Powerful Cemex and Banco Santander are the latest victims on a growing list of companies whose subsidiaries are being nationalized in some countries of Latin America. With Venezuela and Bolivia taking the lead, this development is awakening doubts about the security of investing in some Latin American countries. Above all, it opens the door to two questions: What can be done to prevent nationalization? And, after damage has been done, what is the best way to soften its impact? Carlos Ronderos, formerly Colombia’s minister of foreign trade, says that “except for some contractual clauses that permit companies to go to international arbitration courts, the most advisable thing is to negotiate, since the arbitrary nature of the nationalization, which changes the rules of the game for FDI (Foreign Direct Investment), can also be repeated in the courts.” Ronderos is also a professor at the Sergio Arboleda University in Bogotá.
Ramón Eduardo Guacaneme, who is also a professor at the Sergio Arboleda University, insists on the importance of negotiating with governmental authorities when this sort of situation takes place. He even recommends that companies start to position themselves from the very moment when storm clouds appear on the horizon, without waiting until nationalization actually takes place. “Nationalizations are the result of a political process. This means they are not merely economic phenomena but are ultimately the manifestation of the desire of a ruler who considers that this is the best way to achieve two kinds of key results: winning over public opinion, and achieving an economic impact. From this viewpoint, the nationalization process isn’t something that happens over night.” Guacaneme notes that executives must be skilled at identifying political and social factors “that generally exist in advance of the nationalization process. And based on those factors, they must analyze what would be their best option in case their own company is subjected to a nationalization process.”
Abertis, the Spanish contractor, is a company that is undergoing this sort of process. Its subsidiary, Sabsa, has the right to operate the Bolivian airports of El Alto, Santa Cruz, and Cochabamba until 2022. Two years ago, following its decree on the nationalization of hydrocarbons, the government of Bolivian president Evo Morales announced that it could revoke that concession; in other words, it could deprive Abertis of its right to manage those infrastructure projects and, as a result, all of the airport activities that it has in that country. Far from embarking on a political battle, Abertis, which is a co-owned with AENA, the Spanish public-sector airport operator, used all of the diplomatic tools at its disposal.
Bolivia’s leadership offered two sorts of explanations for the nationalization: It cited a lack of investment in the airports, as well as the company’s relationship with AENA. However, Abertis managed to avoid the issue, until the Evo Morales government raised it again at the beginning of this year. Ever since then, Abertis has maintained numerous contacts with that country’s government, and has reiterated its intention to invest $34 million in improving its infrastructure, as reflected in its strategic plan for 2007-2012. In addition, Abertis has made it clear that the Bolivian government must comply with the terms of its concession contract and, in the event that its contract is rescinded, certain compensation provisions still exist.
Ronderos recommends that companies plan for the possibility of a future nationalization when they sign contracts [with governments]. “I would recommend looking for exit strategies and negotiation formulas that can become available when nationalization becomes a reality.” Nevertheless, Guacaneme notes that each situation is different, and it makes sense to analyze each company’s unique set of options. “Some of the factors that may vary from case to case include the extent to which a sector is unionized; local regulations about procedures for nationalization and compensation; the nature of the company, and its origins. This much remains the same for every company, however: Executives need to evaluate the possibility of a nationalization scenario early enough [to react effectively].”
For example, Venezuelan president Hugo Chávez has made it clear once again that the international arbitration process is not valid in his country, and that any negotiations must be carried out under Venezuelan law. This is medicine that Cemex and Santander have been forced to swallow. Earlier, some companies, including oil giant ExxonMobil, tried to stand up in other courts – such as in the United Kingdom and the Netherlands – with uneven results. The British revoked their measures in response to demands from that company, but pressure from the Dutch forced the Venezuelan government to accept arbitration in that case.
Forewarned by experiences of this sort, the latest victims of nationalization have preferred to negotiate directly with the government of Chávez. Banco Santander, for example, has opted to negotiate directly about the sale of its Venezuelan subsidiary for a price of between $1.225 and $1.850 billion. Once this process is completed, Santander’s subsidiary will be added to the gradually growing list of companies whose assets have been expropriated by Venezuela, such as the aforementioned Cemex and ExxonMobil; Italian-Argentine steelmaker Sidor; and ConocoPhillips, the U.S. oil company.
Guacaneme applauds the way Santander is behaving. “There is a well-known adage that a bad deal is better than a good lawsuit,” he recalls. “Except for some cases involving multinationals who had enough financial power, it’s better to start out by directly making a deal. It’s quite normal for governments that nationalize — or threaten to do so — to resort to forceful public rhetoric aimed at discrediting a company. However, in private they try to reach an agreement that satisfies all parties. Beyond that, they must be very careful when it comes to other foreign investors [in their country]. It does them no good to create panic in a sector that is always important in every country, whatever its political tendencies.”
In fact, Venezuela is suffering damage from its nationalization policy. According to the United Nations Conference on Trade and Development (UNCTAD), FDI in that country fell from $2.5 billion in 2005, to only $400 million at the end of last year.
Support from Public Opinion
In its study, “The Five Keys to a Successful Merger or Acquisition,” Roland Berger Strategy Consultants notes that European companies have been developing their negotiating skills ever since the creation of the Common Market and the emergence of the supervisory powers of Brussels (the European Commission). Although the Europeans defend, in theory, the notion that borders do not exist when it is time to do business, in reality a lot of protectionism continues to exist. The authorities of the member states of the EU often dislike it when a company in one country acquires a company in their own country, especially when their company is considered by its government to have a strategic character.
According to the study, “European companies have developed strategies for negotiating in Brussels and with other member-states on an individual basis before an offer is actually presented, with the goal of anticipating any resistance by member states. They are perfectly aware that governments often face off against the European Commission, arguing that is in their national interest to protect companies from a possible acquisition by a foreign company.” In addition, the study notes that a key weapon for avoiding such opposition is “an open and coherent communications strategy that explains the logic of the move from the viewpoint of an overall strategy for [increasing] competitiveness.”
The situation is different in those Latin American companies where nationalizations are taking place. However, in some cases the possibility also exists of trying to drum up public support as a way to pressure the authorities. Guacaneme notes that “generally speaking, public opinion is very vulnerable but the determining factor is if the rule of law predominates in the government that does the nationalization. If the judicial branch is independent of the executive branch, the risk diminishes and, as a result, public opinion is not essential. If the separation [between the two branches] is not so clear, then [public opinion] could help to provide evidence that there is a problem both within the country and outside it.”
For his part, Ronderos supports the idea of giving more visibility to the problem because, “Even if you negotiate, it is critical for the international business community to learn about the environment in different countries. More and more, because of the globalization process, supranational authorities are an appropriate place to exercise pressure against the measures taken by a single country.”
To enable international organizations to act in response to this sort of situation, Ronderos recommends investing in countries that have signed bilateral agreements with the government from which the investment is derived. “These treaties, as well as treaties covering double taxation, wind up being very useful tools when it is time to consider an investment.”
Repsol YPF, the Spanish oil company, is one example of a firm that knew how to successfully manage this sort of crisis by balancing denials with public opinion messages. When the government of Evo Morales launched its national hydrocarbon decree, the process gobbled up the assets of Pan American Energy, British Petroleum, and Transredes, the gas pipeline operator owned by Ashmore, a British investment company. However, Repsol YPF managed to reach an agreement that allowed it to continue to operate in the region to some degree.
Repsol YPF agreed that the Bolivian government would recover a majority ownership of its Andina subsidiary, while sharing in its management. At the time, Tomás García Blanco, director of exploration and production for Repsol YPF in Argentina, stressed the new operational framework contained in this agreement. He predicted “an exemplary joint operation that can be an example of synergy and teamwork between a state-owned company and a private company.” Things could have turned out worse in the storm that Morales created for the energy sector.