This article is intended to provide the international lawyer with an outline of the Venezuelan legal requirements for international loans granted to the Bolivarian Republic of Venezuela (the "Republic") and issues of debt securities by the Republic. The focus is on international and not domestic debt transactions. We will focus on transactions by the Republic and not by other public sector instrumentalities such as states, municipalities and government-owned companies (i.e., Petróleos de Venezuela, S.A. (PDVSA)).
1. Principles of Venezuelan Public Finance
Venezuelan public finance is governed by the Constitution, the Organic Law on Financial Administration of the Public Sector (Ley Orgánica de Administración Financiera del Sector Público, the "Public Finance Law"), regulations thereunder issued by the President of the Republic, and the annual indebtedness laws also known as "umbrella laws". There are some provisions of other laws, such as the Venezuelan Central Bank Law that also touch aspects of public finance.
The Ministry of Finance (the "Ministry") is the body of the Republic in charge of public finance matters and is vested with the power to negotiate and incur financial obligations on behalf of the Republic.
What is a public finance transaction?
Public finance transactions or public credit transactions (operaciones de crédito público) are defined as transactions by which the Republic incurs any form of indebtedness. The Public Finance Law (art. 76) lists the following as public credit transactions: (i) issue and placement of debt securities, including treasury bills (letras del tesoro), (ii) credits of any kind, (iii) public works contracts or acquisitions which involve payments by the Republic to be made in fiscal years beyond the fiscal year in which they are contracted, (iv) creation of security interests and guarantees, and (iv) restructuring or refinancing of previously existing public debt.
Public credit transactions must be approved by the National Assembly which is the federal legislative body. Currently, this approval is twofold, one is the approval set forth in the annual indebtedness law and the other concerns each specific transaction.
Annual Indebtedness Law
Public credit transactions have to be approved in the annual indebtedness law, which sets forth the maximum indebtedness amount —in Venezuelan bolivars and in U.S. dollars— that may be incurred by the Republic during a fiscal year. The annual indebtedness law also indicates the use of the proceeds to be raised by the Republic through public credit transactions.
The Republic is therefore bound by the annual maximum amount of indebtedness as well as the use of proceeds specified in the annual indebtedness law. Annual indebtedness laws only refer to maximum amounts and use of proceeds. They do not regulate the terms and conditions of public finance transactions.
Approval of each Specific Transaction
In addition to being approved in the annual indebtedness law, each specific public credit transaction (e.g., loan or notes issue) must be presented for approval by the Permanent Finance Commission of the National Assembly, which has a ten business day term to approve or disapprove the transaction. If the commission does not render its decision on the transaction within the aforesaid ten-day term, the transaction is deemed as approved (art. 79, Public Finance Law).
The Public Finance Law requires that the request for approval of each public credit transaction be filed together with the non-binding opinion of the Venezuelan Central Bank (the "Central Bank"), this is dealt with below under Section 3.
In our opinion, which is consistent with the Republic's past practice, it is sufficient for the Republic to file a description of the material terms and conditions of the transaction submitted for approval, similar to a term sheet describing terms and conditions such as: principal amount, interest rate, amortization schedule, governing law, name of the underwriter or financial institution and fees. We believe it is not necessary for the Republic to file with the aforesaid commission the actual drafts of the transaction documents such as credit agreements, offering circulars, subscription agreements, form of notes and related documents.
From late 2000 until early 2003 it was not necessary for the Republic to obtain approval from the National Assembly for each specific transaction. However, a decision by the Constitutional Chamber of the Supreme Tribunal rendered on September 24, 2002, states that public credit transactions are "public interest" contracts and therefore have to be approved by the National Assembly when entered into with...