HONDURAS: CORRUPTION, ELECTRICITY, AND RELATIONS

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 001930

SIPDIS

SIPDIS
NOFORN

STATE FOR EB/IFD, WHA/EPSC, INR/IAA, WHA/PPC, AND WHA/CEN
TREASURY FOR AFABISHENKO
STATE PASS AID FOR LAC/CAM

E.O. 12958: DECL: 10/11/2016
TAGS: ENRG PREL ECON EPET PGOV HO
SUBJECT: HONDURAS: CORRUPTION, ELECTRICITY, AND RELATIONS
WITH TAIWAN


Classified By: Classified by Charge James Williard for reasons 1.5 (B,D
)


1. (C) Summary: Honduras is heading for rolling blackouts
within year, according to Leion "Leo" Starkman, outgoing head
of national electric company ENEE. GOH officials resist
reducing their costs for electricity purchases from as high
as USD 0.25 cents per KWh (for thermal generation) to just
USD 0.08 (for certain types of renewable generation). GOH
opponents claim they will pay no more than USD 0.06 for
renewable energy, yet they appear willing to pay up to USD
0.15 for new thermal generation projects. Starkman alleges
that this insistence on an unreasonably low tariff for
renewable energy is part of a plot by the current big three
private thermal electricity generators to block new entrants
until an energy crisis is upon Honduras, justifying new and
far more expensive "emergency" contracts based on bunker oil.
In the meantime, the GOH has ruled out rate increases and is
unwilling to exercise leadership in selling the public on
restructured contracts (lower prices over longer periods).
The GOH has yet to act on a new law to incentivize investment
in renewable energy, stalling progress on several viable
projects that could be on-line in as little as two years.
The GOH continues to champion a Taiwanese-sponsored
hydro-electric project, but that project will take six to
eight years to complete, and continuing conflicts over price
and timeline have twice scuttled scheduled state visits to
ink the deal. End Summary.


2. (C) The following information was presented by former
Minister Leion Starkman to EconChief on October 2. Starkman
was recently forced to resign from government under a cloud
of accusations of corruption and mismanagement. Starkman is
also known to have defaulted on private obligations owed by
his import/export company and is accused of other unethical
business practices (reported septel). Post finds that many
of the facts presented by Starkman correlate with observed
events, but assesses that Starkman has inflated his own role
in those events with the intent of winning USG favor.


3. (C) Leion Starkman Milla (DPOB 17 May 1968, San Pedro
Sula, Honduras) served until recently as Minister without
portfolio for Investment Promotion and later simultaneously
as Director General of the parastatal electric company ENEE.
In July a Commission was named to take over the task of
restructuring the failing company. Though nominally still in
charge, Starkman was stripped of all authority to sign
contracts and make deals. Starkman told EconChief that he
was pleased by the formation of the commission, since he
understood that any measures taken to fix the ailing
parastatal would be unpopular, and he did not want to be
personally blamed. Amid a flurry of attacks, Starkman
subsequently resigned both his ENEE and Minister positions on
September 22. President Zelaya, however, has yet to formally
accept those resignations, and Starkman traveled to Roatan on
September 30 on GOH business relating to electricity.


4. (C) Starkman, told EconChief on October 2 that corruption
remains endemic in the company, and that poor electricity
service is having a noticeable negative impact on investor
sentiment. According to Starkman, within one year the
Honduran economy could be facing "nine hour rolling
blackouts" if ENEE does not move immediately to install
additional generating capacity. (Separately, thermal
generation owner Schukry Kafie told EconChief that Honduras
has sufficient electricity to last through 2007, but could
encounter problems as soon as 2008 or 2009.)

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Engineering a Crisis?
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5. (C) One cause of the coming electricity shortages has
been lack of appropriate investment by ENEE, which continues
to lose up to 150 million lempiras (nearly USD 8 million) per
month. To address this, the new commission is looking at
technical and financial changes that can be made at the
company. Ordered to reduce payments to private sector
generators, the former head of ENEE Juan Bendeck convinced

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the firms to reduce fixed costs by extending current contract
terms, thus saving an estimated USD 2 million. Unsatisfied,
President Zelaya dispatched former Congressman Arturo
Corrales, who negotiated a deal for USD 7 million in savings.
Still unimpressed, Zelaya ordered Starkman to negotiate once
again. Starkman claims to have achieved a savings of USD 20
million, a reduction over current costs of nearly 15 percent.
Moreover, he told EconChief, this was done through
rescheduling only, such that the net present value of the
additional costs is zero. In other words, neither the GOH
nor the investors stood to lose money on the deal. This
proposal was then approved by the Commission responsible for
ENEE, and sent on to the President Zelaya. Zelaya rejected
the savings as insufficient. Amidst attacks on the GOH by
critics alleging that any extension of the contracts unfairly
benefits the private generators, the GOH seems to have lost
the will to sign any deal. In the meantime, ENEE continues
to lose money daily as expenses outstrip revenues.


6. (C) In addition to renegotiating the contract terms,
Starkman suggested expediting a proposed agreement with
unidentified U.S. or foreign companies to construct a
coal-fired electricity generating plant within 12 to 15
months. Given the specter of rolling blackouts, he said,
only a coal plant could come on-line within that timeframe,
and offer a potential means of diversifying the country,s
energy stock. The only near term alternative, to expand or
build new thermal plants, would play into the hands of the
current thermal generators and increase dependency on
volatile world oil prices. Starkman remained adamant that
the thermal players would continue to mount opposition to any
attempt to diversify away from fuel oil.

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Renewables: Talking a Good Game...
--------------


7. (C) Following the lead of President Jose Manuel "Mel"
Zelaya Rosales, the GOH has focused rhetorically on
diversifying its energy supplies away from its current near
70 percent reliance on fossil fuels (largely bunker fuel oil
and diesel). However, a bill to incentivize investment in
renewable energy generation has languished for more than a
year. Starkman told Post that, as Minister of Investment
Promotion, he drafted a forward-leaning bill based on
existing laws in Europe to spur such investments. The bill
would set fixed, reasonable costs to be paid for electricity,
averaging between USD 0.07 and 0.09 per kilowatt hour
depending on the generation technology used. Installations
of greater than 40 Megawatts would receive better terms, and
all renewable projects would receive a 10 percent premium and
preferential tax treatment. Starkman professed frustration
that his bill was stuck in the bureaucracy and faces
competition from a competing version of the law drafted by
the Ministry of Environment SERNA, which is also responsible
for energy matters. Starkman says the SERNA bill is not
welcoming of investment and would retard rather than spur new
projects. (Comment: Starkman's comments are self-serving
and likely designed to ingratiate him with the USG. That
said, based on Post's unhappy previous dealings with SERNA on
renewable energy projects, we find his criticisms of SERNA to
be credible. End Comment.)

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...But the Oligarchs Block Them Through Corruption
-------------- --------------


8. (C) According to Starkman, Of even greater concern is the
opposition by certain members of the Commission managing ENEE
to any renewable energy project. Starkman claims one
commission member (he did not name names) is being paid to
defend the interests of the existing thermo-electric
generators. To that end, he has blocked any effort to sign
contracts for renewable energy at any cost above USD 0.06 per
KWh. This cost is below the threshold of most greenfield
renewable energy projects, and thus makes most proposals
uneconomical. Starkman says the strategy behind this move is
to prevent installation of any new project for the next six
months. At that point it will be too late to install any

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technology but additional bunker or diesel fired
thermoelectric plants. The three major thermal generators
would thus retain their stranglehold on electricity
generation. Showing his true intentions, the commissioner
told the commission that USD 0.08 was far too high for
renewable energy, but that he would favor paying up to USD
0.15 per KWh for additional thermal generation to meet the
coming electricity "crisis."


9. (C) This corruption may have held up several projects of
which Post is aware: in one instance, a nearly 100 MW wind
project remains stalled after over a year of wrangling,
largely with SERNA. In another case, Starkman indicated that
two sugar mills have proposed adding 30 MW each of
bagasse-fired electricity, but again, despite being less
expensive than the fossil fueled alternative, the move is
being blocked as too costly. Most recently, a U.S. firm has
proposed a 120 MW biomass plant that would use a species of
grass to produce biodiesel, which it could then use to
generate electricity. The biodiesel can be stored to
mitigate risks of supply disruption, and can be refined
further for use as a transportation fuel (to improve overall
project economics). Further, by using the fuel as biodiesel
instead of biomass-derived natural gas, the project can use
more robust and less expensive generation turbines. The
project would be viable at USD 0.075 per KWh, half the cost
of fossil fuels and two thirds of the average USD 0.115 per
KWh cost being paid by ENEE today. Starkman says he remains
supportive of the project, though it is unclear whether he
wields any influence at this point. Starkman also all-but
drooled over the profits thermo-electric generators earn, and
admitted he will enter that business if given an opportunity.
Should he do so, Post assesses he would quickly join those
forces seeking to stifle competition from renewable sources.
Post will continue to support renewable projects, but we note
that special interests continue cynically to attack such
plans as too costly.

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Taiwan: Argument Over Dam Derails Two State Visits
-------------- --------------


10. (C) Starkman then turned to hydroelectricity, championed
by Zelaya as the best solution to Honduras' energy needs.
Skeptics note that such projects are expensive, unpopular,
and take up to a decade to complete, and therefore cannot
meet the urgent needs of the country. The biggest proposed
project is Patuca III, a 300 MW hydro-electric dam to be
designed, built, and operated (DBOT) by the Electric Company
of Taiwan. The Taiwanese had originally proposed a two-year
period to gear up for construction, a six year construction
timeline, and then per KWh costs of USD 0.12 -- a price that
sector experts consider to be outrageous for hydro-electric
power. Starkman contacted an Italian firm, which presented
an offer of one year to start, four years to complete, and
USD 0.08 to operate. Starkman then told the Taiwanese they
must match those terms.


11. (C) Zelaya twice canceled state visits to Taiwan this
year, but finally departed for a visit there on October 7.
One of the publicly acknowledged goals of the visit is to
sign a deal for the Patuca III project. Starkman claims the
previously canceled visits were also intended primarily to
sign the Patuca III contract, but when the terms could not be
agreed to, the visits were scrapped. According to Starkman,
when the Taiwanese finally agreed to terms, Starkman
discovered they intended to seal the deal by signing an MOU.
Starkman objected, requiring instead a full power purchase
agreement (PPA) be drafted. He then hired an international
consultant to draft the contract, at a cost of USD 40,000 for
the estimated six to eight weeks of work. Starkman
considered this contract prudent in light of the potential
billion dollar deal, but others lambasted the decision as
waste, fraud and mismanagement. Though he continues to
defend the decision, the uproar over that contract proved to
be the final straw, prompting Starkman's September 22
resignation.


12. (U) Biographical Information on Leion Starkman

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forthcoming septel.

Williard

WILLIARD