December 27, 2005

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Chávez's Agenda Takes Shape

CARACAS, Venezuela -- Venezuelan President Hugo Chávez is moving his socialist agenda into a new phase by turning some expropriated companies into government-financed operations, jointly run by the state and worker cooperatives.

This latest wrinkle in the country's initiative to confiscate "idle" land and company assets, dubbed "co-management," is being touted by the government as the next step on Venezuela's road to socialism.

The program -- which Mr. Chávez says is "democratizing capital" -- is spooking some investors and threatens to undermine the country's economy. Business leaders fear the corporate initiative is a backdoor attempt to lead the country down the path followed by Cuba's Fidel Castro, Mr. Chávez's friend and mentor.

Co-management draws inspiration from the so-called self management that was popular in Eastern Europe in the 1970s and 1980s. The method, first imposed by Communist Yugoslavian leader Josip Broz Tito, eventually fostered subsidy-dependent industries and left Yugoslavia saddled with debts.

In Venezuela's case, the state says that over the long term -- 10 years or more -- the government will sell its stake in various companies to their workers so they assume full control in a co-managed economy. Almost all the companies that have been taken over this year have attempted to implement such an approach. But the strategy risks becoming a large-scale subsidy framework for weak companies, financed with windfall oil revenue.

Mr. Chávez also is promoting the idea to privately owned companies with promises of government loans. Under the plan, companies are supposed to share profits with employee cooperatives and give them seats on their boards, in exchange for working capital from the government. Companies also are expected to change their board procedures to guarantee workers a say, and devote a portion of profits to social programs in nearby communities.

Government officials defend co-management, saying it will succeed because the government will let workers buy stakes only in viable businesses. The co-managed companies must change their boardroom procedures so that further government capitalizations require approval from 90% of board members, in order to prevent private owners from trying to dilute the workers' stake.

Almost 200 mostly small, cash-strapped private-sector companies have voluntarily offered to adopt co-management in exchange for government funds. The government's co-management team has approved plans this year for 20 of these. Also this year, the government expropriated four failed companies, and conditionally seized the assets of two healthy ones as well. The government plans to eventually co-manage all of them.

Mr. Chávez has vowed to continue taking over companies and converting them into co-managed entities. Despite the currently voluntary nature of the system, Venezuelan lawmakers are considering a law that would impose this structure on companies that receive or have received some sort of government incentive. In a country where the state is the main driver of economic activity, such a law could effectively change the way many private companies do business.

Venezuela has had a record of nationalizations and populist leaders prior to Mr. Chávez taking office in 1999. And it has a long history of the government absorbing the losses of state-dependent businesses. The Chávez administration is focusing on rebuilding once-inefficient companies in key sectors that were privatized by previous administrations. For instance, state-run CVG Telecom is beginning to compete with the country's largest private telecommunications company, while a new state-owned airline, Conviasa, would replace the failed airline Viasa.

Most private companies that have adopted co-management have yet to begin production, and only one state-controlled company is operating. Invepal, a paper company expropriated in January and considered the poster child for co-management, has so far received $7 million from the government. The company filed for bankruptcy in late 2004, and its main plant currently operates at 30% of capacity.

Invepal workers, who control a 49% stake, now decide production and wage increases. Most of them earn roughly the same as they did last year but almost double what they did under the previous management, says Alexis Hornebo, a 42-year-old machinist who heads Invepal's worker cooperative. "The idea is to improve these salaries over time," says Mr. Hornebo, who has worked at the company for 26 years. "In the past our opinion never counted."

Venezuela lacks reliable foreign-investment figures, but Mr. Chávez's constant government meddling in the economy -- and the co-management plan in particular -- is beginning to rattle foreign companies with interests here.

Christophe Nicoli, head of the local unit of Lafarge SA, the French building-materials company, said recently that he worries co-management could hurt Lafarge's suppliers and small-scale clients. Lafarge will limit investment to $5 million a year, the minimum needed to keep cement operations at current levels, until construction picks up. "A possible co-management law is a cause for concern. The government has to manage this carefully," Mr. Nicoli says.

Local business leaders, aware of Mr. Chávez's antibusiness tendencies, are steering clear of making heavy investments as well. Industrial plants have kept investment low for more than three years, and 82% of them plan to invest the minimum needed to keep production at the same level during the coming year, according to a third-quarter survey of the manufacturing trade group Conindustria.

How far Mr. Chávez will push his socialist agenda is an open question, but recent polls show many Venezuelans reject the Cuban model. The president says his government isn't out to copy Cuba's communist system or violate private-property rights. But he has vowed to create a new socialist system for the 21st century.

And there are some who embrace his agenda. At Pulplus, a start-up diaper company and pioneer in co-management, workers and other shareholders must agree on everything from production levels to firing decisions. Indeed, leader Yossi Anidja can't fire ineffective members of the worker cooperative. "I can suggest someone be fired and then we have to agree on it," he says. To protect worker's newly acquired rights and to ensure business viability, a government officer stays in contact with the company day to day.

Pulplus's production is still in its early stages, and so is the co-management initiative. Mr. Anidja admits many solutions are a think-as-you-go process where government involvement is key. If workers and owners have different ideas, for example, the government often will try to broker a solution. But Mr. Anidja, a 48-year-old Moroccan immigrant, is a believer in the system. "Today I can go off on vacation with my mind at ease because all my people work to make money as well as I," he says.