Legalizing preferential treatment

Article 13 of the Privatization Law contemplates preferential treatment for certain parties participating in the privatization processes. Among these is the clause that allows workers of privatized entities to acquire up to 20% of the shares, which should be considered normal from all points of view. The Law also establishes the possibility of awarding certain preference to “Entities domiciled in the Federal Entity in which the asset or activity to be privatized is located..”. This does not seem to make sense.

The idea that any entity, by the sole virtue of being domiciled in any given State, should be entitled to preferential treatment is not understandable. On top of being unconstitutional as far as it is discriminatory and violates economic freedom, it could seriously and adversely affect the Nation’s income from privatizations.

The preferential treatment referred to is described according to Article 14 of the Law as the “possibility of equaling the offer presented by the winning bidder in the privatization process”. In the case of the workers, this means that they must pay the same price as that tabled by the final investors.

In the case of the parties domiciled in the same Federal Entity as is the privatized asset and that are interested in acquiring 100% of the latter the story differs. The “preferential treatment” means that they can quietly fan themselves while watching the process from the sidelines, and if the price is right take control of the privatized asset at the expense of non-domiciled parties, without paying one Bolívar more and without the expense of going through a formal round of bidding. This does not seem rational or fair if you consider that this merely reduces the number of bidders who formally go through the usually tough bid preparation process (which normally tends to maximize the results of the bid) and that only non-domiciled interested parties must do so.

To maximize the results of a bid process, it is important to have the maximum number of bidders come to the table and that all of them have been sufficiently motivated. Only interested and motivated parties would agree to run the inherent risk that their bid could possibly be on the high side and result in a bad deal.

It is not easy to interest and motivate participation in a card game with marked cards. Unfortunately this can easily happen when preferential treatment is awarded the “local boys” to the detriment of foreign investors or Venezuelan investors from other States. On top of this, think of the negative effect on the credibility of the process should this “preferential treatment” be used by “foreign” entities to perpetrate fraud by establishing suitable “local” fronts.

The “preferential treatment” is not obligatory. The Law states that “Preferential rights may be awarded..”. The mere possibility of preferential treatment, however, should be a source of preoccupation and difficulty for, say, the Venezuelan Investment Fund. It would not be surprising if the Directors of the Fund are continually faced with the conflict created by their desire to comply with their duties of maximizing income generated by privatization on one hand (i.e. safeguarding national patrimony), and the continuous vociferation of local groups (whether bona-fide or Trojan), all vying for supposed preferential rights, on the other.

A formal legal complaint has been recently introduced in the corresponding courts by Drs. Fredrik Kurowski and Santiago Cabrera on behalf of a firm interested in the privatization of Fesilven. (Dr. Fredrik Kurowski is the brother of the undersigned and so more that simple coincidence must be acknowledged).

This legal process requests that, in the specific case of the privatization of Fesilven, no “preferential treatment” as discussed above be awarded by the Venezuelan Investment Fund. Obviously, this firm considers that only the clear definition of this situation prior to the actual bid date will allow them to be sufficiently motivated in order to proceed with the expensive due diligence and analysis required.

It would make sense to believe that other interested investors must harbor the same concerns, whether they are domiciled on another continent or simply on the other side of the Orinoco River.

Hopefully this legal process, initiated by an entity that is evidently demonstrating its confidence in the country’s development through its will to invest in the latter, produces rapid results. They would only be for the good of foreign and national investors, the managers of the privatization process, the Directors of the Venezuelan Investment Fund and, last but not least, of the country as a whole.