Venezuelan Legal And Economic Newsletter

In the morning of June 29, 2001, the Caracas Room of the Four Seasons Hotel was buzzing in anticipation. The opening of the bids for the rights to explore and exploit 11 areas of non-associated gas was about to begin with the most coveted areas, Yucal Placer Norte and Sur. These two areas were awarded to the Trio Yucal Placer Consortium (Total, Repsol, Otepi and Inepetrol). Throughout the day, few offers were made and the risk takers obtained their areas with little effort and practically no competition. Despite the existence of a sound legal framework for the gas licenses, Venezuela has lost a great opportunity to attract solid foreign investment that would have resulted in greater development and prosperity, due to pricing and contractual uncertainties.

Energy:

On June 1, PDVSA Petróleo y Gas, S.A. announced its change of name to PDVSA Petróleo, S.A., effective as of May 22, 2001. The reason for the change is to distinguish between the activities of PDVSA Gas, S.A. (gaseous hydrocarbons) and those of PDVSA Petróleo, S.A. (liquid hydrocarbons) which will continue to be exploration, exploitation, production, upgrading, refining, supply and trade of crude oil.

As part of CITGO Petroleum Corporation’s regional plan to increase its fuel and lubricant markets in Latin America, CITGO International Latin American opened the first CITGO gas station in Puerto Rico.

The Hamaca extra heavy crude oil project secured debt financing for approximately US$ 1.1 billion. The Export-Import Bank of the United States will provide a guarantee supporting approximately $628 million of bank funding. An additional $470 million facility will be provided by a group of lead arrangers comprised of Royal Bank of Scotland, BNP PARIBAS, Bank of Tokyo-Mitsubishi, Barclays Bank, Bayerische Landesbank, Export Development Corporation, ING Bank, and WestLB.

PDVSA and the SWEC Consortium (Williams, Enbridge Inc. and Northville) executed a service agreement for the operation and maintenance of the Jose Terminal in the State of Anzoátegui. According to the agreement, PDVSA will hold title to the assets and the SWEC Consortium will provide personnel, operations and maintenance services for a period of 10 years.

Reportedly Alfa Eko and Lukoil, two Russian oil companies, are negotiating various agreements with PDVSA such as: (i) the sale of oil to the Cuban Cienfuegos refinery, (ii) supply of crude from the Lithuanian port of Ventspils to the Gelsenkirchen refinery in Germany which is 50% owned by PDVSA; and (iii) the purchase of Venezuelan oil for Lukoils’ gas stations in the U.S.

The Act of Presentation, Opening of Offers and Announcement of Awards of the Gas Licenses 2000 process was carried out on June 29, 2001. Six (6) of the 11 areas were awarded as follows: (i) Yucal Placer Sur was awarded to the Trio Yucal Placer Consortium (TotalFina (France), Repsol, (Spain) Otepi, (Venezuela) and Inepetrol (Venezuela)) with an offer of 12.5% to be paid in addition to the royalty; (ii) Yucal Placer Norte was also awarded to the Trio Yucal Placer Consortium with an offer of 2.51%; (iii) Barbacoas and Tiznado were awarded to Pluspetrol Resources Corporation (Argentina) with offers of 1.50% for each area; (iv) Barrancas was awarded to Repsol with an offer of 2.59%; and (v) Tinaco was awarded to Perez Companc (Argentina) with an offer of 3.2%.

The Ministry of Finance, PDVSA and the electricity companies as well as the Ministry of Energy and Mines are holding periodic meetings to review and monitor the electricity sector to maintain the quality and efficiency of the service. The problems arising in this sector are due to the poor conditions of the installed capacity of state owned companies such as CADAFE and ENELVEN (west portion of the country), which have not upgraded and/or maintained their infrastructure due to lack of budget.

Venezuela’s third issue of bonds of public debt was offered for a total of 250 million Euros at an interest rate of 11.1% and with maturity of 10 years.

The Venezuelan government has requested the support of the Andean Development Corporation (Corporación Andina de Fomento CAF) in obtaining credit in international capital markets through the Partial Guaranty for Credit systems, originally used by Colombia. Through this system, the CAF partially guarantees syndicated loans to be requested by Venezuela from foreign entities, easing their granting.

As a result of the announcement made by Electricidad de Caracas (ELECAR) stating that it will sell its 6.9% interest in Venworld (the consortium that manages CANTV) and the resolution issued by the Venezuelan National Securities Commission which establishes that if Verizon or Telefónica want to obtain shares of CANTV, one or both will have to launch a tender offer for a minimum 75% of CANTV and that any such acquisition must be carried out through a Public Offer of Shares, governed by the Venezuelan Capital Markets Law and its regulations, Verizon has requested the nullity of the above mentioned resolution.

The National Securities Commission (NSC) issued the Rules regarding Administrative Investigations and Sanctions published in the Official Gazette of June 1, 2001. The purpose of the rules is to regulate the procedures, responsibilities and principles according to which the NSC will open and follow procedures to sanction actions that are penalized by the Capital Markets Law.

Labor:

On June 28, 2001, the National Assembly approved in its second discussion the amendments to the Law that Regulates the Health, Pension and Integral Social Security Subsystems "Ley que Regula el Subsistema de Salud, el Subsistema de Pensiones y de Seguridad Social Integral" which will permit that these legal instruments will only enter into effect on January 1, 2002. The purpose of this amendment is to defer the entering into effect of this law (approved by the Caldera government) stipulated for June 30, 2001. The current government has drafted and is proposing a new social security system through a framework law and several special laws that would definitely supersede the enacted legislation that has not yet entered into effect.

Based on article 172 of the Organic Labor Law, the government began consultations with the National Economic Council (Consejo de Economía Nacional), Fedecámaras, workers’ representatives and the Venezuelan Central Bank (Banco Central de Venezuela) for purposes of decreeing a minimum salary increase.

Taxation:

The Treaty between Venezuela and the Danish Kingdom for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion and Fraud with Respect to Taxes on Income was published on June 14, 2001 (Official Gazette N° 37.219). This Double Taxation Treaty (DTT) is based on the general model of the Organization for the Economic Cooperation and Development (OECD Model) as well as other DTTs entered into by Venezuela. As per the DTT rules, maximum tax rates applicable at the source country are lowered to: (i) 5% in the case of dividends paid by a subsidiary to its parent company, provided that the parent company holds at least 25% of the corporate capital of the company and a 15% maximum tax in all other cases; (ii) 5% in the case of interest income (interest income on credits granted or guaranteed by Venezuela and Denmark shall be exempted from taxation in the country where the interest arises); (iii) 10% in the case of royalty income; (iv) 5% in the case of technical assistance income. The DTT should enter into effect on January 1, 2002, provided that all official notifications are completed on or prior to December 31, 2001.

The Partial Convention for Economic Complementation between Argentina and the Andean Countries (Colombia, Ecuador, Peru and Venezuela) was published on June 5, 2001 (Official Gazette N° 5.535). The Convention aims to establish fixed preference margins as a prior step to accomplishing a Tax Free Zone between the Andean countries and the Mercosur countries. The tariff preferences granted through this convention imply an important reduction from the current tariffs.

On June 15, 2001, the SENIAT (tax authorities) repealed Administrative Order No. 317 that allowed customs agents authorized to work in La Guaira and Maiquetía to temporarily operate in the other customs of the country.

Telecommunications:

CONATEL's Resolution No. 041 containing the Services (Atributos) to be rendered under Administrative Authorizations was published in the Official Gazette of June 8, 2001. This Resolution contains a list and description of the services that may be rendered by holders of administrative authorizations and must be carefully reviewed by companies preparing applications for new administrative authorizations or requesting the incorporation of new "atributos" to their licenses.

CONATEL has formally issued Resolution No. 45 (published in the Official Gazette of June 29, 2001) requesting all telecom and radio broadcast operators to supply certain information to Telecomunicaciones Linkline, S.A. for purposes of carrying out a census. The resolution indicates all information that must be provided, i.e. copies of concessions, permits, charter/by-laws, etc. Furthermore, all information must be presented within 10 working days of the date on which it was requested by Telecomunicaciones Linkline, S.A. This resolution will be in force from June 29, 2001 until December 6, 2001.

CONATEL announced another extension (until July 30, 2001) for registration with the Telecom Equipment Automated Registry (RAETEL (Registro Automatizado de Equipos de Telecomunicaciones). There is a link on CONATEL's web page (www.conatel.gov.ve) and registration is made on line. After the extension and based on the information provided, CONATEL will publish the list of certified equipment for homologation purposes.

CONATEL began the 7th Public Consultation Procedure for purposes of enacting the resolution regarding invoicing of local and rural telephony services that include charges for interconnection, "Resolución contentiva de la forma en que deben facturarse los cobros realizados a los usuarios de los servicios de telefonía fija local y de telecomunicaciones rurales que incluyen la interconexión de redes". Any comments/modifications to this resolution may be presented to CONATEL at consultapublica@conatel.gov.ve, until July 4, 2001.

CONATEL has created an electronic forum on its web page for purposes of discussing issues related with the telecom industry in Venezuela. Initially, two forums have been created: a general and a regulatory forum. The issues currently under discussion in the General Forum relate to rules governing radio stations and rules regarding terminal equipment, moderated by José Guillermo Guerra and Jorge Castro of CONATEL's Regulatory, Rules and Formats Division of the Management of Telecommunications Services Department ("División de Reglamentos, Normas y Modelos de la Gerencia de Gestión de Servicios de Telecomunicaciones").

CONATEL has posted on its web page the comments made as a result of the Public Consultation on the introduction of 3G systems in Venezuela. The purpose of this public consultation was to request opinions from interested parties in the telecommunications sector in order to obtain a greater understanding of the implications of 3G and prepare for its introduction in Venezuela. These comments are located in a section on the web page called Projects under Consultation ("Proyectos en Consulta"), under the name Answers to the Document containing the Public Consultation for the Introduction of the Third Generation in Venezuela ("Respuestas al documento de Consulta Publica para Introducción de Tercera Generación en Venezuela").

CONATEL has also posted on its web page for final comments, the revised resolution containing the portions of the radio spectrum that will be granted via public offer procedures. This resolution has incorporated the comments/modifications proposed by interested parties.

The Treaty for the Protection and Promotion of Investment to be entered into between Venezuela and the United States is apparently ready to be signed. The Minister of Production and Commerce, Luisa Romero announced in Maracay that the negotiations between the US embassy and the team from her Ministry had resolved certain pending issues. Additionally, President Chavez has supposedly ordered its execution in view of President Bush’s Energy Plan, which specifically indicates its need.

Reportedly, Pechiney is studying the possibility of investing US$ 1,600 Million in the construction of a new primary aluminum reducing plant in Venezuela. The plant would produce 460,000 tons of primary aluminum per year. The feasibility study is expected to be completed by July 31, 2001. Marubeni has also shown interest in building Line 6 of Venalum (affiliate of Corporación Venezolana de Guayana CVG) that is also a primary aluminum reducing plant with an installed capacity of 430,000 tons of primary aluminum per year.

On May 30, 2001 the First Court on Contentious Administrative Matters ratified Procompetencia’s decision on the Representaciones Dekema case (unfair competition). The court ordered Dekema to publish an ad in the national and regional press clarifying that the stainless steel cooking pans sold by it under the name Reva International were not manufactured in Solingen, Germany, as the label of the products indicated. Furthermore, Dekema was ordered to place a sticker or otherwise mark the cooking pans with the real place of manufacture, in order to prevent any future confusion.

Another chapter has begun in the battle between Distribuidora Samtronic de Venezuela, C.A. and Samsung Electronics Co. Ltd. This time, Procompetencia opened an administrative procedure against the latter for the presumed performance of practices restrictive of free competition (abuse of its dominant position), through its affiliate, Samsung Electronics Latinoamérica (Zona Libre), S.A. which established commercial relations with Samtronic for the distribution of Samsung products in Venezuela. Samtronic denounced that Samsung: (i) is obligating it to offer warranty on products coming from parallel imports; (ii) is unjustifiably denying the supply of spare parts to be used in technical service; and (iii) is discriminating against Samtronic with respect to other competitors in the market of home appliances. As reported in our November 2000 Newsletter, Samsung and Samtronic had engaged in judicial proceedings, where Samtronic had sued its supplier for damages, based on its allegation of having an exclusive distribution contract with Samsung, and Samsung had filed an "amparo" due to the judicial prohibition to nationalize its products if they were not being imported directly by Samtronic.

In the continuation of the "beer war", the manufacturer Cervecería Regional, C.A. denounced Grupo Polar’s manufacturing and distribution companies before Procompetencia for the presumed performance of practices restrictive of free competition, aimed at excluding Regional from the Venezuelan market. According to Regional, Grupo Polar has been withholding bottles and cases used to transport and distribute Regional beer, limiting the distribution of the drink in the volumes required by the market. The Superintendency issued preventive measures, which order both parties to refrain from receiving, withdrawing, withholding or destroying bottles or cases of their competitors.

Procompetencia also issued preventive measures in the procedure opened against the Chamber of Pharmacies of the State of Zulia, ordering to stop the application of the agreement which impeded wholesalers to supply products to a group of stores ("farmacias populares") in said State. The agreement signed on March 28, 2001 between the Chamber, storeowners, and the pharmacists in charge ("regentes") of the stores, contemplated the discount conditions to be applied to pharmaceutical products in the region.

The Anti-Dumping Commission (CASS) imposed a provisional ad-valorem duty on the CIF value (at customs) of imports of Tereaphtalat Polyethylene PET Polymer, originated in Mexico, disregarding the exporting country, excluding imports of Tereaphtalat Polyethylene, used to manufacture polyester fiber. Official Gazette No. 5539 of June 29, 2001 where the decision is published is not yet available.

A new amendment to the "Montreal Protocol on Ozone Layer Depleting Substances" was fully ratified by the National Assembly (Law No. 19, O.G No. 37217, dated June 12, 2001). This amendment, now a Venezuelan law, significantly modifies the contents and restrictions on the use and trading of Ozone Layer Depleting Substances originally established by the Montreal Protocol.

In addition, on June 12^t, 2001, the Ministry of the Environment issued Resolution No. 76 (O.G. No. 37220, dated June 15, 2001) extending the time frame to obtain Transporting Guides of Baba´s (Caiman cocodrilus) non-processed skins.

Miscellaneous:

On June 12, the Constitutional Chamber of the Supreme Court of Justice issued a very controversial decision denying the right to reply to a well-known journalist and civil rights leader (Elías Santana) in the radio program of President Hugo Chavez ("Aló Presidente"). The Court considered that the comments made by President Chavez against Santana were just "his opinions" and not mere information. Besides, the Court considered that Santana had other available sources (radio programs and the press) to respond to the President’s opinions. Nevertheless, the Court, made some other considerations regarding the legal system of freedom of speech assuming a very restrictive and dangerous position against the media, leaving a wide-open door for criminal sanctions or civil damages for the dissemination of untruthful or partial information.

The Constitutional Division of the Supreme Court of Justice rendered an important decision on May 23, 2001 supporting the judicial execution of arbitration awards. The plaintiff had obtained a favorable arbitration award and requested its compulsory execution. The defendants filed a constitutional injunction (amparo) trying to stop the execution of the award. The Supreme Court sustained that the amparo had no grounds since the defendants had an ordinary course of action against the award, the judicial review (recurso de nulidad) established in the Commercial Arbitration Law (CAL). According to the CAL, a party may stop the execution of the award only by granting a bond to guaranty the enforcement of the award and the damages that may be caused by such suspension. This decision reaffirms the importance of using arbitration clauses in commercial contracts.

Venezuela executed several international treaties among which we point out the following: (i) a Framework Treaty with Saudi Arabia for Economic, Financial, Tourist and Technical Cooperation; (ii) a Cooperation Agreement in the event of Catastrophe with Switzerland; (iii) an Extradition Treaty with Mexico; (iv) a Framework Agreement with the European Investment Bank; and (v) a Basic Technical and Scientific Cooperation Agreement with Peru.

We wish to inform you that the Venezuelan Supreme Court of Justice issued an order according to which the courts located in the Pajaritos building in Caracas may only session (dar despacho) 3 times a week due to the poor conditions of the building (elevators). In view of the foregoing, judicial procedures are being considerably delayed.