Venezuela: Venezuela Plans to Nationalize Telecommunications and Electricity Sectors

Background

President Hugo Chávez yesterday announced his policy for his third term in office. He heralded a "new era" in the transformation of Venezuela to socialism: the "Simón Bolívar national project 2007-2021." The project contemplates the nationalization of strategic industry sectors, such as telecommunications and electricity, through special powers to be sought from the Legislature.

President Chávez plans to nationalize CANTV (Compañía Anónima Nacional de Teléfonos de Venezuela), the former public telecommunications monopoly privatized in 1991 as part of Venezuela’s telecommunications sector reform, which actually extended to President Chávez’s first term with the opening the industry to private investors. The current plans also include the nationalization of electricity utility EdC (Electricidad de Caracas). Other operators and utilities could face similar measures. President Chávez is expected to detail his plan tomorrow during his swearing-in ceremony.

Foreign investors in Venezuela have three basic routes for enforcing their rights: (1) Venezuelan courts; (2) international commercial arbitration; and (3) investment treaty arbitration. This note highlights the last two options.

Venezuelan State-owned entities may submit contractual disputes to binding international arbitration with foreign investors. Venezuela is party to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) since 1995. Under the New York Convention Venezuelan courts are bound to enforce arbitration agreements and arbitral awards rendered in other countries party to the Convention. More than 140 countries are now parties to the New York Convention.

Venezuelan contracts by private operators in highly regulated sectors such as telecommunications and electricity with governmental counterparts will often include arbitration agreements. The October 14, 1991 contract by which CANTV was privatized reportedly does so. Before taking any steps, however, investors should consider seeking specialist advice as to how a specific arbitration clause should be construed.

Venezuela is party to about twenty bilateral investment treaties (BITs) with European and Latin-American countries. BITs require prompt, adequate and effective compensation for direct or indirect expropriation measures. They make arbitrary host State measures unlawful. They contain most-favoured-nation (MFN) clauses requiring Venezuela to extend to covered investors the best protection granted (through another BIT, for example) to investors of any other State. Crucially, they offer direct international arbitration to investors for government breaches of treaty protections.

Venezuela’s BITs entitle foreign shareholders to compensation for expropriation of the assets of a Venezuelan company. Similarly, these BITs define "investment" as "any type of assets." This covers shares, loans, bonds and debt instruments. Many of these BITs contain broad definitions of covered corporate investors, to include not only companies constituted in a contracting State but also companies which, although they are constituted in a third State, are effectively controlled by nationals or companies of a contracting State. These provisions thus extend protection to third country investment vehicles.

Venezuela’s BITs allow investors to take treaty disputes to arbitration administered by the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). Venezuela’s foreign investment legislation acknowledges its obligation to honour its treaty arbitration offers. To make that obligation effective, BITs may provide for important conditions and an investor should seek specialist advice in the event of an investment dispute.

Latham & Watkins’ International Dispute Resolution Group (chaired from London and New York) has a unique capacity to deal with international arbitration and public international law matters. In addition, Latham & Watkins has a dedicated Latin America practice group (chaired from Chicago and New York). These practice groups in combination reflect the firm’s leading experience in acting in commercial and investment treaty arbitrations and public international law matters, both contentious and non-contentious, around the world. Latham & Watkins’ expanding work in Latin America is bolstered by its full capacity to work in both English and Spanish, including on a number of ICSID arbitrations. The firm’s public international law group has ranked the highest among its peer law firms in the Legal 500 (UK) 2006 and Chambers (UK) 2007 directories. Latham & Watkins currently acts for clients with investments in Venezuela.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.