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As nation starves bankrupted by Socialism, Venezuela cedes control of companies

More than 5 million Venezuelans have left in a desperate attempt to avoid ruin.

- Investors join with public food companies
- New managers expected to hand over part of production, profits

By Fabiola Zerpa and Nicolle Yapur/Bloomberg

Petroleumworld 02 15 2021

Saddled with hundreds of failed state companies in an economy barreling over a cliff, the Venezuelan government is abandoning socialist doctrine by offloading key enterprises to private investors, offering profit in exchange for a share of revenue or products.

Dozens of chemical plants, coffee processors, grain silos and hotels confiscated over the past two decades have been transferred -- but not sold -- to private operators in so-called strategic alliances, nine people with knowledge of the matter said. Managers cover payroll and investments, and deliver products and a percentage of their income to the government.

“We believe this is positive because it is the synchronization of the public sector with the private sector,” said Ramon Lobo, a legislator with the ruling socialist party and former finance minister. “The state acts as a supervisor and receives compensation.”

The shift is pronounced in agriculture, part of President Nicolas Maduro's effort to feed a hungry population after seven years of economic and social collapse. It isn't clear how much money is brought in by the new policy, which follows last year's passage of an “anti-blockade” law seeking to reduce the impact of U.S. sanctions and encourage investment. The government now allows dollar remittances to flow and private enterprise to flourish in small pockets.

Maduro took power eight years ago after the death of Hugo Chavez who launched the socialist revolution by confiscating more than 1,000 companies and numerous farms and properties, including assets of multinationals such as Kimberly-Clark, Cemex and Kellogg 's. The new state-run enterprises failed miserably due to poor management. Using its vast oil income, the government replaced homegrown and homemade goods with imports.

But Venezuela's state oil company, PDVSA , was placed in the hands of cronies and also grew bloated, becoming in effect an arm of the party. It was run into the ground and forced to slash its output. Between that and recent U.S. sanctions, significantly increased during the Trump administration, a society that was once among the world's wealthiest has come undone.

More than 5 million Venezuelans have left in a desperate attempt to avoid ruin.

“Maduro's government took a U-turn at the end of 2019 by promoting a wild capitalism,” Rodrigo Agudo, head of the Venezuela Food Network, said. “It stopped collecting taxes on certain businesses, granted licenses for imports and convinced military officials and others to invest money of unknown origins into local businesses.”

The strategic alliances started to form quietly in 2017. Last year's publication of the anti-blockade law gave the deals a grounding in law, bypassing regulations such as bidding processes.

But the precise nature of the new deals -- whether leases, licenses or easements -- is unclear. The law bars disclosing such information theoretically to protect firms from U.S. sanctions, which are aimed at entities doing business with the government but spare private enterprises.

The agriculture and information ministries didn't respond to requests for comment.

The new arrangements are affecting major companies and mostly involve business people with ties to the government, but not exclusively. In some cases, seized properties are going back to those from whom they were taken. In others, the owners are refusing to take part.

Similar partnering terms have been set before in the oil industry. PDVSA granted local firms more control over state-run assets such as oil fields and gas-compressing plants to operate and raise production. And in some cases, PDVSA granted partners more equity at their joint-ventures.

Lobo, the socialist legislator, said the arrangements have time limits, typically five to 10 years, and work like a concession. The private company commits to invest, increase production under a deadline and manage the asset.

Most of the new arrangements are in rural parts of the country.

Agropatria, a monopoly-sized farm-supply business nationalized in 2010 that ran five companies, is now turning to private management. More than half of its 70 stores and two of its pesticides plants -- seized “to free producers from extortion and middlemen,” according to then-president Chavez-- are now run by Agrollano 2910, a local farming firm investing almost $150 million to restock, according to four of the people.

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Lacteos Los Andes, a large milk processor and beverage maker bought by the government in 2008, is now administered by a private Venezuelan firm, although no official changes in the board have been made.

Two government grain processing plants -- mostly idle since their inauguration in 2007 -- have been transferred but not sold to local privates firms. So are milk and coffee plants built during Venezuela's oil boom and under bilateral agreements with regional allies like Cuba, Bolivia, Brazil and Argentina.

Conditions for the firms vary. The main contribution is a percentage of profits or production to the state. In some cases, a standardized monthly pay scale of $60-$80 for workers and technicians is being discussed by government and managers at the joint ventures, some of the people added.

Not all companies targeted by the government for partnership are generating interest. Local businesspeople are wary of years of poor upkeep under state supervision and are fearful of new nationalizations.

Maduro, who has cut allowances for some state and local governments in the crisis, has granted them leeway to partner with local firms to produce income. In December, the governor of the farming state of Portuguesa, Rafael Calles, told public media that alliances with the private sector in the administration of 24 state-owned companies raised $60,000 dollars a month for his office.

The government has never publicized how many properties it has seized over the years. But a study by the national industrial chamber Conindustria said a total of 1,322 cattle farms, food stores, electricity companies, mills, glass manufacturers, banks, supermarkets and cold storage facilities were expropriated between 2002 and 2015.

Many ceased to exist and only around 700 remain. Most of their former owners are still waiting for compensation or are tied up in litigation in hopes to be compensated, according to a 2019 International Transparency study.

Some analysts note that what is happening in Venezuela has precedents in other leftist authoritarian states.

“This process is similar to the privatization process in Russia in that assets are transferred to private local companies and to investors from countries allied to the government,” said Asdrubal Oliveros, head of economic consultancy Ecoanalitica, speaking of the 1990s. “But unlike in Russia there hasn't been a deep stabilization program with help from multilateral organizations. Being isolated and under sanctions makes it a different situation.”


By Fabiola Zerpa and Nicolle Yapur from Bloomberg
02 12 2021



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