All companies could end up like Clorox de Venezuela S.A., eventually
Mar 12, 2015
The mechanism of direct expropriation may be defined as an indemnification through a fair payment in the light of an act that ultimately affects private property (specifically the transfer of ownership title) due to reasons established by the lawmaker. However, this is not the only way of affecting ownership rights. Often arbitrary and unjustified measures affect these rights, even though no transfer of ownership title does occur.
Unfortunately, this last scenario is the most common in Venezuela. According to the most recent statistics, there have been 66 procedures involving the rescue of portions of land, 9 expropriations, 14,000,000 fines imposed on commercial establishments, 6,032 supervision procedures, 5 interventions, and 39 temporary occupation procedures – all on record. (Please refer to the December 2014 Bulletin Edition issued by Observatorio de Derechos de Propiedad, consulted on http://paisdepropietarios.org/, a project initiative carried out by CEDICE and Liderazgo y Visión.).
Below is a brief report on the current situation in Venezuela:
(i) The recent measures of temporary occupation
As a result of problems resulting from scarcity and high inflation in the country, there have been a series of measures taken by different public entities against recognized commercial chains of pharmacy and food commercialization stores.
In the last few weeks there have occurred several cases of abuse and inappropriate conduct towards private property. Let’s just take as an example – Zuly Milk. This is a company with a trajectory of over 10 years of experience in the commercialization of milk products and byproducts, relying on its own sales force and transportation network, as well as on a processing and container plant for powder milk where its own trademarks are canned and shipped.
On January 2015, some officials of the National Superintendence of Agriculture and Alimentary Management (SUNAGRO) held an inspection at the facilities of the Company and identified certain alleged inconsistencies between the physical and registered inventories at the SICA (Spanish acronym for Integral System of Alimentary Control). The Superintendent ordered a preventive measure for the temporary occupation of the facilities under operational supervision, all in accordance with the provisions contained in article 147, number 4 of the Organic Law on Agricultural and Alimentary Security and Sovereignty.
We still remember the case involving Clorox de Venezuela S.A., which experienced the immediate occupation by means of a Resolution identified as DM/N° 074 dated October 29 of 2014 issued by the Ministry of the People’s Power for the Social Process of Employment, on the grounds of article 149 of the 2012 Organic Labor Law. In addition, a Special Administration Board was designated.
This measure was decreed immediately after the company announced a halt in operations as a result of the rather difficult and uncertain conditions in the country. Unfortunately this can affect any company conducting economic activities in Venezuela.
(ii) The companies operating in different sectors are potentially exposed to temporary occupation or may be driven towards closing due to the country’s current and adverse conditions.
It is precisely this last issue what we wish to address in this particular moment. Some may think that companies such as Zuly Milk or Farmatodo should be the main target of the aforementioned measures, since they operate on highly regulated areas and sectors deemed as of first necessity, e.g., food and medicine (pharmaceutical products).
The truth is, if we analyze the case of Clorox, we shall reach the conclusion that companies operating in different sectors of the country may be potentially classified as being in this situation. Even if they do not reach the level of an occupation, they may be driven to closing due to the current conditions of Venezuela that are adverse for private initiatives, for freedom of enterprise, and for private property.
In this sense, it is important to recall that as of 2003 there are controls over prices. Although it is not generalized, it has already affected many companies and scarcity began to be apparent in certain products. Many traders can no longer decide freely on the price to be asked for their products.
Also in 2003, the foreign exchange control system was established and it continues to be in full force. It was applied as a State policy aimed at exercising a higher control on individuals instead of a temporary economic measure. Under the system, traders can no longer freely import raw materials, byproducts or finished products as they have serious difficulties to repatriate earnings. In addition, they have an obligation to sell to the Central Bank of Venezuela the foreign currency obtained from exports, etc.
We must also refer to the daily complications involving the current regulation imposed on companies. There is a strong regulation by the State as we have commented previously, since a company is subject to the “regulation” of the National Integrated Service of Customs and Tax Administration (SENIAT), of the National Center for Domestic Trade (CencoEx), of the Superintendence of Fair Prices (SUNDDE), and of the Labor Inspectorates, etc. At the same time, they must also deal with rates and encumbrances established by different public entities (Please see ABACHE CARVAJAL, Serviliano and BURGOS IRAZÁBAL, Ramón: Parafiscalidad, Sistema Tributario y Libertad. Academia de Ciencias Políticas y Sociales, Caracas, 2013, pages 253-330).
More than one decade of with this policy in effect has had serious effects on a company’s finances. A foreign exchange control system and controls over prices have led companies to deal also with a significant loss of capital stock, thereby placing them at the verge of bankruptcy. In the last few years companies have managed to come up with several different solutions to delay an outcome that seems inevitable if the fixed prices are maintained and if no foreign currency is granted for import purposes, etc.
In the last 2 years the situation has worsened unavoidably. It was already difficult for a company to deal with her accounting records under the foreign exchange control system and the price controls, today this difficulty is higher as result of the three exchange rates existing (the CENCOEX, SICAD and SIMADI rates).
(iii) All companies may end up like Clorox
With the recent experiences of companies which have resorted to closing operations in the country and which have been subject to occupation measures by the Government, we can see once more how private property is being attacked. In the first case, in a manner that can be deemed as a silent one, ownership rights are equally under a constant threat.
In these cases, violations against property are not only carried out through occupation measures, which are the most evident forms of violation.
Violations to private property are also carried out with a systematic application of policies and mechanisms from the different administrative instances under the form of “technical criteria”, “interpretations”, “administrative practices”, which can be translated in the actual obstruction to the development of the economic activity of companies.
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