FONDEN: A BLACKBOX

UNCLAS E F T O CARACAS 000943

SIPDIS

NOFORN
SIPDIS
HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR KLINGENSMITH AND NGRANT

E.O. 12958: N/A
TAGS: EFIN ECON PGOV VE
SUBJECT: FONDEN: A BLACKBOX

REF: CARACAS 01336

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SUMMARY
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1. (SBU) Created by the July 2005 Central Bank Reform Law,
the National Development Fund (FONDEN) is the BRV's
multibillion dollar off-budget fund. Established to pay for
the foreign component of investment projects, pay down
foreign debt, and pay for other special projects, FONDEN, as
of March 2006, has received USD 8.425 billion in Central Bank
(BCV) "excess reserves" and PDVSA transfers. By the end of
2006 total transfers to FONDEN could reach USD 17 billion,
with the addition of new Central Bank injections of USD 4
billion and PDVSA weekly contributions of USD 100 million.
Given the large sums being accumulated in FONDEN and expected
expenditures of only USD 2-3 billion in 2006, critics
question the BRV's management of the balance, particularly
FONDEN's investments in Argentine bonds. FONDEN's
administration, to state the obvious, remains a black box
with all the hallmarks of BRV public finance:
non-transparency, non-accountability, and ease of access by
the Bolivarian gentleman. END SUMMARY.

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FONDEN'S RESOURCES
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2. (U) Two years after Chavez's initial request for a mere
billion dollars ("un millardito") from the country's
international reserves to address Venezuela's social needs,
the National Assembly passed the Central Bank Reform Law in
July 2005, creating FONDEN (reftel). The law provided FONDEN
with a one-time transfer of USD 6 billion in Central Bank
(BCV) "excess reserves" and monthly PDVSA transfers of
foreign exchange earnings beyond PDVSA's needs for domestic
expenses. FONDEN's purpose was to pay for the foreign
components of investment projects, pay down Venezuela's
foreign debt, and pay for other special projects (read: a
discretionary, albeit smaller, parallel budget for Chavez).


3. (SBU) In January 2006, PDVSA announced that it will
transfer USD 100 million a week to FONDEN in 2006. In
February 2006, Chavez called for another Central Bank (BCV)
transfer of USD 4 billion. In March 2006, under BRV
pressure, BCV Directors approved new transfers to FONDEN
totaling USD 4 billion over the next three months (note: some
sources report a USD 4.2 billion transfer). By the end of
2006, transfers to FONDEN could reach USD 17 billion. (Note:
Despite the Central Bank Reform Law only allowing a one-time
transfer of BCV funds, BRV officials have interpreted the law
to authorize one transfer a year. Complicating things
further, the law directed the BCV to determine the "adequate
level" of reserves, but did not specify how BCV "excess
reserves" would be administered (presumably they will be
transferred to FONDEN). We believe that the BCV will
conclude USD 25-26 billion is the "adequate level" as
suggested by Chavez in recent statements. As of April 4,
2006, the BCV holds USD 31 billion in reserves, which covers
approximately 12 months of imports. Local media attribute a
decrease in international reserves on April 3, 2006 to a new
BCV transfer to FONDEN. End Note.)

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FONDEN'S MANAGEMENT STRUCTURE
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4. (SBU) In August 2005, the BRV established FONDEN as a
public corporation under the Finance Ministry (Official
Gazette 38.261). Observers note that FONDEN's establishment
as a public corporation limits public disclosure. Finance
Minister Nelson Merentes is FONDEN's President, and board
members include known Chavez economic confidants: Planning
Minister Jorge Giordani, Petroleum Minister Rafael Ramirez,
and "La Capitana" Carmen Teresa Melendez de Maniglia, the
Defense Minister's wife, who runs the National Treasury
Office and reportedly talks to Chavez daily. The President
of the Deposit Guaranty Fund (FOGADE),the Venezuelan
equivalent to the U.S. Federal Deposit Insurance Corporation
(FDIC),Humberto Ortega Diaz is also a board member, but is
not well known to Post. Marcos Torres, the President of the
recently created Treasury Bank (August 2005, Official Gazette
38.249),is the fund's Executive Secretary. Torres has a
military background and was the Administrative Director of
the Presidential Offices and the Administrative Director of
the Ministry of the Secretary of the Presidency. Torres has
been described by contacts as incompetent, incorrigible, and
inexperienced in banking.


5. (SBU) Contacts have told us that HSBC bank, with
headquarters in London and offices worldwide, is FONDEN's
financial advisor. While HSBC's U.S. ties remain
significant, it satisfies the BRV political need to hold the
funds in a non-U.S. institution. Contacts have also alleged
that HSBC has profited handsomely from FONDEN's business.

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LITTLE SPENDING PLANNED FOR 2006
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6. (U) In his speeches, Chavez has highlighted FONDEN's
planned expenditures, which include highly visible public
infrastructure projects. The Finance Ministry has also said
that they will use FONDEN funds to pay down Venezuela's
foreign debt. FONDEN currently has USD 8.425 billion, of
which USD 823 million (9.7 percent) has reportedly been
spent. The President of the National Assembly's Finance
Commission, Rodrigo Cabezas reported to local press in
February 2006 that the BRV has committed all FONDEN
resources. In its 2005 Annual Yearbook, presented to the
National Assembly (Memoria y Cuenta) in March 2006, the
Finance Ministry reported USD 5.316 billion in commitments
(this is the most recent publicly available data) distributed
across various Ministries: Infrastructure (34 percent),
Energy and Petroleum (32 percent),Finance (19 percent),
Agriculture and Land (4 percent),Housing (4 percent),
Defense (4 percent),Basic Industries and Mines (2 percent),
Environment and Natural Resources (1 percent). Of this
amount, FONDEN obligated USD 2.5 billion in 2005 and USD
2.649 billion in 2006 for spending. Finance Ministry sources
told a reliable section contact, that the BRV would not
disburse more than USD 2-3 billion in 2006. The Chief of the
Finance Ministry's Office of Public Credit, Rudolfo Romer
told econoffs in November 2005, that FONDEN allocated funding
for the full lifecyle of each project (which may be several
years),which partially explains the small 2006 expenditures.


On January 30, 2006, Chavez announced the following
infrastructure, transportation, and energy projects to
receive FONDEN funding (a number of which will be ready for
roll-out later this election year):

Project Name USD million


1. Caracas' subway Line 3 (El Valle-La Rinconada) $204

2. Caracas' subway Line 4 $119
(Capuchinos - Plaza Venezuela)

3. Transport for Barquisimeto (Lara State) $7

4. Maracaibo's subway (Zulia State) $30

5. Los Teques' subway (Miranda State) $76

6. Valencia's subway (Carabobo State) $109

7. Railroad (Caracas-Tuy Medio) $150

8. Railroad system (Puerto CabelloQ)La Encrucijada) $233

9. Railroad program (Barquisimeto-Puerto Cabello) $55

10. Electric Plant based on gas (Plantacentro) $57

11. Hydro-electric Plant (Uribante-Caparo) $9

12. Reconstruction of turbines $14

13. Dry border dam $4

14. State-owned Electricity Company (Cadafe)'s $12
network

15. Thermo-electric Plant (Ezequiel Zamora) $15

16. Hydro-electric Plant (Masparro) $14

17. New thermo-electric plants (Termozulia) $109

18. Expansion of electric transmission $2
(ENELVEN-Zulia State)

19. Expansion of electric transmission $3
(ENELCO) to 230 Kv.

20. Electric generation park (ENELBAR) $28

21. Electric sector institutional framework project $8

22. Quartz concentration plant $125

23. Four new oceanic patrols $110

24. Expansion and rehabilitation of water $34
supply lines

25. Railroad project (Monagas and n.a.
Delta Amacuro States)

26. Electric distribution network $90
(Monagas and Amacuro)

27. Electric system for Apure State $195

28. Thermo-electric Plant Ezequiel Zamora y $60
Alberto Lovera

29. Railroad Puerto Bol!var-Carora-Barquisimeto $79

30. Second Maracaibo Lake Bridge n.a.

31. Recovery of lakes (Maracaibo, Valencia),
and rivers (El Guaire, and El Tuy) n.a.

32. Ethanol project n.a.

33. Sugar plant Ezequiel Zamora $68

34. Massive transport system (MQrida) $30

35. Housing project between China and Venezuela $226

36. New companies supported by the government $1,300

37. Thermo-electric Plant (San Diego de Cabrutica) $125
and electric transmission line (Malena-Cabruta)


TOTAL $3,700


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INTERESTING INVESTMENTS
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7. (SBU) In February 2006, investment bank Credit Suisse
told local media that BRV officials used FONDEN funds to
purchase USD 1.1 billion in dollar-denominated Argentine
bonds and USD 2 billion in securities backed by Latin
American debt. Critics disapprove of the BRV investing
FONDEN funds (essentially international reserves) in what
they term speculative investments that are not easily
tradable. A financial sector broker told econoffs that the
BRV sold dollar-denominated Argentine bonds (he claims,
originally purchased with FONDEN dollars) in the local
economy for Bolivars to allegedly spend in the local economy.
He said that HSBC handled the transactions. Miguel Guzman,
Vice President of Research with Banco de Venezuela Santander
Investment Group, said that the BRV parked the Bolivars from
the bond sales either in the Venezuelan Petroleum Corporation
(CVP) or in accounts with the BRV's Economic and Social
Development Bank (Bandes). According to Guzman, the BRV has
also placed some FONDEN funds in trust accounts in several
local banks.


8. (SBU) The Finance Ministry does not see these foreign
bond purchases as expenditures, but rather as savings
instruments. The latest publicly available official data
from the Finance Ministry's Yearbook shows that 79 percent of
FONDEN funds were invested in dollars, earning 4.2 percent
interest, and 21 percent were in euros, earning 2.2 percent
interest. The Finance Ministry also reports that FONDEN
earned USD 41 million on FONDEN investments in 2005.

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POTENTIAL ADDITIONAL RESOURCES
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9. (U) In the Fall of 2005, BRV officials stated that the
PDVSA-managed Special Fund for Economic Development
(FONDESPA) would be folded into FONDEN; however, BRV
officials have not mentioned this recently. FONDESPA which
received up to USD 2 billion a year was created in May 2004
from PDVSA extraordinary income. From May 2004 to May 2005,
FONDESPA approved USD 2.343 billion for various
infrastructure projects that included: 26 percent for roads,
24 percent for public transportation, 20 percent for electric
energy, 13 percent for endogenous development of medium-sized
firms, 9 percent for services, environment, and
communications, and 8 percent for agriculture. The most
recent official statistics show that, as of the end of May
2005, FONDESPA had spent USD 859 million. (Note: FONDESPA
funds are separate from other PDVSA support (we believe
through CVP) directly to the BRV Missions. End Note.)

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COMMENT
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10. (SBU) We speculate that Chavez will continue to
accumulate funds in FONDEN to, inter alia, hand out largesse
to local and selected international companies and ensure that
he has an adequate cushion to address future political or
economic contingencies. Not known for its efficiency in
project execution, but with significant resources awaiting
expenditure and little oversight, the BRV could also use
FONDEN to buy more bonds from other countries or otherwise
invest strategically abroad.
BROWNFIELD