HONDURAN FUELS: THE SEARCH FOR A CALM DIALOGUE

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 000534

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: 03/16/2016
TAGS: EPET ENRG PGOV PREL PINR VZ HO
SUBJECT: HONDURAN FUELS: THE SEARCH FOR A CALM DIALOGUE

REF: A. (A) TEGUCIGALPA 482


B. (B) TEGUCIGALPA 505

C. (C) TEGUCIGALPA 521

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


1. (C) Summary: At present the decision on if and how to
implement the recent decision to have the GOH itself offer a
public fuel tender rests with the GOH. Over the coming
weeks, however, Post plans to encourage both GOH and private
sector interlocutors to engage in a process of calm and
reasonable dialogue on next steps and alternatives. The
sense of urgency generated by the initial burst of activity
-- including the snap GOH decision to implement the import
scheme (ref A),a series of Congressional and Presidential
public statements on the issue (ref B),and Ambassador's
private demarche on President Zelaya (ref C) -- served to
generate appropriate public debate, but such overt
interventions have perhaps now run their course. A public
debate over the fuels issue, now in full swing (without any
obvious Post involvement),has put many of the key issues on
the table and seems to have slowed momentum towards
precipitous GOH action. While it is far too early to
definitively say that the GOH is prepared to engage
meaningfully in seeking a face-saving exit from this morass,
it now seems appropriate to push behind the scenes for such a
dialogue. End Summary.


2. (C) As reported ref C, Post seeks to offer President
Zelaya USG engagement on his proposal to move the country
toward a liberalized fuels market. This process would be
extremely delicate for the GOH both politically and
economically, and would likely take three years or more to
complete. Fortunately, according to former Minister of
Finance William Chong Wong, a World Bank study on market
liberalization already exists, paving the way to open a
discussion on that topic. Moreover, according to IMF
Resident Representative Hunter Monroe, the GOH's own
Technical Petroleum Unit (UTP) statistics clearly indicate
that in Central America liberalized markets enjoy lower fuel
prices than managed ones. USG engagement on this topic would
also be useful, but should, in Post's view, be confined to a
limited role of impartial source of analysis and advice.


3. (C) According to Esso Country Manager Daniel Mencia, the
oil companies themselves would welcome such a move towards
liberalized markets. Mencia notes, for example, that it
remains a struggle for him to persuade his corporate
management to invest in Honduras because of its managed
market. Liberalization would free him to compete more
effectively, in his view. He lamented to Post that he had
repeatedly offered to discuss such issues with the GOH, but
we note that, to date, Esso has not offered a credible plan
as an alternative. Esso has also offered to craft a joint
public outreach campaign with the GOH to lay the foundations
for such a move with the public, but this effort has been
repeatedly rebuffed. Post considers that this was part of
was a deliberate political strategy on the part of the GOH to
set the oil companies up as the bad-guys, and notes a number
of occasions on which such overtures were rejected by the
GOH. The most egregious, per ex-Minister Chong Wong, was the
GOH Commission of Notables refusal to take the above-cited
World Bank study into account during its deliberations.
According to Chong Wong, the Commission's consultant rejected
the study because it did not fit his pre-conceived idea of
moving to a state-managed system. (In other words, Chong
alleges, the Commission picked its facts to fit the
conclusion they had already decided they must reach.)


4. (C) That said, there are some encouraging signs that the
GOH is realizing the difficult position it has placed itself
in. In conversations with oil company representatives,
Minister of the Presidency Yani Rosenthal has begun
distancing himself from the policy, noting that he is only
following the Commission's recommendations. Vice President
Santos has long opposed the plan privately, and is now
publicly managing-down expectations and generally showing

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greater leadership in the fuels policy debate. Even
President Zelaya -- a self-professed supporter of free trade
-- now claims to be seeking political cover to move towards
liberalized markets. While we are not convinced the will is
yet there to reverse the bid solicitation process, we are
hopeful there is a growing willingness to consider
alternatives. As one businessman put it to Ambassador, the
oil companies "need a Plan B."


5. (C) There is no doubt that the GOH decision to abruptly
change policy regarding oil imports was ill-conceived, poorly
executed, and risks alienating and discouraging both current
and potential investors. On the eve of CAFTA entry into
force, it was, put bluntly, a very poor policy choice. Post
remains committed to using this as a teaching opportunity for
the GOH, to emphasize the vital importance of transparent and
participatory decision-making, and of predictable, credible
rule sets in maintaining investor confidence. While the GOH
actions do not imperil CAFTA, they certainly imperil its
success to the extent that they cause investors to look
elsewhere for their investment opportunities. Many in the
business community are now making this point publicly; Post
will continue to make this point in its contacts with GOH
officials as well.


6. (C) Post has been equally frank with the oil companies
themselves about the creative and constructive role they must
play in resolving this situation. While Post (and to a
limited extent, Washington) can provide support and perhaps
leverage at key moments, the companies are responsible for
engaging with the GOH in crafting a plan and selling it to
the public. The GOH is in a box of its own making, but it is
clearly in the oil companies' interest to help the GOH find a
politically viable way out. (Comment: Nor can the companies
rely on USG claims of expropriation. The current petroleum
import regime is based on licenses, which Mencia admitted
could be legally revoked by the GOH. Under those
circumstances, it is far from clear that any expropriation
has taken place, and Post feels it would be unwise for the
companies to use that issue to pressurize negotiations. End
Comment.)


7. (C) In a March 16 meeting between Ambassador, business
magnate Freddy Nasser, and EconChief, Nasser agreed with
Post's analysis of both the political and economic threats
posed by this situation. While Nasser could not present an
exit strategy, he clearly grasped the fundamentally political
nature of the problem. That said, he noted that many in the
Zelaya Administration are young and inexperienced, and
passionate about improving the quality of life for Honduras'
poor. Educating them on the economic realities and risks
posed by the GOH import plan will take time and patience. In
the meantime, Nasser said he is telling his own staff to
"calm down."


8. (C) Comment: The GOH plan, and particularly the process
that led to its adoption, is dangerous for Honduras and puts
at risk its future growth. The Zelaya team used a highly
inflammatory social issue as political fodder, and is now
paying the price. The GOH must simultaneously find a way to
calm public passions on fuels while identifying a technical
solution to a long-standing and complex sectoral policy
problem. We don't believe the Zelaya team fully comprehends
as yet how deep a hole they are in, but they are starting to.
We are cautiously optimistic that, once they do, they would
accept an extended hand from the oil companies and others to
help them climb out. This will require creative and credible
engagement by the companies, and genuine will (not political
theatre) by the GOH. In the meantime, as Nasser sagely
advised, both sides should take a deep breath and calm down.
End Comment.

Ford
Ford