OPPOSITION STATES AND MUNICIPALITIES SURVIVING

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000776

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR RJARPE
NSC FOR RKING
USDOC FOR 4332 MAC/ITA/WH/JLAO

E.O. 12958: DECL: 05/25/2019
TAGS: ECON EFIN PGOV VE
SUBJECT: OPPOSITION STATES AND MUNICIPALITIES SURVIVING
FINANCIALLY, FOR NOW

REF: A. 2008 CARACAS 1453

B. CARACAS 445

Classified By: Economic Counselor Darnall Steuart, for reasons
1.4 (b) and (d).


1. (SBU) Summary: With the significant exception of the
Alcaldia Mayor (Mayor of Metropolitan Caracas),states and
municipalities won by opposition candidates in the November
2008 elections appear to be weathering significant budget
cuts forced by central government action, particularly
changes in the government's 2009 budget. The Government of
the Bolivarian Republic of Venezuela (GBRV) has not to date
made extensive use of other tools at its disposal to restrict
the resources flowing to opposition-controlled areas. End
summary.

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Regional Public Finance: Dependent Decentralization
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2. (SBU) As noted in ref A, the Government of the Bolivarian
Republic of Venezuela (GBRV) has developed a variety of tools
it could use to restrict the resources available to states
and municipalities. States, which have very limited
authority to raise taxes, depend almost entirely on
constitutionally-mandated transfers from the central
government. The most significant of these transfers is known
as the "situado constitutional," which obligates the central
government to transfer 15 to 20 percent of estimated ordinary
revenue. Although they have greater authority to raise
taxes, many municipalities, particularly those covering less
prosperous areas, also rely almost entirely on these
transfers. Tools at the GBRV's disposal to restrict
resources available to states and municipalities include
diversion of ordinary revenue to quasi-fiscal funds (thus
reducing the mandated transfers),changing estimates of
ordinary revenue, changing revenue streams from ordinary to
extraordinary, and, at the most extreme, appointing "regional
authorities" and diverting central government transfers from
states and municipalities to these new authorities.

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Budgets Take a Hit
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3. (SBU) The GBRV has taken two broad steps since the
November 2008 elections that reduce the income of many states
and municipalities. On March 12, the National Assembly
passed a law giving President Chavez the authority to take
control of ports and airports from state governments, an
authority he has exercised in states controlled by opposition
governors. Then, on March 21, Chavez announced revisions to
the 2009 central government budget which reduced estimated
ordinary revenues. The first of these steps, while
significant from a political perspective, has not had a major
impact on state budgets. In Valencia, home to Puerto
Cabello, Venezuela's largest port, state officials told
Econoff that Puerto Cabello represented less than 4 percent
of the state's revenue.


4. (C) The budget revision has had a far greater impact on
state and many municipal budgets. While the revised budget
has not been published, our contacts report the net decrease
in estimated ordinary income is roughly 21 percent. Thus,
central government transfers to states and municipalities
deriving from the situado will be reduced by this amount.
Taking into account the situado reduction (which the central
government is retroactively applying with a 28 percent
reduction starting in April or May) and other changes, the
deputy governors of Miranda and Carabobo (strictly protect
throughout) separately estimated to Econoffs their budget for
the rest of the year would be 27 to 28 percent lower than
anticipated. (Note: Miranda's deputy governor said the
state's original 2009 budget was roughly the same as the
effective 2008 budget. End note.)

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Impact of the Budget Revision
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5. (C) With inflation at close to 30 percent, one would
think a budget cut of 27 percent would be disastrous for

CARACAS 00000776 002 OF 003


states and many municipalities. Miranda's deputy governor,
however, said the state would be able to provide better
services in 2009 than it did in 2008, as the previous
administration was so inefficient and corrupt. She said
Miranda had raised salaries for teachers and police by 40
percent, a raise made possible in part by eliminating
salaries of many "contract workers" put on the payroll by the
previous administration. Carabobo's deputy governor and
economic secretary said the state would have to cut some
services and would likely have to lay off some workers, but
would have the resources to fund social spending priorities.
Both deputy governors noted poorer municipalities, almost
completely dependent on central government transfers and
often poorly administered, would suffer the most from the
budget revision. In both states, these municipalities tend
to be run by Chavista mayors. On the other hand, wealthier
municipalities such as Chacao and even Sucre (both part of
metropolitan Caracas and run by opposition mayors) have
generally not been so hard hit. Sucre officials told PolOff
the municipality's tax revenues had increased between 30 and
40 percent year-on-year, more than compensating for the cut
in central government transfers (which make up less than 10
percent of Sucre's budget). The officials speculated some
businesses might be more inclined to pay taxes to the current
municipal administration than they were to the previous
Chavista administration.


6. (C) The central government has several ways of
compensating specific mayors or governors for the broad
budget cut, if it chooses. The National Assembly can approve
"additional credits," which can be transferred to specific
mayors or governors through the Interior Ministry or which
can be used for projects in a given state or municipality run
by a central government ministry. A review of state or
municipality-specific projects receiving additional credits
suggests, not surprisingly, they tend to be in
Chavista-controlled jurisdictions, although the amounts are
not great. Secondly, Chavez can order off-budget transfers
or projects financed by a variety of discretionary
quasi-fiscal funds. As these funds lack transparency, there
is no way of evaluating this mechanism.

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Specific Moves
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7. (SBU) In contrast to the budget revision, which affects
all states and municipalities, the GBRV specifically targeted
the budget of the opposition mayor of Metropolitan Caracas
(Alcaldia Mayor) in the course of promulgating a law creating
a new Vice President of the Republic for Caracas (ref B).
With respect to the situado constitucional, the Alcaldia
Mayor was treated as if it were the state corresponding to
the Libertador municipality. (Note: Libertador is the
largest of the five metropolitan Caracas municipalities.
Whereas the other four are part of Miranda state, Libertador
does not fall within any state. The new Vice President
oversees only Libertador municipality. End note.) While the
Alcaldia Mayor was also supposed to receive 10 percent of the
revenue collected by each of the five municipalities, in
practice the municipalities resisted transferring this
revenue, and our contacts estimate that over 90 percent of
the Alcaldia Mayor's revenue came from the situado. The new
law gave control over the situado to the new Vice President,
thus stripping the Alcaldia Mayor of almost all its financial
resources.


8. (SBU) Another recent GBRV action which will have a large
impact on the finances of specific municipalities is the
expropriation of selected oilfield service providers. As
PDVSA, the new owner of these businesses, is exempt from
paying municipal tax, the expropriation will result in
significant losses to municipalities where these providers
were based. Some have interpreted these expropriations as an
attempt to undermine the economy of Zulia state, an
opposition stronghold and site of many of the expropriated
companies. While this interpretation may have some basis,
one contact told Econoff the immediate, direct fiscal impact
is likely to hurt Chavista mayors in the municipalities on
the east side of Lake Maracaibo more than the opposition
mayor of Maracaibo (and certainly more than the opposition
governor of Zulia, as the state cannot raise taxes).


CARACAS 00000776 003 OF 003


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Comment
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9. (C) President Chavez has amassed an extensive toolbox
through which he can restrict finances to opposition
governors and mayors. He has used several of these tools
since the November 2008 regional elections, which saw a
number of significant posts - including Mayor of Metropolitan
Caracas, Governor of Miranda, Governor of Carabobo, Mayor of
Sucre, and Mayor of Maracaibo - pass from Chavistas to
opposition leaders. The fact that the most significant of
GBRV actions to date, namely the budget revision, also
impacts Chavista governors and mayors is not surprising, as
it serves to remind them of their dependence on Chavez. We
expect additional selective application of these tools in the
future, as Chavez gauges the extent to which he can use them
without a political backlash. End comment.
CAULFIELD