Identifier
Created
Classification
Origin
05TEGUCIGALPA1970
2005-09-26 17:47:00
CONFIDENTIAL
Embassy Tegucigalpa
Cable title:  

HONDURAN FUEL SECTOR CONCERNED ABOUT GOH GASOLINE

Tags:  EPET ECON ELAB PGOV KSAC HO 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 001970 

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, AND EB/ESC
STATE FOR DS/IP/WHA - MFLYNN, DS/ITA - KHALL, DS/DSS/OSAC -
CMEDEIROS
COMMERCE FOR MSEIGELMAN
TREASURY FOR DDOUGLAS
ENERGY FOR IA
DOL FOR ILAB

E.O. 12958: DECL: 09/22/2015
TAGS: EPET ECON ELAB PGOV KSAC HO
SUBJECT: HONDURAN FUEL SECTOR CONCERNED ABOUT GOH GASOLINE
PRICE FREEZE AND OTHER PROPOSED RESTRICTIONS

REF: A. A) TEGUCIGALPA 1851


B. B) TEGUCIGALPA 1873

C. C) TEGUCIGALPA 1910

D. D) TEGUCIGALPA 1958

Classified By: ECONCHIEF PDUNN FOR REASONS 1.5(B AND D)

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 001970

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, AND EB/ESC
STATE FOR DS/IP/WHA - MFLYNN, DS/ITA - KHALL, DS/DSS/OSAC -
CMEDEIROS
COMMERCE FOR MSEIGELMAN
TREASURY FOR DDOUGLAS
ENERGY FOR IA
DOL FOR ILAB

E.O. 12958: DECL: 09/22/2015
TAGS: EPET ECON ELAB PGOV KSAC HO
SUBJECT: HONDURAN FUEL SECTOR CONCERNED ABOUT GOH GASOLINE
PRICE FREEZE AND OTHER PROPOSED RESTRICTIONS

REF: A. A) TEGUCIGALPA 1851


B. B) TEGUCIGALPA 1873

C. C) TEGUCIGALPA 1910

D. D) TEGUCIGALPA 1958

Classified By: ECONCHIEF PDUNN FOR REASONS 1.5(B AND D)


1. (C) Summary. Gasoline prices in Honduras remain in limbo,
as a de facto price freeze appears to remain in effect, but
with no GOH decree mandating such a policy. Some in Congress
have suggested price caps should remain in place until
December 31, with importers being forced to pick up the tab,
since they are perceived to be the ones profiting most from
the current spike in gasoline prices. This is a red-herring,
as importers have the smallest profit margins of any
participant in the value-chain. However, no political will
exists to take on the politically powerful transport
companies or gas station operators to reduce their excessive
guaranteed margins. The industry might have little choice
but to go along with a plan presented by President Maduro
that would subsidize fuel purchases by taxis and buses. The
precise mechanism for implementing such a plan remains
undefined. Political theater aside, little has been done to
establish a viable long-term fuel pricing strategy, and
industry is concerned that changing the rules of the game
unilaterally and without warning could hamper investment or
even cause fuel shortages. Post believes that the long-term
solution must be a move away from government price controls
and toward increased competition and improved consumer
protection through rigorous anti-trust enforcement. End
Summary.


2. (C) Gasoline prices in Honduras remain in limbo, as a de
facto price freeze appears to remain in effect, but with no
GOH decree mandating such a policy. As reported refs A-C,
the GOH rolled back fuel prices on September 7 to

pre-Hurricane Katrina prices and froze those prices for a
period of ten days. The cost differential was to be
reimbursed by the GOH directly to gasoline retailers. In the
meantime, a Commission of Notables was established to review
and revise the fuel pricing formula, and given ten days to
report their results. The Commission report did not succeed
in revising the fuel pricing formula, and went well beyond
the Commission mandate -- by suggesting reviews of
electricity contracts, state intervention in fuel imports,
and other policies -- prompting a number of Commission
members to resign (ref D.) Since the expiry of the initial
ten day freeze, the price freeze has remained in effect, but
without benefit of a Congressional decree. Thus, there is no
formal justification for the freeze and, more worrisome, no
determination of who will pay for it.


3. (C) Members of the National Congress have suggested over
the last several days that "fuel importers" should be forced
to absorb any losses incurred by the price freeze, and some
have gone so far as to suggest the freeze should be extended
through December 31, 2005. Both politicians and the media
have loudly accused the "transnational companies" of
profiteering, and mistakenly feel these companies have more
than ample margins to absorb this additional cost. The
fundamental misinformation in this debate was graphically
demonstrated in a September 22 article in the newspaper El
Heraldo, which explained the profit margins of each stage of
the fuel delivery and marketing chain. Despite the
accompanying pie-chart that clearly showed that importing
firms have the smallest profit margins by far, the headline
read: "Importers gain the most."


4. (C) Seeking a politically viable exit strategy, President
Ricardo Maduro called petroleum sector representatives to his
office the evening of September 20. According to Texaco
Country Manager Luis Mayorga, who was present at the meeting,
Maduro proposed that the gasoline retailers agree to freeze
prices for taxis and buses only, while selling to the public
at market prices. Maduro said the plan would remain in
effect until December 31, or until total costs had reached 70
million lempiras (approximately USD 3.7 million). In
exchange, Maduro said, the GOH would reimburse gasoline
retailers for losses stemming from the second 10-day period
(from September 17 to 26) of price freezes. Mayorga told
EconChief that this plan would cost his company an estimated
USD 750,000.


5. (C) Petroleum sector representative responded that they
would examine the request, and expressed concerns that if
they yielded in Honduras, other countries would seek similar
sacrifices. They encouraged Maduro to think long-term and to
guarantee predictability of investment rules. They also said
they are concerned about maintaining a level playing field
and about changing the rules governing investments in
mid-course. The ultimate consequences of such behavior, they
warned, could be a drop in investment in Honduras (for
example, no new or expanded gas stations or distribution
infrastructure) or even a fuel shortage. In what could be
viewed as a shot across the bow of industry, the Commission
of Notables has reminded importers that if they choose not to
cooperate, the state could import directly and use private
industry storage to supply the domestic market.


6. (C) Industry has also told the GOH that if they are to go
along with the President's proposal, they require a formal
decree to be issued outlining the specifics of the plan, the
duration, the cost, and the terms under which those costs
will be absorbed by each party. Under U.S. anti-trust law,
colluding on prices, subsidizing foreign governments, or
offering differential pricing to distinct segments of the
public are illegal. The companies could not contemplate
cooperating in the new scheme unless ordered to do so by the
GOH, and even then they will need to refer the matter to
their lawyers. Moreover, industry has also suggested that a
tiered price regime at the pump level (one set of prices for
taxis, another for consumers) would be an administrative
nightmare. (In an interesting bit of frankness, President of
the National Transport Union Jorge Lopez told reporters that
he feared such a scheme would encourage taxi drivers to stop
hauling passengers and instead get into the gasoline resale
business.) To minimize fraud, the GOH contemplated limiting
taxis to six gallons per day at the controlled price. Far
easier and less subject to abuse, the petroleum industry is
promoting a system administered by the Ministry of
Transportation (SOPTRAVI) that simply would reimburse all
registered taxi drivers the equivalent of the price
differential for six gallons per day. A database of
registered taxi and bus drivers already exists and could be
used for this purpose. (Comment: Post was thinking along
similar lines, and notes another potential benefit:
unlicensed taxis would not benefit from the subsidy,
assisting the GOH in its apparent crackdown on these
operators. Other recent actions by the GOH Council of
Ministers seem similarly targeted at taking advantage of the
current crisis to impose some order on the taxi and bus
sector, and in particular to weed-out unlicensed operators
currently clogging Tegucigalpa traffic (ref D). End
Comment.) Minister of Trade and Industry Irving Guerrero
told EconChief on September 23 that such an arrangement is
already under study, with SOPTRAVI coordinating with the
Ministry of Finance to identify beneficiaries and establish
modalities.


7. (C) Regarding the current formula by which the GOH manages
fuel prices, Mayorga said the formula works sufficiently well
when prices are below USD 50 per barrel. As prices have
climbed, however, the formula has become increasingly
unpopular. IMF ResRep Hunter Monroe separately told
EconChief that the underlying problem is two-fold: First,
the lack of competition in the sector in Honduras has led to
very high pre-tax prices for fuel (which is then exacerbated
by some of the highest fuel taxes in the region.) Second, he
said, the GOH formula reacted too quickly to price swings in
the market, mimicking the upside volatility of the price
increase, but not adjusting down quickly enough. Mayorga
echoed this sentiment, noting that in El Salvador (which has
a freely competitive gasoline market),prices only increased
by seven cents, versus the nearly one dollar swing seen in
Honduras. In large part, Mayorga said, this reflects
industry understanding that price volatility (especially
panic buying due to storms and other sudden exogenous shocks)
is both natural and temporary, and that retail prices should
not spike every time the market does. By waiting a day or
two for the markets to settle, retailers in El Salvador
reportedly were able to raise prices appropriately, but not
so sharply as in Honduras, thereby avoiding the public outcry
and civil unrest that accompanied that price shock.


8. (C) The current pricing formula establishes profit margins
for each link in the fuels value chain, from importation
through retail sales. On a gallon of gasoline, for example,
profits are as follows:

GOH USD 1.15
Transport USD .85
Retailer USD .25
Wholesaler USD .11
Importer USD .04

Two facts are readily apparent from the above. First,
importers -- easy political targets because they are often
foreign multinationals -- make the least of any of the
participants in the process. (Mayorga told EconChief that
four cents per gallon is a good profit, but not excessive,
and certainly not the biggest profit margin in the value
chain.) Second, aside from GOH tax revenues, the largest
profits are made by the transport companies. According to
Monroe, Article 18 of the Honduran Transportation Law
requires that only natural-born Honduran citizens can own
transport trucks, and joint venture trucking companies must
be majority Honduran-owned as well. This lack of competition
has led, predictably, to price gouging. (Privately, the
Minister of Industry referred to the trucking companies as
"pirates.")


9. (C) Nor do the foreign firms make windfall profits as
retailers. Of the approximately 450 gasoline stations in
Honduras, for example, 98 are Texaco. Of those 98, only 13
are owned and operated by the company, while 27 are
company-owned and dealer operated, and 58 are dealer owned
and operated. The operators receive the 25 cent per galllon
profits, not Texaco. Esso has a similar ownership mix
(owning and operating only 14 out of 68 stations),while both
DIPPSA (a Honduran company) and Shell (the other two major
brands in the Honduran market) gasoline stations are all
company owned but dealer operated. Mayorga also pointed out
that a 25 cent per gallon margin for operators is extremely
generous -- the industry average in the region is 12 to 15
cents per gallon. According to Mayorga, while this is the
obvious place to cut prices in the formula, the GOH fears
offending the politically powerful elites that operate these
stations (including Juan Ferrera, one of the members of the
Notables Commission). ADHIPPE, the Honduran association that
represents gasoline station owners, meanwhile has gone on the
offensive, accusing multinational companies of unfair
competition, loudly proclaiming that (even with their grossly
bloated profit margins) their members are barely making a
living, and threatening to march on Tegucigalpa if the GOH
seeks to adjust those profit margins downward.


9. (C) Comment: It is disappointing but perhaps not
surprising that the Commission of Notables has failed to
address the core concern of fuel prices. With no technical
expertise in the sector, the Commission was unlikely to
arrive at such a solution, particularly in just ten days.
Even so, the squabbling and politicization of the issue has
done little to ameliorate the situation. By not taking
action on many of the Commission's suggestions and instead
interacting with the petroleum sector directly, the GOH
Council of Ministers seems implicitly to recognize that the
Commission has not lived up to expectations. The industry,
fearing an even worse alternative to the present price
controls, is willing to go along in the short-term, but sees
a clear need for a long-term approach that is predictable and
guaranteed. Post believes the long term strategy must
include increased competition and improved consumer
protection. With a newly passed anti-trust law on the books,
the GOH is on its way to developing the regulatory capacity
to crack down on monopolistic pricing. Opening the gasoline
market to competition should drive prices and margins down to
levels commensurate with the rest of the region, and any
attempts to exert market power (whether by transnationals or
domestic firms) should be met with strong penalties. That
said, the GOH is far from having the technical capacity to
undertake such enforcement, and it is our view that the
political will for such a bold move -- on the eve of a
Presidential election -- is simply not there. We will
continue to watch as events develop, encouraging a short-term
policy that protects both investors and consumers, and a
long-term move towards free competition. End Comment.

Williard
Williard