20 May 2008

Nationalizing Strategic Industries

The Venezuela way of ensuring that it gets the majority of the income derived from its natural resources is to heavily tax foreign companies on the profits made. The oil sector is one of Venezuela's top earning resources and the current tax rates are 50% per barrel when the price of oil is above USD 70 per barrel and 60% once the price per barrel hits USD 110. With the current oil price at almost USD 130 per barrel, Venezuela is projecting revenue of some USD 9 billion a year going forward.

Nice income if you can get it!

This follows 2006 legislation that forced foreign companies to offload 60% of the operations to the Venezuelan Government. What this means in simple economic terms is that for foreign investors the law of diminishing returns is starting to kick in and it is no longer a worthwhile endeavour to invest in Venezuela. The regulatory changes have already forced the arm of two of the world's biggest oil players in Exxon Mobil and ConocoPhillips, both of whom have opted out of their respective Venezuelan adventure.

Exxon Mobil are suing to claim back USD 12 billion that it claims to have lost when Hugo Chavez, the President, nationalized Exxon operations last year. Most commentators would be wishing them luck with that action! Chavez has said that Venezuela is prepared to pay fair compensation to any foreign company affected by the recent round of nationalizations.

Oil is not the only "strategic" industry in the sites of the President. He has recently nationalized the entire Venezuelan cement industry as he says that he cannot rationalize the export of cement when Venezuela is experiencing a housing crisis that might just be averted if sufficient cement was available to the local building industry.

Nationalization of strategic industries is not a new concept and most States have constitutions that permit nationalization to occur with fair compensation to be paid.

I wonder what the investor response would be if Indonesia took a similar root and started to declare specific industries to be strategic and then commenced the process of nationalizing them in the national interest.

Although there seems to be no real interest in Indonesia for nationalization on a broad scale, it is worth noting that some high profile Ministers and politicians are on the record as saying that it is high time Indonesia took a stronger interest in the rape and pillage of its natural resources by foreign companies. The Health Minister, although this would be somewhat outside of her portfolio, has commented recently about the natural resources sector. She has also be adamant that foreigners are trying to exploit Indonesia in respect of the avian influenza outbreak.

Simply, nationalization is not entirely beyond the realm of possibility. It would require a sharp hair-pin turn in current policy, but as I said; this is Indonesia and anything is possible!

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