MINISTRY OF ECONOMY'S SECRETARY OF TECHNICAL

C O N F I D E N T I A L SECTION 01 OF 03 BUENOS AIRES 000498 SIPDIS SIPDIS WHA PATRICK DUFFY NSC FOR DAN FISK SOUTHCOM FOR POLAD AND J5 FOR JUAN RENTA USDOC FOR 4322/MAC/OLAC/BASTIAN/PEACHER E.O. 12958: DECL: 03/01/2016 TAGS: ECON EINV ENRG AR SUBJECT: MINISTRY OF ECONOMY'S SECRETARY OF TECHNICAL COORDINATION DISCUSSES INVESTMENT DISPUTES Classified By: Ambassador Lino Gutierrez for reasons 1.4 (B) and (D) -------------- Summary -------------- ¶1. (C) The DCM paid a courtesy call on new Ministry of Economy Secretary for Technical Coordination Carlos Salas on February 24, to ask about the GOA's economic policy plans for the coming year. Salas responded that he was not an economist, but expressed optimism that the economy would continue on an expansionary track with good prospects for investment. Salas acknowledged that inflation was a major GOA concern, but claimed that it was more a problem of expectations than underlying macroeconomic pressure. The DCM recognized the political sensitivities of the inflation problem, but noted that sound monetary and public spending policies were important factors to consider. The DCM raised the case of CMS Energy, which received a USD 133.2 million award from an ICSID tribunal but is willing to explore the possibility of a negotiated settlement with the GOA. Salas responded that he had never talked to anyone from CMS during the two-and-a-half years he served with UNIREN, the GOA agency responsible for renegotiating public sector contracts. Nevertheless, Salas offered to meet with the new CMS President and to put him in touch with the relevant UNIREN representatives. Salas' transfer from the Ministry of Planning, where he was a close confidant of Minister Julio De Vido, reflects De Vido's increasing influence in GOA economic policymaking following the departure of Minister of Economy Roberto Lavagna last December. It is worth noting with concern that the senior GOA official responsible for consumer protection has little understanding of the macroeconomic factors causing inflation. End Summary. -------------- U.S. Support for Argentina -------------- ¶2. (C) The DCM paid a courtesy call on new Ministry of Economy Secretary for Technical Coordination Carlos Salas on February 24. The DCM was accompanied by Econcouns (notetaker). The DCM sought Salas' views on the economy and then raised a business advocacy case. Salas explained that as Secretary of Technical Coordination, he was only responsible for the Secretariat of Consumer Affairs and the GOA's Anti-Trust Agency (CNDC). This differs from the responsibilities of his predecessor, Secretary Leonardo Madcur, who had a much broader and loosely defined set of responsibilities. (Comment: Local Embassy contacts report that former Undersecretary of Consumer Affairs Patricia Vaca Narvaja, who left to assume her newly-elected position as a deputy in the Lower House of Congress, will not be replaced and that all of her former responsibilities will be assumed by Salas. End Comment.) Salas added that he had been the Ministry of Planning's representative at the GOA's Renegotiation and Analysis Unit (UNIREN),the organization responsible for re-negotiating the GOA's 62 public service contracts, from 2003 to November 2005. He said he had not looked for short-term solutions at UNIREN, but had sought a sustainable process for the future where all stakeholders would benefit. ¶3. (C) The DCM noted that U.S. companies also have a long-term interest in Argentina and that he was not aware of any major U.S. company that had left Argentina during the recent crisis. Most U.S. companies wanted to stay in Argentina, including those who have international arbitration (ICSID) cases against Argentina. They came in good faith and made tangible investments. The DCM added that U.S. firms do not want difficulties with the GOA but want to achieve settlements that give them clear and fair rules of the game BUENOS AIR 00000498 002 OF 003 to work and compete in Argentina. -------------- Optimism About GOA Economic Policies -------------- ¶4. (C) The DCM asked Salas about the GOA's economic policies for the coming year. Salas appeared somewhat reluctant to discuss the economy's performance, pointing out that he was an architect, not an economist. However, he said he was optimistic about growth and investment prospects. Salas said President Kirchner is not one to change things from one day to the next, preferring a prudent approach to policymaking. Salas said President Kirchner believes that long-term policies require the involvement of both the public and private sectors. Salas stressed that the strong macroeconomic recovery boded well for the future. ¶5. (C) Salas acknowledged that inflation was a major concern, but claimed that it was more a problem of expectations than real conditions. Existing inflation is primarily a function of the rapid economic growth that has taken place during the last three years and the economy's inability to meet this demand. The greater the demand, the greater the expectation that prices will rise in the face of limited supply and the economy's inability to satisfy demand. This is the reason why the GOA has paid so much attention to negotiating price control agreements with the private sector in recent weeks. The GOA's objective is to limit expectations. Salas thought that the GOA was winning the expectations battle and that inflation would be controlled. ¶6. (C) The DCM said he understood the political sensitivity of the inflationary problem, but noted that there were also basic macroeconomic reasons why inflation was rising, such as rapid expansion of the money supply and excessive public spending. The DCM opined that the fact that Argentina had faced hyperinflation in the late 1980s, and zero inflation in the mid-1990s, was a function of tangible monetary and fiscal effects on consumer prices, rather than an arbitrary decision by the private sector to raise or not to raise prices. Salas didn't disagree but admitted he was not an economist, although he added that all sectors, including business, had to assume responsibly for bringing inflation under control. -------------- Making the Case for CMS -------------- ¶7. (C) The DCM raised the case of CMS Energy, a U.S. energy sector firm that operates natural gas pipelines in Argentina under a license granted by the GOA. CMS received a USD 133.2 million award from an ICSID tribunal, wants to remain in Argentina, and would like to reach a negotiated settlement with the GOA. CMS also indicated that it would accept compensation in benefits other than cash, such as additional licenses or concessions. The Ambassador has in the past conveyed CMS' interest to Minister of Planning De Vido, and met with the new CMS president of the local subsidiary. However, UNIREN officials have insisted that CMS suspend its ICSID case prior to the initiation of negotiations. While there seemed to be a willingness to talk, no real progress has been made toward resolving the dispute. ¶8. (C) Salas said that he had never talked to anyone from CMS during his two-and-a-half years at UNIREN. He added that CMS had failed to understand the GOA's message, i.e., that public service companies should understand the GOA's severe political and economic constraints and look for a long-term settlement that benefits all parties, rather than a short-term payout for the company in question. CMS is free to go to ICSID if they choose and seek a favorable ruling. BUENOS AIR 00000498 003 OF 003 However, Salas offered to meet with the new CMS President and to put him in touch with the right people in UNIREN. "We don't want anyone to leave the country," he said, "UNIREN never closes the door on anyone, there is always a way to find a solution, and Minister De Vido and Minister of Economy Miceli will find a way to dialogue." The DCM said we would pass this message back to CMS. -------------- Biographical Note -------------- ¶9. (U) Salas is a close friend and confidant of the increasingly powerful Minister of Planning Julio De Vido. Salas met De Vido when he was a member of the Faculty of Architecture at the University of La Plata. De Vido is also an architect, so the two had much in common. De Vido later recruited Salas to work as a technical advisor during the 2003 presidential campaign. De Vido then offered him his first public office as Ministry of Planning's representative at UNIREN. Salas had little experience in renegotiating public service contracts, but he slowly but surely achieved success as a negotiator. He claims that he was responsible for renegotiating 10-12 major energy contracts, including AES/Edelap of the U.S., Endesa, Gas Ban, Edesur, Edenor, and Transgener. He was not able to conclude negotiations with Telefonica of Spain, which was concluded shortly after his departure. De Vido also made him responsible for Ports and Navigable Waterways, where he reportedly had conflicts with both the unions and some of the companies in the sector. He has a low profile and he avoids the press. One of his first acts as Secretary of Technical Coordination was to participate in the negotiation of a price control agreement for the largest supermarket chains. He is a graduate of the Faculty of Architecture of the University of La Plata. He spent many years working for private construction companies or provincial governments as a supervisor, director or inspector of public works projects in the provinces of Santa Cruz, Chubut and Buenos Aires. -------------- Comment -------------- ¶10. (C) Salas' transfer from the Ministry of Planning to what was the number three position in the Ministry of Economy is a reflection of Minister of Planning Julio De Vido's increasing influence following the departure of Minister of Economy Roberto Lavagna last December. It is unthinkable that De Vido ever would have had a close associate working within his archrival's ministry. It is also worrisome that the GOA official responsible for consumer protection admits to not understanding the macroeconomic factors causing inflation. Salas also is the lead official on anti-trust issues, which may not be good news for companies that have been accused of colluding to increase prices. ¶11. (U) To see more Buenos Aires reporting, visit our classified website at: http://www.state.sgov.gov/p/wha/buenosaires.< /a> GUTIERREZ