THE CASE OF VENEZUELA´S OIL SECTOR SPACES FOR SUSTAINABLE DEVELOPMENT POLICY IN INTERNATIONAL RULES FOR INVESTMENT THE CASE OF VENEZUELA´S OIL SECTOR Werner Corrales-Leal , ICTSD CANCUN TRADE AND DEVELOPMENT SYMPOSIUM: INVESTMENT AS IF SUSTAINABLE DEVELOPMENT REALLY MATTERED. Cancun, September 12, 2003.

LIST OF CONTENTS An approach for making trade integration supportive of sustainable development. Market friendly policies for development: An illustrative case in the Venezuelan Oil Sector . Lessons for future rules on FDI

PART ONE An approach for making trade integration supportive of sustainable development.

Factors explaining real growth in revenues and competitiveness An approach for making trade integration supportive of sustainable development COMPETITIVENESS AND SURPLUS APPROPRIATION RATIONALE IN THE GLOBAL MARKET PLACE Factors explaining real growth in revenues and competitiveness Static: Export growth based in market access Rents related to productivity, based on “Best Global Practices” Productive linkages and networking enhancing domestic multipliers Dynamic ( Rents related to innovation ): Knowledge-enhanced productivity; Innovation in processes and attributes … Strategic marketing; differentiation; short life cycles of products.. Constraints for “adding value” or appropriating trade surplus Traditional barriers and access to GVCs limit exports of “Value Added” goods Extreme competition in commodities and declining terms of trade “Unleveled playing field” in access to knowledge Weak enterprise networks and institutions for learning and multiplying effects

Reduce dependency on current trade in commodities An approach for making trade integration supportive of sustainable development THE NEED FOR ACTIVE POLICIES FOR DEVELOPMENT: LIBERALISATION IS NOT ENOUGH Reduce dependency on current trade in commodities Basis and intensity of competition erodes capabilities for reinvestment Commodity production has very limited networking or spill-over effects Promote technology upgrade and increase internal multipliers “Global Chain Optimisation”: Promote Clusters and insertion to Chains Motivate and promote domestic R&D and Technological Capacity Building A “Levelled playing field ” to negotiate alliances and complementarities Modify dynamics of investment in extreme resource-based cases Extreme productivities, appreciated exchange rates and competitiveness National and Foreign Investment go to non-tradable and commodities

Objectives in the three spheres of Sustainable Development An approach for making trade integration supportive of sustainable development GUIDELINES FOR A TRADE-SUPPORTED STRATEGY TOWARDS SUSTAINABLE DEVELOPMENT Objectives in the three spheres of Sustainable Development Expansion of real incomes and freedoms of the citizens Sustainable use of natural resources and environment Integration in global system securing long term, stable economic growth Aims and strategic guidelines for trade-supported policies Increase value added, knowledge intensity and differentiation to exports Enhance efficiency in production through technology and innovation Improve internal multipliers: clustering, linkages and SMEs networking Gain market access; improve marketing and trade defense capabilities Improve social effectiveness of economic policy (e.g. Informal sectors) Mainstream environmental concerns in competitiveness policies

INTERNATIONAL TRADE RULES An approach for making trade integration supportive of sustainable development KEY COMPONENTS OF A COMPETITIVENESS STRATEGY SUPPORTED ON TRADE AND INVESTMENT SOCIALLY AND ENVIRONMENTALLY - FOCUSED POLICIES FOR COMPETITIVENESS ENTERPRISE DEVELOPMENT, PRODUCTIVITY & TECHNOLOGY POLICIES SUPPLY SIDE POLICIES RULES IN THE SPACE FOR DEVELOPMENT POLICIES MARKET ACCESS AND FAIR TRADE RULES DEMAND SIDE POLICIES NATIONAL POLICIES FOR INTERNATIONAL TRADE AND INTEGRATION INTERNATIONAL TRADE RULES

Market consistent investment-related policy instruments An approach for making trade integration supportive of sustainable development COMPETITIVENESS RELATED “SPACES” IMPLIED IN CURRENT AND PROPOSED NEGOTIATIONS Market consistent investment-related policy instruments Conditioned access to FDI, as “benefit” in sectors reserved for national investment Focalized promotion; incentives to ToT, R&D, Clustering and SME development Government and POE procurement promoting technological capacity building Coordinated implementation of IPR , Competition rules and R&D programmes Multilateral disciplines and issues involved TRIMs; TRIPs, GATS, Subsidies, Government Procurement Special and Differential Treatment; “Spaces for Development Policies” in general Eventual negotiations on investment in WTO

PART TWO Market friendly policies for development: An illustrative case in the Venezuelan Oil Sector

Strategic need to reduce Technological Dependence on TNCs The use of Market-Friendly Active Policies, a case of the Oil Sector in Venezuela 1980 : MAIN CHALLENGES IN THE SECTOR RELATED TO TECHNOLOGICAL CAPABILITIES Strategic need to reduce Technological Dependence on TNCs Pre-existing contracts for the provision of technology and engineering Only 15% of the engineering & capital goods procurement was national Objective shortages in Technological Capabilities in the Country Almost inexistent R&D Capabilities in the sector (PDVSA or elsewhere) Only 5 construction management firms capable of major assignments About 20 engineering companies for projects of medium complexity Doubts and confidence after only 5 years of the nationalization Public doubts about the success of the Capacity Building Program Decision to face the program on a “Market Friendly” basis Firm commitment of PDVSA and the Venezuelan private sector

Creation of a High Quality Research & Development Organization The use of Market-Friendly Active Policies, a case of the Oil Sector in Venezuela THE STRATEGY FOR CAPACITY BUILDING IN R&D, ENGINEERING AND CONSTRUCTION SERVICES Creation of a High Quality Research & Development Organization Creation and development of INTEVEP Establishment policy for Transfer of Technology on Commercial Basis Massive program for training human resources in research fields Promotion of Capital Goods Manufacturing and Service SMEs Implementation of Quality Assurance and Competitiveness Programs Export Promotion Program Incentives for Chains of Suppliers Development Programs Promotion of Engineering and Construction Management firms Non Mandatory Performance Requirements for Joint Ventures Reform of Contracting Practices introducing Project Disaggregation Continuous Improvement and Quality Control Practices in all Contracts

Highly skilled jobs,sources of Added Value and backward links created The use of Market-Friendly Active Policies, a case of the Oil Sector in Venezuela LONG TERM EVOLUTION OF THE ENGINEERING AND CONSTRUCTION SERVICES 1980 - 2001 Very high improvement in Technological Capabilities Highly skilled jobs,sources of Added Value and backward links created Further evolution of Engineering & Construction to Integrated Services Investment US$ 2,500 MM/yr 10 20 30 40 50 60 70 80 90 100 82 84 86 88 92 94 96 98 2000 % evolution trend

PART THREE Lessons for future rules on FDI

+ - - - - + - - + + Lessons for future rules on FDI Admission and IMPACTS OF THE TERMS OF AGREEMENT ON POLICY SPACES AND INVESTOR’S DECISIONS 1/2 DECISION FACTORS OF THE INVESTOR TERMS OF AGREEMENT DEVT POLICY SPACES PROPERTY RIGHTS FREEDOM IN MANAGEMENT INMUNITY PRESCRIPTION Admission and establishment Sectors reserved to national investment + - Post-diversification to Other sectors Promotion for National and Regional players Equitable treatment Technological Capacity Building Clustering, SME Networking - Pre- establishment Risks NT pre-establishment + MFN considering regional agreements - - + - + - Positive Impact Negative Impact

- + - + + - - - + - - + + + + + + + Lessons for future rules on FDI IMPACTS OF THE TERMS OF AGREEMENT ON POLICY SPACES AND INVESTOR’S DECISIONS 2/2 DECISION FACTORS OF THE INVESTOR TERMS OF AGREEMENT DEVT POLICY SPACES PROPERTY RIGHTS FREEDOM IN MANAGEMENT INMUNITY PRESCRIPTION Performance Requirements PR related to trade - + + + PR related to R&D and TT + Hands Off - PR related to K association + + + - Promotion for National and Regional players Technological Capacity Building Clustering, SME Networking Rules on Investor practices Effective sanctions to uncompetitive practices + - Limitations to unfriendly Take Overs of local firms + - + - + - Positive Impact Negative Impact