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Down the toilet; where did Venezuela's loan money go?


If you want to understand how LatinAmerica spent $365 billion in foreign loans, go visit the restroom of any public building in Venezuela. During the borrowing boom of the 1970s, then-President Carlos Andres Perez used the money foreign banks loaned his country to finance a unique employment program. He decreed that every public bathroom have an attendant. Forget that the program does nothing for Venezuela's economy; think hygiene and public relations: hand-towels courtesy of Citicorp.

The amount of money Latin America hasthrown down the toilet in recent years is staggering. Equally amazing, few people--borrowers or lenders--seem to know where the billions went. The Reagan administration doesn't have a handle on the problem either, judging by its latest plan for easing the debt crisis. Treasury Secretary James Baker's much-heralded proposal calls for $29 billion in international lending to Latin American governments that reduce their public sectors through privatization. The truth is that the private sector is nearly as responsible for the debt problem as any government. In Venezuela, about half of the country's $33.5 billion in foreign debt was originally lent to the private sector. International bankers and businessmen are extremely reluctant to make more loans to Latin America. Those willing to do so want Third World governments to be involved in loans to private companies, so that the lenders will be protected if the loans go sour. Baker's approach will not solve Latin America's financial woes. Any hope of doing that begins with a look at where the money went.

$100 million park

At first glance it seems Venezuela should haveavoided going deeply into debt. It has been called a democracy since 1959, complete--on paper at least--with the checks and balances that might rein in excessive spending. It exports oil. And it did spend a portion of its foreign loans wisely. It built the Guri Dam, which will generate more hydroelectric power than almost any dam in the world, providing the country with a cheap energy source. Venezuela used foreign money to modernize the three state aluminum companies, which now operate at full capacity and are an important source of foreign exchange. Foreign loans also built the Caracas Metro, among the cleanest and most efficient in the world. Nevertheless, Venezuela has amassed the fourth largest unpaid debt in the region, behind Brazil, Mexico, and Argentina.

The groundwork for the debt crisis inVenezuela--and around the world--was laid in 1973, when world oil prices quadrupled. Initially, Venezuela was awash in cash; its oil revenues soared to $10.8 billion in 1974 from less than $5 billion the year before. The money gave Perez, who became president in February 1974, enough funds to meet his ambitious plans to finance roads, electric power plants, sewers, bridges, schools, hospitals, and scores of other projects. The government committed itself to bigger and bigger outlays. Especially important was the centerpiece of Perez's economic policy: a massive five-year Fifth National Plan. The plan, scheduled to begin in 1977, called for spending billions of dollars to exploit the nation's abundant natural resources and industrialize the economy. But by 1976, oil income had leveled off. Without the revenue to pay for the plan, Perez decided to finance his dream with foreign capital, a decision international bankers eagerly endorsed. At the time, bankers, many with no international lending experience, were swarming Venezuela with open checkbooks. In October 1976, a group of foreign banks lent $1 billion to the Venezuelan government. Soon they were back lending to a host of state agencies. From 1976 to 1978, Venezuela's public-sector foreign debt more than quadrupled to $7.2 billion. The Perez government began to sink the money into vast building projects, many of which had been planned by Centro Simon Bolivar (CSB), a government housing agency. One CSB project called for building a giant high-rise apartment and shopping complex in downtown Caracas. The design for the project was a duplicate of a nearby CSB complex called the Parque Central, but CSB spent millions of dollars to draw up plans again. Then after work had begun, the blueprints were repeatedly changed. "Changing the plans meant new billings,' explains a former CSB official. "They did this just so some people could make a lot of money. I've never seen such theft in my life.'

Altogether, CSB spent an estimated $100million in foreign loans on the site. A foundation solid enough to support a 100-story tower was constructed, but no structure was put up. Today, the high-rise site is still an empty pit. After a decade of inactivity, construction crews have recently returned. Their purpose, however, is not to put up a building. A sign at the site proudly proclaims it will become a park. "That's going to be the world's most expensive park,' says the ex-CSB official.

Boondoggles like this abound. Near the parkstands the Teatro Teresa Carreno, Venezuela's artistic pride and joy. The project was supposed to take four years to build and cost $100 million. Because of delays and design changes, it took ten years and cost at least $500 million. In 1981, the National Housing Institute was supposed to have financed the construction of 100,716 low-cost housing units, according to a report by the Venezuelan comptroller general. By November of that year only 14,366 apartments had been built. This kind of "efficiency' helps explain why today, the National Housing Institute has a $490 million foreign debt.

These mistakes piled up because governmenttechnocrats at the state agencies that managed the projects were inexperienced and corrupt. The central government, for its part, ignored the technocrats' squandering of so much money. "Throughout the [debt years], there was an evident lack of supervision and analysis on whether the funds were needed and how they were used,' says a former high ranking finance ministry official. "There was no planning, no one charting the direction we should head.'

Lack of accountability is built into Venezuela'spolitical system. Though Venezuelans have voted for their president and congressional representatives every five years since 1959, these free elections mask as almost total lack of checks and balances. Power is concentrated in the president, who has extraordinary statutory powers to rule by decree. The congress, which could be a countervailing force, rarely is. The tradition of support for the strong man, or caudillo, is deeply ingrained in Venezuelan culture. As for judicial review, forget it. The courts are heavily politicized, with judges appointed by, and acting at the behest of, the president or party leaders. Aside from a somewhat independent but powerless comptroller general, government oversight in Venezuela is non-existent.

Rather than demanding a role in charting thegovernment's expenditures, the Venezuelan congress was content to make laws that only gave the appearance of oversight. For instance, at Perez's behest, the congress passed a law requiring that government loans of more than one year have congressional approval. But it contained a massive loophole: state agencies could still get loans for less than one year without congressional approval. Not surprisingly, the dozens of state-owned institutes and companies took advantage of the measure by borrowing short-term for long-term projects.

That was fine with international bankers; theiroil-rich Middle-Eastern depositors insisted on making only short-term deposits. No one--not the banks, not the central government--was keeping track of how much money hundreds of international banks were lending to the dozens of independent state agencies. Bankers who had qualms about this told themselves that if the agencies to which they lent money couldn't pay off their loans, the central government would bail them out. "You would lend to Sidor (the state steel company) thinking that the Republic of Venezuela would guarantee payment if Sidor went bankrupt,' says V.E. Smallman, Mellon Bank's representative. "A lot of loans were made with the idea that countries don't go bankrupt.'

Cake mix capitalism

Perez sought to increase his popularity byfreezing the prices that utilities and other independent state agencies charged customers, even though investment and payroll costs were soaring. Although subsidizing the cost of food, water, and electricity made Perez popular, by 1978 the focus of the country's borrowing had shifted from modernizing infrastructure to covering operating deficits.

A case in point is Corpomercadeo (CMA), thestate agency created in 1971 to oversee the country's food production. CMA borrowed heavily from abroad to finance food imports and to subsidize food prices. This policy came at the expense of local agriculture, which was neglected in the rush to import. Once self-sufficient, Venezuela today imports about 50 percent of its food. "I couldn't believe the amount of imports available when I arrived here,' says C. Michael Kruse, Bankers Trust Company's representative. "There was every kind of Betty Crocker cake mix imaginable.'

From 1971 to 1982, CMA had $3 billion inoperating losses, yet threw away thousands of metric tons of spoiled food each year. A 1983 private analyst's report stated: "CMA went through ten presidents in less than a decade, all of whom promised (and failed) to reorganize the corporation. CMA's terrible reputation was unmatched by any other of the nation's many inefficient entities. Indeed, its corrupt administration was so apparent and all-encompassing that anyone working for CMA, or associated with it, was frequently assumed to be dishonest.' Today, CMA is bankrupt and in the process of being liquidated. Its $1.2 billion foreign debt has been assumed by the state-owned Banco Industrial de Venezuela.

Another example of Perez's mistaken generosityto his constituents is INOS, the state water company, which currently has a foreign debt of $772 million. One reason why it hasn't repaid its loans is that until mid-1983 INOS billed customers for only 35 percent of the water it provided, and it collected a mere 25 percent of what it billed. It used foreign loans to pay most of the costs. INOS's books were a shambles. The comptroller general discovered that in 1982 that water agency had failed to register more than $30 million in its bank accounts. "INOS has never been able to produce a balance sheet,' says a former finance ministry official.

Officials at the National Ports Institute (INP)apparently also flunked Accounting 101. In 1979, INP was charging companies $30 to move a metric ton of cargo for which it paid $40 in wages alone. "They couldn't product enough revenue to meet their payroll and fixed costs, so they borrowed abroad,' says economist Pedro Palma. "It was absolutely crazy.'

One reason for INP's high operating costs isthat the agency is a safehouse for the gainfully unemployed. The comptroller general found that hundreds of retired and "pre-retired' individuals on INP's payroll were earning $3,000 to $6,000 per month, and called this "one of the most blatant examples of featherbedding in Venezuela.' Not surprisingly, INP regularly runs a deficit and has often been charged with corruption. Today it has a foreign debt of $115 million.

Another part of the borrowing went to fatteningup the Venezuelan bureaucracy: the number of civil servants nearly tripled from 1974 to 1984. Many of their positions are make-work jobs. In addition to bathroom attendants, Perez decreed that every public elevator have an operator. "Today we have 500,000 government employees who do not work,' says Tomas Enrique Carillo-Batalla, a former finance minister.

Having put a large number of Venezuelans onthe public payroll, Perez also created a generous and innovative retirement plan for some of them. He ordered CANTV, the state telephone company, to count all years in public service--not just those at the phone company--when calculating retirement benefits. CANTV's pension plan also lets workers retire at 70 percent of their final wage after just 14 years of service, or at 100 percent of salary after 20 years, and pays all medical expenses for pensioners and their families. "The result is that every public employee with political connections seeks a "transfer' to CANTV just before retirement,' a private analyst wrote in 1980. Today, CANTV has a foreign debt of $685 million.

Privatizing a swamp

The Venezuelan private sector matched thegovernment's incompetence dollar for dollar. The private sector debt was primarily in loans made by commercial banks to private parties, using state-owned banks and development agencies as middlemen. The idea was that if the private borrower went bankrupt, the commercial banks could demand payment from the government. Financed by foreign loans, the now defunct Venezuelan Development Corporation (CVF) made millions of dollars worth of loans to the private sector during the 1970s. "It was able to make loans to just about any field pertaining to development: heavy industry, tourism, agroindustry, shipping, chemicals, construction, telecommunications,' says Cesar Egana, a member of the three-man board now liquidating the corporation. The foreign banks that lent to CVF weren't watching: they reasoned that the government would pay off any CVF loans that went bust. The central Venezuelan authorities left everything up to CVF officials. The only people paying attention were the CVF officials themselves--and the only thing they attended to was lining their pockets.

Consider a $200 million loan CVF guaranteedto Venezuela's largest cement company, Cemento Andino. The company is now bankrupt; $45 million of the loan is unaccounted for. According to the comptroller general, the company's three principal owners siphoned off the $45 million by overpaying subcontracted work to other firms, of which they were also the owners. The businessmen, along with a former CVF president involved in the scam, have fled the country.

Another CVF-sponsored project involved aplan to turn government-owned swampland into one of the biggest resorts in the world. The plan called for the construction of 50 hotels and 1,500 vacation homes. When finished in 1979, the resort was supposed to attract more than one million people a year.

Things didn't work out as planned. CVF officialscouldn't coordinate the many private companies they hired to build the complex. Graft was common, and much of the work shoddy. The developer, Deniel Camejo, couldn't sell or even promote such a huge venture. After private- and public-sector spending of nearly $1 billion-- much of it borrowed from abroad, including $40 million from Bank of America--the project is still far from finished. Only one of the 50 hotels has been built; two others were started but their financing ran out.

Crime pays

Businessmen and government officialssquandering government-financed loans, state agencies awash in red ink, widespread graft, featherbedding, pension scandals--the last decade in Venezuela could have been an investigative journalist's dream. But if you had read the Venezuelan newspapers, you'd have precious little idea how wayward the country had become. The Venezuelan press often reported charges but rarely followed up or pursued independent investigations.

It's not as if significant evidence isn't available.The comptroller general's annual report to the congress contains enough examples of corruption and mismanagement to bring down many democratic governments. But not Venezuela's. "The report's release each year signals the beginning of a fruitless ritual: two weeks of headlines, handwringing, and horror stories, followed by oblivion,' a private analyst wrote in 1984. "Few or none of the comptroller's suggestions are followed, no one is ever investigated for malfeasance, and the report's findings are typically forgotten for another year.'

One reason the press buries the comptrollergeneral's reports is that the government is not afraid to silence its critics. El Diario de Caracas, the only newspaper in Venezuela that has a muckraking tradition, had four investigations of corruption involving the government halted earlier this year by the current president, Jaime Lusinchi. Almost no negative publicity is tolerated by the government. El Diario's editor has been jailed twice this year for quoting from a police report that alleged a politician was drunk in public and tried to urinate on an employee of a beach resort.

Still, the government's heavy-handednessdoesn't fully explain the press's timidity. A deeper explanation is cultural. There is in Venezuela-- and in Latin America in general--a tolerance of graft. If you doubt this, consider ex-president Perez. It is widely believed that Perez stole millions of dollars of public funds. How else can a man born into a lower-middle-class family, and who has been on the government payroll most of his life, own an expensive house in an exclusive Caracas neighborhood? And today Perez is a vice president of the Socialist International, and also the leading contender in the 1988 presidential election.

Underground obsession

The most sensible way out of the debt crisisis the plan put forth by Sen. Bill Bradley. It calls for relieving Latin American debtor nations of two-thirds of their annual $30 billion debt burden by cutting interest rates by 3 percent over a three-year period, and at the same time forgiving 3 percent of the loan principal. Not only does Bradley's plan avoid the Baker plan's distinction between public and private lending, which is nearly meaningless in Latin America, Bradley specifies only that debtor nations receiving relief adopt internally generated reforms; it also offers a way to ease the debt burden without throwing good money after bad. The Baker plan calls for new loans and more debt--no solution to a crisis caused by debt.

Where the Bradley plan comes up short is infailing to address the excessive tolerance of corruption and mismanagement that is at the heart of the debt crisis in Venezuela and other countries. Anyone who has spent time in Venezuela quickly realizes there is only one place where civic-mindedness is conspicuous and consistent: the Caracas Metro. On the streets, nothing seems illegal. Cars regularly run red lights, drive the wrong way down one-way streets, and scatter pedestrians by driving on the sidewalk to get around traffic jams. Below ground, however, all is quiet. The platforms on the Metro are spotless, and the passengers whisper. If you put your feet up on an empty Metro seat another passenger will invariably scold you. In the Metro, the citizens of Caracas seem to have found a public institution of which they can be proud. One wonders what would happen if the Venezuelans allowed this attitude to become a national obsession.
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Copyright 1986, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Bridges, Tyler
Publication:Washington Monthly
Date:Dec 1, 1986
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