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Improving South American military expenditure data

Front view of a Sukhoi Su-30MK2 of the Bolivarian Military Aviation (AMB) deployed during the Aeronautical Fair BALANDA 2016 in Barquisimeto - Venezuela
Front view of a Sukhoi Su-30MK2 of the Bolivarian Military Aviation (AMB) deployed during the Aeronautical Fair BALANDA 2016 in Barquisimeto - Venezuela. Photo: Wikimedia Commons / Carlos E. Perez S.L
Dr Nan Tian and Diego Lopes da Silva

 

SIPRI’s Military Expenditure Database currently covers 11 South American countries and contains data going back to 1960. SIPRI provides the only available long-term, historically consistent series of military expenditure data for South America, but the reliability and comprehensiveness of the data are a matter of debate. Several key sources of military expenditure are not covered in the data, which leads to an underestimation of military spending. Off-budget expenditure is used to fund a large proportion of the arms purchases not captured in the current military expenditure data on South American countries. This topical backgrounder begins to address this issue, using Venezuela as the initial country case for improvement.

 

Off-budget military spending in South America

Off-budget military spending is the allocation of funds for defence functions from outside the regular state budget. This can include revenues from mineral extraction or from military business activities. The military in Ecuador, for example, has owned corporations in the oil industry since the 1970s and much of the profits supplement the military budget, subject to very limited levels of transparency or legislative review. The creation of such mechanisms is fairly common practice in South America. Several countries in the subregion have at some point financed their armed forces through off-budget funding. Essentially, these instruments seek to cope with funding instability. Military projects usually require a steady source of income for a significant number of years. In South America, periods of political instability and erratic economic growth have disrupted the course of military funding. These inconsistencies make off-budget practices particularly appealing as a way of insulating budgets from political and economic shifts.

Given the outward-oriented profile of South American economies, off-budget mechanisms are usually linked to mineral extraction and commodity exports. A noted example is Chile’s Copper Law, which allocates 10 per cent of sales from copper exports to arms acquisitions and maintenance. Similarly, the Peruvian National Police and Armed Forces Fund is financed through natural gas revenues. In Venezuela, the National Development Fund (Fondo de Desarrollo Nacional, FONDEN), which finances a large part of Venezuela’s military projects, is funded in part by the Banco Central de Venezuela and the oil company PDVSA. Commodity-fuelled off-budget military spending was particularly beneficial to these countries as prices rose in the international market in the mid-2000s. The main driver of this appreciation was China’s rapid economic growth and subsequent increase in net imports of primary commodities. However, the sensibility to commodity prices also brought military spending down as commodity prices plunged in the aftermath of the 2008 economic crisis and the 2014 commodity price crunch.

The inherent opacity surrounding off-budget spending mechanisms poses a particularly difficult challenge for SIPRI’s military expenditure data collection efforts. Thus far, the only off-budget funding figures in South America that are accounted for in SIPRI’s military expenditure dataset are those on Chile’s Copper Law. The Corporación Nacional el Cobre (CODELCO), a state-owned copper company from which the funds come, publishes an annual report that discloses the sums transferred to the military according to the legislation. Venezuela’s FONDEN figures, by contrast, remain largely unknown. Weak oversight of military financing processes can create an institutional environment prone to corruption. Indeed, even Chile’s efforts at transparency have fallen short. Despite CODELCO’s annual disclosure,  it is estimated that in 2010–2014 around US$11 million was diverted through irregular arms procurements under the Copper Law. In addition, the lack of Congressional or parliamentary debate on or oversight of arms purchases prevents a more thorough assessment of the strategic necessity for such procurements. Thus, higher levels of transparency are of paramount importance in limiting the mismanagement of military spending and ensuring civilian control over the armed forces.

 

Underestimate of Venezuela’s military expenditure

An article in the Journal of Peace Research (JPR) in 2011 highlighted the limitations of SIPRI’s military expenditure data with regard to off-budget spending, noting that users should be cautious about how they use the data. In the case of Venezuela, the author noted that SIPRI’s military spending figures are drawn from official budgetary documents. Because a large proportion of arms purchases are funded through off-budget mechanisms, however, this data does not capture the full extent of the state’s military expenditure. Thus, although SIPRI’s current military expenditure data does not include off-budget funds, this does not mean that SIPRI was unaware of this form of financing. The main concern until now had been the lack of information and process transparency in these off-budget spending documents, which complicates efforts to create a consistent and reliable time-series for Venezuelan military expenditure. In many South American counties, such as Chile, Ecuador[1] and Peru, and particularly Venezuela, the majority of off-budget funding comes from natural resources. In the case of Venezuela, its armed forces benefited tremendously from increased oil revenues. It has been reported that not only did the country’s official defence budget receive increases, but such revenues were also the main source of funding for off-budget weapon purchases.

 

Venezuelan military spending and crude oil prices
Figure 1 Venezuelan military spending and crude oil prices. Sources: World Bank Commodity Price Data and SIPRI Military Spending Database.

 

Since 2006, Venezuelan military equipment purchases have mainly been funded through FONDEN. These outlays are not consolidated into the national accounts and sources of funding reportedly come from the Banco Central de Venezuela and the oil company PDVSA. A third source of FONDEN funding, introduced in 2011, is that provided through the Law Creating a Special Contribution on Extraordinary Prices and Exorbitant Prices in the International Hydrocarbons Market (CEPEPEMIH). During periods when the PDVSA did not provide funding for FONDEN, the CEPEPEMIH contributed up to 80 per cent of FONDEN’s annual budget. Given that official Venezuelan military expenditure does not include arms purchases funded through FONDEN, an accurate measure of the country’s military expenditure must include the off-budget portion of the financing. Adding off-budget expenditure from FONDEN to official government expenditure should give a more precise figure for military spending in Venezuela.

Although SIPRI has known about the use of FONDEN to finance special spending projects, the details of such spending have remained a mystery. Since its inception, FONDEN funding has been used to carry out numerous development projects in the areas of health, infrastructure, energy and education. For example, the Venezuelan Government reported in 2009 and 2011 that FONDEN projects were worth US$ 53 and US$ 66 billion respectively. While these reports offer some idea of total off-budget spending in Venezuela, the figures were reported in aggregate. SIPRI was therefore unable to confidently add the correct proportions of FONDEN funding for arms purchases to total Venezuelan military expenditure. Until now, this lack of disaggregation precluded a comprehensive accounting of Venezuela’s overall levels of military spending. The Ministry of Defence has reported that it receives around 7 per cent of FONDEN’s funding, but verifying this claim has proved difficult.

 

Off-budget military expenditure: FONDEN

The rare publication of a FONDEN document written by the Minister of Finance for the Venezuelan Parliament has provided the first credible information from an official source to back up earlier claims and reports. In addition, the document helped verify the figures on arms purchases published in the JPR. While the numbers in the JPR article and what is reported in the FONDEN document differ, they confirm that substantial amounts of arms purchases in Venezuela were funded off-budget during the oil and economic boom.

The 2010 FONDEN document provides the first real insight into the types of arms purchases that were funded by off-budget oil revenues. The document lists all existing and new arms purchases that had been either partially or fully paid off by the end of 2010. For example, FONDEN allocated US $2167 million for the purchase of 24 Sukhoi-30s from Russia, of which $2141 million had already been paid ($64.6 million was paid in 2010) and the remaining $25.4 million was scheduled to be paid in the coming years. This acquisition was the largest single major weapons purchase in Venezuela’s recent history and over 3.5 times larger than the next largest arms purchase funded by FONDEN (see table 1).

FONDEN funded off-budget spending in the military sector
Table 1: FONDEN funded off-budget spending in the military sector (US$ m). Source: Fondo de Desarrollo Nacional 2010.

 

While much of FONDEN’s funding for the defence sector is for major arms purchases, some is for operational and personnel costs as well as small arms factories. Based on the 2010 document, US $5.1 million was paid towards the US$ 9.9 million allocated for the education of 40 cadets for the Venezuelan armed forces in Belarus, while $106 million was allocated to the general category Acuerdos Complementarios de Seguridad y Defensa de Estado (Complementary Agreement on State Security and Defense). Given the lack of transparency in the process and that much of Venezuelan military spending is off-budget, this raises additional questions about the misuse of funds or corruption. Questions arise, for instance, over the type of military training that costs around US$ 250 000 per cadet, what the Acuerdos Complementarios de Seguridad y Defensa de Estado is and what it spends US$ 106 million on.

Of the US$ 9.62 billion provided by FONDEN for various projects in 2010, about US$ 682 million (7.1%) was spent on the defence sector. New projects in the defence sector that were both started and completely paid off by FONDEN in 2010 amounted to $112 million (16% of the 2010 total for FONDEN defence spending). Up till 2010, defence projects funded by FONDEN totalled US$ 4.87 billion, of which US$ 4.62 billion has been paid and US$ 262 million was still outstanding.

Following the disclosure of this detailed FONDEN document earlier this year, a number of related documents on FONDEN for the period 2006–2015 have been found. Using this new information, SIPRI will begin to systematically adjust Venezuela’s military spending to account for the additional off-budget expenditure. As an initial estimate, SIPRI believes that adding the off-budget expenditure to Venezuela’s current military spending will increase the military expenditure figures for the period 2006–2016 by an average of 22 per cent. The range will vary substantially, due to changes in oil revenue, from as much as 43 per cent in some years to as little as 1 per cent in others.

 

Improving South American military spending

In the light of the revision of Venezuelan military spending to include off-budget funding, the same process has begun in other South American countries that partly rely on off-budget mechanisms to fund their military expenditure (e.g. Ecuador and Peru). These revisions are likely to lead to a substantial upward adjustment of spending figures for the South American region in the 2018 edition of the SIPRI military expenditure database. This entire data improvement process will foster discussion on the accuracy and reliability of SIPRI’s military expenditure database. In the case of South America, SIPRI’s ongoing efforts to improve the quality of the dataset for users (e.g. scholars, analysts, policymakers and the public) will help improve the accuracy of estimates of the effects and determinants of military expenditure, offer a better understanding of the regions ever-changing security environment and bring additional transparency to information on defence sector financing.

 

[1] The Ecuadorean military received off-budget revenues from oil exports between 1972 and 2008.

ABOUT THE AUTHOR(S)

Dr Nan Tian is a Researcher with the Arms and Military Expenditure Programme.
Diego Lopes da Silva is a Guest Researcher with the SIPRI Arms and Military Expenditure Programme.