FROM BAD TO WORSE: ENERGY FINANCES IN HONDURAS

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 001798 SIPDIS SIPDIS STATE FOR WHA/CEN, WHA/EPSC, EEB/ESC, EEB/OMA, USAID FOR EGAT/IE, LAC/CAM E.O. 12958: DECL: 11/15/2012 TAGS: ENRG EFIN EAID HO SUBJECT: FROM BAD TO WORSE: ENERGY FINANCES IN HONDURAS REF: REF A: 07 TGG 1647 Classified By: Ambassador Ford for reasons 1.4 (b) and (d). ¶1. (SBU) Summary: Due to rates that do not cover costs, Honduran state-run electric company ENEE is losing USD 300 million a year, equal to 3 percent of GDP. The Zelaya administration appears to be seriously considering a long overdue rate increase. Some businesses have said they would pay higher rates in return for a secure energy supply, but investors are hesitant to construct new power plants given ENEE's poor track record at paying its bills. Whether Zelaya can find the political courage to take substantive action is an open question. End summary. -------------- Financial Woes - From Bad to Worse -------------- ¶2. (SBU) Problems at ENEE -- cash flow losses, inadequate generation capacity, management chaos (reftel) -- have gone from bad to worse. A recent World Bank technical team reported in early November that, due to rising fuel prices, cash flow losses are now USD 25 million a month, or 3 percent of GDP. The Honduran Central Bank's estimate for ENEE's losses for 2007 is 2.7 percent of GDP. After taking into account deferred maintenance and deferred capital expenditures, total losses are USD 35-80 million a year higher. Furthermore, the World Bank estimate assumes a baseline price of bunker fuel (heavy fuel oil) of USD 70 a barrel, whereas the current price is USD 74 a barrel and rising. The Bank's estimate also does not take into account expected growth in electricity demand of 6-13 percent a year. President Zelaya is thought to be considering raising electricity rates, we assume because he has been persuaded that the mounting losses could have a severe impact not just on the GOH budget but on the broader financial system, given that commercial banks are being asked to finance unsecured ENEE debt. ¶3. (SBU) International banks have refused to accept ENEE paper without an explicit GOH guarantee. The GOH planned to issue ENEE letters of credit to raise USD 80 million to cover short term arrears. To date local banks have bought only 40 percent of this paper, and then only with an accounting change allowing them to count such paper toward their reserves. Last week the GOH announced it would draw from �A;public employee pension funds to cover ENEE's losses until a bond issuance can be arranged through the National Congress. This drew protests from the teachers union and drew increased public attention to the seriousness of ENEE's financial problems, which are now front-page news. -------------- Looking for Solutions -------------- ¶4. (C) Zelaya has thus far resisted raising rates because of political promises he made as a presidential candidate (reftel). However, in a recent private meeting, Zelaya told the Ambassador he would consider rate increases but was worried about media attacks and political fallout (he asked the Ambassador to persuade Honduran media barons to hold their rhetorical fire; the Ambassador would make no such commitment but indicated he would be prepared to make positive statements in public if the GOH were to present a credible reform package for ENEE that included rate increases). ¶5. (C) International donors and the Honduran Manufacturers Association have publicly stated their support for rate increases. The Vice President of the Central Bank privately lamented to Econoff this week the difficulties of convincing the IMF to renew its program here because of ENEE's unrealistic rate structure. ¶6. (C) Leaders of the Chamber of Commerce of San Pedro Sula, the business capital of Honduras, recently told EconOff their primary concern regarding energy was security of supply. They said they would be willing to pay higher rates so long as availability would be guaranteed and the increases would not put them at a disadvantage with competitors in other Central American countries. They also expressed an interest in hydro power for reasons ranging from environmental concerns to a belief that, while sometimes limited in drought years, hydro power is still more reliable TEGUCIGALP 00001798 002 OF 002 than thermal given the steadily rising prices of fuel oil. Luis Larach, whose family owns both thermal and hydro plants, said the new, long-delayed Renewable Energy Law promulgated in October, which offers tax incentives for projects under 50 MW, effectively places responsibility for large hydro projects in the hands of the state. -------------- Short Term Proposals -------------- ¶7. (C) Multiple sources from the GOH and private industry have told EconOff the next generation of Honduran power plants would run on coal. However, under current conditions, investors are hesitant to build plants of any type in Honduras. Private sector sources said there were no serious bids in response to the recent GOH solicitation to directly purchase 250 MW of new capacity (reftel). Freddy Nasser, who owns half the thermal plants in Honduras, told Econoff his and other companies had asked ENEE a multitude of technical and financial questions about the bid, none of which had been unanswered. This may explain why the date for announcing the bids has slipped from November 2007 to February 2008 at the earliest. ¶8. (SBU) A Ministry of Finance official said demand for energy would exceed installed capacity before new coal plants could come online. Therefore, ENEE is likely to purchase additional diesel capacity. Honduras's two existing diesel plants are currently shuttered because the cost to operate them is prohibitive. Filling the short-term power gap with diesel would therefore increase ENEE's losses even further. -------------- Comment -------------- ¶9. (C) In coordination with the IFIs, Post has been pursuing quiet diplomacy to convince the GOH to reform ENEE and raise rates. At 3 percent of GDP, ENEE's current rate of cash flow loss exceeds what the GOH will save this year in debt-service payments as a result of roughly USD 4 billion in recent international debt forgiveness. Although many high-level GOH officials seem to understand the fiscal nightmare ENEE is creating, the President himself must make the tough decisions to stop the hemorrhage. End comment. FORD