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DE RUEHCV #0943/01 0962044
ZNY EEEEE ZZH
R 062044Z APR 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 3985
INFO RUEHBO/AMEMBASSY BOGOTA 6268
RUEHBU/AMEMBASSY BUENOS AIRES 1122
RUEHLP/AMEMBASSY LA PAZ APR LIMA 0076
RUEHQT/AMEMBASSY QUITO 1945
RUEHSG/AMEMBASSY SANTIAGO 3419
RUEHGL/AMCONSUL GUAYAQUIL 0405
RUCNDT/USMISSION USUN NEW YORK 0082
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL

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. 
 
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SUMMARY 
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¶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.) 
 
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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