Chavez's oil-fed fund obscures Venezuela money trail

Special Report - Chavez's oil-fed fund obscures Venezuela money trail
ReutersBy Brian Ellsworth and Eyanir Chinea | Reuters

MACAPAIMA, Venezuela (Reuters) - The site of what may someday be
Venezuela's first newsprint factory today consists of little more than a
warehouse, several acres of cleared tropical savannah, and two
billboards bearing pictures 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 south-eastern Venezuela for the more than half a billion
dollars 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 annual report for 2011
said the project was stalled for lack of funding. A manager at the dusty
gates of the compound declined to comment. So did contractors involved.
Requests for interviews with the industry ministry, charged with
disbursing Fonden money for such projects, went unanswered.

Fonden is the largest of a handful of secretive funds that put decisions
on how to spend tens of billions of dollars in the hands of Chavez, who
has vowed to turn the OPEC nation's economy into a model of oil-financed
socialism. Since its founding seven years ago, Fonden has been
funnelling cash into hundreds of projects personally approved by Chavez
but not reviewed by Congress -- from swimming-pool renovations for
soldiers, to purchases of Russian fighter jets, to public housing and
other projects with broad popular appeal.

The fund now accounts for nearly a third of all investment in Venezuela
and half of public investment, and last year received 25 percent of
government revenue from the oil industry. All told, it has taken in
close to $100 billion (61.7 billion pounds) of Venezuela's oil revenue
in the past seven years.

Fonden attracts scant attention beyond policy experts and Wall Street
analysts. But it is at the heart of Chavez's promise to use Venezuela's
bulging oil revenue to build new industries, create jobs and diversify
the economy in the service of his self-styled revolution.

Finding out how much of that money Fonden has spent, and on what, is not
easy. The most detailed descriptions usually come from Chavez himself,
rattling off multimillion-dollar investments on television while
chatting with workers and extolling the virtues of socialism. Fonden
does not regularly release lists of projects in its portfolio.

Adversaries excoriate it as a piggy bank that lets Chavez arbitrarily
spend billions of dollars with little more than the stroke of a pen and
perhaps a celebratory Tweet, with accountability to no one. The secrecy
also makes it impossible to determine what went wrong - at Fonden, or at
the ministry level, or on the ground -- when a project like Pulpaca stalls.

"I'm shocked that we don't know exactly what has happened to $105
billion," said Carlos Ramos, an opposition legislator who has led a
campaign to extract more information about the fund from the finance
ministry. "That is not Chavez's money. That money belongs to 29 million
Venezuelans and as such the information should be available to everyone."

Critics point out that since Fonden's creation, Venezuela's economy,
rather than becoming more diversified, is even more dependent on its
mainstay: In the first half of this year, oil accounted for 96 percent
of export earnings, compared with about 80 percent 10 years ago.

The perception of secrecy has left investors unsure how to measure
Venezuela's fiscal strength. Fitch Ratings this year warned it could
downgrade the country's debt, in part because of transparency concerns.
Those same concerns are also helping push up borrowing costs. Despite
Venezuela's ample oil wealth, yields on the country's bonds are nearly
equal to those of impoverished Pakistan, and higher than war-ravaged Iraq's.

"The visible portion that we can compare in Venezuela vis-à-vis other
countries has declined considerably," said Erich Arispe, director in
Fitch Ratings Sovereign Group. "I can't rate what I can't see."

CONTROL THE PURSE STRINGS

Chavez's control over the country's purse-strings -- unprecedented for
any Venezuelan president in more than 50 years -- will be a key
advantage in his bid for re-election on October 7. Projects successfully
executed with billions of dollars in Fonden financing -- housing,
hospitals and public transportation lines -- have improved the lot of
Venezuela's poor, many of whom are already fans of Chavez's leadership.

"It's magnificent. It means we can have access to health care,
education. All of this is for the people," said Domingo Gonzalez, 58,
after being treated for hypertension at a new Caracas hospital funded by
Fonden. "People say Chavez is throwing the money away, but that's
obviously a lie, because otherwise we wouldn't have hospitals like this
one," he said at the hospital gate near the slum of Petare, where
middle-class Caracas merges with a chaotic jumble of narrow winding
streets and ramshackle homes.

At the same time, Chavez is under growing opposition fire over abandoned
or half-built projects, including some that received millions of dollars
from Fonden. A fleet of modern busses for a transit project in the city
of Barquisimeto, which received $301 million from Fonden, were left
sitting idle so long that vines started growing inside them.

Some information about Fonden's outlays can be found in annual reports
of government ministries. The finance ministry last year released a
partial list of projects, following pressure by Ramos, the opposition
legislator. A link on Fonden's website apparently dating from 2007 also
provided a partial list of projects, but was taken offline in the first
week of September. A cryptically worded internal Fonden document leaked
to the press provides an outline of its financial investments, though it
omits key details, such as losses on holdings.

Other publicly available data is provided at irregular intervals and in
formats that often do not allow for comprehensive comparisons. Public
officials pressed for additional information are as laconic as Chavez is
loquacious. A Reuters reporter at a Fonden event who approached the
finance minister -- the fund's president - to ask questions was
physically restrained by two security personnel.

CENTURY OF PLUNDER

Venezuela's public finances have never been particularly transparent,
and much of the oil industry's proceeds have been squandered for more
than 100 years.

Early 20th century dictator Juan Vicente Gomez passed out concessions to
friends while enriching himself. The country became known as "Saudi
Venezuela" during the 1970s oil boom, but corrupt politicians wasted and
stole much of the bounty, and Venezuela's economy was in ruins by the
1980s, after oil prices crashed.

Chavez's vow to direct oil revenue to the poor was music to the ears of
millions and helped propel him to the presidency in a landslide election
victory in 1998.

Fulfilling that promise required years of struggle for control of state
oil company Petroleos de Venezuela SA, a tussle that would be a major
factor in sparking a bungled 2002 coup. A two-month oil industry walkout
meant to force Chavez from power gave him the opportunity to sack
PDVSA's opposition-linked management, as well as half the company's
staff, leaving him firmly in control of oil revenue. He also sharply
raised royalties and taxes on all producers operating in Venezuela.

In 2005, as oil prices were reaching new highs, Chavez found a way to
sidestep bureaucracy and speed up spending.

Rather than creating a new state agency, Chavez founded a corporation:
National Development Fund Inc, universally known as Fonden. Its status
as a corporation owned by the finance ministry lets it disburse billions
of dollars in state money while subject to few of the reporting and
disclosure requirements that apply to government entities.

Money funnelled through Fonden is ultimately spent by government
agencies, similar to funding from Congress. But it doesn't require
congressional approval. Instead, Fonden outlays begin with Chavez's
approval and are viewed by a board of directors made up of his closest
allies.

They include Finance Minister Jorge Giordani, a septuagenarian economist
considered the brains behind the country's byzantine price and currency
controls, and Oil Minister Rafael Ramirez, who is also president of PDVSA.

Industry Minister Ricardo Menendez, who oversees the Pulpaca pulp and
paper project, also has a seat on the board, as does long-time Chavez
ally Vice President Elias Jaua.

It is not clear how often the group meets, and it does not publish
meeting minutes.

CITY OF ALUMINUM

In one of his many grand plans, Chavez has vowed to turn the geographic
centre of Venezuela, a sparsely populated savannah where lush vegetation
grows out of reddish soil, into a vibrant "City of Aluminium."

The flagship project for the plan is an Aluminium rolling mill called
Servicios de Laminacion CA, or Serlaca, in the town of Caicara.

The company's most recent annual report shows Serlaca had spent at least
$312 million on the project by 2011. A subsidiary of Italian company
Salico had been tasked with building equipment for the plant, according
to an Aluminium industry trade publication dated October 2010 posted on
Salico's website. Salico did not respond to a request for comment.

By 2011, construction of the equipment had been stalled for 18 months
for lack of funding, and the project had piled up debts with
construction contractors, according to Serlaca's annual report. A visit
last month to the site showed only a clearing with a concrete foundation
and structural skeleton for the main factory.

Two union leaders and a civil engineer interviewed at the gates of the
site said the project was moving at a snail's pace and contractors were
using their own money to keep it from grinding to a halt. They said
infighting between unions had killed seven workers since construction
began four years ago.

Complaints from the neighbouring community grew as the project remained
stalled, and Caicara's mayor accused Serlaca's president of using
company funds to advance his political career. The industry ministry in
2011 named a committee to look into the project, but Serlaca's president
- later sacked by Chavez - blocked the group's efforts.

In a televised broadcast in March from Havana, where he was receiving
treatment for cancer, Chavez complained the project was moving too
slowly and offered a plan to restart it: $500 million from Fonden.

Serlaca's current president did not respond to calls seeking details
about the additional funding.

FINANCIAL ENGINEERING, SOCIALIST STYLE

With cash rushing into Fonden faster than it can build new roads and
factories, the fund often has billions of dollars to invest in securities.

But as the leaked internal report shows, Fonden at various times bought
risky, high-yield securities in efforts to expand its resources while
helping Chavez's foreign allies. Its unusual portfolio has included
bonds issued by ally Ecuador, high-yield derivative securities issued by
Lehman Brothers, and Honduran bonds purchased to support then-President
Manuel Zelaya.

By 2008, these investments had become problematic: Lehman went bankrupt,
and Ecuador declared a partial debt default. In addition, Fonden
unloaded the Honduran bonds -- purchased at a concessionary rate of 0.75
percent -- months after buying them because Zelaya was ousted in a
military coup.

Fonden hasn't revealed whether it lost money in these operations and if
so, how much it lost. The fund sold off some of the assets and swapped
the remainder for $960 million worth of derivative securities called
structured notes, according to the internal Fonden report obtained by
Reuters.

But it offers no detail on the market value of those securities. The
report does say that Fonden's auditors pointed out that the fund had not
adequately valued some $1.8 billion in complex fixed-income securities.
That represented close to a quarter of its liquid assets of $7.9 billion
in late 2011, according to the finance ministry's latest annual report.

CASTING A WIDE NET

Government leaders bristle at the idea that Fonden is Chavez's slush
fund. But Fonden appears to have violated its own internal rules about
which investments it does and doesn't make.

A Fonden 2007 instruction sheet for agencies seeking funding says it
does not finance the purchase of buildings, vehicles or shares in
companies. But by 2010, it had disbursed nearly $700 million to buy
shares in a retailer and two cement-makers -- payments generated by
several nationalizations ordered by Chavez. It also set aside $46
million to buy an embassy building in Moscow, and $19 million to buy a
fleet of busses for use during the 2007 America's Cup soccer championships.

The president's office received almost $10 million from Fonden,
according to the leaked internal report. The office did not respond to
requests for clarification.

Fonden also gave $156 million to a social program called Mothers of the
Barrio that provides cash stipends to mothers in extreme poverty,
contradicting its stated mission to make "productive investments" that
create jobs and spur development.

The national comptroller's office noted that in 2009 it detected
"presumed irregularities" by Mothers of the Barrio, including payments
to women who were not registered in the program and did not meet the
conditions for participation. The women's ministry, which oversees the
program, did not respond to requests for comment.

Fonden has also become a conduit for financing joint projects with Cuba,
bankrolling at least $6.1 billion and disbursing at least $5.1 billion
for some of the hundreds of ventures the two allies had signed as of 2010.

Fonden does not say what the projects are.

Press releases from bilateral meetings mention only several of the
projects signed at each one, which run the gamut from a software
development firm to a scrap-metal recycling operation. An agency
overseeing the projects called the Cuba-Venezuela Joint Commission,
which reports to the oil ministry, did not respond to requests for
information.

For Pulpaca, the two billboards at the site provide details on what has
been visibly completed to date: around $43 million to clear land and
build the warehouse. Its last annual report says that as of 2011, it had
spent nearly $530 million.

On a visit in August, silence hung over the compound. Trucks and
bulldozers sat idly parked in rows. There was no sign of activity, or of
the football-field-size machines that will be needed to turn Caribbean
pine into paper.

Even so, it continues to enjoy financial support from the government.
Around the time Pulpaca said it was struggling to move forward, Congress
approved an additional $305 million for the project. That, combined with
the Fonden outlays, brings total funding to $845 million.

And that's not all. Pulpaca said in a recent presentation that it will
need $1.4 billion to complete the newsprint factory.

(Additional reporting by German Dam and Maria Ramirez in Puerto Ordaz,
and Gustavo Palencia in Tegucigalpa; editing by Kieran Murray and John
Blanton)

http://uk.news.yahoo.com/special-report-chavezs-oil-fed-fund-obscures-venezuela-110427825.html