HONDURAN PRESIDENT ZELAYA NOW CLAIMS HE SECRETLY

S E C R E T SECTION 01 OF 03 TEGUCIGALPA 000521

SIPDIS

SIPDIS

STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, AND WHA/CEN
STATE FOR S, D, E, P, AND WHA
TREASURY FOR DDOUGLASS
STATE PASS AID FOR LAC/CAM
NSC FOR DAN FISK

E.O. 12958: DECL: 03/16/2036
TAGS: EPET ENRG PGOV PREL PINR VZ HO
SUBJECT: HONDURAN PRESIDENT ZELAYA NOW CLAIMS HE SECRETLY
WANTED A LIBERALIZED FUELS MARKET ALL ALONG

REF: A. (A) TEGUCIGALPA 482


B. (B) TEGUCIGALPA 505

Classified By: Classified By: Ambassador Charles Ford for reasons 1.4 (
b) and (d).


1. (U) This is an action cable. Please see para 11.


2. (S) Summary: In a private meeting, President Zelaya told
Ambassador he was solely responsible for the decision to move
to a state-run fuel import regime, but that he had done so in
the hopes the affected companies could convince the Honduran
public that it was a bad plan. The future failure of that
plan, he said, would give him an opening to liberalize the
fuels market -- his alleged true aim. Post is skeptical of
his explanation, but proposes to engage him on this issue in
order to quickly test his commitment to move to the
liberalized market he claims to want. Separately, former
President Carlos Flores expressed concerns at the potential
damage done to the GOH-USG relationship by Zelaya's recent
statements. Flores and Zelaya also reported that PetroCaribe
is off the table as an option. Post is skeptical and will
continue watching developments, particularly for signs that
PetroCaribe is still being pursued by the Zelaya team. End
Summary.


3. (S) Ambassador met with President Jose Manuel "Mel" Zelaya
the evening of March 15 to deliver a strong message of
support for U.S. oil companies facing possible expropriation
of their assets (ref A). The unpublicized meeting was hosted
by former President of Honduras Carlos Flores, who privately
told Ambassador that he was "stunned" by Zelaya's attacks on
the U.S. companies in his Monday press conference (ref B).
Flores said he is frustrated at the apparent mess Zelaya is
making of relations with the U.S. and sought to mediate a
rapprochement.


4. (S) Zelaya opened by admitting to Ambassador that he had
met with Venezuelan President Hugo Chavez while in Chile (a
senior aide had previously denied the meeting took place),
and that he had only "shaken hands" with Secretary Rice.
Ambassador noted that the new GOH administration will be
judged in part by the friends it chooses, and that by meeting
with Chavez while not even seeking a meeting with Rice,
Zelaya was sending a message. Zelaya took this on board, but
made no comment on the content of his talks with Chavez,
other than to say that PetroCaribe was not an option.
Separately, Flores had told Ambassador that the talks were
fruitless, as Chavez had reportedly rebuffed Zelaya, claiming
that he (Chavez) had his own problems to deal with and that
he did not want to provoke the USG further. He would be
willing to lend money to Honduras in an emergency, but that
was as far as he could go. In effect, Flores said,
PetroCaribe is off the table. (Comment: This does not sound
like Chavez to us. We also note that this report contrasts
sharply with the view of Vice President Elvin Santos, who had
confided to Ambassador the day before his belief that the
public tender is specifically aimed at allowing Honduras to
access PetroCaribe financing. Santos is now in Washington,
DC at a Microsoft conference. End Comment.)


5. (S) Discussion then turned to the March 6 decision to move
forward with an international tender for fuel imports.
Zelaya told Ambassador that the decision had been his and his
alone. According to Zelaya, the numerous ministers that
incorrectly told Post as late as the afternoon of March 6
that there would be no decision taken at the meeting that
evening were not lying, they simply did not know. Zelaya
admitted the plan is primarily political theatre and has
little economic justification. (Indeed, the consultant will
reportedly get a performance bonus even if the total savings
realized are as little as USD 20 million.) Zelaya decided to
announce the plan on March 6 because he feared that street
protests against fuel prices threatened for March 7 (when he
would be out of the country) could create a "governability
crisis."


6. (S) Zelaya also told Ambassador that he was disappointed

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at the weak defense from the oil companies to the proposal.
He claims his intent had been to allow the companies to prove
the bid solicitation is a bad idea, thus giving him political
cover to change course. (Comment: Zelaya's recent rhetoric
-- particularly his implication on March 13 that any failure
of the plan would be the result of a transnational oil
company conspiracy to sabotage it, and his subsequent threat
to prosecute them if there are shortages -- would have made
it impossible for the companies to follow his alleged
strategy in any case. End Comment.)


7. (S) Ambassador noted Zelaya's explanation of the political
motives for the decision, but explained that the results of
the decision could easily result in a de facto expropriation
of U.S. investor assets and rights. In an effort to avoid a
future crisis over such an issue, the Ambassador said, Post
requests that the GOH identify senior-level interlocutors now
to begin discussions of compensation to the companies.
Zelaya was visibly shocked by the suggestion that the
decision would require compensation, or that an expropriation
crisis was a possibility. Ambassador closed by noting that
in the event of such a crisis, the USG would intervene
forcefully in defense of U.S. investor rights.


8. (S) In a dramatic shift, Zelaya then told Ambassador that
he actually would prefer to liberalize the fuels market in
Honduras, along the lines of El Salvador. However, he does
not feel he could stand up to firebrand Juliette Handal,
leader of the &Patriotic Coalition,8 or to Roman Catholic
Cardinal Andres Rodriguez, both of whom supported the
international tender. He also said he could not stand up to
the vested interests of the domestic fuel distributors and
retailers -- who would certainly lose their bloated profit
margins under any reform plan. Instead, these constituencies
must first see the public tender fail, to give Zelaya room to
propose a liberalization scheme. Rather than tackle this
issue, Zelaya will seek to include fuels market reform as a
performance criterion in the next International Monetary Fund
agreement, scheduled for April.


9. (S) IMF Resident Representative noted separately on March
15 that inclusion of such a criterion would be "the surest
way to drive Honduras off the program." He questioned
whether the intent of such a request was to give the GOH an
excuse to later break faith with the Fund agreement. He also
noted that some probing of the issue has convinced him that
little or no analysis of the fiscal impact of the proposed
import scheme has been conducted. The IMF review team, in
Honduras this week, will raise this issue with the GOH as
appropriate.


10. (S) Post proposes two prompt responses to Zelaya's
announcement of his desire to liberalize the market. First,
the USG should seek to immediately engage the Zelaya
Administration by sending a team to explore his intent to
create a liberalized fuels market over the next two or three
years. Second, Post recommends a senior-level dialogue
between the affected companies and the GOH. To date all
contacts between the companies and the GOH have been at the
country manager level. If a crisis or expropriation is to be
avoided, senior corporate leadership should now get involved.
Such talks could be conducted privately, out of the public
eye, and could be linked to or part of the above discussions
on reforms and liberalization.


11. (U) Action request for State/EB, Energy, and Commerce:
Post seeks Washington agency assistance in identifying
technical experts in fuels market liberalization, regulation,
and administration who could travel to Honduras to engage in
a dialogue with the GOH on these topics. If Zelaya is
serious, the USG should be prepared to support his efforts at
liberalization. Such support should be coordinated with the
World Bank, which also provides intermittent technical
assistance to the GOH on fuels market issues.


12. (S) Comment: Post does not find Zelaya's alleged
strategy (using the bid proposal as a straw man to leverage
reform) credible. We do not feel the GOH has adequately

TEGUCIGALP 00000521 003 OF 003


considered the political and economic fallout of the game
they have chosen to play -- including but not limited to: its
budget impact; its impact on the economy; the potential for
expropriation compensation claims; the damage to investor
confidence; and strained relations with the U.S. Post also
remains unconvinced that PetroCaribe is off the table, and
will remain alert to signs of moves to access that program by
the GOH. We are unsure how to evaluate Zelaya's call for
liberalized fuel markets, but feel it is too good an
opportunity to pass up. If he is serious, a concerted effort
now could move Honduras towards an open, competitive, more
efficient market -- essential for long term growth and
investment. We should take him up on his offer, and push
hard for the reforms he claims to seek.


13. (S) Comment (continued): Far more troubling is Zelaya's
apparent strategy of letting difficult issues proceed to
crisis instead of confronting them. If he is unwilling or
unable to exercise leadership when confronted by a relative
political lightweight like Juliette Handal, how will he fare
when he must face down the teachers' unions on public sector
wages later this year? End Comment.

Ford
Ford