Corporate do-gooders

by Jens Erik Gould
CARRIZAL, VENEZUELA
In Venezuela, companies get the message to give back

Inveval hasn't produced an oil-field valve in more than three years.

But Antonio Galvis is thrilled with the valve company's socialist-style makeover that is helping him learn how to read and write while it gears up to go back into production. The 69-year-old machinist, who had toiled for 27 years in the factory, has nothing but scorn for past management.

"The only thing they wanted was to exploit us," said Galvis, who was shaping up old plant equipment. "The company's improved now because we don't have anyone to give us lashes on our backs."

The transformation at Inveval is part of a sweeping initiative by the Venezuelan government to promote local oil service companies, and to encourage them to become cooperatives that devote more resources to social development.

Another part of the program requires international service companies to designate some of their subcontracting to these cooperatives and boost social spending or lose their contracts with state-owned oil company Petróleos de Venezuela, known as PDVSA.

"We want the private company to really be committed to society," said Susana Manzano, PDVSA's director for the program. "It's obligatory. All of PDVSA's contracting companies must be enrolled in the program."

International service companies, many with ties to Houston, are cooperating, so far, with the program. But they are just getting details about how it will affect them and they have many unanswered questions about its less-than-clear legal framework.

"It would be one thing if I entered something very clear and well-defined legally," said Giuseppe Castagna, president of CTA, a Caracas-based company that builds and maintains electrical systems for oil installations. "Here everyone's big worry is that the only option is to comply, but we're putting ourselves on a path without knowing at all where it's taking us."

Service companies are not openly resisting the mandatory social services program, although some grumble off the record. Many are reluctant to complain to the press because they don't want to arouse the ire of a government that is evaluating their proposals for future contracts with PDVSA.

Small companies benefit
Meanwhile, small local companies that are converting into cooperatives under the program, Companies of Social Production, known by the Spanish acronym EPS, are benefiting from incentives from PDVSA like special access to state contracts.

President Hugo Chavez, who inaugurated a $100 million fund to create the EPS program last November, said it is an example of his effort to reinvent businesses as socialist entities. Chavez said he is leading Venezuela toward the "new socialism of the 21st century."

Government support has already generated a sharp escalation in the number of new cooperatives in industries not related to oil, from manufacturing to agriculture.

The EPS program aims to reverse a trend in which a small percentage of companies, many of them large multinational firms, account for the majority of PDVSA's contracting work.

In 2004, over 1,000 companies were registered with PDVSA as contractors, but just 148 companies earned 83 percent of the money paid, the government-owned oil company said.

"It is true that there is a sort of club or elite industries that capture the bulk of the contracts with PDVSA," said Roger Tissot, an analyst based in Canada who works for a Washington, D.C., firm, PFC Energy. "Opening opportunities to more companies through EPS will provide more access to revenues to Venezuelan businesses."

Lessening dependence
Inveval planned to restart production last year, but workers are still fixing up the plant. They say it will be back to producing a variety of valves for PDVSA by next year, hoping to lessen the state company's dependence on international suppliers.

The state expropriated the company, formerly National Valve Constructor, last year from its previous owners, who shut it down as part of national strikes ending in early 2003.

As an expropriated plant, Inveval is in the special position of receiving loans from the state, which owns 51 percent of the stock, with the rest of the shares held by workers.

This allows it to focus on social development rather than concerns about meeting the bottom line that occupy traditional private companies. The company has even set up a school for Galvis and others to get the elementary education they never received.

Some international companies say they are making the transition to the program smoothly.

Services company Schlumberger, which has increased its social development budget in Venezuela even without the help of the EPS program, said as early as April that it had already enrolled. At the oil conference where Manzano made her presentation, the company's stand featured a Schlumberger logo entwined with a Venezuelan flag and the words "social development."

Favel, which has offices in Houston and a contract with PDVSA to study a reservoir in Lake Maracaibo, said it will now devote 8 percent of its project income in Venezuela to social development, up from the 3 percent social budget it had in past years.

"We don't mind paying extra if we see the benefit," Favel President Clive Ferebee said. "The program makes companies more socially aware, and that's been missing in developing countries."

The latest step
Putting social obligations on service companies is the latest step in the Chavez government's drive to redirect oil profits toward low-income Venezuelans. It announced in June that companies like Chevron and Shell must devote a portion of their royalties to social development under new joint ventures with the government.

Venezuela also recently demanded that operating companies convert their contracts to give PDVSA a majority stake.

Most service companies are just now figuring out the rules of the EPS program.

Company representatives crowded around Manzano after a presentation she gave at an oil conference here in April, interrupting her interview with journalists with their own questions about requirements for the EPS program.

Four months later, some of them say PDVSA has still not set clear guidelines about its structure. Companies say legal troubles could arise because they depend on local cooperatives who may not be up to doing the job.

One international service company said PDVSA assigned an agricultural cooperative to build a school to satisfy its social obligations under the EPS program, even though that cooperative has no experience in construction.

Some firms say they don't know if the government will hold them liable if a cooperative does a sloppy job or does not complete a project.

"I have to commit to social activities that could be outside of my technical capacity," Castagna said.

Giving wheelchairs
Venezuelan company Forjacentro has proposed donating 200 wheelchairs to a senior citizens home. The company expects PDVSA to weigh its social offer as strongly as its technical offer when considering its proposal.

"It's an additional cost, but we think it's right," said Hernan Matute, Forjacentro marketing manager. "Someone needs to bring about this social work, and not all companies will make the effort if invited or given incentives. I think this obligates us to guarantee a success."

Galvis and his fellow employees at Inveval agree that obliging companies to help with the social projects will make Venezuelan communities better off.

"They must share it with the population, with the whole society," said Antonio Betancourt, who has worked at the plant since 1982. "If we don't see it from that point of view, we're selfish."