PRIVATE SECTOR VIEWS OF HUMALA: THE MAN WITH NO

C O N F I D E N T I A L LIMA 001258 SIPDIS SIPDIS USTR FOR BHARMAN COMMERCE FOR 4331/MAC/WH/MCAMERON TREASURY FOR OASIA/INL WHA/AND, WHA/EPSC, EB/TPP/BTA E.O. 12958: DECL: 03/27/2014 TAGS: ETRD ECON EINV PGOV PE SUBJECT: PRIVATE SECTOR VIEWS OF HUMALA: THE MAN WITH NO PLAN REF: A. LIMA 1247 ¶B. LIMA 728 Classified By: Ambassador J. Curtis Struble. Reasons: 1.4 (b/d). ¶1. (C) Summary: Spanish investors in Peru are taking a wait-and-see attitude to leading Presidential Candidate Ollanta Humala, but most believe they can live with what he might do, according to the Spanish Ambassador. Private sector representatives in the mining, oil, and gas sectors, including some Spanish investors, are increasingly concerned about Humala's comments and hostile attitude toward them. The Mining, Petroleum, and Gas Society President described Humala and his technical team as uninformed, incoherent, and without a clear plan. While some business leaders we consulted do not believe Humala will nationalize private companies, he undoubtedly will raise their taxes, royalties and permit fees. Some U.S. company representatives expect the investment climate will deteriorate and several planned investments under consideration could fail to materialize under a Humala administration. End Summary. Spanish Firms Confident of Weathering Humala Government -------------- -------------- ¶2. (C) The Ambassador on March 27 met privately with Spanish Ambassador Julio Cuesta de Albi to compare notes on contingencies being taken by the business community in the event of a Humala electoral victory. According to Cuesta de Albi, Spanish investors expect a Humala government to increase the cost of doing business, but most of them believe they can weather what Humala intends to do. Many of the Spanish business leaders are reassured by the role of Humala's vice presidential candidate Gonzalo Garcia, calculating that the Central Bank Board member is sincerely interested in maintaining macroeconomic stability and unlikely to adopt too radical a course. ¶3. (C) The Spanish Ambassador indicated that Humala is an untested leader with no business experience, and that Spanish firms will take a wait-and-see attitude. It remains to be seen whether Humala would continue to listen to Gonzalo Garcia or swing in another direction once in office. Another concern is whether he would give investors adequate protection when commodity prices drop or rigidly insist on higher royalties. The Spanish Ambassador had the impression that a couple of Spanish firms have already opened backchannel lines of communication to the Humala camp. (Note: he did not identify them, but we suspect them to be Telefonica and Repsol. End Note.) ¶4. (C) Spanish investors in mining are more worried than other firms, the Spanish Ambassador added. He sees that fear as justified, inasmuch as Humala's discourse on mining is tougher, charging that the mines do not generate employment (except for guards and drivers),export rocks rather than value-added products, and leave nothing but pollution and a hole in the ground. Humala's Team Lacking -------------- ¶5. (C) The President of the National Society of Mining, Petroleum, and Power (SNMPE) Carlos del Solar told us on March 24 about his two meetings with the Humala camp. The first, a four-on-four, lasted two hours. The meeting revealed the limited knowledge of Humala's leading advisors, who had no plan and hold deep prejudices based on a lack of information. Accompanying Humala were VP candidate Gonzalo Garcia, businessman and Humala confident Salomon Lerner, and Teofilo Casas, a former head of ElectroPeru that President Toledo had fired early in his term. In the second meeting with Humala's so-called technical team, Casas participated again with nine others, most of whom were long-ago retired engineers from PetroPeru. ¶6. (C) Del Solar described Humala and his team as incoherent, uninformed and clueless on the key issues of Peru's mining and other extractive industries. Del Solar expressed disappointment with Gonzalo Garcia, noting that he expected more from a Central Bank Board member. Del Solar identified Casas as an extremist on the mammoth Camisea natural gas pipeline project, and feared that he would be Humala's choice as Minister of Energy and Mines. (Note: Carlos Del Solar also serves as Hunt Oil's top executive in Peru overseeing Phase II of the Camisea project, which envisions exporting gas to Mexico and the United States. Nonetheless, he said Hunt Oil is moving ahead with its plans.) ¶7. (C) Del Solar highlighted the bizarre exchange on Humala's nationalization plans. Humala stated that the government should have a larger share and participation in the extractive industries. When Del Solar emphasized that the government receives more than 50 percent of company profits in taxes and royalties, Humala concluded then that there should not be a problem. However, before departing, Humala stated that he hoped there were no traitors in the group; otherwise they would see them in the trenches, shooting at each other. U.S. Companies Worried and Waiting -------------- ¶8. (C) Among the U.S. energy and oil companies we contacted, none have requested to meet with Humala. Maple Gas President Rex Cannon expressed concern to us about Humala's advisors, who he said appear to be socialists with poor economic credentials. If Humala were to become President, Maple Gas hopes to continue to work with the career officials at the four key government entities on energy issues. Cannon did not expect Maple Gas to be a likely immediate target because its operations (petroleum production, refining, and power generation) have not generated controversy. Cannon said the firms that should worry are those with high media attention and a perception of excessive profits, environmental problems, and social conflicts. ¶9. (C) Canon cautioned, however, that the firm would consider the rapid dismissal of GOP agency professionals as a very negative sign. Any expropriations by the new administration would also force them to reconsider their options. Despite the campaign rhetoric, Cannon did not expect Humala to nationalize an industry right away or outright, or throw out a company like Camisea pipeline operator TGP. Cannon expected an Humala administration to impose higher taxes, permit fees, and royalties. He lamented that projects in the planning or negotiation stage are particularly vulnerable, because new permitting requirements could be imposed or even renegotiation of contracts. Maple Gas has some pending plans, such as an oil drilling project and an ethanol plant, both of which may be delayed until the direction of the new government is more clear. Comment: Foreshadowing Rough Times Ahead -------------- ¶10. (C) Humala's threatening rhetoric, uninformed advisors, and lack of a coherent plan are a dangerous combination. Mistrust of the private sector runs high, as demonstrated by Humala's refusal to meet with the head of Peru's largest confederation of industry associations (CONFIEP). There are several Humala targets in the business community. For example, Yanacocha gold mine (majority owned by Denver-based Newmont) is among the largest income tax contributors in Peru, and Humala recently singled out the firm for not paying royalties. If Humala were to win, many in the private sector expect new hurdles and bureaucratic problems, which will adversely impact on Peru's investment climate. STRUBLE