SELECTIVE VENEZUELAN PORT NATIONALIZATIONS BENEFIT

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000908 SIPDIS HQ SOUTHCOM ALSO FOR POLAD COMMERCE FOR 4332/MAC/WH/JLAO TREASURY FOR RJARPE NSC FOR RKING DIA WASHINGTON DC//DHO-F// COMDT COGARD WASHINGTON DC SECSTATE PASS AGRICULTURE ELECTRONICALLY E.O. 12958: DECL: 07/15/2019 TAGS: ECON PGOV PREL ETRD EINV EAGR MARR EAIR VE SUBJECT: SELECTIVE VENEZUELAN PORT NATIONALIZATIONS BENEFIT GOVERNMENT OFFICIALS REF: A. CARACAS 330 ¶B. CARACAS 778 ¶C. 2008 CARACAS 1754 ¶D. CARACAS 615 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: The Venezuelan government has seized all port operators in Maracaibo and is threatening to do the same throughout the country. The seizures have further deprived an opposition state of tax revenue and sources indicate costs and opportunities for corruption have already increased at the Maracaibo port. Close Chavez associate Diosdado Cabello is reportedly a "shadow partner" in the country's largest port operations company, which has thus far escaped nationalization. Private companies operating cargo services at airports may be next as the political and financial benefits the government is reaping from wide-spread nationalizations continue to outweigh the costs. END SUMMARY. -------------- THE ROAD TO NATIONALIZATION - PORT OPERATORS -------------- ¶2. (C) Econoffs met July 9 with XXXXXXXXXXXX, who explained that the road to nationalization for private port operators began when Government of the Bolivarian Republic of Venezuela (GBRV) passed the Decentralization Law March 12, which routed important sources of income away from opposition states to the central government (ref A). The GBRV sent in the National Guard to take over the ports and airports operated by opposition states in March, but had left private company operations untouched until June. ¶3. (C) Adding fuel to the nationalization fire was President Chavez's reported unhappiness over port handling charges that frequently exceeded the value of the government's food imports. Part of the reason why PDVSA, government-owned petroleum company and the GBRV's primary food importer, was experiencing such high port charges, was because PDVSA would bring in thousands of containers of food and leave them at Puerto Cabello for seven to eight months at a time. XXXXXXXXXXXX claimed that PDVSA was the largest culprit in the severe port congestion Venezuela experienced in 2008. PDVSA's solution was to bring in the National Guard, seize the containers, and refuse to pay the outstanding port charges. XXXXXXXXXXXX said PDVSA then tried to donate some of the months old food to the Cubans, but the Cubans politely declined. ¶4. (C) XXXXXXXXXXXX reported that by June, repeated statements by government officials about private companies overcharging at ports had laid the ground work for the take over of port operators. In the case of the port at Maracaibo, the government sent in the National Guard to seize all private port operators, literally overnight, on June 12. The operators have received no indication of when or if compensation will be forthcoming. The seizure of the Maracaibo port operators was followed by the announcement of a 30-day GBRV review of port concessions throughout the country. The deadline for the thirty-day GBRV review of port concessions has come and gone, however, with no decision on whether or not the GBRV will seize additional port operators in other states, or will instead form public/private ventures called "empresas mixtas," with minority private sector ownership. XXXXXXXXXXXX commented that if the government forms "empresas mixtas" in ports such as La Guaira and Puerto Cabello, the private sector owner will be "responsible for everything, but in charge of nothing." -------------- -------------- PORTS NEEDED GOVERNMENT OVERSIGHT, NOT NATIONALIZATION -------------- -------------- ¶5. (C) Years ago, XXXXXXXXXXXX said, the Venezuelan shipping CARACAS 00000908 002 OF 003 association asked the government to limit port operators to two or three companies per port as having too many operators at one port is costly and inefficient. He opined that any "reasonable" government would have intervened to stop the corruption and explosion in costs and inefficiencies. However, the government's seizure of private operators was not the answer to the serious issues facing Venezuelan ports. Instead, the government should have put port operations up for international bid and selected a maximum of three operators per port. The government should have then compensated existing port operators at fair market value and only then ceded the ports to the new, transparently selected companies. ¶6. (C) As it stands now in Maracaibo, XXXXXXXXXXXX continued, companies are still legally liable for lost cargo even though they are no longer in charge of their warehouses. The government-owned insurance company "Horizonte" will be the new insurer once the properties formally change hands but XXXXXXXXXXXX does not believe Horizonte has the capacity to insure multi million dollar port assets and operations. One industry expert said companies will charge 15 to 20 percent more due to increased risk of asset seizure as indicated by Venezuela's addition to the Lloyd's of London "Hull War, Strikes, Terrorism and Related Perils" list (ref B). Some companies were already avoiding Venezuelan ports due to exorbitant charges and long delays. However, XXXXXXXXXXXX stated, transit times to Venezuelan destinations from popular alternative ports such as Cartagena and Kingston average 70 days. There is no real alternative to Venezuelan ports, he said. ¶7. (C) Additionally, XXXXXXXXXXXX stated that operational problems have already arisen within the first thirty days of government ownership at Puerto Maracaibo. He explained that the Government fired numerous highly skilled employees and does not have the sophisticated software needed to manage port operations. As a good will gesture, XXXXXXXXXXXX is allowing the GBRV to use a "blank copy" of its proprietary port operations software for Maracaibo. If port operators such as XXXXXXXXXXXX do not allow the GBRV to use their software for operations such as pinpointing the location of one container among 20,000, the GBRV will be "operating blind" and the result will quickly be chaos, he said. -------------- -------------- VENEZUELAN PORT OPERATIONS "STRAIGHT OUT OF THE GODFATHER" -------------- -------------- ¶8. (C) XXXXXXXXXXXX contended that there is a large amount of money to be made from the port services business. Often port fees in Venezuela amount to more than the merchandise itself is worth, he said. The March decentralization law re-routed this revenue from opposition states, to the central government. This punishes the states and translates into more control for key officials such as close Chavez confidant Diosdado Cabello (ref C),who heads the Ministry responsible for ports. However, XXXXXXXXXXXX claims that even Diosdado Cabello's brother, Jose David Cabello, Superintendent of the Venezuelan tax authority, is trying to distance his agency from the impending "port mess." It is only a matter of time before it becomes apparent that government seizures have only made things worse at the ports, XXXXXXXXXXXX opined. ¶9. (C) At the same time, in a situation resembling "The Godfather", XXXXXXXXXXXX claimed that Diosdado Cabello is a major "shadow associate" in several of the port operators that his ministry oversees. In addition to his interests in firms at the port in La Guaira, he is also the real owner of the largest port operator in Puerto Cabello, Braperca. Interestingly, he noted, private port operators at La Guaira and Puerto Cabello have not yet been taken by the central government. By contrast, operators have been seized in Maracaibo where Cabello does not seem to have a personal stake in port operations. ¶10. (C) In another example of corruption at the ports, XXXXXXXXXXXX CARACAS 00000908 003 OF 003 added that the Makled family (ref D) owned the second largest port operator in Puerto Cabello. The National Anti-Drug Office seized the company when several Makled family members were jailed on drug charges. (Note: The U.S. Office of Foreign Assets Control designated Walid Makled a Drug Kingpin in May. End Note.) In 2009, Venezuelan courts ordered the Makled's to return their port operations company to its original owners. However, the Anti-Drug Office has thus far ignored the Venezuelan court order as it is "making so much money" from running the company, said Oronoz. -------------- AIRPORTS NEXT? -------------- ¶11. (C) XXXXXXXXXXXX also claimed that the government has private operators in the country's airports in its sights as well. Private air cargo companies and commercial airlines with cargo operations, such as American Airlines, will be next on the chopping block, he argued. However, he believes the GBRV will finish taking over private companies at the ports, including customs brokers and stevedoring services, before targeting airports. -------------- COMMENT -------------- ¶12. (C) There is indeed method to the GBRV's seeming madness when it comes to its disregard for private property. Not only do the nationalizations deprive opposition states of valuable sources of tax revenue, the selective seizures also personally benefit key Chavez officials such as Diosdado Cabello if the allegation of his interests in port service companies is true. There has been no real opposition to the on-going nationalizations either domestically or internationally, which has allowed the political and financial benefits of the nationalizations for the government overwhelmingly to outweigh the short and long term costs. CAULFIELD