LEVIATHAN'S RETURN: CHAVEZ'S NEW ECONOMIC

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
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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
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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.


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Two More Ministries ) The Lending Window is Open
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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
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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.

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CVG Telecom - GOV As Cable Guy
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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
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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