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DE RUEHCV #0470/01 0641822
ZNR UUUUU ZZH
R 051822Z MAR 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 8012
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE
RUEHRC/DEPT OF AGRICULTURE USD FAS

UNCLAS SECTION 01 OF 04 CARACAS 000470 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
 
E.O. 12958: N/A 
TAGS: EAGR ECON PGOV VE
SUBJECT: FOOD SECURITY IN THE BRV: MERCAL'S WOES 
 
REF: A. 05 CARACAS 00578 
     ¶B. 06 CARACAS 01897 
     ¶C. CARACAS 404 
 
¶1.  (SBU) Summary:  Mission Mercal, the BRV's subsidized food 
distribution network, is plagued with corruption, 
inefficiency, and mismanagement.  Shortages in basic staples 
have developed in large part because Mercal has fallen 2-3 
months behind in imports.  Once the poster child of the BRV's 
mission program, Mercal's popularity has plummeted from over 
90 percent to 64 percent and is reaching fewer Venezuelans 
with fewer products.  Chavez realizes that he needs Mercal in 
order to maintain his government's popularity.  Rather than 
tackle the hard questions of economic distortions and 
inefficiencies, Chavez will most certainly pump money into 
Mercal until the shelves are re-stocked, regardless of the 
real economic cost and waste.  It is unclear in the longer 
run whether the Mercal program can recoup its prior 
popularity and level of distribution, given the BRV's 
increasing financial commitments in all areas and lower 
average oil prices.  End Summary. 
 
¶2.  (SBU) Mercal had earned high marks from Venezuelans as 
the BRV's most popular mission.  Customer satisfaction, as 
measured by the consulting firm Datanalysis, reached above 90 
percent in early 2006.  There were also indications that the 
low-cost food chain had penetrated middle-class neighborhoods 
(Reftel B).  According to a recent survey by Datanalysis in 
January 2007, Mercal's popularity has dropped from 74 percent 
to 64 percent in only five months.  Luis Vicente Leon, 
Director of Datanalysis, said that the reasons for the steep 
drop were shortages of basic foods. 
 
¶3.  (SBU) Statistical trends show a downward slope in 
Mercal's efficiency; it is distributing less food to fewer 
customers.  According to statistics of the Ministry of 
People's Power of Food (MINPPAL), the number of Venezuelans 
served by Mercal dropped from over 15 million to under 10 
million from 2005-2006, a 41.5 percent decline.  Since April 
2006, food sales at Mercal have steadily declined and 
November 2006 sales totaled half of those in April 2006. 
 
--------------------- 
Econoffs visit Mercal 
--------------------- 
 
¶4.  (SBU) Econoffs recently visited seven Mercals for a 
firsthand look in low and low-middle income areas of Caracas. 
 Mercal customers can expect to find shortages in basic 
staples.  It would be impossible to prepare even the most 
basic meal with the selection available at a Mercal. 
Chicken, eggs and milk were not available in any of the seven 
stores we visited.  Pasta, black beans and sugar --all 
Venezuelan staples -- were available in only two stores.  In 
one store that had sugar, there were 75-100 customers waiting 
outside on a slowly moving line.  When econoffs were driving 
through Caracas and asked a man on the street where the 
nearest Mercal was, he pointed over his shoulder but 
cautioned, "Don't go to that one because there's nothing 
there!"  He then suggested econoffs head back to the store we 
had just visited, which also had a meager selection. 
Consistent with econoffs' experiences, the daily newspaper El 
Universal reported recently that customers complain when 
milk, sugar, and chicken are actually available, "everyone 
tells everyone" and the merchandise immediately disappears. 
 
 
------------------- 
What about Imports? 
------------------- 
 
¶5.  (U) One explanation for Mercal's shortages is lack of 
imports.  According to El Universal, a source in MINPPAL said 
that CASA, Mercal's purchasing arm, has not executed a single 
import in the past three months, dating back to a sugar 
shipment received in November 2006.  The report notes that, 
prior to this shipment, other imports such as milk, chicken, 
and beans, were paralyzed.  (Note: An estimated 68-70 percent 
of food consumed in Venezuela is imported or processed from 
imported raw materials.  End Note.)  Though Chavez has 
stressed the importance of making Venezuela less reliant on 
foreign products, Mercal still claims to import about 30 
percent of its merchandise, though the actual figure is 
probably closer to 70 percent. 
 
¶6.  (SBU) Purchases for foodstuffs on the international 
market are generally executed as forward contracts 2-3 months 
 
CARACAS 00000470  002 OF 004 
 
 
in advance of delivery.  This makes it difficult to quickly 
import in an emergency if shortages develop.  According to a 
contact within the Venezuelan Association of Rice Millers, 
the former Minister at MINPPAL, Erika Farias, did not 
understand how forward contracts worked.  Our source 
described Farias as "a 23 year old totally in over her head." 
 She said there was no rice on Mercal's shelves because no 
purchase orders had been placed in the past two months. 
 
¶7.  (SBU) A shipping executive confirmed to econoff CASA's 
sharp decline in imports, indicating that the main reason was 
failure to execute forward contracts.  According to this 
executive, CASA typically imports 140,000 tons of food per 
month.  In November 2006, the number dropped to 55,000 tons 
and dipped even further to 40,000 tons in December.  From 
September to December 2006, CASA did not execute any forward 
contracts to purchase food and, consequently, fell three 
months behind in purchase orders. 
 
¶8.  (SBU) On February 25, MINPPAL provided rare public 
statistics for CASA and Mercal.  While designed to show CASA 
is on the mend, these numbers actually confirmed CASA's 
import problems.  CASA has recently increased its daily 
supply to Mercal from 1,400 tons of food to 4,000 tons. 
Assuming a 30-day month, this means that CASA had been 
supplying Mercal only 42,000 tons of food monthly, which 
tracks the statistics we received regarding CASA's sharp 
decline in imports (see paragraph 7). 
 
--------------------------------- 
Buhoneros: The Cause of All Evil? 
--------------------------------- 
 
¶9.  (U) Another cause for the shortages is that buhoneros 
(street merchants) buy Mercal products in short supply at 
subsidized prices and re-sell them at several times the 
Mercal price.  We have heard that some buhoneros are tapped 
into the institutionalized fraud in Mercal and can obtain the 
products before they ever reach the stores.  In a recent 
speech, Chavez complained that street merchants were selling 
Mercal products at high prices and warned, "This is one of 
the accusations and we need to attack it."  Chavez announced 
a decree banning CASA products from being sold outside of the 
Mercal chain.  In a recent report on Mercal in the Chavista 
newspaper "Vea," street merchants were made scapegoats for 
supply and distribution problems and portrayed as greedy 
"capitalists."  A Mercal supervisor is quoted as saying, "I 
don't think that any real Mercal leader - really involved in 
the Mission and its essence - would hoard food.  We know that 
there are businesspeople who prefQto fill their bags at the 
expense of others' necessity.  It's this type of corruption 
that we need to fight against." 
 
------------------ 
The BRV's Reaction 
------------------ 
 
¶10.  (SBU) Chavez is clearly concerned about Mercal.  On 
February 27 during his daily "Alo Presidente," he announced a 
USD 278 million package to support Mercal.  On January 27, 
Chavez called on Farias to make a "superhuman effort" to 
improve Mercal.  Chavez appeared genuinely upset and puzzled, 
as he questioned, "How is it that Mercal is distributing less 
than before?"  Two days after Chavez criticized Farias, he 
replaced her with General Rafael Oropeza as Minister at 
MINPPAL and Omar Duarte, also a military man, took the reins 
of CASA.  Oropeza and Duarte previously worked together in 
the same positions from 2004-2006, during Mercal's period of 
expansion.  Oropeza said that Mercal's problem was not at the 
point of sale and that shortages were attributable to "other 
causes" in the Mercal system.  Mercal has recently launched 
an initiative of selling CASA products from small stands 
within urban markets that has already drawn the ire of 
established merchants. 
 
¶11.  (SBU) The BRV has tried to counter criticism of Mercal 
and, in doing so, has tongue-tied itself in double-speak. 
Over the first weekend in February, MINPPAL organized an 
"outside market" for Mercal products, known as "Megamercal." 
Vice President Jorge Rodriguez visited the market and took 
the opportunity to turn it into a propaganda event, 
proclaiming "this market is the proof that there are no 
shortages.  We have sold 50 thousand kilos of chicken and 
have the capacity to sell 50 thousand more."  In a separate 
statement, Interior Minister Pedro Carreno contradicted 
Rodriguez, saying the BRV would investigate hoarding.  Last 
week, Chavez signed the first decree under the Enabling Law 
 
CARACAS 00000470  003 OF 004 
 
 
to criminalize hoarding in price-regulated products (Reftel 
C). 
 
--------------------------------------------- --------- 
The Industry's Viewpoint: Corruption and Mismanagement 
--------------------------------------------- --------- 
 
¶12.  (SBU) Corruption has reportedly become rampant in the 
Mercal system.  In November 2006, Ramon Rengifo, the sole 
opposition member of the Legislative Council of Aragua State, 
denounced corruption in Mercal.  He estimated loss through 
fraud at Bs 6 billion (approximately USD 2.9 million) between 
September 2005 and January 2006.  "There are many 
administrative people in Mercal that are involved because 
they think that it is their patrimony because the President 
says so," said Rengifo.  Rengifo said that the investigation 
was being handled by Mercal's internal auditors and was in 
the hands of the BRV's general accounting office, without any 
answers to date. 
 
¶13.  (SBU) Agricultural Counselor and econoff met separately 
with Jose Anzola, Director of Food Logistics at Empresas 
Polar, Venezuela's largest private food distributor, and 
Jorge Macedo, President of Central Madeirense, Venezuela's 
largest supermarket chain.  Both Anzola and Macedo told us 
that the biggest problem in Mercal is pervasive corruption 
and incompetence on every level, beginning with the 
hopelessly incompetent former MINPPAL Minister Farias. 
Anzola estimated that corruption and inefficient management 
cost Mercal approximately 30 percent of revenue.  He also 
said that Mercal's inability to import stemmed from 
mismanagement and CASA's inability to pay suppliers and 
producers on a timely basis.  Macedo agreed that Mercal was 
hopelessly inefficient and corrupt and told us that entire 
truckloads of deliveries often never arrive at the Mercal 
stores and are entirely sold off by employees and 
occasionally, the National Guard. 
 
¶14.  (SBU) Anzola and Macedo both expected the BRV to 
continue to pump money into Mercal.  When asked if Mercal 
would recover, both Anzola and Macedo concluded that it has 
to, for Chavez' sake.  They anticipated that Chavez would 
continue to throw money at Mercal until the system regained 
its function, or rather, seemed to function.  Macedo, 
however, expressed skepticism that Mercal's popularity would 
ever climb back to the 90 percent range.  He argued that 
while Mercal benefited from its originality and rock-bottom 
prices, Venezuelan customers preferred supermarkets for 
better service, air-conditioning, product selection, and 
brand name availability. 
 
¶15.  (SBU) While agreeing that providing low-cost food to the 
poor is a worthy social goal, Anzola took issue with the 
politicized way that the BRV has gone about the project.  He 
cited, for example, the prevalence of the military in Mercal 
and CASA management as opposed to experienced purchasers with 
private sector backgrounds.  (Note: As we previously 
reported, Chavez has publicly welcomed Cuban participation in 
Mercal.  During an April 2006 "Alo Presidente," Chavez said 
that Mercal existed thanks to the help of Cuban experts 
(Reftels).  End Note.) 
 
------- 
Comment 
------- 
 
¶16.  (SBU) Mercal's woes are indicative of the "black box" 
economics of the BRV.  Mismanagement and corruption siphon 
off money and goods as they move through the system, with 
neither institutional transparency nor individual 
accountability to control the process.  The end product is 
less than the sum of its parts, resulting in waste and 
economic distortions.  Disciplined economics would suggest 
that the BRV try to understand the root causes of Mercal's 
problems - corruption, mismanagement, and retrograde pricing 
policies.  The more likely outcome is that Chavez will keep 
pumping money into Mercal until there is food on the shelves, 
regardless of the program's real cost.  An approval rating 
for a program that offers cheap food hovering at 60 percent 
is indicative of a serious problem.  Consumers' inability to 
buy staple products because Mercal cannot stock its shelves 
is a major embarrassment to the BRV and Chavez has taken this 
personally.  Mercal needs to deliver the goods - literally - 
for Chavista propaganda to continue to resonate.  With lower 
average oil prices and ballooning BRV commitments, the 
long-term sustainability of Mercal is a major question mark. 
 
 
CARACAS 00000470  004 OF 004 
 
 
 
BROWNFIELD