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 This message is Sensitive but Unclassified, please treat accordingly. -------------- SUMMARY -------------- ¶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. -------------- FONDEN'S RESOURCES -------------- ¶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.) -------------- FONDEN'S MANAGEMENT STRUCTURE -------------- ¶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. -------------- LITTLE SPENDING PLANNED FOR 2006 -------------- ¶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 -------------- INTERESTING INVESTMENTS -------------- ¶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. -------------- POTENTIAL ADDITIONAL RESOURCES -------------- ¶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.) -------------- COMMENT -------------- ¶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