, Venezuela's food and drug regulatory
agency (INH) began approving the commercialization of new
drugs which were the bioequivalents of already patented
drugs, thereby denying the patent-holding companies
protection of their test data. In effect, the government now
allows the test data of patented drugs or those for which
patents have been requested, most of which required lengthy
and expensive development, to be used by others seeking
approval for their own unlicensed versions of the same
products.

-- G.4 Copyrights

Andean Pact Decision 351 and Venezuela's 1993 Copyright Law
provide the legal framework for the protection of copyrights.
The 1993 Copyright Law is modern and comprehensive and
extends copyright protection to all creative works, including
computer software. A National Copyright Office was
established in October 1995 and given responsibility for
registering copyrights, as well as for controlling,
overseeing and ensuring compliance with the rights of authors
and other copyright holders. Industry experts are concerned
about a proposed new copyright law proposal, which would
require the mandatory registry of works, reduce protection
terms, hamper distribution agreements and increase royalties.

The Venezuelan copyright and trademark enforcement branch of
the police (COMANPI) continues to provide copyright
enforcement support with a small staff of permanent
investigators. A lack of personnel, coupled with a very
limited budget and inadequate storage facilities for seized
goods, has forced COMANPI to work with the National Guard and
private industry to improve enforcement of copyrighted
material. COMANPI can only act based on a complaint by a
copyright holder; it cannot carry out an arrest or seizure on
its own initiative, which leads to weaker enforcement.

Venezuela does not automatically recognize foreign patents,
trademarks or logotypes, so foreign investors must be sure to
register patents and trademarks appropriately and in as many
categories as are applicable. It is advisable not to have
agents or distributors do this in their name because the
agent can then claim that he/she is the registered owner of
the trademark in question.

----------------------------------------
H. Transparency of the Regulatory System
----------------------------------------

-- H.1 Legal Environment

The Government of Venezuela adopted three laws in the early
1990's to promote free market competition and prevent unfair
trade practices: an Anti-Trust Law (Gazette No. 34,880 of
1992), an Antidumping Decree (Gazette No. 4,441 of 1992), and
a Consumer Protection Law (Gazette No. 37.390 of 2004).

Venezuela also passed a government procurement law that came
into effect in 2001. The law supposedly increases
transparency in the competitive bidding process for contracts
offered by the central government, national universities, and
autonomous state and municipal institutions. Despite this
legal framework, there is little transparency in Venezuela
and many contracts are awarded without open competition.

-- H.2 Tax Treatment of Foreign-Owned Firms

All companies and individuals are required to register with
the national tax authority (SENIAT). Income received from
any economic activity carried out in Venezuela is subject to
taxation.

There are several different corporate tax regimes to which
foreign investors could be subject, depending upon the type
of economic activity in which they are engaged. Except for
the petroleum sector, the current Venezuelan income tax law
does not differentiate between foreign-owned and
Venezuelan-owned firms. The income tax rate is progressive
based on income, ranging from 6 percent to 34 percent.
Companies involved in hydrocarbon and related activities pay
50 percent, except associations formed under the Hydrocarbons
Law, which receive a different treatment. Companies involved
in mining pay 60 percent. The Business Assets Law imposes a
one percent tax on business assets (Gazette No. 4654 of
1993). The assets tax is assessed on the gross value of
assets (with no deduction for liabilities) after adjustments
for depreciation and inflation

Venezuela has international double taxation agreements in the
areas of air and sea transport with several countries,
including the Unites States. A US/Venezuelan treaty to avoid
double taxation went into effect on January of 2001.

SENIAT is undertaking a very aggressive tax collection
program called "The Zero Evasion Plan" which has boosted
fiscal revenues in 2004. Highly publicized raids have taken
place and businesses, including multinational firms, have
been temporarily closed administratively. Firms subject to
these measures complain that these closures have been imposed
for minor paperwork violations as opposed to actual tax
evasion.

In 1999, the government replaced the wholesale tax (ICVSM)
with a value-added tax (IVA). The value-added tax rate is
currently 15 percent.

A Bank Debit Tax (BDT) was also implemented last year levying
all bank transactions. Since its implementation rates have
varied increasing from 0.75 percent to 1 percent at the end
of 2002, and then decreasing again to 0.5 in 2004 where it
currently stands.

--------------------------------------------- --------
I. Efficient Capital Markets and Portfolio Investment
--------------------------------------------- --------

-- I.1 Capital Markets

Access to the Venezuelan secondary capital market is
relatively easy, and U.S. firms essentially enjoy treatment
equal to that of domestic firms. Foreign companies may issue
common and preferred stocks, bonds, and other securities in
Venezuelan capital markets. Foreign investors may also buy
shares directly in Venezuelan companies or on the stock
exchange.

The Caracas Stock Exchange (CSE) is a privately owned
corporation in operation since 1947. Trading on Venezuelan
stock exchanges is thin and highly concentrated. The
Venezuelan Futures and Options Clearinghouse (CACOFV), the
first market of its kind in the country, started operations
in Caracas in September 1997. Membership in local capital
markets is open to both individuals and legal entities.

A Capital Markets Law came into effect in September 1998
(Gazette No. 36,565 of 1998). It gives autonomy to the
National Securities Commission (CNV) and provides regulations
for intermediaries, establishes new conditions for public
offerings, enhances the transparency of brokerage operations,
and makes regulations more flexible for small firms that wish
to issue stocks.

The Congress passed the Collective Investment Companies Law
(Gazette No. 36,027 of 1996) to foster the development of
Venezuela's capital market through the creation of collective
investment companies. The law, which is designed to make
capital market investments more attractive for small and
medium investors, opened the door to the establishment of
mutual funds, collective investment venture capital
companies, and collective real estate investment companies.
CNV issued capital requirements for collective investment
companies in 1998 (Gazette No. 36,027 of 1998). Despite the

relatively advanced legal regime, Venezuela's capital markets
have shrunk in size over the last decade, a reflection of
economic stagnation.

-- I.2 Credit Markets

The Venezuelan financial system recovered strongly from a
crisis in the mid 90's that caused the failure of a number of
institutions. Banks tend to register higher profits than
those in other countries in the region. Much of this is
attributable to exchange controls which limit the ability of
the owners of capital to transfer it outside of the country.
The purchase of several troubled banks by large foreign banks
also injected much needed capital, technology, and
competition into the sector. Foreign banks have also taken a
minoity interest in several other local banks.
Conseuently, foreign banks now control approximately 40
percent of all banking sector assets. Venezuelan banks have
become increasingly dependent on the public sector as a
borrower. It is currently estimated that approximately 50
percent of banks' investment portfolios is made up of
government debt.

Financing is available from a variety of sources and does not
discriminate against foreign investors seeking access to
credit. Banks cannot lend more than 10 percent of their
assets to any one borrower.

A major concern for the financial system is the recent
agricultural and housing mortgage legislation, which forces
banks to lend a percentage of their portfolio at preferential
rates fixed by the local authorities. The percentage of the
portfolio to be dedicated to agricultural loans is currently
fixed at 16 percent. The percentage for mortgages has not
yet been established it is expected to be around 15 percent.
These loans are of concern because the mandated rates are
well below market rates and below the fairly high Venezuelan
inflation rate (19.2 percent in 2004).

---------------------
J. Political Violence
---------------------

No major incidents were confirmed against foreign-owned or
operated companies, projects, or installations in Venezuela
in 2004.

-------------
K. Corruption
-------------

Corruption is a serious problem in Venezuela. Venezuela has
a regulatory system to prevent and prosecute corruption and
accepting a bribe is a criminal act. Penalties include fines
and/or prison sentences. Historically, the country has
lacked an effective judicial system to provide judicial
security for either foreign or national residents. The new
constitution also gives the central government enhanced
powers to investigate cases of corruption and oversee the use
of government funds.

Government tenders are the most vulnerable to corruption
because the tender process frequently lacks transparency.
Critics have also targeted the current regime of government
price and exchange controls as a source of corruption.

----------------------------------
L. Bilateral Investment Agreements
----------------------------------

Venezuela currently has bilateral investment agreements in
force for the promotion and protection of investment with the
following countries: Argentina, Barbados, Canada, Chile,
Costa Rica, Cuba, the Czech Republic, Denmark, Ecuador,
Germany, Lithuania, Netherlands, Paraguay, Peru, Portugal,
Spain, Sweden, Switzerland, the United Kingdom and Uruguay.
France and Belgium have signed agreements that are still
awaiting legislative approval. No agreement exists with the
United States.

--------------------------------------------- --

M. OPIC and Other Investment Insurance Programs
--------------------------------------------- --

OPIC currently has significant exposure in Venezuela, as does
the Export-Import Bank. Please refer to the section on
Expropriations and Compensation for information on OPIC. In
April 2003 Ex-Im Bank formally placed Venezuela "off cover"
for new lending where it currently remains.

--------
N. Labor
--------

Venezuela's total labor force (defined as all persons 15
years of age and older who are working or looking for work)
was 12.2 million at the end of December 2004. According to
the National Institute of Statistics (INE), 1.8 million, or
15.5 percent, were unemployed. Persons are considered as
employed if they work at least 1 hour per week. Of the 10
million employed workers, approximately 47 percent work in
the informal sector (i.e. as street vendors, domestics, small
entrepreneurs, etc.). The government employs about 1.4
million of those who work in the formal sector.

The major labor organization in Venezuela is the
Confederation of Venezuelan Workers (CTV), which represents
most of the unionized workers in Venezuela. The CTV claims a
membership of 3 million, although its actual membership is
probably closer to one million. The CTV is especially strong
in the public sector. A second union confederation the
National Workers Union (UNT) has been formed and enjoys
support from the Venezuelan government.

President Caldera signed landmark legislation in June 1997
(Gazette No. 5152 of 1997) to reform the outdated and
unworkable severance pay system in the Organic Labor Law. The
legislation was based on a framework agreement negotiated
among representatives from the government, private business,
and organized labor. Under the previous severance pay system,
departing employees received one month's salary (two months
if they left involuntarily) for each year worked based on
their current pay. The 1997 system did away with
"retroactivity" (i.e. basing the entire benefit on current
salary) and requires employers to calculate their severance
pay obligations annually and to make monthly deposits into a
pension fund, an employer account, or an outside trust
account.

The 1997 Organic Labor Law also provides that the minimum
wage will be reviewed at least once a year and may be
adjusted based on considerations such as the "food basket." A
minimum wage of Bs. 321,235 ($139) per month for urban
workers and Bs. 289,111 ($125) per month for agricultural
workers took effect in August 2004.

The Organic Law Pertaining to the Integral Social Security
System (Gazette No. 5199 of 1997) provides the general
framework for the social security structure. Congress passed
a social security reform in 1998, but the system remained
under review by the Chavez government, until 2002, when the
National Assembly passed the Social Security System Organic
Law (Gazette No. 37600). However, the full application of
this law that covers everybody that contributes or not with
the expenses, will depend on the fiscal reforms.

The Organic Labor Law places quantitative and total wage cost
restrictions on the employment decisions made by foreign
investors. Article 27 of the Labor Law requires that the
number of foreigners hired by an investor not exceed 10
percent of a company's employees, while salaries paid to
foreigners may not exceed 20 percent of the total company
payroll. Article 28 allows for temporary exceptions to
Article 27 and outlines the requirements for hiring technical
expertise when equivalent Venezuelan personnel is not
available. Article 20 of the law requires that industrial
relations managers, personnel managers, captains of ships and
airplanes, and foremen be Venezuelan. Article 19 requires
that all orders and instructions to workers be given in
Spanish.

The Venezuelan government has imposed a freeze--renewed every

six months--on layoffs. Thus, reductions-in-force require
the negotiation of severance packages in exchange for
voluntary resignation.

---------------------------------
O. Foreign Trade Zones/Free Ports
---------------------------------

The Free-Trade Zone Law (Gazette No. 34,772 of 1991) provides
for free trade zones/free ports. The two existing free trade
zones are located in the Paraguana Peninsula on Venezuela's
northwest coast (industrial) and Margarita Island
(commercial). Under the law, any investor in the Paraguana
industrial free zone can receive a 10-year exemption from
income taxes on all profits earned from goods produced for
export. The government may extend such benefits for an
additional 10 years. Few investors have taken advantage of
the tax breaks in Paraguana due to infrastructure problems in
the region. Both the Paraguana and Nueva Esparta (Margarita
Island) zones provide exemptions from most import and export
duties and offer foreign-owned firms the same investment
opportunities as host country firms. Venezuela has three free
ports that also enjoy exemptions from most tariff duties:
Margarita Island, Maracaibo and, the most recent addition to
this list established in May 1999, Santa Elena de Uairen in
the state of Bolivar.

----------------------------
P. Foreign Direct Investment
----------------------------

Embassy estimates the total stock Foreign Direct Investment
(FDI) in Venezuela stood at 21 billion in 2004. The United
States was the single largest foreign direct investor in
Venezuela, representing approximately 53 percent, followed by
the Cayman Islands with 17 percent, the Netherlands with 7.5
percent and Spain with 5 percent. The percentage represented
by the Cayman Islands is thought to include Chinese
investments.

The stock of U.S. foreign direct investment (FDI) in
Venezuela in 2003 was $10.8 billion according to U.S.
Department of Commerce statistics. U.S. FDI in Venezuela is
concentrated largely in the petroleum, telecommunications,
manufacturing and finance sectors.

The estimated U.S. trade deficit with Venezuela for 2004 is
projected at $19.5 billion, an increase of $5.2 billion from
the trade deficit of $14.3 billion in 2003. U.S. goods
exports to Venezuela were approximately $4.5 billion, up $1.8
billion from 2003. U.S. imports from Venezuela are estimated
at about $24 billion in 2004, an increase of $7 billion from
the level of imports in 2003. The large increase in imports
is related primarily to the increase the price of petroleum,
which represents the vast majority of U.S. imports.

Brownfield


NNNN
2005CARACA00790 - UNCLASSIFIED

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