In late July, the government of Venezuela seized Guardian Industries’ float glass plant there — and experts say the company will face challenges to receive direct compensation for the action.
International investments like Guardian’s 26-year-old operation in Venezuela are often covered under agreements know as bilateral investment treaties, or BITs, according to information on the website of Sidley, an international law firm headquartered in Washington, D.C. When assets are seized by a government, BITs “establish clear limits on the expropriation of investments and entitle foreign investors to seek compensation,” the site reads. “Expropriation can occur only in accordance with international law standards—that is, for a public purpose, in a nondiscriminatory manner, under due process of law, and accompanied by payment of prompt, adequate, and effective compensation.”
Koch Industries, which owns a minority stake in Guardian Glass, has had facilities seized by Venezuela before — and still hasn’t been compensated for it.
In 2010, Koch’s fertilizer operations in Venezuela were seized by the government of then-president Hugo Chavez. The company petitioned the World Bank’s International Centre for Settlement of Investment Disputes for relief in July 2011. A decision in the case is still pending.
Even when cases are resolved in favor of companies, there’s no guarantee that Venezuela will pay up.
In March 2015, bottled glass maker Owens-Illinois was awarded $455 million by the World Bank as compensation for Venezuela’s takeover at the company’s two plants there in October 2010. Owens-Illinois has not received any money, and a press release about the case in April 2016 indicated that it might never get any.
“The company recognizes that the collection of the award may present significant practical challenges,” the statement reads. “The company cannot reasonably predict the efforts that will be necessary to successfully enforce collection of the award or the timing of any such collection efforts.”
It’s possible that Guardian could get some compensation via political risk insurance (PRI), a type of policy that insures against events such as a host government seizing a company’s assets. It’s a $2 trillion global industry, according to a February 2016 report in Global Risk Insights. Officials from Guardian declined to respond to requests for information about any PRI coverage the company might carry.
The Deconsolidation Option
It’s also possible the plant seizure could be written off.
A July 2016 article from Reuters describes how many U.S. companies operating in Venezuela are “deconsolidating” the financial results of their operations there. Deconsolidation means that operations in unstable countries such as Venezuela are no longer part of a company’s balance sheet. This can be accomplished by one-time charges and other accounting methods. Those accounting rules apply to both publicly traded companies and privately owned ones such as Guardian, according to Robert Willens LLC, a tax and accounting service based in New York City.
“Deconsolidation will likely remain an attractive option for foreign companies with Venezuelan subsidiaries, which routinely say they cannot access hard currency, obtain raw materials, lay off workers or raise prices to compensate for inflation,” the Reuters report reads.
Was the Furnace Turned Off?
Venezuela’s president, Nicolas Maduro, claimed in early August that Guardian closed the glass plant in Monagas as part of a U.S.-led “economic war” against his country. Since then, the government occupied it, declared the plant a “socialist company” and claimed to have re-started operations there with the goal of producing 350 tons of flat glass a day.
However, it’s unclear if the actual float line at the facility was ever shut down. Because of the nature of the float glass process, it can be much less expensive to keep the furnaces operating than turning them off and re-starting them later. For example, when demand for glass used in construction plummeted during the recent economic downturn in the U.S., most glass factories continued making it. They recycled it to avoid the expense of shutting down and re-starting the furnaces. Float plants typically operate continuously for up to 15 years between maintenance shutdowns.
During a press event at the Guardian facility in Venezuela on August 10, Labor Minister Osvaldo Vera accused Guardian of implementing a “boycott and sabotage,” adding that the company was “a business that, of which there is no doubt, operated at a fraudulent level, selling its products very cheaply abroad … it bought very little raw material here and basically defrauded the country.”
Yelitza Santaella, governor of the state of Monagas, claimed that 60 percent of the basic materials Guardian needed to manufacture glass was in the state’s mines, “but even that was abandoned.” She said the takeover would benefit the plant’s workers, as well as the nation.
Guardian has declined to comment on the plant takeover outside of a single statement it issued on August 1.
“The Venezuelan government seized control of Guardian’s operations in Venezuela by military force,” the statement reads. “Guardian has operated proudly in Venezuela for decades. We have been fully committed to ensuring the safety of our employees, and have acted in compliance with all applicable laws and with respect for the community. The safety of the employees and management of Guardian de Venezuela’s operations are now in the control of the Venezuelan government.”
While Maduro frequently blames “U.S. imperialism” for Venezuela’s ongoing economic turmoil, most analysts cite the collapse of global oil prices and the country’s disastrous socialist economic policies. The government recently began taking over factories that had closed because of shortages of raw materials, including a Kimberly-Clark plant that makes diapers.