MAS ECONOMICS TEAM: STRONG SOCIAL AWARENESS, WEAK

UNCLAS LA PAZ 000186

SIPDIS

SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: BL ECON EINV EMIN ENRG EPET ETRD PGOV
SUBJECT: MAS ECONOMICS TEAM: STRONG SOCIAL AWARENESS, WEAK
ECONOMICS

REF: 05 LA PAZ 3670


1. (SBU) Summary: If reports about its economic transition
teams are any indication, the future Movement Toward
Socialism (MAS) government will have lots to learn. Current
government ministers have told us that the MAS mining,
economic development, and hydrocarbons teams conspicuously
lack technical and administrative experience and have
unrealistic ideas about mining taxation, free trade, and
foreign assistance. The MAS transition teams have requested
that four hydrocarbons-related supreme decrees be suspended
and appear to define "nationalization" as state control over
commercialization and the establishment of service-based
contracts. End summary.

Minister of Mining Predicts Royalty Increase
--------------

2. (SBU) Minister of Mining Dionisio Garzon told the
Ambassador recently that few of the incoming Morales
administration's mining transition team members have mining
or technical backgrounds, noting that some said they wanted
to impose royalties as high as 11 percent of the value of
extracted minerals, or roughly half of company profits.
(Companies currently pay two to seven percent.) Garzon said
he had acknowledged that royalties needed to be raised but
had argued that raising them by that much would render most
projects unprofitable, potentially forcing companies to
cancel existing projects or delay new investments. Garzon
said the three U.S. companies operating in Bolivia will have
no legal recourse if the new administration introduces
royalty hikes because of the special status of mining and
exploration concessions granted by the state (which differ
from contracts with the Bolivian Mining Corporation). Garzon
believed the new mining minister would likely be associated
with the mining cooperatives, which often take positions
antagonistic to large mining multinationals.

Incoming Economic Team Inexperienced
--------------

3. (SBU) In recent meetings with Econoffs, Minister of
Economic Development Carlos Diaz and lead Andean Free Trade
Agreement (FTA) negotiator Julio Alvarado said that few
personnel of the relevant MAS transition team had technical
backgrounds or previous government experience and that many
evinced a tendency to think on a local rather than on a
national level. Alvarado told us a decision on whether to
continue FTA negotiations would likely be delayed as the
incoming administration mulls over its priorities. Minister
Diaz doubted the team understood the importance of an
agreement and noted that team members expressed more interest
in potential salaries for future MAS appointees than in the
FTA or other economic issues, including the Millennium
Challenge Account. Both speculated that the new lead FTA
negotiator may be Ramiro Uchani, an indigenous leader of
small and medium enterprise associations in El Alto.

Service Contracts and State-controlled Sales: The Future of
Hydrocarbons?
--------------

4. (SBU) Hydrocarbons Minister Mauricio Medinaceli told
Econoffs recently that he had held four meetings with the MAS
hydrocarbons transition team, some of whom had
sector-relevant experience. These included Carlos Villegas
(MAS Economic Adviser),Jorge Alvarado (MAS candidate for
Cochabamba Prefect who has an energy background and some
knowledge of the sector),Barninia Daza (affiliated with
YPFB, the State Oil Company),Eduardo Valdiviezo (former
employee of Chaco oil company),Andres Solis Rada (leftist
journalist and former NFR deputy),and several individuals
affiliated with social sector watchdog groups. Medinaceli
lamented that his administration would not be able to
implement four recently drafted supreme decrees (reftel),as
the incoming administration had pressured them to take no
action. The four decrees concern: 1) lowering the price of
jet fuel for international carriers; 2) changing gas

transportation regulations -- U.S.-invested Transredes is
waiting for these regulations to secure loans to move forward
on a pipeline construction project that has been pushed by
the GOB; 3) regulations concerning royalty payments; and 4)
regulations on tax breaks for producers with small fields,
which will affect U.S.-invested Vintage Petroleum. (Note:
Vintage representatives are satisfied with the proposed
regulations. End note.) Medinaceli also complained that the
MAS transition team had disclosed information from the
meetings to the press, including the idea that the price of
Bolivian gas sold to Argentina would increase. Medinaceli
told us that, judging from his discussions with the
transition team, the MAS understood "nationalization" to mean
moving from shared risk contracts to operation or
service-based contracts, coupled with the state's assuming
control over the commercialization of gas.


5. (SBU) Comment: The MAS economic transition teams appear to
place a premium on social sector representation rather than
on subject matter expertise. This could play well with the
future government's social sector bases in the early going,
but the lack of experience and the flirtation with
investment-unfriendly ideas could prove costly in the longer
run. End comment.
GREENLEE