Lafarge warns unclear rules stifle business in Venezuela

Lafarge warns unclear rules stifle business in Venezuela
Published: 15 September 2005

Venezuela’s constantly changing rules, stringent price controls and government inefficiency are making it extremely hard to do business there, officials at Lafarge warn. 

"The rules here change much too often," Christophe Nicoli, president of Lafarge in Venezuela, said in an interview with Dow Jones Newswires late Tuesday. "We understand the social goals of the government and its political objectives, but investors need stability and clear rules to do business." 

Nicoli’s call for clarity and efficiency comes months after a group of construction-sector companies offered to help the government of President Hugo Chavez simplify the process of building housing for the poor. 

Chavez has recognized that bureaucratic inertia is a top problem for his administration. But his government is known for treating the private sector with suspicion. 

Under Chavez’s rule, the government has imposed price controls on a number of products, including cement sold by companies like Lafarge, Mexico’s Cemex (CX) and Switzerland’s Holcim Ltd - the top cement suppliers in Venezuela. 

Chavez has repeatedly accused the companies of making Venezuelan cement "the most expensive in the world." But Nicoli denies the claim and notes that price controls on cement do little to help reduce construction costs, and only cause difficulties on companies. 

Cement amounts to 7 to 8 per cent of the construction costs in housing projects, Nicoli said. 

Almost 45 per cent of Lafarge’s sales are subject to price controls. "I respect the government’s right to regulate prices in times of hardship, but when things return to normal, prices have to be adjusted," Nicoli said. 

As cement prices are regulated prices for inputs needed to produce cement continue to climb, he said. "This situation cannot continue. If market mechanisms can’t work, then it will be impossible for companies to keep investing and we will have a big problem," Nicoli said. 

Construction-related companies are some of the biggest employers in the Andean nation but they often complain about the red tape when dealing with the government. And many Chavez critics point to housing as a prime example of government inefficiency that hurts the nation’s goals. 

Chavez recently replaced his housing minister after it became clear the government will fail to meet its goal of building 120,000 homes for low-income families this year. As of late July, roughly 10,000 homes have been built. 

"The housing issue has been handled with a lot of good will, but few results," Nicoli said. "Too many government institutions are involved...almost 300, its pure craziness." 

Furthermore, the government has placed limits on interest rates for mortgages and home prices, hoping to encourage companies to build houses for low-income families. But all these reduce the margins that construction companies receive and place all the commercial risk of trying to sell them on private contractors, Nicoli said. The government must assume this risk, he said. 

Lafarge has donated cement for the government’s social programs, but the company is prepared to offer competitive cement price reductions under a joint private sector proposal if the government is willing to discuss it, he said. 

Despite the current Venezuelan business climate, the French company plans to continue to invest an average of $5 million a year at least through 2006 - the minimum needed to keep its current production capacity. The company could expand, Nicoli said, but it will depend on how the market fares in coming years.