VENEZUELA

The president’s secretive fund showers billions of dollars in oil revenue on projects that cheer voters, but raise questions about where the money is going Chavez’s murk y spending spree

By Brian Ellsworth and Eyanir Chinea MACAPAIMA, Venezuela, September 26, 2012

UNFINISHED BUSINESS: A warehouse amid cleared scrub is about all there is to show for the hundreds of millions of dollars President Hugo Chavez’s secretive Fonden fund has committed to a pulp and paper factory in central Venezuela. /stringer

SPECIAL REPORT 1 VENEZUELA Chavez’s murky spending spree

he site of what may someday be Venezuela’s first newsprint factory Ttoday consists of little more than a warehouse, several acres of cleared tropical savannah, and two billboards bearing pic- tures of President Hugo Chavez. More than five years after Chavez first hailed state-owned Pulpa y Papel CA as a vanguard “socialist business,” there is little else to show here in rural southeastern Ven- ezuela for the more than half a billion dol- lars that state investment fund Fonden set aside for the project. As with many Fonden investments, tracking the money sent to Pulpaca, as the project is known, is difficult. A Pulpaca an- nual report for 2011 said the project was stalled for lack of funding. A manager at the dusty gates of the compound declined REVOLUTIONARY ROAD: President Chavez touts Fonden as a means of using Venezuela’s oil revenue to comment. So did contractors involved. to achieve socialist ends; critics see it as a slush fund for buying off the electorate and indulging his Requests for interviews with the industry whims. REUTERS/Miraflores Palace/Handout ministry, charged with disbursing Fonden money for such projects, went unanswered. Fonden is the largest of a handful of my in the service of his self-styled revolution. ministry. “That is not Chavez’s money. That secretive funds that put decisions on how Finding out how much of that money money belongs to 29 million Venezuelans to spend tens of billions of dollars in the Fonden has spent, and on what, is not easy. and as such the information should be hands of Chavez, who has vowed to turn The most detailed descriptions usually come available to everyone.” the OPEC nation’s economy into a model from Chavez himself, rattling off multimil- Critics point out that since Fonden’s of oil-financed socialism. Since its founding lion-dollar investments on television while creation, Venezuela’s economy, rather than seven years ago, Fonden has been funneling chatting with workers and extolling the vir- becoming more diversified, is even more cash into hundreds of projects personally tues of socialism. Fonden does not regularly dependent on its mainstay: In the first half approved by Chavez but not reviewed by release lists of projects in its portfolio. of this year, oil accounted for 96 percent of Congress - from swimming-pool renova- export earnings, compared with about 80 no accountability tions for soldiers, to purchases of Russian percent 10 years ago. fighter jets, to public housing and other Adversaries excoriate it as a piggy bank The perception of secrecy has left inves- projects with broad popular appeal. that lets Chavez arbitrarily spend billions tors unsure how to measure Venezuela’s fis- The fund now accounts for nearly a third of dollars with little more than the stroke cal strength. Fitch Ratings this year warned of all investment in Venezuela and half of of a pen and perhaps a celebratory Tweet, it could downgrade the country’s debt, in public investment, and last year received 25 with accountability to no one. The secrecy part because of transparency concerns. Those percent of government revenue from the oil also makes it impossible to determine what same concerns are also helping push up bor- industry. All told, it has taken in close to went wrong – at Fonden, or at the ministry rowing costs. Despite Venezuela’s ample oil $100 billion of Venezuela’s oil revenue in level, or on the ground - when a project like wealth, yields on the country’s bonds are the past seven years. Pulpaca stalls. nearly equal to those of impoverished Paki- Fonden attracts scant attention beyond “I’m shocked that we don’t know ex- stan, and higher than war-ravaged Iraq’s. policy experts and Wall Street analysts. But actly what has happened to $105 billion,” “The visible portion that we can com- it is at the heart of Chavez’s promise to use said Carlos Ramos, an opposition legislator pare in Venezuela vis-à-vis other coun- Venezuela’s bulging oil revenue to build new who has led a campaign to extract more in- tries has declined considerably,” said Erich industries, create jobs and diversify the econo- formation about the fund from the finance Arispe, director in Fitch Ratings Sovereign

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BANG FOR BUCKS: Fighter jets like these Russian Sukhoi Su-30s are among the purchases Chavez has made through Fonden, without approval from Venezuela’s Congres. REUTERS/Jorge Silva

Group. “I can’t rate what I can’t see.” apparently dating from 2007 also provided Chavez’s control over the country’s a partial list of projects, but was taken of- purse-strings - unprecedented for any Ven- fline in the first week of September. A cryp- ezuelan president in more than 50 years tically worded internal Fonden document - will be a key advantage in his bid for 25% Percentage of Venezuela’s oil leaked to the press provides an outline of its re-election on Oct. 7. Projects successfully financial investments, though it omits key executed with billions of dollars in Fonden revenue last year that went details, such as losses on holdings. financing – housing, hospitals and public to Chavez’s Fonden national Other publicly available data is pro- transportation lines - have improved the investment fund vided at irregular intervals and in formats lot of Venezuela’s poor, many of whom are that often do not allow for comprehensive already fans of Chavez’s leadership. comparisons. Public officials pressed for “It’s magnificent. It means we can have ing opposition fire over abandoned or half- additional information are as laconic as access to health care, education. All of this built projects, including some that received Chavez is loquacious. A Reuters reporter is for the people,” said Domingo Gonzalez, millions of dollars from Fonden. A fleet of at a Fonden event who approached the fi- 58, after being treated for hypertension at modern busses for a transit project in the city nance minister - the fund’s president – to a new Caracas hospital funded by Fonden. of Barquisimeto, which received $301 mil- ask questions was physically restrained by “People say Chavez is throwing the money lion from Fonden, were left sitting idle so two security personnel. away, but that’s obviously a lie, because oth- long that vines started growing inside them. Venezuela’s public finances have never erwise we wouldn’t have hospitals like this Some information about Fonden’s out- been particularly transparent, and much one,” he said at the hospital gate near the lays can be found in annual reports of gov- of the oil industry’s proceeds have been slum of Petare, where middle-class Cara- ernment ministries. The finance ministry squandered for more than 100 years. cas merges with a chaotic jumble of narrow last year released a partial list of projects, Early 20th century dictator Juan Vicen- winding streets and ramshackle homes. following pressure by Ramos, the opposi- te Gomez passed out concessions to friends At the same time, Chavez is under grow- tion legislator. A link on Fonden’s website while enriching himself. The country be-

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came known as “Saudi Venezuela” during also has a seat on the board, as does long-time his political career. The industry ministry in the 1970s oil boom, but corrupt politicians Chavez ally Vice President Elias Jaua. 2011 named a committee to look into the wasted and stole much of the bounty, and It is not clear how often the group meets, project, but Serlaca’s president – later sacked Venezuela’s economy was in ruins by the and it does not publish meeting minutes. by Chavez – blocked the group’s efforts. 1980s, after oil prices crashed. In one of his many grand plans, Chavez In a televised broadcast in March from Chavez’s vow to direct oil revenue to the has vowed to turn the geographic center of Havana, where he was receiving treatment poor was music to the ears of millions and Venezuela, a sparsely populated savannah for cancer, Chavez complained the project helped propel him to the presidency in a where lush vegetation grows out of reddish was moving too slowly and offered a plan to landslide election victory in 1998. soil, into a vibrant “City of Aluminum.” restart it: $500 million from Fonden. Fulfilling that promise required years of The flagship project for the plan is an alu- Serlaca’s current president did not re- struggle for control of state oil company minum rolling mill called Servicios de Lami- spond to calls seeking details about the ad- Petroleos de Venezuela SA, a tussle that nacion CA, or Serlaca, in the town of Caicara. ditional funding. would be a major factor in sparking a bun- The company’s most recent annual re- With cash rushing into Fonden faster gled 2002 coup. A two-month oil industry port shows Serlaca had spent at least $312 than it can build new roads and factories, walkout meant to force Chavez from power million on the project by 2011. A subsidiary the fund often has billions of dollars to in- gave him the opportunity to sack PDVSA’s of Italian company Salico had been tasked vest in securities. opposition-linked management, as well as with building equipment for the plant, ac- But as the leaked internal report shows, half the company’s staff, leaving him firmly cording to an aluminum industry trade Fonden at various times bought risky, high- in control of oil revenue. He also sharply publication dated October 2010 posted on yield securities in efforts to expand its re- raised royalties and taxes on all producers sources while helping Chavez’s foreign operating in Venezuela. Fonden at various times bought allies. Its unusual portfolio has included In 2005, as oil prices were reaching new risky, high-yield securities in bonds issued by ally Ecuador, high-yield highs, Chavez found a way to sidestep bu- efforts to expand its resources derivative securities issued by Lehman reaucracy and speed up spending. while helping Chavez’s foreign Brothers, and Honduran bonds purchased Rather than creating a new state agen- allies Ecuador and . to support then-President Manuel Zelaya. cy, Chavez founded a corporation: Na- By 2008, these investments had become tional Development Fund Inc, universally problematic: Lehman went bankrupt, and known as Fonden. Its status as a corpora- Salico’s website. Salico did not respond to a Ecuador declared a partial debt default. In tion owned by the finance ministry lets it request for comment. addition, Fonden unloaded the Honduran disburse billions of dollars in state money By 2011, construction of the equipment bonds - purchased at a concessionary rate of while subject to few of the reporting and had been stalled for 18 months for lack of 0.75 percent - months after buying them be- disclosure requirements that apply to gov- funding, and the project had piled up debts cause Zelaya was ousted in a military coup. ernment entities. with construction contractors, according to Fonden hasn’t revealed whether it lost Money funneled through Fonden is Serlaca’s annual report. A visit last month money in these operations and if so, how ultimately spent by government agencies, to the site showed only a clearing with a much it lost. The fund sold off some of the similar to funding from Congress. But it concrete foundation and structural skeleton assets and swapped the remainder for $960 doesn’t require congressional approval. In- for the main factory. million worth of derivative securities called stead, Fonden outlays begin with Chavez’s Two union leaders and a civil engineer structured notes, according to the internal approval and are viewed by a board of di- interviewed at the gates of the site said the Fonden report obtained by Reuters. rectors made up of his closest allies. project was moving at a snail’s pace and con- But it offers no detail on the market value They include Finance Minister Jorge tractors were using their own money to keep of those securities. The report does say that Giordani, a septuagenarian economist it from grinding to a halt. They said infight- Fonden’s auditors pointed out that the fund considered the brains behind the country’s ing between unions had killed seven workers had not adequately valued some $1.8 billion byzantine price and currency controls, and since construction began four years ago. in complex fixed-income securities. That Oil Minister Rafael Ramirez, who is also Complaints from the neighboring com- represented close to a quarter of its liquid president of PDVSA. munity grew as the project remained stalled, assets of $7.9 billion in late 2011, according Industry Minister Ricardo Menendez, who and Caicara’s mayor accused Serlaca’s presi- to the finance ministry’s latest annual report. oversees the Pulpaca pulp and paper project, dent of using company funds to advance Government leaders bristle at the idea

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that Fonden is Chavez’s slush fund. But tered in the program and did not meet the idly parked in rows. There was no sign of Fonden appears to have violated its own conditions for participation. The women’s activity, or of the football-field-size ma- internal rules about which investments it ministry, which oversees the program, did chines that will be needed to turn Carib- does and doesn’t make. not respond to requests for comment. bean pine into paper. A Fonden 2007 instruction sheet for Fonden has also become a conduit for Even so, it continues to enjoy financial agencies seeking funding says it does not financing joint projects with , bank- support from the government. Around the finance the purchase of buildings, vehicles rolling at least $6.1 billion and disbursing time Pulpaca said it was struggling to move or shares in companies. But by 2010, it had at least $5.1 billion for some of the hun- forward, Congress approved an additional disbursed nearly $700 million to buy shares dreds of ventures the two allies had signed $305 million for the project. That, com- in a retailer and two cement-makers - pay- as of 2010. bined with the Fonden outlays, brings total ments generated by several nationaliza- Fonden does not say what the projects are. funding to $845 million. tions ordered by Chavez. It also set aside And that’s not all. Pulpaca said in a re- Software to scrap metal $46 million to buy an embassy building in cent presentation that it will need $1.4 bil- Moscow, and $19 million to buy a fleet of Press releases from bilateral meetings lion to complete the newsprint factory. busses for use during the 2007 America’s mention only several of the projects signed Cup soccer championships. at each one, which run the gamut from a Additional reporting by German Dam and The president’s office received almost software development firm to a scrap-metal Maria Ramirez in Puerto Ordaz, and Gustavo $10 million from Fonden, according to the recycling operation. An agency overseeing Palencia in ; editing by Kieran leaked internal report. The office did not re- the projects called the Cuba-Venezuela Murray and John Blanton spond to requests for clarification. Joint Commission, which reports to the oil Fonden also gave $156 million to a so- ministry, did not respond to requests for cial program called Mothers of the Barrio information. FOR MORE INFORMATION that provides cash stipends to mothers in For Pulpaca, the two billboards at the Brian Ellsworth extreme poverty, contradicting its stated site provide details on what has been visibly [email protected] mission to make “productive investments” completed to date: around $43 million to Eyanir Chinea that create jobs and spur development. clear land and build the warehouse. Its last [email protected] The national comptroller’s office noted annual report says that as of 2011, it had John Blanton, Enterprise Desk Editor that in 2009 it detected “presumed irregu- spent nearly $530 million. [email protected] larities” by Mothers of the Barrio, including On a visit in August, silence hung over Michael Williams, Global Enterprise Editor payments to women who were not regis- the compound. Trucks and bulldozers sat [email protected]

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