Cablegate: Co-Management in Venezuela: The Cracks Are

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UNCLAS SECTION 01 OF 02 CARACAS 001995

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON VE
SUBJECT: CO-MANAGEMENT IN VENEZUELA: THE CRACKS ARE
STARTING TO SHOW

REF: CARACAS 1209

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Summary
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1. (SBU) In early 2005, President Chavez hailed
"co-management" (a management model that distributes company
ownership among the government, workers and/or original
owners) as a powerful initiative to make the economy more
"human" and "productive." Sixteen months later, a single
successful BRV co-managed company remains to be seen.
Invepal, an expropriated paper mill, made recent headlines
when the workers' cooperative accused the company's board of
corruption. The Minister of Light Industry and Commerce,
visibly irritated by the allegations, said that the company
would take three years to turn a profit (it's barely breaking
even today). Other companies, such as an aluminum and steel
plant, a sugar mill and a valve factory, are either awaiting
legal hurdles to adopt the co-management model or are not yet
operating months after their restructuring. The BRV, blaming
"red tape" for the delays, is proposing legal reforms that
would make it easier to apply the co-management structure to
ailing private companies. The BRV's play to blue-collar
workers -- promising them a stake in the company and job
security -- is starting to backfire, as the co-management
model fails to deliver. End summary.

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Scandal in a paper mill
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2. (SBU) In January 2005, President Chavez expropriated
Venepal, a paper mill in Carabobo state that filed for
bankruptcy in 2004, and hailed it would be reopened as a
"co-managed" firm. He added that "the success of the
co-management model is dependent on Invepal's success."
(Note: Co-management is not a clearly defined term, but
generally means a company that is co-owned by the government,
workers, and/or original owners. End Note.) With a USD 6.1
million capital infusion, the BRV renamed the mill Invepal
and assumed 51 percent ownership, leaving 49 percent to
workers organized under the company's cooperative, Covinpa.
The company currently employs 620 workers (capacity is 2,000)
and as of May 2006, reportedly earned USD 511,267 in profits
with a sales revenue of USD 10.4 million (50 percent of sales
are to the public sector).

3. (SBU) On June 21, the President of Covinpa, Ramon
Lagardera, announced that the company's former board
(majority BRV, minority Covinpa) had "lost" USD 418,000 and
was responsible for multiple "irregularities." The Minister
of Light Industry and Commerce (MILCO), Maria Cristina
Iglesias (also former Minister of Labor), took visible
offense to the allegations, declaring that Lagardera "perhaps
doesn't understand what co-management means," and that she
had seen no proof of corruption. Months ago, the prior board
financed three audits (costing the large sum of USD 45,000),
which Lagardera said came from money to renovate the
company's chemical lab. The results of the audits have not
been disclosed, and current Covinpa board members say they've
never received a company financial statement. SUNACOOP, the
Superintendency for Cooperatives, confirmed on June 27 that
during a November 2005 spot audit they discovered
"administrative irregularities" in Covinpa.

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Does successful co-management exist?
------------------------------------

4. (SBU) According to MILCO, 139 companies adopted the
co-management model in 2005 (there are around 260 total
according to legal experts), and six are co-owned by the BRV,
but none are visible success stories. Alcasa, the aluminum
processing plant hailed as the flagship example of
co-management, reported losses of USD 56.7 million in 2005
(despite a USD 210 million BRV investment) and vicious
infighting on the board has prompted an unhappy and
politicized worker base. Invetex (formerly Hilanderia
Tinaquillo), a textile mill, turned to co-management in May

CARACAS 00001995 002 OF 002

2005, when the BRV provided USD 1.6 million to re-open the
plant. The original owners, the Mishkin family, kept 49
percent of shares with an agreement to let workers
participate in plant management. Over a year later, the
plant is not yet operational, and the Mishkins nearly
abandoned the venture when SENIAT, the Customs and Tax
Agency, kept delaying a tax exemption due to them based on
their adoption of the co-management model.

5. (SBU) Other high-profile co-management attempts, such as
the Sideroca steel plant in Zulia, the Inveval valve factory
in Miranda, and the Cumanacoa Sugar Mill in Sucre, have
either underperformed or are awaiting the culmination of
legal processes allowing the switch to co-management (Ref A).
On June 23, Vice-President Rangel announced the purchase of
two Parmalat dairy plants. The National Assembly, after
reading a report on the plants, suggested forming worker
cooperatives and operating under co-management. (Note:
reportedly, these plants are already problematic -- one
cannot ensure a steady supply of raw materials and the other
has significant employee productivity issues. End Note.)

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Blame for underperformance
--------------------------

6. (SBU) To account for Invepal's poor performance, Iglesias
declared publicly that MILCO had "planned it that way" and
that the company wouldn't show profits until the third year
of operation. Other BRV officials often blame overly
bureacratic regulations for delays -- MILCO has suggested
reforming the Commerce Code to make it easier for the BRV to
take control of bankrupt companies. In May 2006, Chavez
decreed a change to the Organic Labor Law so that companies
would be subject to co-management if they fired a large
number of workers based on economic difficulty. Prior to the
decree, companies usually turned to co-management only after
declaring complete bankruptcy or shuttering operations.

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Comment
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7. (SBU) In February 2005, Chavez said that co-management
would bring forth a "human, social, productive, and
egalitarian economy." Sixteen months later, Invepal is
embroiled in a corruption scandal and is only breaking even.
Though many co-managed companies nationwide are operating,
none co-owned by the BRV seem to be proving successful. If
there are examples of successful co-management without the
BRV, none have been publicly acclaimed. The "threat" of
applying co-management forcefully has hampered the private
sector's freedom to declare bankruptcy or fire workers. As
with other "Bolivarian" business models (such as cooperatives
and Social Production Enterprises), productivity,
sustainability and positive revenues seem to be secondary
concerns for the BRV, which just keeps pumping money into
enterprises based on their "pro-worker" management structure
and social development model. In BRV co-management, the
cracks are starting to show. End Comment.
BROWNFIELD

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