BOLIVIAN BUSINESS: GAS, PAPER, AND MILK MAS STYLE

C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 000313

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/15/2018
TAGS: ECON PGOV PREL ENRG EPET EINV BL
SUBJECT: BOLIVIAN BUSINESS: GAS, PAPER, AND MILK MAS STYLE

REF: A. LA PAZ 3259


B. LA PAZ 2981

Classified By: EcoPol Chief Mike Hammer for reasons 1.4 (b) and (d).

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SUMMARY
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1. (C) The Movement Toward Socialism (MAS) vision of their
21st century economy is taking shape, but it only echoes the
disasters of the past. The government recently announced the
creation of state run milk processing and paper plants.
These plans make little economic sense and were seemingly
designed within the ideological vacuum of government offices.
Moreover, the continuing process of "refounding" the state
hydrocarbon company (YPFB) is beginning to show results:
technical incompetence, threatened strikes, logistical
failures, and public griping about purely politically
motivated appointments. The Morales Administration is laying
the foundations of the new economy, but they are faulty. (End
summary)

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THE NATIONAL HYDROCARBONS COMPANY (YPFB)
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2. (SBU) The general disorder within YPFB is becoming ever
more evident. The additional responsibilities heaped on the
company following the May 2006 "nationalization" were bound
to cause strain, but instead of increasing technical know-how
and professionalism, YPFB appears instead to be headed toward
further politicization. Moreover, internal battles have
become more public. In early February, the President of
YPFB, Guillermo Aruquipa, was accused of trying to remove 30
workers in Santa Cruz by reducing their salaries and
announcing mandatory reassignments to other areas of the
country. The workers responded by drawing attention to a
number of complaints: the existence of four different salary
schedules, complete centralization of all decision making,
the random contracting of executives and technicians with no
experience, a lack of safety concerns at industrial
installations and frequent logistical incompetence.
Following a local shutdown of YPFB installations in Santa
Cruz, which lasted several hours, the workers announced a
nation-wide strike for February 13.


3. (SBU) Government supporters within the company responded
by taking out full page adds in the newspapers denouncing the
planned strike. The headline read: "Petroleum workers of the
nation will not support stoppages or strikes designed by
neoliberal leaders." It closed by adding that "the
neoliberal parties that destroyed YPFB today want to do the
same with the nationalization" but "no one will hold back the
process of change and the strengthening of YPFB".


4. (C) In the end the strike was averted through
negotiations. The head of the Petroleum Workers of Bolivia,
Domingo Velazques, announced that there was a government
promise to attend to their demands. He also said that the
workers had agreed to accept "social control" over the
company so that the whole society can move the company
forward. Social control is a ill defined concept pushed by
the government, where businesses would need to work with
local groups to shape the future of their companies. (NOTE:
The private electrical companies have also been told they
would need to rethink their businesses in light of "social
control". This also points to perhaps the biggest threat
posed by the proposed new constitution: it would require that
any exploitation of natural resources be subject to a
"process of consultation with the affected population".
Moreover, when this involves indigenous communities, the
consultations must also respect local "norms and

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proceedings". End note)


5. (C) Despite the settlement, the claims of the Santa Cruz
workers are consistently confirmed by professionals outside
of the company. The General Manager of FANCESA (a major
cement producer in Sucre),Gonzalo Arce, who worked 15 years
in YPFB and whose factory depends on natural gas supplies,
reported that the few remaining colleagues he has in YPFB all
confirm the politicization of the company. Moreover, he says
that the salary ceiling placed on government workers limits
the ability of YPFB to hire qualified personnel. Arce
laments that when he dealt with Petrobras for his gas
supplies, all the factory orders could be handled over the
internet, professionally; now it takes several phone calls,
letters, stamps, and waiting.


6. (C) Due to logistical problems, diesel shortages have
been a constant strain on the economy over the past six
months (Ref A). These problems are now affecting the supply
of aviation fuel. In Santa Cruz, where small planes are used
to spray crops (especially soy),the number of flights has
been cut back from 170 per day, to only 55 because of fuel
shortages. Crop losses are expected as a result.

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INTERNATIONAL HELP NOT WANTED
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7. (C) In November, Norwegian diplomats held meetings with
YPFB to initiate a program of cooperation to help with the
restructuring of the company (Ref B). Trond Gabrielsen,
First Secretary at the Norwegian Embassy, told EconOff that
despite promises of meetings with company president Aruquipa,
the Norwegian Embassy has been unable to schedule any further
meetings to advance their offer of aid. The Norwegians were
dismayed with the lack of competence at YPFB back in
November, and are now disappointed at the lack of
follow-through at the Ministry of Hydrocarbons.

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THE NEW STATE COMPANIES: MILK AND PAPER
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8. (SBU) The Morales Administration, in accordance with its
National Development Plan (PND) is moving to reinsert itself
in the productive sector of the economy. As a first step, it
plans to install eight new milk and paper factories. The
decrees authorizing the creation of these factories was
issued in September and list as their objectives: to
substitute the dependency on imports; to reach food self
sufficiency; and to add value to Bolivian natural resources
(ironically no pulp is produced in Bolivia, all paper is
imported and transformed into other products or made from
recycled stock).


9. (C) Construction has begun on two of the planned paper
factories, one in the coca growing area of the Chapare and
the other in the altiplano of Oruro. Brothers Emilio and
Conrad von Bergen, President and Vice President of La
Papelera (the largest packing materials producer in Bolivia)
think that the plans of the factories make absolutely no
sense. The economic justifications are all wrong (there were
even significant mathematical errors in the business plan),
the machinery the government plans to import is inadequate,
and the employment expected to be generated is unrealistic.
To quote Emilio von Bergen, "It is not socialism, it is
stupidity". That said, both expressed concern that as the
first, exemplary model, the state run factory would not be
allowed to fail; thus, it might create an unequal competitor
over the short term. The brothers added that certain
cooperation with the state in the sector may have made sense,
but when they approached the government with their ideas they
found only closed doors. It appears that plans for the

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future productive sector are made with little consultation
with those who have actual private sector experience.


10. (C) Government plans for involvement in milk processing
are equally mysterious. The marketing manager of PIL, the
largest milk processor in Bolivia and a wholly owned
subsidiary of Peruvian conglomerate "Gloria," Orlando
Gutierrez, was somewhat baffled as to the government's
possible plans. He thought that the production must be going
to the government programs, such as school lunches, because
it wasn't realistic to think that government production could
compete with the private sector. Ironically, considering the
government's blame of private agribusiness for inflation,
Gutierrez's only concern was that government competition for
milk would drive up prices. There is no planned additional
dairy production, which will leave PIL bidding against the
government for limited milk supplies, especially in the
altiplano.

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COMMENT
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11. (C) Worth watching as the Morales Administration
carries out its planned foray into production is the role of
foreign money. The Brazilians have already pledged help in
creating the paper factory in the Chapare. (A Chinese
machine, refurbished by a Brazilian company, will be
purchased. According to the von Bergen brothers, it is a
machine that could never be sold to modern, Brazilian paper
producers.) Additionally, Iran has pledged $1 billion to
help Bolivia. The aid is supposed to go primarily to the
energy sector, but they announced that it will also be used
to install 23 food processing plants, with the first six
factories dedicated to the production of milk and paper.
Post has yet to confirm if Iranian money is being used to
build these initial plants.
GOLDBERG