FOOD SECURITY IN THE BRV: MERCAL'S WOES

UNCLAS SECTION 01 OF 04 CARACAS 000470

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON

E.O. 12958: N/A
TAGS: EAGR ECON PGOV VE
SUBJECT: FOOD SECURITY IN THE BRV: MERCAL'S WOES

REF: A. 05 CARACAS 00578

B. 06 CARACAS 01897

C. CARACAS 404


1. (SBU) Summary: Mission Mercal, the BRV's subsidized food
distribution network, is plagued with corruption,
inefficiency, and mismanagement. Shortages in basic staples
have developed in large part because Mercal has fallen 2-3
months behind in imports. Once the poster child of the BRV's
mission program, Mercal's popularity has plummeted from over
90 percent to 64 percent and is reaching fewer Venezuelans
with fewer products. Chavez realizes that he needs Mercal in
order to maintain his government's popularity. Rather than
tackle the hard questions of economic distortions and
inefficiencies, Chavez will most certainly pump money into
Mercal until the shelves are re-stocked, regardless of the
real economic cost and waste. It is unclear in the longer
run whether the Mercal program can recoup its prior
popularity and level of distribution, given the BRV's
increasing financial commitments in all areas and lower
average oil prices. End Summary.


2. (SBU) Mercal had earned high marks from Venezuelans as
the BRV's most popular mission. Customer satisfaction, as
measured by the consulting firm Datanalysis, reached above 90
percent in early 2006. There were also indications that the
low-cost food chain had penetrated middle-class neighborhoods
(Reftel B). According to a recent survey by Datanalysis in
January 2007, Mercal's popularity has dropped from 74 percent
to 64 percent in only five months. Luis Vicente Leon,
Director of Datanalysis, said that the reasons for the steep
drop were shortages of basic foods.


3. (SBU) Statistical trends show a downward slope in
Mercal's efficiency; it is distributing less food to fewer
customers. According to statistics of the Ministry of
People's Power of Food (MINPPAL),the number of Venezuelans
served by Mercal dropped from over 15 million to under 10
million from 2005-2006, a 41.5 percent decline. Since April
2006, food sales at Mercal have steadily declined and
November 2006 sales totaled half of those in April 2006.

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Econoffs visit Mercal
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4. (SBU) Econoffs recently visited seven Mercals for a
firsthand look in low and low-middle income areas of Caracas.
Mercal customers can expect to find shortages in basic
staples. It would be impossible to prepare even the most
basic meal with the selection available at a Mercal.
Chicken, eggs and milk were not available in any of the seven
stores we visited. Pasta, black beans and sugar --all
Venezuelan staples -- were available in only two stores. In
one store that had sugar, there were 75-100 customers waiting
outside on a slowly moving line. When econoffs were driving
through Caracas and asked a man on the street where the
nearest Mercal was, he pointed over his shoulder but
cautioned, "Don't go to that one because there's nothing
there!" He then suggested econoffs head back to the store we
had just visited, which also had a meager selection.
Consistent with econoffs' experiences, the daily newspaper El
Universal reported recently that customers complain when
milk, sugar, and chicken are actually available, "everyone
tells everyone" and the merchandise immediately disappears.


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What about Imports?
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5. (U) One explanation for Mercal's shortages is lack of
imports. According to El Universal, a source in MINPPAL said
that CASA, Mercal's purchasing arm, has not executed a single
import in the past three months, dating back to a sugar
shipment received in November 2006. The report notes that,
prior to this shipment, other imports such as milk, chicken,
and beans, were paralyzed. (Note: An estimated 68-70 percent
of food consumed in Venezuela is imported or processed from
imported raw materials. End Note.) Though Chavez has
stressed the importance of making Venezuela less reliant on
foreign products, Mercal still claims to import about 30
percent of its merchandise, though the actual figure is
probably closer to 70 percent.


6. (SBU) Purchases for foodstuffs on the international
market are generally executed as forward contracts 2-3 months

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in advance of delivery. This makes it difficult to quickly
import in an emergency if shortages develop. According to a
contact within the Venezuelan Association of Rice Millers,
the former Minister at MINPPAL, Erika Farias, did not
understand how forward contracts worked. Our source
described Farias as "a 23 year old totally in over her head."
She said there was no rice on Mercal's shelves because no
purchase orders had been placed in the past two months.


7. (SBU) A shipping executive confirmed to econoff CASA's
sharp decline in imports, indicating that the main reason was
failure to execute forward contracts. According to this
executive, CASA typically imports 140,000 tons of food per
month. In November 2006, the number dropped to 55,000 tons
and dipped even further to 40,000 tons in December. From
September to December 2006, CASA did not execute any forward
contracts to purchase food and, consequently, fell three
months behind in purchase orders.


8. (SBU) On February 25, MINPPAL provided rare public
statistics for CASA and Mercal. While designed to show CASA
is on the mend, these numbers actually confirmed CASA's
import problems. CASA has recently increased its daily
supply to Mercal from 1,400 tons of food to 4,000 tons.
Assuming a 30-day month, this means that CASA had been
supplying Mercal only 42,000 tons of food monthly, which
tracks the statistics we received regarding CASA's sharp
decline in imports (see paragraph 7).

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Buhoneros: The Cause of All Evil?
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9. (U) Another cause for the shortages is that buhoneros
(street merchants) buy Mercal products in short supply at
subsidized prices and re-sell them at several times the
Mercal price. We have heard that some buhoneros are tapped
into the institutionalized fraud in Mercal and can obtain the
products before they ever reach the stores. In a recent
speech, Chavez complained that street merchants were selling
Mercal products at high prices and warned, "This is one of
the accusations and we need to attack it." Chavez announced
a decree banning CASA products from being sold outside of the
Mercal chain. In a recent report on Mercal in the Chavista
newspaper "Vea," street merchants were made scapegoats for
supply and distribution problems and portrayed as greedy
"capitalists." A Mercal supervisor is quoted as saying, "I
don't think that any real Mercal leader - really involved in
the Mission and its essence - would hoard food. We know that
there are businesspeople who prefQto fill their bags at the
expense of others' necessity. It's this type of corruption
that we need to fight against."

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The BRV's Reaction
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10. (SBU) Chavez is clearly concerned about Mercal. On
February 27 during his daily "Alo Presidente," he announced a
USD 278 million package to support Mercal. On January 27,
Chavez called on Farias to make a "superhuman effort" to
improve Mercal. Chavez appeared genuinely upset and puzzled,
as he questioned, "How is it that Mercal is distributing less
than before?" Two days after Chavez criticized Farias, he
replaced her with General Rafael Oropeza as Minister at
MINPPAL and Omar Duarte, also a military man, took the reins
of CASA. Oropeza and Duarte previously worked together in
the same positions from 2004-2006, during Mercal's period of
expansion. Oropeza said that Mercal's problem was not at the
point of sale and that shortages were attributable to "other
causes" in the Mercal system. Mercal has recently launched
an initiative of selling CASA products from small stands
within urban markets that has already drawn the ire of
established merchants.


11. (SBU) The BRV has tried to counter criticism of Mercal
and, in doing so, has tongue-tied itself in double-speak.
Over the first weekend in February, MINPPAL organized an
"outside market" for Mercal products, known as "Megamercal."
Vice President Jorge Rodriguez visited the market and took
the opportunity to turn it into a propaganda event,
proclaiming "this market is the proof that there are no
shortages. We have sold 50 thousand kilos of chicken and
have the capacity to sell 50 thousand more." In a separate
statement, Interior Minister Pedro Carreno contradicted
Rodriguez, saying the BRV would investigate hoarding. Last
week, Chavez signed the first decree under the Enabling Law

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to criminalize hoarding in price-regulated products (Reftel
C).

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The Industry's Viewpoint: Corruption and Mismanagement
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12. (SBU) Corruption has reportedly become rampant in the
Mercal system. In November 2006, Ramon Rengifo, the sole
opposition member of the Legislative Council of Aragua State,
denounced corruption in Mercal. He estimated loss through
fraud at Bs 6 billion (approximately USD 2.9 million) between
September 2005 and January 2006. "There are many
administrative people in Mercal that are involved because
they think that it is their patrimony because the President
says so," said Rengifo. Rengifo said that the investigation
was being handled by Mercal's internal auditors and was in
the hands of the BRV's general accounting office, without any
answers to date.


13. (SBU) Agricultural Counselor and econoff met separately
with Jose Anzola, Director of Food Logistics at Empresas
Polar, Venezuela's largest private food distributor, and
Jorge Macedo, President of Central Madeirense, Venezuela's
largest supermarket chain. Both Anzola and Macedo told us
that the biggest problem in Mercal is pervasive corruption
and incompetence on every level, beginning with the
hopelessly incompetent former MINPPAL Minister Farias.
Anzola estimated that corruption and inefficient management
cost Mercal approximately 30 percent of revenue. He also
said that Mercal's inability to import stemmed from
mismanagement and CASA's inability to pay suppliers and
producers on a timely basis. Macedo agreed that Mercal was
hopelessly inefficient and corrupt and told us that entire
truckloads of deliveries often never arrive at the Mercal
stores and are entirely sold off by employees and
occasionally, the National Guard.


14. (SBU) Anzola and Macedo both expected the BRV to
continue to pump money into Mercal. When asked if Mercal
would recover, both Anzola and Macedo concluded that it has
to, for Chavez' sake. They anticipated that Chavez would
continue to throw money at Mercal until the system regained
its function, or rather, seemed to function. Macedo,
however, expressed skepticism that Mercal's popularity would
ever climb back to the 90 percent range. He argued that
while Mercal benefited from its originality and rock-bottom
prices, Venezuelan customers preferred supermarkets for
better service, air-conditioning, product selection, and
brand name availability.


15. (SBU) While agreeing that providing low-cost food to the
poor is a worthy social goal, Anzola took issue with the
politicized way that the BRV has gone about the project. He
cited, for example, the prevalence of the military in Mercal
and CASA management as opposed to experienced purchasers with
private sector backgrounds. (Note: As we previously
reported, Chavez has publicly welcomed Cuban participation in
Mercal. During an April 2006 "Alo Presidente," Chavez said
that Mercal existed thanks to the help of Cuban experts
(Reftels). End Note.)

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Comment
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16. (SBU) Mercal's woes are indicative of the "black box"
economics of the BRV. Mismanagement and corruption siphon
off money and goods as they move through the system, with
neither institutional transparency nor individual
accountability to control the process. The end product is
less than the sum of its parts, resulting in waste and
economic distortions. Disciplined economics would suggest
that the BRV try to understand the root causes of Mercal's
problems - corruption, mismanagement, and retrograde pricing
policies. The more likely outcome is that Chavez will keep
pumping money into Mercal until there is food on the shelves,
regardless of the program's real cost. An approval rating
for a program that offers cheap food hovering at 60 percent
is indicative of a serious problem. Consumers' inability to
buy staple products because Mercal cannot stock its shelves
is a major embarrassment to the BRV and Chavez has taken this
personally. Mercal needs to deliver the goods - literally -
for Chavista propaganda to continue to resonate. With lower
average oil prices and ballooning BRV commitments, the
long-term sustainability of Mercal is a major question mark.


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