Taking a close look at Venezuela’s special economic zones
Vice President Delcy Rodriguez speaks at the opening session of the 25th World Special Economic Zone Development Forum on 12 December 2024, at the Teresa Carreño Theatre in Caracas. Source: MPPEFCE.
Between 12 and 13 December, Caracas hosted Shenzhen University’s special economic zones forum. The Venezuelan government used the occasion to announce new plans for the two-year-old special economic zones regime.
Speakers included over a dozen Chinese academics and various Venezuelan cabinet ministers, among others. This was the first time the World Special Economic Zone Development Forum was held outside of Asia.
At the closing session, Vice President Delcy Rodriguez said that Venezuela’s new SEZ “master plan” has a “projected investment of USD 10 billion.” From her comments, it will mostly focus on industry and tourism across Venezuela’s five SEZs.
The figure sounds overly ambitious. While there are no official figures on foreign direct investment, few investors have committed capital this year, and they have mostly focused on the oil industry—SEZs are designed to boost other sectors.
The UNCTAD estimates that in 2023 there was a gross FDI inflow of USD 678 million in Venezuela; in net terms, there would be a net outflow of USD 756 million.
On the same occasion, President Nicolás Maduro also revealed that former tourism minister Ali Padrón will oversee the SEZ for Tortuga, a small, largely undeveloped island that the government hopes to transform into a leading tourist destination.
Meanwhile, on the same day, Alex Saab, who heads the CIIP—the government centre for foreign investment—announced an agreement with Dutch investors for tourism-related projects in the Paraguaná SEZ.
The SEZ head office declined to comment on this latest project, and the investment centre did not respond to a request for information.
Venezuela and Colombia are also due to sign a special economic zone treaty, which will cover the border regions of Norte del Santander and Tachira.
This porous side of the border accounts for most of the bilateral trade, which rose to USD 768 million in the first three quarters of the year. It also saw half of international tourist arrivals in the first four months of the year, according to the Ministry of Tourism.
What are the incentives that Venezuelan SEZs have to offer, what are the main challenges, and what are the first projects that the government has to show?
SEZs: Diversify the economy and offset country risk ratings
In July 2022, Venezuela’s National Assembly approved a new framework for special economic zones, and by August 2023 President Nicolás Maduro designated five areas.
Johan Álvarez, the Vice Minister for Foreign Trade and Investment Promotion, has led the SEZ head office since its creation in 2022.
“SEZs arise from the need to overcome sanctions,” says Álvarez. “They have two strategic objectives: to diversify exports and thus reduce our dependence on oil, and to offset the negative risk perception of Venezuela by offering fiscal incentives.”
Since 2017, the US government has imposed sectoral sanctions on Venezuela’s financial system and oil industry. The latter provided up to 98% of export revenues in the past, as Venezuela has relied heavily on oil for the last century.
Álvarez argues that there is a risk that can be quantified, but an even greater perceived risk that is not grounded in reality. This would be the product of a political and media campaign to discredit and topple Venezuela’s government, alongside economic and financial sanctions.
Various global ratings agencies give Venezuela the highest level of country risk in the world. Reports cite reasons such as run-down public services, corruption, a weak rule of law, and poor property rights. In practice, this means that few investors will look to Venezuela, and only do so expecting extraordinarily high returns.
In brief, SEZs offer tax relief for companies in designated areas that export more than half of their output. “It would be unfair to give tax relief in a select few locations, for companies selling into the domestic market,” says Álvarez. “It would only make sense if we were trying to substitute imports, which is also being considered.”
This new framework must be understood with the broader economic policy. There is a push to attract private investors by offering more advantageous conditions and even the privatisation of Venezuela’s colossal state sector.
While in the oil industry this strategy means that private partners have greater control over operations and finances in joint ventures, in other sectors investors are allowed to either buy state assets or rent them out via “strategic alliances.”
Projects planned for La Guaira and Paraguaná intend to use state-owned warehouses and construction sites to build factories and hotels, under the strategic alliance framework. However, foreign investors report having been approached to buy the targeted assets instead.
Incentives and problems
The SEZ bill states that companies operating under the framework can ask for the reimbursement of national taxes, such as on income, and import tariffs for inputs. The drawback of tariffs does not apply to finalised products or those that “displace national production or that affect objectives of the import substitution strategy.”
The key distinction for Venezuela’s SEZ regime is that it offers reimbursements or drawbacks, rather than an outright tax exemption. Investors consider this to be the main problem, especially as Venezuela has a low liquidity economy.
Tax exemptions are more common in SEZs across the world, including in China. Multiple business associations have therefore complained that Venezuela’s SEZ will not be competitive, and will thus fail to draw in the expected amount of capital.
Private investors have also raised concerns over the respect of property rights. Late president Hugo Chávez’s socialist nationalisations are a thing of the past, and privatisations are now on the agenda. However, politically motivated expropriations are still taking place.
In the last two years, shrimp farms have become a success story as Venezuela tries to boost its economy and diversify its exports away from oil. In 2023, shrimp exports made USD 214 million, a figure expected to rise by 50% in 2024. The Paraguaná SEZ was set up in part to favour shrimp farm production.
However, in late November the leading shrimp producer, José Enrique Rincón was accused of conspiring to organise a coup d’état by interior minister Diosdado Cabello, and his business group Lamar was taken over by the state.
The designated areas
There are five SEZs in Venezuela, which are found along its long Caribbean coast. They are mostly geared towards tourism, agriculture, and manufacturing. Other important sectors like oil, gas and mining are left out, at least for now.
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This SEZ covers about 38% of the Paraguaná Peninsula, in the state of Falcon. The government hopes to incentivise manufacturing, tourism, wind power, and certain types of agriculture and fishing.
The peninsula is also a zona franca—no import tariffs or VAT on industries that export 100% of their output—and a puerto libre—no import tariffs or VAT for retail sellers; although there are volume limits for buyers.
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The Military SEZ of Aragua is the smallest zone, just to the North of Maracay. The area is administered by the military, and it is being inherited from an older SEZ framework. This area is mostly geared towards metalworking and light manufacturing, like textiles.
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The La Guaira SEZ has three vectors. The length of the state’s coastline is designated for tourist projects. The urbanised area is projected to become a manufacturing and transport hub, as it has access to the port and airport nearest to Caracas. An agricultural section follows a mountainous area that reaches up to the Colonia Tovar in the state of Aragua.
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The Nueva Esparta SEZ covers the coastline of Margarita Island and the entirety of Coche Island. The SEZ is aimed at boosting tourism, fishing, and agro-industry. There is also hope that the towns of Porlamar and Pampatar can be turned into information technology hubs. The SEZ head office remarked that these Caribbean islands are outside of the hurricane belt.
The state of Nueva Esparta is also a puerto libre.
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All of Tortuga Island is designated for an ambitious project to develop it with hotels, an airport, a port, leisure facilities and even a golf course. So far, the island has only a few buildings and a rudimentary airstrip and dock.
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The governments of Gustavo Petro and Nicolás Maduro plan to set up a new SEZ across the regions of Norte de Santander (Colombia) and Táchira (Venezuela).
The area concentrates the majority of trade, migration and tourism-related crossings between the two neighbours.
First SEZ projects in La Guaira
Marcos Meléndez, the authority of the La Guaira SEZ, says that there are nine projects in the area, of which four are already in the execution phase. This would mean that this SEZ is the most advanced to this date.
There are two projects for tourism: the Bahia Sunset Hotel, which is refurbishing containers as modern lodgings; and Camuri Mar, a beach club-style hotel. Additionally, Iran’s Modern Data Development Centre Company is setting up a fibre optic cable factory in a warehouse in Catia La Mar; and Turkey’s Sayinlar Group is investing in a facility to bottle vegetable oil near the port.
La Guaira state governor José Alejandro Terán visits Frit Oil’s vegetable oil bottling facility. The plant is being built with investment from Turkey’s Sayinlar Group within the special economic zone framework, meaning it will have to export more than half of its output. Source: Gobernación de La Guaira.
Then, there would be the agreement between Dutch investors and Venetur, the state-owned tourism company, in the Paraguaná SEZ. The short press release says that the two parties will jointly develop the beach complex at Adicora, a town on the peninsula.
The SEZ head office said that most investors that have shown an interest come from China and across the Middle East, especially the Gulf states.
In a radio interview, Francisco Melía, the president of Paraguaná’s Chamber of Commerce, said that this month Venezuela expects to receive over 30 Chinese investors who are considering opportunities across the country.
Meliá also said that these businesspeople “will seek the same fiscal advantages as in China.” The Venezuelan government may therefore have to reform the 2022 law if it hopes to attract a significant inflow of capital.
There are other SEZs in consideration: one around the Puerto Cabello-Morón port area in Carabobo; and a large agricultural zone covering Venezuela’s five easternmost states.
Currently, Venezuelan SEZs are hardly competitive given the conditions they offer, alongside the high-country-risk level. But will we see reforms in the coming year? Could SEZs be expanded to higher-yield sectors like oil and mining? Will they cover entire metropolises like Shenzhen?
