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UNCLAS SECTION 01 OF 04 CARACAS 001209 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON VE
SUBJECT: CHAVEZ' "BOLIVARIAN" BUSINESS MODELS: THE TRIUMPH 
OF IDEOLOGY 
 
REF: A. CARACAS 944 
     ¶B. CARACAS 172 
 
This message is sensitive but unclassified, please treat 
accordingly. 
 
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Summary 
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¶1. (SBU)  As part of his "XXI-Century Socialism" project, 
President Chavez has chosen to reward business models that 
conform to his political vision via financial incentives and 
preferential treatment.  The BRV has supported the creation 
of thousands of cooperatives, which have largely failed to 
revive the economy as promised.  It has also "rescued" a 
handful of nearly-bankrupt companies by promoting the 
"Co-Management" model of buying out a majority of shares and 
leaving the rest to workers or the original owners.  Chavez 
has fostered the creation of Social Production Enterprises 
(EPS), structured like cooperatives -- with a mandate to 
reinvest in surrounding communities -- but without a basis in 
law.  PDVSA is requiring all contractors to become EPSs or 
pay a percentage of gross income for social programs.  The 
BRV has touted "endogenous development" (development from 
within) as a guiding principle.  However, rewarding business 
models based on ideology versus their productivity or 
financial health is economic folly, and predictably, the 
"Bolivarian" models are already showing signs of weakness. 
End Summary. 
 
------------ 
Cooperatives 
------------ 
 
¶2. (SBU)  Since Pres. Chavez took office, the BRV has 
actively promoted cooperatives, defined as structures where 
means of production and profits are distributed equally, and 
a lack of hierarchy guarantees all members have equal rights. 
 By April, the Ministry of Popular Economy (MINEP) had over 
107,000 registered cooperatives, 42,000 in 2005 alone.  An 
estimated 4.6 percent of employed Venezuelans work in 
cooperatives, and setting up a cooperative takes little more 
than a willing group of five people and some minimal 
training.  Mision Vuelvan Caras (Mission About Face) trains 
participants on how to form and operate a cooperative, with 
over 6,014 cooperatives created under this program in 2005. 
According to MINEP, 3,007 of these are producing and selling 
products, 800 are waiting for land to work on (Ref A), and 
the rest -- 37 percent -- are in the "planning stages." 
MINEP announced in April 2006 that it hoped to oversee the 
creation of 100,000 cooperatives in 2006, over 28,000 through 
Mision Vuelvan Caras. 
 
¶3. (SBU) The infusion of new cooperatives into the economy is 
catalyzed by preferential financing from the BRV.  Many 
existing companies are taking advantage of the situation and 
simply "re-structuring" their charters as cooperatives to 
obtain financial benefits.  However, most keep their 
operating model intact.  This same trend is occurring in all 
BRV-favored business models, though no figures are available 
to estimate how many cooperatives are "just for show." 
 
¶4. (SBU) The financial probity of new cooperatives is 
questionable.  Of 1,500 cooperatives audited by the National 
Superintendency of Cooperatives (SUNOOP) in 2005, 628 of them 
presented "irregularities" and are being sanctioned for a 
myriad of violations, ranging from denying partnership to 
employees after six months of employment (required by law) to 
incomplete or missing financial records.  The National 
Assembly is launching a separate investigation to determine 
the extent of "irregularities."  To get a handle on 
cooperatives, SUNOOP announced on April 11 that they planned 
to carry out a nationwide census to gather information.  Some 
analysts believe that the cooperatives have largely "failed" 
-- high loan default rates and poor productivity have 
dampened the high hopes the BRV had for these production 
models. 
 
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CARACAS 00001209  002 OF 004 
 
 
Co-management 
------------- 
 
¶5. (SBU)  Another favored business model is Co-Management 
("Co-gestion").  Co-management is not a clearly defined term, 
even by the BRV.  In most cases, co-management means worker 
involvement in management of a company, either through a 
worker's union taking over management decisions or a 
cooperative sitting on a company board.  The model also 
requires investment in social programs that benefit the 
surrounding community.  In all cases, the BRV comes to own a 
majority share in the company, while the minority is left to 
workers, original owners, or a combination of the two. 
According to legal experts, fewer than 260 co-management 
enterprises were formed in 2005 in all of Venezuela. 
 
¶6. (SBU)  Many co-managed companies are born out of near 
bankruptcy -- workers fear for their jobs and call on the 
government to intervene, either to buy out the company's 
majority shares (a de facto capital infusion), or to outright 
expropriate.  (Note: in the last year, there have been less 
than 10 actual expropriations (Ref B).  End Note.)  Many 
companies which suffered financially from the 2002 general 
strikes turn to co-management.  As with cooperatives, the BRV 
provides financial incentives to co-managed companies.  The 
National Assembly (AN) approved USD 52.5 million in 
additional credits for use by MINEP's Program for Investment 
in Co-Management.  The government doles out the credits on 
the condition that companies reinvest 10 percent of profits 
in social programs.  SENIAT, the tax agency, also provides 
tax breaks to co-managed enterprises.  On April 28, Chavez 
issued a presidential decree saying that companies that were 
going to fire workers due to "economic hardship" could be 
required to re-structure under the co-management model. 
 
¶7. (SBU) The success of co-management schemes overall is 
difficult to gauge, given that their ownership structures 
vary greatly.  Alcasa, a large aluminum processing plant (and 
landmark co-management enterprise) reported a USD 56.7 
million loss in 2005, despite nearly USD 210 million of BRV 
investment.  In Zulia state, Sideroca (a steel mill) was 
expropriated in September of 2005, yet administrative delays 
have prevented the completion of the legal process required 
to operate under a co-management model, prompting worker 
protests and illegal occupation of the plant.  (Note: 
Chavista workers blame Zulia state's opposition governor for 
stalling the company's transformation.  End Note).  Since 
co-management is largely born out of failing companies, the 
BRV argues that its intervention keeps them operational, 
which is true.  However, these "rescues" in turn prompt other 
workers to mobilize and seek government intervention. 
Selfex, an underwear and bathing suit manufacturing plant, 
was taken over by workers in March 2006 and is awaiting BRV 
funding to continue operating. 
 
----------------------------------- 
Social Production Enterprises (EPS) 
----------------------------------- 
 
¶8. (SBU) A third business model favored by the BRV is the 
Social Production Enterprise (Empresas de Produccion Social, 
EPS).  There is no legislation that defines EPS structure, 
and only two documents (a September 2005 BRV decree and a 
November 2005 PDVSA document) shed any light on what an EPS 
should achieve (but not its structure).  According to this 
guidance, EPS management is non-hierarchical and property is 
collective (like a cooperative).  Its objectives should 
include generating goods and services that satisfy the needs 
of the community, employing the "men and women of the 
missions," and holding values of "solidarity" and 
"cooperation."  It should keep an "economic balance" that 
allows continued re-investment of profits into social 
programs.  The Minister of Mining and Basic Industry (MIBAM), 
Victor Alvarez, failed to clarify the picture when he stated 
that EPSs "will not be classic mercantile companies, nor will 
they have collective contracts and a predatory effect on the 
environment." 
 
¶9. (SBU)  The BRV is encouraging the creation of EPSs via 
direct investment.  In November 2005, PDVSA pledged USD 100 
 
CARACAS 00001209  003 OF 004 
 
 
million to "promote socialism" via EPSs.  In February 2006 
the BRV created CONIBA (National Company for Basic 
Industries), a holding unit for state-owned companies in this 
sector, including a steel mill, a tubing manufacturer, a 
cement plant, a cotton processing plant, a rail manufacturer, 
a pulp and paper processing company, a mining enterprise and 
a construction materials manufacturer.  The BRV owns 51 
percent of the companies and private or public foreign 
entities own the rest.  As EPSs, companies are expected to 
re-invest in the community -- CONIBA has already allocated 
USD 2.8 million of investment toward badly-needed housing 
construction.  So far, the BRV has allocated USD 1.39 billion 
for EPSs from FONDEN (National Development Fund), and will 
provide preferential loans for these companies via the 
Foreign Commerce Bank of Venezuela (Bancoex).  SENIAT, as 
with other favored business models, offers tax breaks to 
EPSs. 
 
¶10. (SBU)  The private sector is alarmed about BRV backing of 
EPS enterprises, especially in relation to PDVSA.  PDVSA has 
traditionally had a contractor registry (RAC), but now has 
created a parallel registry only for EPSs (REPS).  Rumors 
abound that they've dropped the RAC altogether, though PDVSA 
hasn't issued an official statement confirming this.  PDVSA 
is already unofficially requiring all contractors to adopt 
the EPS business model or pay a percentage of profits (1-2 
percent of gross income) for social programs.  As a result, 
non-EPS companies are adjusting their bids to account for 
what amounts to an extra-legal "social tax" and PDVSA's costs 
are being inflated artificially.  In some areas of the 
country PDVSA is requiring that companies include a social 
project proposal in contract bids. 
 
¶11. (SBU) Though the EPS movement is relatively new, already 
some weak spots are showing.  In the case of CVG Venalum, a 
state-owned aluminum processor, 14 of their subcontracted 
EPSs are protesting because they haven't been paid in over 18 
months, despite the preferential treatment they're supposed 
to receive as EPSs. 
 
----------------------------- 
Endogenous Development Nuclei 
----------------------------- 
 
¶12. (SBU) As an overall economic concept, Chavez has often 
referred to "Nuclei of Endogenous Development" (Nucleos de 
Desarrollo Endogeno), but a concrete and coherent definition 
is hard to come by.  Official BRV websites explain that 
endogenous development is "development from within -- by the 
community and for the community" and represents a more "human 
economy," but has no objective standards on what a "nucleus" 
looks like or how it operates  (Note: given the randomness of 
the projects approved under this model, it is likely there is 
no set definition.  End Note.)  The BRV has awarded grants 
for everything from chicken farming projects by high 
schoolers, to tropical fruit processing plants, to housing 
repair programs in disadvantaged neighborhoods.  Endogenous 
development is more of a concept than a business model.  If 
anything, it's become an umbrella justification for BRV 
support of ad hoc -- and politically correct -- projects that 
don't fit easily into other models. 
 
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Comment 
------- 
 
¶13. (SBU)  Rewarding business models based on their ideology 
versus their productivity or financial solvency is economic 
folly.  In fact, many companies are taking advantage and 
simply "re-structuring" themselves to obtain BRV benefits 
while keeping operations unchanged.  For Chavez, however, 
it's a way to play to his voter base and direct funds toward 
businesses that align to his political vision.  Of the three 
business models discussed (Cooperatives, Co-Management, and 
EPS), the future of co-management is the most uncertain, 
since too many variables in ownership structure preclude a 
sensible prediction.  EPSs, however, will likely go down the 
same familiar path that cooperatives have traveled by virtue 
of their non-hierarchical, not-for-profit structures.  The 
fact that EPSs are not rooted in law may be intentional -- it 
 
CARACAS 00001209  004 OF 004 
 
 
provides a quiet exit in case the model fails.  For now, poor 
economic decisions are sustainable only with high oil 
windfall revenue.  When that inflow slows down, the 
consequences of favoring ineffective business models will 
become all too apparent.  End Comment. 
BROWNFIELD