INTERAIRPORTS AT AGE THREE: A NEW CONTRACT, A NEW

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002302

SIPDIS

SENSITIVE

STATE FOR WHA/CEN AND EB/TRA

E.O. 12958: N/A
TAGS: EAIR ECON EINV PGOV HO
SUBJECT: INTERAIRPORTS AT AGE THREE: A NEW CONTRACT, A NEW
START?


1. (SBU) Summary: InterAirports, the international consortium
that operates Honduras' four international airports, has
recently renegotiated its contract with the GOH. The new
contract would resolve many of the issues that have troubled
InterAirports in its three years of operation, specifically
the matter of a financing guarantee to allow InterAirports to
continue work on renovations. The renegotiated contract has
been heavily criticized in the press as offering too much to
InterAirports and not enough to the GOH, but GOH and
Congressional leaders believe the chances of passage are
good, indicating there were only a few points of concern.
End Summary.


2. (SBU) EconOffs have held several meetings in recent weeks
and months to discuss the ongoing negotiations between
InterAirports and the GOH. From InterAirports EconOffs have
met with the General Manager Elida Howell, a Honduran, and
Carlos Vidal Ferreira, the leader of the recent negotiations,
a Portuguese national who works for Soares de Costa, the
largest partner in the consortium. From the GOH, EconOff met
with Vice Minister for Transportation Eduardo Pavon, and
Ambassador and EconCouns discussed the issue briefly with the
President of Congress at a mid-September luncheon. EconOff
has also received a copy of the renegotiated InterAirports
contract that is currently awaiting approval by Congress.

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Background
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3. (SBU) In October 2000, operation of Honduras' four
international airports (in Tegucigalpa, San Pedro Sula, La
Ceiba and Roatan) was granted to an international consortium
called InterAirports. The consortium is made up of Soares de
Costa S.A. (of Portugal, with roughly 25 percent ownership),
Calmaquip Engineering Corporation (USA, 22 percent),SERLIPSA
Swissport S.A. (Peru, 20 percent),Pacific Architects and
Engineers, Inc. (USA, 18 percent),San Francisco Airports of
Honduras (USA/Honduras, 10 percent) and the local businessman
Raul Torres Lazo (Honduras, 5 percent). Currently American
businesses comprise just over 50 percent ownership of the
consortium, though this will likely fall to 40 percent in the
months ahead (see paragraph 11 below). While InterAirports
is responsible for maintenance and operations at the
airports, safety and security remain the responsibility of
the Director General of Civil Aviation (DGAC),currently
under the leadership of Cesar Vasquez (see septel for an
overview of airport security issues in Honduras).


4. (SBU) Initial problems faced by InterAirports included a
sharp increase in cargo and handling fees that was not well
explained to the public, which led to a public backlash and a
court case. In August 2001 the fees were lowered and
InterAirports secured a public declaration from leading
private sector figures that the new rates were fair and
reasonable, but the damage in the court of public opinion was
already done. Comment: InterAirports claims the government
had raised the fees previously but left the blame to the
consortium. End comment.


5. (SBU) A further dispute then developed over the
renovations to the four airports that InterAirports had
agreed to undertake. As explained by InterAirports President
Vidal Ferreira, these renovations were to be funded by three
sources: equity from InterAirports' shareholders, cashflow
from their operations, and a bank loan, which was to be
obtained using the airports concession as collateral.
However the GOH refused to allow the concession to be used as
collateral (despite a provision in the contract which,
according to InterAirports, required the government to
authorize the financial guarantee). While the issue remained
unresolved, InterAirports was prevented from obtaining
financing and could not proceed with renovations. As project
due dates specified in the concession contract passed without
progress on the renovations, InterAirports found itself
subject to fines of USD 20,000 per day, which began accruing
on May 16th. InterAirports, in the meantime, began
preparations for submitting the dispute to international
arbitration in London.


6. (SBU) InterAirports and the GOH subsequently agreed to a
renegotiation of the concession contract in order to address
the financial guarantee, to rebalance the responsibilities
and income attributed to the consortium, and to allow the
lowering of some fees in order to increase competitiveness.
These negotiations began in June 2003 and ended in late July,
though the fact that negotiations were taking place was not
made public until August. The GOH was represented in these
negotiations by Minister of Tourism Thierry Pierrefeu, who
together with InterAirports General Manager Howell made a
presentation to Congress in late August on the benefits of
the new contract. A vote is expected in the next few weeks.

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What's in the new contract
--------------


7. (SBU) The new contract resolves the current dispute by
explicitly stating that InterAirports may use its concession
as a guarantee to receive financing for the renovation
projects, something that was not stated in sufficiently clear
terms in the original contract. While the new contract does
not address the punitive fines directly, it effectively
eliminates the issue by rescheduling the due dates for the
projects that InterAirports is contracted to undertake.
(According to the new schedule renovations to the airports in
San Pedro Sula, La Ceiba and Roatan would be completed in
2004, and to Toncontin International Airport in Tegucigalpa
by July 2005.)


8. (SBU) The new contract also reduces, by an average of 45
percent, the landing and parking fees charged, a change which
the GOH hopes will make Honduran airports more competitive in
the region and help the country attract more air traffic.
(International landing fees are reduced from USD 4 to USD
2.40 per ton, international parking fees are reduced from USD
1 to US 40 cents per ton per hour, with somewhat smaller
reductions in fees for national flights.) In return,
however, InterAirports is allowed to keep a larger share of
its revenue: the percentage paid to the GOH is reduced from
39.7 percent to 34.4 percent.


9. (SBU) Cargo fees are unchanged from the level that was
negotiated with the private sector in 2001. While these fees
continue to receive criticism, Howell stressed in her
presentation before Congress that they are lower than the
fees charged in either El Salvador or Costa Rica, the other
two Central American countries in which the airports are
privately owned.

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Goodbye San Francisco
--------------


10. (SBU) Another aspect of the new contract which has
received significant attention is the requirement that a new
partner take the place of San Francisco Airports of Honduras
(a.k.a. SFO Honduras) within two months of the contract's
approval. The involvement of SFO Honduras has been
controversial from the start. The fact that SFO Honduras is
a legally separate entity from the San Francisco
International Airport was interpreted in the Honduran press
as some kind of trick, in which the GOH had been fooled into
believing that InterAirports included members with experience
and expertise in operating a major international airport,
when in fact this was not the case. Some critics of
InterAirports continue to argue that the granting of the
concession to InterAirports in 2000 was not legally valid,
since SFO Honduras does not qualify as an "operator" as
defined by the terms of the concession.


11. (SBU) In reality, Howell said that InterAirports has had
no problems working with SFO Honduras, and the legal
separation between SFO Honduras and the San Francisco
International Airport has been misinterpreted and is typical
in the industry. (The company most likely to take San
Francisco's place in the consortium, Vancouver Airport
Services, is itself legally separate from the Vancouver
International Airport Authority.) Furthermore, San Francisco
had already decided to pull out of InterAirports, for their
own reasons, before the contract renegotiations began in
June. Thus, InterAirports was able to offer the replacement
of SFO Honduras as a free bargaining chip in the
negotiations, presenting as a concession something that was
going to happen anyway.

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Perceptions of the Public and the Press
--------------


12. (SBU) InterAirports still must contend with consistently
negative portrayal in the press, fueled by the former
operators, some members of the business community, and the
consortium's Honduran "partner". The press has created the
public perception that the company has cheated the government
and the people of Honduras. Media reaction to the new
contract has focused on the fact that InterAirports will not
have to pay the fines for falling behind schedule on
renovations, and on the reduction of the share of revenues
that the GOH will receive. The press does not mention the
GOH's failings to meet its contractual obligations.
Headlines such as "They're raising fees, and they won't even
be punished!" are unfortunately typical - misstating the
facts (since the new contract doesn't raise fees) while
indignantly criticizing the government for being too soft on
a company that ought to be penalized. In August, a newspaper
cartoon portrayed InterAirports as a fat, laughing
businessman, riding on the back of a departing plane,
carrying a suitcase bulging with U.S. dollars.

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The New Contract and Congress
--------------


13. (SBU) In a meeting on September 22nd, Vice Minister of
Transportation Eduardo Pavon explained that the vote in
Congress is being delayed so that members of Congress can
prepare for the negative public reaction that approval of the
contract will generate. Pavon said that Congressmen need
some time to develop justifications and explanations of the
contract so that they will be able to answer "to the people".
However in private meetings, according to Pavon, leaders of
both major parties (National and Liberal) and several minor
parties have expressed their support for the new contract,
and he expressed confidence that it will eventually be
approved.

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Comment
--------------


14. (SBU) The GOH and InterAirports appear to have
successfully stepped back from the brink. The assignment of
Minister of Tourism Pierrefeu to repair the relationship and
sell Congress on the benefits of a revised contract was
advantageous. It is finally looking as if a resolution is in
sight, although, in typical Honduran fashion, the contract's
progress through Congress is slow. The Embassy remains
convinced that success in this concession is vital to pave
the way for privatization in other important sectors. End
comment.
Palmer