2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Openness To, and Restrictions Upon, Foreign Investment

Economic and political uncertainties, a history of actual and threatened nationalizations, increasing state intervention in the economy, and an increasingly restrictive and opaque legal framework make Venezuela's investment climate considerably less welcoming than it once was. As a result of these risks, foreign direct investment into Venezuela in recent years has lagged behind that of most other Latin American countries. According to the Central Bank of Venezuela, foreign direct investment in Venezuela increased by USD 3.2 billion during the period January-December 2011, following an increase of USD 1.2 billion in 2010, and a decrease of USD 2.5 billion in 2009.

The investment climate began to decline in 2007 because of increasing political and economic uncertainty although many companies decided to maintain their investment position in Venezuela in the hope that the economic environment might eventually improve. Strict labor and environmental laws, coupled with the difficulties investors have faced in repatriating dividends since 2008, have also increased the costs of withdrawing from the Venezuelan market. A flurry of new laws passed by the Venezuelan National Assembly in a marathon session at the end of 2010 included laws intended to create a communal state and economy. Additional controversial legislation passed in 2011 may adversely affect future investment in the country. The upcoming October 2012 presidential election heralds an uncertain political outlook in the coming year. Venezuela’s economic outlook at the beginning of 2012 is for continuation of the modest economic recovery that began in 2011, following two years (2009-2010) of recession. Inflation plagues the economy and is likely to remain an ongoing problem. The economic scenario that may follow the October elections is not clear.

Important developments in 2011 and 2010 included the devaluation of the official exchange rate, continued banking sector interventions, and the nationalization of assets in a number of different sectors. An on-going electricity crisis continues to result in rationing, particularly outside Caracas. In 2011, at least 497 companies (mainly domestic) were nationalized, according to private sector data. Nationalizations encompassed a broad swath of the economy including: oil services, the petrochemical sector, transport, mining, agribusiness, packaging, banking, logistics and distribution, iron, steel, ports, construction, tourism, auto parts manufacturing, electrical services, paper, telecommunications, textiles, and commercial and residential real estate.

In August 2007, as part of his push toward "21st Century Socialism," President Chavez proposed a series of constitutional reforms that would have, among other things, defined Venezuela as a socialist state and significantly weakened protections for private property. Voters rejected these proposals by a slim margin in a December 2007 referendum, but President Chavez decreed 26 new laws on July 31, 2008 that implemented some of the rejected constitutional reforms and weakened property rights. The National Assembly passed many of the most important reforms rejected in the referendum in December 2010. Among the most important were the five “popular power” laws intended to create a communal state and economy. In addition, the GBRV passed other laws in 2010 affecting investment: the Banking Sector Institutions Law, the Emergency Law of Urban Lands and Housing, the Insurance Activity Law, the Electricity Service Law as well as reforms to the Science, Technology, and Innovation Law, the Law of Social Responsibility for Radio and Television, and the Telecommunications Law.

A Law of Fair Costs and Prices was passed in July 2011 giving the Venezuelan government broad authority to regulate the prices of almost all goods and services sold to the public, including those of imported products. A new bureaucracy has been empowered to decide whether prices are “fair” and to identify businesses that make “excessive profits.” The GBRV announced that, in early 2012, it would begin imposing maximum prices under this law. The National Assembly passed the Lease Adjustment and Control Act in November 2011, expanding government regulatory powers over the residential rental market. The law mandated that a new government entity would set rental prices and approve all rental contracts. It eliminated tenant deposit guarantees and limited landlord profits to a margin well below inflation. Combined with a May 2011 Law Against Arbitrary Eviction, these new real estate regulations makes it very difficult for landlords to legally evict tenants.

State intervention in the economy has created a series of distortions. The GBRV has maintained a fixed exchange rate and exchange controls since February 2003. As a result, there has been intense competition to access hard currency at the official rate (including for repatriation of capital and/or profits); the rationing of official dollars led to the development of a parallel foreign exchange market. In January 2010, President Chavez announced a devaluation of the bolivar and implemented a dual official exchange rate system. However, at the official rate, the bolivar remained overvalued. The government took steps in May 2010 to declare the parallel market illegal, and in January 2011, President Chavez again devalued the bolivar exchange rate by eliminating the lower of the two official exchange rates previously established in January 2010. The GBRV has also maintained price controls on a wide variety of goods and services since 2003. These controls have caused shortages and created disincentives to investment, in some cases driving companies that produce price-controlled goods out of business. These price controls have now been augmented by the Law of Fair Costs and Prices mentioned above.

In 2011, Venezuela ranked 175 in the Heritage Foundation’s Index of Economic Freedom, essentially unchanged since last year. According to the Heritage Foundation report, Venezuela had the second lowest score in Latin America due to an interventionist government, inefficient and rigid regulation, opaque and burdensome investment laws, corruption in civil society and the judiciary, and the weakening of property rights. The World Bank’s 2012 “Doing Business Report” ranked Venezuela 177nd in terms of the ease of doing business, with an average of 147 days and 17 procedures necessary to start a business. Transparency International's 2011 Corruption Perceptions Index ranked Venezuela as the most corrupt country in Latin America.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Index

2011

172

Heritage Economic Freedom

2011

175

World Bank Doing Business

2012

177

MCC Gov’t Effectiveness

N/A

N/A

MCC Rule of Law

N/A

N/A

MCC Control of Corruption

N/A

N/A

MCC Fiscal Policy

N/A

N/A

MCC Trade Policy

N/A

N/A

MCC Regulatory Quality

N/A

N/A

MCC Business Start Up

N/A

N/A

MCC Land Rights Access

N/A

N/A

MCC Natural Resource Mgmt

N/A

N/A

Legal Framework for Foreign Investment

In theory, Venezuela's legal framework for foreign investment is relatively liberal: the law requires equal treatment for both foreign and local companies, with the notable exception of a few sectors in which the state or Venezuelan nationals must be majority owners, including hydrocarbons and the media. In practice, however, would-be investors might encounter significant hurdles. Although no prior registration is generally required for foreign investment, subsequent registration with the Superintendency of Foreign Investments is required. The 2010 Insurance Activity Law requires that half the members of insurance company boards of directors be Venezuelan citizens and that all be Venezuelan residents. Repatriation of capital and dividends is legally allowed, but is subject to the exchange control regime. In practice, few companies have been able to repatriate dividends since 2008. The Venezuelan judicial system is highly politicized, and marked by frequent Executive branch interventions.

The 1999 Constitution

The Venezuelan Constitution of 1999 treats capital investment as a means of promoting the development of the national economy. Article 301 of the Constitution adopted international standards for the treatment of private capital, with equal treatment of local and foreign capital. The Constitution reserves strategic sectors such as oil and hydropower for the State.

Decree 2095

Decree 2095 of 1992 established the legal framework for foreign investment in Venezuela. This decree implemented Andean Community Decisions 291 and 292 and lifted most of the prior restrictions on foreign participation in the economy. Article 13 of the decree explicitly guaranteed foreign investors the same rights and imposed the same obligations as applied to national investors "except as provided for in special laws and limitations contained in this Decree." Decree 2095 also guaranteed foreign investors the right to repatriate 100 percent of profits and capital, including proceeds from the sale of shares or liquidation of a company, and allowed for unrestricted reinvestment of profits. As noted above, however, most investors have been unable to repatriate dividends since 2008 due to Venezuela’s exchange controls. During the period from April 2006, when Venezuela first withdrew from the Andean Community, and April 22, 2011, when its withdrawal was nominally finalized, the GBRV continued to apply some of the Andean Community norms in the absence of other regulations. With Venezuela’s withdrawal from the Andean Community complete, a lack of clarity remains regarding certain Venezuelan laws based on Andean Community norms. Since 2006, Venezuela has sought full membership in the regional trade group Mercosur. It has also pursued negotiation of individual bilateral agreements with Andean Community member states to replace its membership in the Community.

Under Decree 2095, foreign investors need only register with the Superintendent of Foreign Investment (SIEX) within 60 days of the date of their investment. 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 that they are not contrary to existing legal provisions.

Decree 2095 reserved three areas of economic activity to "national companies": (1) broadcast media, (2) Spanish-language newspapers, and (3) professional services regulated by national laws. These services include law, architecture, engineering, medicine, veterinary medicine, dentistry, economics, public accounting, psychology, pharmacy, and management. A "national company" (as defined in Article 1 of Andean Community 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 the areas noted above. The Investment Promotion and Protection Law of October 1999, whose regulations were published in July 2002, maintained the same reserved sectors.

Foreign professionals are free to work in Venezuela without restriction—provided that they possess a government-issued identity card or government-approved work permit—but must first revalidate their certification at a Venezuelan public university. Consulting services under contract for a specific project are not subject to this requirement.

The Hydrocarbons Sector

A number of sectors are regulated by “special laws” that supplement the Constitution and affect the business environment. These sectors include hydrocarbons, mining, telecommunications, banking, and insurance. Of these, the hydrocarbons sector has the most significant restrictions on foreign investment.

Over the last decade, the GBRV has made a number of changes in royalty, tax policies, and contracts that have substantially increased uncertainty for foreign companies operating in Venezuela. For example, the 2001 Hydrocarbons Law did not expressly grandfather contracts executed under earlier legislation. Specifically, it did not include the 33 operating service contracts awarded for "marginal" or inactive oilfields in three rounds in the 1990s, exploration and production profit-sharing agreements awarded in 1996, and four so-called "Strategic Associations," legal entities with majority private and minority PDVSA ownership formed in the 1990s to extract and upgrade extra heavy oil in Venezuela’s Orinoco Heavy Oil Belt or “Faja” region. The GBRV argued in 2001 that no grandfather provision was necessary because retroactive application of legislative provisions was forbidden by constitutional mandate. .

The 2001 Hydrocarbons Law reserved the rights of exploration, production, "gathering," and initial transportation and storage of petroleum and associated natural gas for 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 law left refining ventures open to private investment as well as commercialization activities under a license and permit regime. It also stipulated that any arbitration proceedings would henceforth be in domestic, not international venues.

In October 2004, the GBRV unilaterally eliminated a nine-year royalty holiday ceded to the Strategic Associations, arguing that this action was allowable under earlier hydrocarbons legislation. In early 2005, the GBRV informed companies with operating service contracts that they had to transfer their contracts to joint ventures in conformance with the 2001 Hydrocarbons Law. It threatened to seize fields operating under the services contracts on December 31, 2005, if oil companies had not signed transition agreements to migrate their contracts. Sixteen oil companies signed memoranda of understanding, converting their contracts to joint ventures on March 31, 2005. In January 2008, ENI and Total, two companies that had not signed MOUs in 2005, reached an agreement with PDVSA.

President Chavez issued a decree in late February 2007 requiring the four Strategic Associations to convert to joint ventures in which PDVSA would hold a 60 percent stake. The decree established an April 30, 2007 deadline for completing the conversion. ConocoPhillips and ExxonMobil refused to transfer their investment stakes in three of the four associations. As a result, the GBRV took control of their investments. Both companies treated the government's actions as expropriations and filed international arbitration claims against the GBRV. A ruling in the first of these claims became public at the end of 2011.

In April 2011, Chavez decreed changes to a windfall profit law first passed in 2008. The new law established a sliding scale payment system that peaks at 95 percent of oil sales revenue when prices exceed $100 per barrel. The changes increased uncertainty about the amount of tax due from crude oil production that had already resulted from the original 2008 law. Some assert that the 2008 law slowed new investment in oil projects.

In contrast to the legal framework for petroleum, the 1999 Gaseous Hydrocarbons Law offered more liberal terms to investors in the unassociated natural gas sector. This law opened the entire natural gas sector to private investment, both domestic and foreign, and created a licensing system for exploration and production regulated by the then Ministry of Energy and Mines (now the Ministry of Petroleum and Mining). The state retained ownership of all natural gas "in situ," but PDVSA involvement was not required for gas development projects (although the law allows PDVSA to back into 35 percent ownership of any natural gas project once the private partners have declared commerciality). The law prohibited complete vertical integration of the gas business from wellhead to the consumer. President Chavez has publicly stated, however, that he would like to modify the terms of the 1999 law, i.e. to require that the state have a controlling interest in primary unassociated natural gas activities.

On September 18, 2008, an Organic Law on the Restructuring of the Internal Liquid Fuels Market came into effect. The law mandated government control of domestic transportation and wholesale of liquid fuels and set a 60-day period for negotiations with the affected companies. The law does not define the term "liquid fuels" which created uncertainty as to whether it applies to products other than gasoline and diesel fuel, such as motor oils or lubricants. This law affected several foreign companies which had investments in the downstream sector.

On May 7, 2009, Venezuela enacted the Organic Law that Reserves to the State the Assets and Services related to Hydrocarbon Primary Activities. The bill specifically affected petroleum service companies involved in the injection of water, steam, or gas as secondary recovery methods as well as services rendered for the performance of primary activities on Lake Maracaibo. It provided for the "extinction" of contracts executed in the past between PDVSA and private companies and stipulated that all contracts and activities governed by the law would be subject to Venezuelan law and to the exclusive jurisdiction of Venezuelan Courts. Under the provisions of this law, the GBRV nationalized over 75 companies, including three U.S. firms. We do not believe that the GBRV has paid any compensation to date.

Several international and domestic oil field services companies have agreed since 2009 to create joint venture oil field services companies with PDVSA. As majority PDVSA-owned enterprises, the new joint ventures do not have to follow many of Venezuela’s public contracting and solicitation rules and regulations, possibly limiting competition in the sector. In addition, the number of services companies operating in Venezuela has shrunk considerably due to the problem of late payments from PDVSA that began in late 2008, nationalizations, and internal company risk assessments.

On July 10, 2009, Venezuela's Organic Law for the Development of Petrochemical Activities entered into force. The new law has a limited scope of application and does not apply to activities regulated by the 2001 Hydrocarbons Law or the 1999 Gaseous Hydrocarbons Law. The Petrochemicals Law reserves basic and intermediate petrochemical activities for the State as well as the assets and facilities required for their handling. It allows the State, through the Ministry of Petroleum and Mining, to create mixed companies in which the GBRV will control at least 50 percent of the shareholder equity and exercise effective control over company decisions. The legislation mandates that certain investment incentives for the GBRV (e.g. technology transfer, incentives for industrial development, infrastructure supply, facility maintenance, social resources, import substitution, price advantages, and estimated profits) will be required for authorization of a mixed company. The Petrochemicals Law gives priority to the supply of the domestic market and the development of state and socialist companies. Upon the expiration of the term of a mixed company, its works, ancillary facilities, and equipment revert to the State, free of encumbrance and without any indemnity whatsoever.

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 and Decree 2095. In practice, however, repatriation has not been possible since 2008 for many companies.

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." President Chavez used this law to create the Commission for the Administration of Foreign Exchange (CADIVI) on February 5, 2003 to regulate the purchase and sale of foreign currency. A Foreign Exchange Crimes Law (Gazette No. 38,272 of 2005; revised by the National Assembly in December 2007) established criminal penalties and fines for transactions made outside the official foreign exchange process. The exemption for bond operations in this law led to the creation of a parallel foreign exchange market, known as the "permuta" (swap) market, which was essentially a currency exchange market that operated through bond swaps. In early 2008, the GBRV prohibited the publication in Venezuela of the parallel exchange rate. In January 2010, President Chavez announced that the Central Bank of Venezuela (BCV) and the executive branch would intervene in the parallel foreign exchange market to “eliminate the speculative increase in hard currency.” The government declared the “permuta” market to be illegal in May 2010.

The GBRV established a legal alternative exchange market in June 2010 called the Transaction System for Foreign Exchange Denominated Securities (SITME). Users access SITME through authorized Venezuelan financial institutions. SITME operates via a bond swap mechanism under the auspices of the Venezuelan Central Bank. Since beginning operations, the SITME exchange rate has been approximately 5.3 Bs/USD. Foreign exchange operations in an unofficial market continue at rates currently averaging between 8-10 Bs/USD.

On January 11, 2010, the GBRV devalued the bolivar and established two official exchange rates. According to President Chavez’s announcement on January 8, 2010, the official 2.6 Bs/USD exchange rate applied to imports of food, health products, machines and equipment, and science and technology; to imports made by the public sector; to remittances to family members; to hard currency for students studying abroad; to embassies and consulates in Venezuela, to retired pensioners; and other special cases. The higher, 4.3 Bs/USD rate applied to “everything else,” including the repatriation of dividends. Despite the devaluation, the official exchange rate remained overvalued, and companies that manufacture tradable goods in Venezuela found it very difficult to compete against goods imported at either of the official rates. On January 1, 2011, President Chavez devalued the currency again, eliminating the 2.6 Bs/USD rate, so that only the 4.3 Bs/USD rate remained. There is speculation that a devaluation of the 4.3 Bs/USD rate could occur in 2012, following the October 7 presidential election.

Foreign companies wishing to repatriate capital, dividends, or profits at the 4.3 Bs/USD rate have to secure authorization from CADIVI. However, CADIVI approvals of foreign exchange for capital repatriation have been limited since 2008. According to the Venezuelan American Chamber of Commerce, foreign companies operating in Venezuela are now waiting to repatriate as much as USD 9 billion. In comparison, CADIVI authorized approximately USD 107 million in foreign exchange for “foreign investment” during January-September 2011, USD 66 million in 2010, USD 566 million in 2009, USD 1.12 billion in 2008, and USD 3.79 billion in 2007.

Expropriation and Compensation

The government has nationalized significant assets in recent years and this trend is expected to continue. In January 2007, President Chavez announced his intent to nationalize strategic sectors. Shortly thereafter, the GBRV took over an electric company and cable company owned by U.S. companies and investors. These investors received compensation. In 2008, the GBRV announced nationalizations of several multi-national cement companies, a steel maker (SIDOR) and the Banco de Venezuela. In 2009, the GBRV nationalized assets in the petroleum, tourism, agribusiness, and banking industries. In 2010 and 2011, the GBRV nationalized agricultural lands and assets belonging to companies in the oil services sector, electricity production, chemicals, steel, transport, construction, commercial and residential real estate, paper, agribusiness, fertilizer production, food production, packaging, textiles, retail, tourism, insurance, and banking sectors.

As noted above, ConocoPhillips and ExxonMobil have not come to an agreement with the GBRV for the nationalization of their respective investments in the Strategic Associations and have filed for international arbitration. A first ruling in one of these cases became public at the end of 2011. Two U.S. oil field service companies filed for international arbitration in 2010 following the nationalization of their assets in 2009. Venezuela faced ten new international arbitration cases in 2011, including claims filed by several U.S. companies.

According to Conindustria, Venezuela’s largest industrial association, the GBRV nationalized 497 private companies in 2011. In addition, the GBRV continues to nationalize large tracts of land. According to the local NGO Liderazgo y Visión, in 2010, the GBRV seized 301 urban or rural properties; this trend continued in 2011. The sectors affected by nationalizations encompass a wide cross-section of the economy: oil production, oil services, electricity production and services, chemicals, iron, steel, auto parts, manufacturing, transport, ports, construction, commercial and residential real estate, agribusiness and agriculture, fertilizer production, packaging, textiles, retail, telecommunications, tourism, insurance, and banking. The GBRV has cited the following reasons for its nationalizations: monopolistic behavior, strategic importance, food security, abusive charges for services or products, excessive profit margins, economic sovereignty, and public utility.

The legal framework used to carry out these nationalizations includes the Law of Expropriations (2002), the Land Reform Law (2005), the Urban Land Law (2009), Decree 1040 of the Mayor of Libertador (2009), and the Emergency Law of Urban Lands and Housing (2011). On December 17, 2010, the Venezuelan National Assembly enacted an enabling law granting Chavez the power to pass legislation by presidential decree for 18 months.

The GBRV maintains that it will compensate for nationalizations. However, the process to establish compensation has been slow, leading some companies to seek settlement through international arbitration. There are now 21 cases involving U.S. and other investors before the World Bank International Centre for the Settlement of Investment Disputes (ICSID). Settlements in several of these cases are believed to be under negotiation.

Venezuela's 2001 land law, as modified in 2005, calls for the redistribution of "unproductive" land. At the end of 2011, the GBRV claimed to have seized over 8.9 million acres of land in the ten years since the law entered into force. The owners of some of this land have yet to receive compensation. These actions discouraged investment in key agricultural subsectors and have reduced their output potential. The GBRV has also conducted “inspections” of plants to determine if they are in violation of Venezuelan law. These inspections have also led to occupation or nationalization.

On February 21, 2007, the GBRV published the "Decree Law of Popular Defense against hoarding, speculation, boycott, and any other conduct that affects consumption of food or products under price controls." The law defines all stages of the production cycle for regulated foods as within the ambit of "public utility and the social interest." It also empowers the government to expropriate any business that fits this sweeping definition to protect "food security and sovereignty." The GBRV invoked this decree to direct the military to seize two slaughterhouses in 2007.

A Law of Fair Costs and Prices was passed in 2011 giving the Venezuelan government broad authority to regulate the prices of almost all goods and services sold to the public, including those of imported products. The newly established regulator of prices, Sundecop (the National Costs and Prices Superintendency), announced that price controls would be imposed on 19 personal and household care, food, and construction materials product categories starting in early 2012.

Dispute Settlement

Venezuela's legal system is available to foreign entities seeking to resolve investment disputes, and legal proceedings have generally not discriminated against foreign entities. However, the legal system is often slow and inefficient, and critics have accused it of being both corrupt and lacking independence from the executive branch.

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 therefore be automatically binding. The 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. As noted above, however, the 2001 Hydrocarbons Law prohibits PDVSA from entering into agreements providing for international arbitration, although the company appears to have done so in recent years with certain partners.

In a few cases, the GBRV has accepted the results of international arbitration in disputes involving foreign investors and government entities. Recent GBRV statements and actions, however, call into question whether this trend will continue. For example, in a February 2006 decision involving Haagen-Dazs, GBRV courts invalidated an American Arbitration Association award entered in Miami. In April 2006, a GBRV court set aside an International Court of Arbitration award entered in favor of an Italian electronics company against VTV, the state owned television channel, in connection with a concession agreement.

In October 2008, the Venezuelan Supreme Court, while acknowledging the existence of a fundamental right to arbitration, resolved that the GBRV must expressly consent to it. The ruling challenged the legal analysis cited by a number of former investors who believe that Article 22 of the 1999 Law on Promotion and Protection of Investors provides them with access to arbitration with the World Bank International Centre for the Settlement of Investment Disputes (ICSID). The Court reasoned that Article 22 does not provide a clear and open offer of consent to ICSID arbitration. The full impact of this decision remains to be seen.

On June 10, 2010, ICSID issued a jurisdictional decision in the ExxonMobil (XM) case against the GBRV and national oil company PDVSA, ruling that while ICSID has jurisdiction to hear the case against Venezuela based on the Dutch bilateral investment treaty, it rejected the argument that Venezuelan law provides the private sector with an explicit right to go to ICSID.

At the end of 2011, an International Chamber of Commerce (ICC) arbitration panel ruled that PDSVA should pay USD 907.6 million to ExxonMobil in payment for its share of the assets in the former Cerro Negro Strategic Association. Following the nationalization of its Venezuelan investments in 2007, ExxonMobil filed claims with both the ICC and ICSID. On January 8, 2012, President Chavez said that he would not accept rulings by tribunals administered by ICSID and that Venezuela should withdraw from the ICSID Convention entirely. On January 9, 2012, Energy Minister Ramirez said that Venezuela would not make an additional payment to ExxonMobil should it subsequently win before an ICSID panel. Minister Ramirez announced on January 15 that, in accordance with President Chavez’s order, Venezuela would take steps to withdraw from ICSID.

Performance Requirements/Incentives

Foreign companies receive the same tax treatment as domestic companies with the exception of the non-associated natural gas sector where foreign investors receive preferential tax treatment. Performance requirements related to workforce composition are discussed in the labor sector below. The state oil company, PDVSA, seeks to maximize local content and hiring in its negotiations with foreign companies. New deals require technology transfers and also that companies make social contributions.

Right to Private Ownership and Establishment

There are legal limits on foreign ownership in certain sectors, such as banking, insurance, and media and as noted in the Constitution, Decree 2095, and "special laws" (see above).

Protection of Property Rights

Real Property Rights

Foreign investors may pursue property claims through Venezuela's legal system. See also the Expropriation and Compensation section for discussion of expropriation of real property rights and the Dispute Settlement section for a discussion of the legal system.

Intellectual Property Rights

Article 98 of the 1999 constitution guarantees state protection for intellectual property rights "in accordance with the conditions and exception established by law and the international treaties executed and ratified by the Republic in this field." Under the 1999 constitution, intellectual property rights are classified as cultural and educational rights rather than economic rights as they were in the past. Venezuela is 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. Venezuela is also a member of the World Intellectual Property Organization (WIPO). In the past, Venezuela has implemented its obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) through Andean Community Decision 486. As noted above, there is still uncertainty regarding the impact of Venezuela’s withdrawal from the Andean Community on existing laws that implemented Andean Community norms, including those related to intellectual property rights.

The Venezuelan Industrial Property Office, or SAPI, through its actions and occasional public antagonism towards IPR, often draws criticism from IPR advocates and rights holders. IPR protection 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. SAPI has publicly advocated for anti-IPR legislation and has not issued a pharmaceutical patent since 2004. Both President Chavez and former Commerce Minister Eduardo Saman publicly called for the elimination of patents. In 2009, the GBRV nullified two patents for an antibiotic produced by a pharmaceutical company after the company protested the local production of two illegal copies of the drug. Pirated software, music, and movies are readily available throughout the country. In December 2010, the National Assembly passed the Law on the Crime of Smuggling, which aims to combat piracy by criminalizing and punishing acts relating to smuggling goods in or out of the country with higher penalties of 10-14 years. In the 2011 Special 301 Annual Review, Venezuela remained on the U.S. Department of State’s "Priority Watch List."

Patents and Trademarks

Venezuela has provided the legal framework for patent and trademark protection through Andean Community Decision 486 (and Decision 345 for plant varieties). In September 2008, however, SAPI issued a press release resurrecting the Industrial Property Law of 1955, which expressly prohibited patent protection for pharmaceuticals and other products. The return to the 1955 law codifies the GBRV's de facto policy of refusal to issue patents, particularly in the area of medicines. The GBRV has not awarded a patent for new pharmaceuticals since 2004. Since 2002, Venezuela's food and drug regulatory agency has approved the commercialization of generic drugs without requiring unique test data. These drugs are the bioequivalent of innovative drugs that have already received market approval. This practice thereby denies the innovative drug companies protection against unfair use of their test data as required by TRIPS. From a trademark standpoint, the 1955 Law changes the registration procedure and adds the cumbersome and expensive requirement of publishing trademark applications in a local newspaper before they can be published in the Industrial Property Bulletin. The Law also contains numerous provisions which conflict with TRIPS.

Venezuela does not automatically recognize foreign patents and 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 so because the agent can then claim that he/she is the registered owner of the trademark in question. Following the nationalization of a well-known domestic coffee company in 2009, the GBRV also expropriated the trademark and brand name.

Copyrights

Andean Community 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 is responsible for registering copyrights, as well as for controlling, overseeing, and ensuring compliance with the rights of authors and other copyright holders.

COMANPI, the Venezuelan copyright and trademark enforcement branch of the police, fails to provide adequate copyright enforcement. Due to its lack of personnel, limited budget, and inadequate storage facilities for seized goods, COMANPI has had to work with the National Guard and private industry to enforce copyright laws. COMANPI can only act based on a complaint by a copyright holder; it cannot carry out an arrest or seizure on its own initiative. In the past, the GBRV's tax authority (SENIAT) has been more successful enforcing IPR laws. It has taken action against some businesses importing or selling pirated goods based on presumed tax evasion. While such actions on the part of SENIAT have decreased considerably over the past few years, it does continue to take action against pirated goods.

In 2004, the National Assembly considered a copyright bill, but there has been no additional action on copyright since then. The bill, proposed by SAPI, was very controversial and raised serious concerns in the private sector. Among other things, the bill called for the local registration of all works, certification by a government-appointed commission to approve the copyright, a significant increase in royalty rates, and a provision to expropriate works if in the national interest.

Transparency of the Regulatory System

The Government of Venezuela adopted three laws in the early 1990s to promote free market competition and prevent unfair trade practices: a Law to Promote and Protect Free Competition (Gazette No. 34,880 of 1992), an Antidumping Decree (Gazette No. 4441 of 1992), and a Consumer Protection Law (Gazette No. 4898 of 1995). In 1997, the government created a new agency, Pro Competencia, to implement the 1992 law. A government procurement law of 2001 supposedly increased transparency in the competitive bidding process for contracts offered by the central government, national universities, and autonomous state and municipal institutions.

Despite this legal and institutional framework, there is little transparency in Venezuela's regulatory system. The vast majority of contracts are awarded without open competition. There is often little coordination between the government and private sector, and even among different government agencies, in the process of promulgating new laws and/or regulations. As a result of this lack of coordination and the state's increasing intervention in the economy, many companies are struggling to cope with the growing array of regulations in areas as diverse as the tax code, labor, and the environment.

As noted above, an amendment to Venezuela's consumer protection law was included as part of the 26 decree laws passed on July 31, 2008. This law renamed the consumer protection institute—now INDEPABIS—and gave it broader powers. Since then, INDEPABIS has operated in the absence of implementing regulations, which has given its inspectors an extraordinary degree of discretion, resulting in uneven standards and enforcement. INDEPABIS conducted over 15,000 inspections in 2009 and 6,700 in 2010, and numerous companies, both domestic and foreign, have been shut down for several days or have faced serious fines due to what some observers see as over-zealous enforcement.

Efficient Capital Markets and Portfolio Investment

Capital Markets

Venezuela’s 1999 Constitution generally provides equal treatment for foreign and domestic investors although investment in some sectors is restricted. As long as the foreign investor has registered with the National Superintendency of Securities, it can buy or sell stocks and bonds in Venezuelan capital markets. Foreign investors may also buy shares directly in Venezuelan companies. Although no prior registration is generally required prior to making foreign investments, subsequent registration with the Superintendency of Foreign Investments is required. On January 31, 2011, the GBRV launched the Bicentennial Public Securities Exchange to sell government and corporate bonds and compete with the private Caracas Stock Exchange. This new market functions differently in that entities that can participate by issuing bonds include “organized communities” and state entities. In 2011, its activities were limited to the sale of corporate commercial paper and public bonds.

In November 2010, the Securities Market Law (Gazette 39.546) superseded the Capital Markets Law. As a result, the National Securities Superintendency replaced the National Securities Commission, which had been Venezuela’s securities market regulator since 1973. The new law prohibits brokerage houses from handling transactions involving instruments of public debt and from holding public debt instruments in their portfolios. It mandated the creation of a public securities exchange, which is exempted from this prohibition. The Collective Investment Entities Law (Gazette No. 36,027 of 1996) allows for creation of collective investment companies such as mutual funds, collective investment venture capital companies, and collective real estate investment companies.

Credit Markets

Financing is available from a variety of sources, and there is no discrimination against foreign investors seeking access to credit. The credit market is highly regulated, however. The maximum nominal interest rate banks can charge is 29 percent. Banks are required to set aside 51 percent of their portfolio for loans to the housing, agriculture, small business, manufacturing and tourism sectors, in most cases at preferential rates.

The majority of banking sector assets is concentrated in the country's six largest banks, which are generally solid. In 2011, the efficiency, liquidity, and profitability indicators of the system as a whole displayed positive tendencies. However, some of the banking sector is highly exposed to the public sector through government deposits and bond holdings. Some banks are pushing the limits of capital adequacy requirements. In November 2009, the GBRV took over or shut down eight banks, ostensibly for violating a number of regulatory requirements. Since then, nine more banks have been intervened by the GBRV. In 2011, the GBRV ordered the intervention and liquidation of Banvalor Commercial Bank and Casa Propia Savings and Loan. The GRBV controlled more than 36 percent of the banking sector by assets as of November 2011.

Competition from State-Owned Enterprises (SOEs)

Private enterprises are often at a disadvantage when competing with public enterprises, specifically in terms of accessing foreign exchange at the official rate. For example, in 2010, non-petroleum public sector imports were eligible for an exchange rate of 2.6 Bs/USD whereas the majority of private sector imports were eligible only for the 4.3 Bs/USD rate. Public sector companies, in some cases, did not need to go through the GBRV’s exchange control board, CADIVI, to request hard currency at the official exchange rate, but CADIVI often delayed or refused the applications of private companies, limiting or denying their access to foreign exchange. In 2011, even with the single exchange rate, the public sector still had an easier time accessing dollars than private enterprises had.

State Owned Enterprises (SOEs) are active in almost every sector of the Venezuelan economy, including hydrocarbons, mining, media, telecommunications, tourism, and agribusiness. The CEO of PDVSA is also the Minister of Petroleum and Mining; the rest of PDVSA’s board members are appointed by the President. The pattern is similar in other important SOEs (although their CEOs are not ranked as ministers), such as the Venezuelan Corporation of Guayana (CVG), a state holding company that includes companies in basic heavy industries, such as electricity generation, steel production, iron ore mining, and aluminum production.

Corporate Social Responsibility (CSR)

Many companies in Venezuela have attempted to integrate corporate social responsibility (CSR) into their business models although it is difficult to measure the general awareness of CSR among consumers. By law, companies bidding on state contracts must earmark five percent of their budget for CSR-related activities. This requirement has raised concerns about corruption, particularly when companies are not vigilant about the organizations receiving the funds and how they administer them. While some foreign and local enterprises have adopted generally accepted corporate social responsibility practices such as the OECD Guidelines for Multinational Enterprises, these principles are not broadly applied.

Political Violence

Venezuela's political climate is polarized between supporters and opponents of President Chavez and his policies. However, there were no major incidents of political violence that specifically targeted foreign-owned companies or installations in 2011.

Corruption

Corruption is a problem in Venezuela. As noted above, Transparency International's 2011 Corruption Perceptions Index ranked Venezuela as the most corrupt country in Latin America. Venezuela has laws on the books to prevent and prosecute corruption, and accepting a bribe is a criminal act. A proposed amendment to the existing corruption law passed a first reading in the National Assembly in May 2011 but is pending a second reading.

Bilateral Investment Agreements

Venezuela has concluded the following bilateral investment agreements as of June 1, 2011:

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Partner

Date of Signature

Date of entry into force

Argentina

16-Nov-93

1-Jul-95

Barbados

15-Jul-94

31-Oct-95

Belarus

6-Dec-07

13-Aug-08

Belgium and Luxembourg

17-Mar-98

29-Apr-04

Brazil

4-Jul-95

---

Canada

1-Jul-96

28-Jan-98

Chile

2-Apr-93

25-May-95

Costa Rica

17-Mar-97

2-May-01

Cuba

11-Dec-96

15-Apr-04

Czech Republic

27-Apr-95

23-Jul-96

Denmark

28-Nov-94

19-Sep-96

Ecuador

18-Nov-93

1-Feb-95

France

2-Jul-01

30-Apr-04

Germany

14-May-96

16-Oct-98

Indonesia

18-Dec-00

23-Mar-03

Iran, Islamic Republic

11-Mar-05

7-Jun-06

Italy

14-Feb-01

---

Lithuania

24-Apr-95

1-Aug-96

Netherlands*

22-Oct-91

1-Nov-93

Paraguay

5-Sep-96

14-Nov-97

Peru

12-Jan-96

18-Sep-97

Portugal

17-Jun-94

7-Oct-95

Russian Federation

7-Nov-08

---

Spain

2-Nov-95

10-Sep-97

Sweden

25-Nov-96

5-Jan-98

Switzerland

18-Nov-93

30-Nov-94

United Kingdom

15-Mar-95

1-Aug-96

Uruguay

20-May-97

18-Jan-02

*Effective November 1, 2008, Venezuela revoked its Bilateral Investment Treaty with the Netherlands. Revocation did not have any immediate consequences for investments made prior to the date of revocation. The BIT remains in force for these investments for a period of 15 years.

OPIC and Other Investment Insurance Programs

OPIC programs in Venezuela were suspended in 2005 as a result of Venezuela's decertification for failure to cooperate in suppressing international narcotics trafficking. The certification process is an annual event, and in September 2011 the President again determined that Venezuela “failed demonstrably” to make sufficient or meaningful efforts to adhere to its obligations under international counternarcotics agreements and conventions.

The Export-Import Bank has not provided new financing for projects in Venezuela since formally placing Venezuela "off cover" for new lending in April 2003. Both OPIC and the Ex-Im Bank still have significant exposure in Venezuela contracted prior to suspending operations.

Labor

Venezuela's National Institute of Statistics (INE) estimated October 2011 unemployment at 8.2 percent. This estimate does not include individuals who work in the informal sector or those who are self-employed—both groups collectively constitute more than half of the nation’s workforce. Several factors make human resources a challenge for domestic and foreign investors alike: a significant number of skilled and professional Venezuelans have sought employment opportunities abroad due to domestic political and economic uncertainty; government programs that support poorer Venezuelans have also made it more difficult for companies to attract unskilled labor; and the power of traditional trade unions has diminished as the government has supported the establishment of thousands of “parallel” unions that are closely aligned to government interests. Only 9-11 percent of the total workforce is unionized.

In 2011, Venezuela saw continued protests and work stoppages by unions across both the public and private sectors. Union protests—in some cases resulting in deaths—have disrupted operations at many companies since 2009, including auto assembly plants owned by General Motors, Toyota, and Mitsubishi, and forced the temporary shutdown of various oil drilling operations and oil service companies. Meanwhile, the GBRV has repeatedly delayed negotiations over collective bargaining agreements for workers in the public sector, leaving more than two million public employees without collective contracts, including employees in the oil and gas industry, teachers, and electrical workers. As of December 2011, PDVSA and unions representing oil and gas industry employees have yet to agree on a new collective bargaining agreement.

The Organic Labor Law (Gazette No. 5152 of 1997) places quantitative and total wage cost restrictions on the employment decisions made by foreign investors. Article 27 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 are not available. Article 20 of the law requires that industrial relations managers, personnel managers, captains of ships and airplanes, and foremen be Venezuelan. On November 14, 2011, President Chavez announced the creation of a Presidential Commission to come up with recommendations for reform of the existing labor law by May 2012. At the end of 2011, President Chavez also renewed a firing freeze, first issued ten years ago, that prohibits companies from firing personnel unless they are a part of management.

Foreign Trade Zones/Free Ports

The Free-Trade Zone Law (Gazette No. 34,772 of 1991) provides for free trade zones/free ports. The three existing free trade zones, created in subsequent Gazette decrees, are located in the Paraguana Peninsula on Venezuela's northwest coast, Atuja in the State of Zulia, and Merida (but only for cultural, scientific, and technological goods). These zones provide exemptions from most import and export duties and offer foreign-owned firms the same investment opportunities as host country firms. The Paraguana and Atuja zones provide additional exemption of local services such as water and electricity. Venezuela has two free ports that also enjoy exemptions from most tariff duties: Margarita Island (Nueva Esparta) and Santa Elena de Uairen in the state of Bolivar.

Foreign Direct Investment Statistics

U.S. FDI in Venezuela is concentrated largely in the petroleum, manufacturing, and finance sectors. In 2009, according to U.S. Department of Commerce statistics, the stock of U.S. foreign direct investment (FDI) was USD 14.5 billion. According to Venezuelan Central Bank (BCV) statistics, FDI in the private sector declined 30 percent between 2007 and September 2011.

[This is a mobile copy of Venezuela]