US embassy cable - 04CARACAS3536

C O N F I D E N T I A L  CARACAS 003536 
 
SIPDIS 
 
 
NSC FOR SHANNON/BARTON 
TRESURY FOR OASIA - SIGNORELLI 
COMMERCE FOR ITA/MAC/WH/OLA-SOUTHERN DIV/MCAMERON 
SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: DECL: 11/06/2014 
TAGS: ECON, PGOV, VE 
SUBJECT: LEVIATHAN'S RETURN:  CHAVEZ'S NEW ECONOMIC 
BUREAUCRACIES 
 
 
Classified By: Economic Counselor Richard M. Sanders.  Reasons:  1.5 (b 
) and (d). 
 
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Summary 
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1.  (C)  With his pockets full of petro-dollars, Chavez has 
created new Ministries of Food, Housing, Popular Economy, and 
Development Finance.  He is also moving forward with the 
creation of a new state airline and a telecommunications 
enterprise.  The establishment of the Ministries of Food and 
Housing appear to be aimed at providing an additional impulse 
and a stronger institutional base for signature oil-funded 
GOV anti-poverty programs.  The Popular Economy and 
Development Finance Ministries reflect the Bolivarian 
government's belief in stimulating growth (and obtaining 
political dividends) through directed state credits, 
especially to cooperatives.  The new aviation and telecoms 
enterprises are a throwback to 1950's vintage Latin American 
state capitalism.  End summary. 
 
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Ministry of Food ) Building on a Popular Program 
--------------------------------------------- --- 
 
2.  (C)  In September, President Chavez announced the 
creation of a new Ministry of Food ("Alimentacion") which 
will have as its principal function the administration of the 
GOV,s "Mercal" network of subsidized food markets for low 
income consumers.  Mercal had previously been a free-standing 
program, run by the military, with technical support from the 
Ministry of Agriculture.  The new Ministry of Food will also 
take over the operations of the Agricultural Supply and 
Services Corporation ("CASA,") an existing para-statal 
corporation previously reporting to the Ministry of 
Agriculture.  It had originally existed to operate 
state-owned silos and other food storage facilities, but 
under Chavez had become a purchasing agency for the imports 
required to fill the Mercal shelves.  The Ministry will also 
have responsibility for the Strategic Food Program ("PROAL"), 
a military-run program which distributes free food baskets 
and maintains soup kitchens for the neediest.  The new 
minister is General Jose Rafael Oropeza, who had previously 
served as head of the Mercal program. 
 
3.  (C)  Tomas Socias, chief of governmental relations for 
agri-business giant Cargill, told econcouns that the 
Ministry's creation of the Ministry of Food was an effort to 
improve coordination in a program that has become crucial to 
the GOV's overall anti-poverty strategy and key to the rise 
in Chavez's political fortunes over the last year.  Socias 
added that there had been constant in-fighting between CASA 
and Mercal management as well as consistent reports of 
corruption.  That said, however, he noted that Mercal and 
CASA programs have already moved far beyond their initial 
improvised aspect.  He had visited the Ministry's offices 
(formerly Mercal's), which had an elaborate, bustling 
operations center, and a large staff, with several Cubans 
present.  (Cuban state food purchasing agency Alimport has 
had a close relationship with Mercal and CASA).  The Mercal 
program, with more than 200 retail stores, plus a network of 
smaller "Mercalitos" run out of individual homes and corner 
stores, may be supplying 20-30 pct of national demand in some 
sectors such as cooking oil. 
 
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Ministry of Housing ) Re-starting a Shut-Down Sector 
--------------------------------------------- ------- 
 
4. (C)  At the same time as he announced the creation of the 
Ministry of Food, Chavez also unveiled a new Ministry of 
Housing, which would have responsibility for overseeing the 
existing National Housing Institute (INAVI), as well as  the 
Urban Development Fund (FONDUR).  The former is roughly the 
equivalent of the U.S. Federal Housing Authority, providing 
funding to commercial banks to support mortgage lending.  The 
latter has directly constructed low-income housing.  Both 
previously reported to the Ministry of Infrastructure, which 
also covers transportation, telecommunications and public 
works.  Chavez nominated as Minister Julio Montes, a 
 
 
long-time Chavez confidant who had served as Minister of 
Infrastructure, Ambassador to Cuba and Presidential chief of 
staff. (In none of these positions was he considered an 
especially strong figure.)  The Housing Ministry will be a 
"ministry of state," enjoying a lesser status than a 
full-scale ministry. 
 
5.  (C)  What the new ministry will accomplish is unclear. 
The Chavez administration has admitted that it has been slow 
to resolve the "housing deficit" of 1.6 million dwellings 
that the country requires.  According to one private sector 
analyst, during the period of 1999-2003 an average of 20,000 
new homes were built per year, compared with 60,000 per year 
during the period of 1994-1998.  The Ministry will have the 
advantage of counting on resources from state oil company 
PDVSA, which has already staked out housing as one of the 
areas in which, through its Venezuelan Petroleum Corporation 
(CVP) subsidiary, it is engaged in "social investment." 
Coordinating the Ministry's and PDVSA's activities in this 
area will be an important challenge. 
 
6.  (C)  The creation of the Ministry has been hailed by the 
Venezuelan Construction Chamber, the building industry's 
trade association (historically one of the less militantly 
anti-Chavez business groups).  Chamber President Alvaro Sucre 
told econcouns that he saw the creation of the Ministry as an 
effort to revive the one sector, construction, which has 
failed to participate in the recovery that the partial return 
of oil production, together with high prices, has encouraged 
elsewhere, and he was hopeful that important new resources 
would be dedicated to the sector.  The president of large 
commercial bank BANESCO was less optimistic, telling 
econcouns that, when representatives of the Banking 
Association had met with Chavez, discussion had centered on 
revitalizing lending for housing, and the banks had submitted 
their own plans for this sector.  However, he was convinced 
that the GOV would take the plans, and use them to design its 
own mechanisms which would channel housing finance through 
state-owned institutions, shutting the private banks out. 
 
 
--------------------------------------------- --- 
Two More Ministries ) The Lending Window is Open 
--------------------------------------------- --- 
 
7.  (C)  Chavez also re-organized the ministerial 
responsibilities for a range of state banks and institutes 
which lend money for non-housing-related development 
purposes.  Previously the range of institutions running 
credit programs, large and small, had reported to Nelson 
Merentes, Minister of Social Economy, and, more importantly, 
head of the large National Bank for Economic and Social 
Development (BANDES).  However, the smaller programs 
dedicated to micro-enterprise, i.e., the Bank of the 
Sovereign People, the Women's Bank, and the Micro-financial 
Development Fund, will now report to a new "Ministry of 
Popular Economy," as will the National Job Training Institute 
(INCE), previously located within the Ministry of Education, 
and the Superintendency of Cooperatives (previously found in 
the Ministry of Education). 
 
8.  (C)  The new Ministry of Popular Economy (a "ministry of 
state" rather than a than a full ministry), will be headed by 
Elias Jaua, a former student radical, who is currently 
"Director of Ideology" for the Fifth Republic Movement (MVR), 
the principal pro-Chavez political party.    He also 
currently serves as head of the "Inter-governmental 
Decentralization Fund," a GOV entity which distributes funds 
to the states, separate from constitutionally mandated 
revenue sharing.  He briefly served as Chavez's chief of 
staff.  (Comment:  As head of the Ministry of Popular 
Economy, he will be well placed to promote a key ideological 
and political interest of the GOV --  the promotion of 
cooperatives of small farmers and artisans, as an alternative 
to a less desirable mode of production  -- the medium- or 
large-scale business or ranch run by the garden-variety 
capitalist.  The cooperative sector, ever dependent on GOV 
credit, of course, also provides a new political clientele 
with its interests tied directly to the Bolivarian 
government.  End comment.) 
 
 
9.  (C)  While the Ministry of Social Economy will disappear, 
Merentes, however, will continue to hold ministerial rank, as 
Minister for Development Financing, a position in which 
BANDES and other larger state financial entities such as the 
Industrial Bank of Venezuela (the state-owned commercial 
bank), and the Bank for Andean Regional Development 
(BANFOANDES) will report to him.  This ministry too will be a 
ministry of state.  (Note:  Merentes, who served as Minister 
of Finance before being forced to resign in a shake-up 
following a scandal relating to the transfer of funds from 
the GOV's Macro-economic Stabilization Fund to the 
ministry,s budget, remains a person of substance within the 
GOV, all the more so as he had an important role in the 
organization of Chavez's successful campaign to defeat the 
recall referendum.  End note.) 
 
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CONVIASA --  Flying the Bolivarian Skies 
---------------------------------------- 
 
10.  (C)  The GOV has established a new, state-owned 
passenger airline - CONVIASA (Venezuelan Consortium of 
Aviation Industries and Services).  Its name deliberately 
evokes that of VIASA, once Venezuela's leading airline, which 
had originally been founded by private investors, but which 
had taken over by the GOV (under President Caldera), run into 
the ground, partially sold off to Spanish carrier Iberia, and 
ultimately closed down.  CONVIASA is headed by Minister of 
Production and Commerce Wilmer Castro, a former Air Force 
officer who participated in Chavez's failed 1992 coup, who 
after Chavez took office in 1998 served briefly as president 
of a small bankrupt air carrier which the GOV had taken over, 
and then as Vice Minister for Tourism. 
 
11.  (C)  CONVIASA, which is supposed to be in the air by 
December 2004, has as of now, one aircraft, a 47 seat Dash 7, 
provided in trust by the Navy, which, we understand had been 
largely used in the past to transport senior officers and 
their families to tourist destinations within Venezuela. 
CONVIASA reportedly has been in conversations with Airbus and 
General Electric Capital Aviation Services (GECAS) about 
renting other craft.  The first route is expected to be 
between Caracas and Margarita.  Grander plans outlined in the 
press include eventual flights to foreign destinations in the 
Caribbean, the Andes, and elsewhere in South America, as well 
as the U.S. and Europe.  The 2004 budget includes USD 20 
million for the state firm's operations, and USD 8.3 million 
reportedly is coming from the off-budget social 
infrastructure fund created from earnings from PDVSA. 
 
------------------------------ 
CVG Telecom - GOV As Cable Guy 
------------------------------ 
 
12.  (C)  As in civil aviation, the GOV is looking to return 
to another "strategic" industry - telecommunications - 
through the "Corporacion Venezolana de Guayana" (CVG), the 
steel, aluminum, and electricity generation para-statal based 
in eastern Venezuela.  A new entity, "CVG 
Telecomunicaciones," has been created with the ultimate aim 
of providing an alternative to CANTV, the former state-owned 
telecoms carrier, now privatized (29 pct owned by U.S. 
company Verizon).  CVG Telecom's principal asset is the 5000 
kilometers of right-of-way suitable for fiber optic cable 
which its subsdiary, electricity generator and transmitter 
EDELCA owns.  CVG's secretary general told econcouns that CVG 
Telecom would partner with an international telephone company 
which would provide needed capital and technology.  Expanding 
telephone services to underserved rural areas would be an 
important part of the new entity's mission, he added. 
 
13.  (C)  Our private sector contacts are skeptical about the 
prospects for CVG Telecom.  They note that CANTV's 
privatization has led to enormous improvements from the 
extremely poor level of service which the firm had provided 
when it was state-owned, and see a new state corporation as a 
step back.  Ricardo Baquero, President of CASATEL, the 
telecommunications industry association, suggested that CVG 
Telecom would have an unfair advantage; while there was 
nothing in Venezuelan law which prevented it from being set 
up, it would inevitably use CVG's resources and 
 
legal/political clout to obtain market share.  Billionaire 
Oswaldo Cisneros, who holds a minority interest in cellular 
provider TELCEL, was more sanguine.  Only 1228 kilometers of 
fiber-optic cable was already laid on EDELCA rights of way, 
"leading from one unpopulated location to another," he told 
econcouns.  He suggested it would be a long time before CVG 
Telecom provided any meaningful competition.  For its part, 
CANTV has maintained a rigorous silence on the issue of the 
new para-statal. 
 
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Comment - Back to the Future 
---------------------------- 
 
14.  (C)  The creation of new ministries and state 
corporations obeys the usual mix of ideological and 
straightforwardly political motives that dominate so much of 
the Chavez government's economic decision-making.  The 
creation of a Ministry of Popular Economy oriented towards 
cooperatives is a perfect example.  And the re-creation of 
state telecoms and aviation enterprises is a return to the 
vision of 50 years ago when it was held that the "commanding 
heights" of the economy had to be in state hands to assure 
their rational development.  We also suspect a continuing 
concern within the GOV about having these strategic sectors 
largely in the hands of foreign (American) firms.  As for the 
creation of the Ministries of Food and Housing, here there 
may be a simple recognition of necessity.  Having identified 
these as key areas in which Chavez is supposed to be 
providing his low-income constituency with significant 
benefits, aided by the oil bonanza, he has chosen that tried 
and true remedy of chief executives the world over ) create 
a new bureaucracy. 
 
14.  (C)  Of course, this is Venezuela, and a considerable 
deflator must be applied to either the benefits or the damage 
to be done by these new ministries and state corporations. 
Our aviation and telecommunications contacts seem unimpressed 
by the threat posed by CONVIASA and CVG Telecom, which will 
require huge injections of capital if they are to become 
viable.  The cooperatives that the Ministry of Popular 
Economy is sponsoring still are far from challenging the 
private sector in most areas of the economy.  The Ministry of 
Food's Mercal program, which indeed is challenging normal 
distribution channels, and any future initiatives of the 
Ministry of Housing are entirely dependent upon petroleum 
money staying available.  As of now, Chavez,s new economic 
ministries are more an inefficient overlay on Venezuela,s 
unsuccessful economy than a major transformation. 
 
Brownfield 
 
 
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      2004CARACA03536 - CONFIDENTIAL