HONDURAN PRIVATE SECTOR OPPOSES ANNOUNCED GOH

S E C R E T SECTION 01 OF 03 TEGUCIGALPA 000086

SIPDIS

SIPDIS
NOFORN

STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, EB/CBA, AND WHA/CEN
STATE FOR D, E, P, AND WHA
STATE FOR S/ES-O MMILLER AND MSANDELANDS
TREASURY FOR AFAIBISHENKO
STATE PASS AID FOR LAC/CAM
NSC FOR DAN FISK
COMMERCE FOR MSELIGMAN
STATE PASS USTR FOR AMALITO

E.O. 12958: DECL: 01/15/2032
TAGS: EPET ENRG PREL BBSR NI VE HO
SUBJECT: HONDURAN PRIVATE SECTOR OPPOSES ANNOUNCED GOH
INTENTION TO SEIZE OIL FACILITIES; ESSO VOWS TO FIGHT BACK

REF: TEGU 0077 AND PREVIOUS

Classified By: CDA James Williard for reasons 1.4 (b,d)


1. (S/NF) Summary: Lawyers for U.S. firm Esso admit that
expropriations can be legal if carried out properly and
effectively compensated, so they continue to monitor closely
the GOH's implementation of its January 13 decree announcing
its intention to take control of private sector oil storage
facilities. However, they say, the GOH requirement to sell
gasoline inventories at below cost is equivalent to
confiscation, which is illegal and which they will forcefully
challenge. For the time being Esso will continue fuel
deliveries to Honduras, in part to avoid any breaches of
contract with its customers. That said, Esso clearly feels
that this time the GOH has "crossed the line." Esso seeks a
strong, public USG denunciation of this GOH attack on private
investment. The breadth of the Honduran private sector has
also come out against the surprise GOH move, and several
opposition political parties have criticized the intended
takeovers as well. Independent gasoline service stations
will suffer significant financial losses as they, too, are
forced to sell their inventories below cost. After a year of
cheering on the GOH as it sought to nationalize the fuels
sector (as long as only the international oil companies were
made to suffer the price),the small gas station owners
suddenly find their own losses from this policy a bitter pill
to swallow. End Summary.


2. (C/NF) Following the GOH's January 13 decision to go
forward with seizing control of privately-owned oil storage
facilities, U.S. firm Esso privately told EconChief that it
would fight back. To date, Esso has made no public
statements on the announced takeovers. In reviewing the
GOH's decree, Esso lawyers admit that under certain
circumstances expropriation or similar acts, if effectively
compensated, can be legal. However, they say that Esso
signed no contract with the GOH similar to DIPPSA's, and
therefore that the clause in DIPPSA's contract allowing the
GOH to take control of installations in an emergency is not
binding on Esso. Esso will therefore request from the GOH a
legal justification for its action. However, Esso lawyers
draw a clear distinction between the compelled use of the
facilities and the requirement to sell existing inventories
below cost. In their view, that act constitutes
confiscation, not expropriation, and is therefore clearly
illegal. Esso country representative Daniel Mencia estimated
the value of these gasoline and diesel inventories at up to
USD 20 million, just for Esso. "This time the Honduran
government has crossed the line," Mencia said. Echoing COHEP
President Mario Canahati's January 13 plea to EconChief,
Mencia says Esso is seeking a strong, public USG denunciation
of this GOH attack on private investment.


3. (C/NF) As the GOH plan to nationalize imports has
developed over the last year (reported extensively, reftels)
Mencia has found himself toning down the positions taken by
his headquarters. In this instance, however, he does not
think that will be possible and predicts that Esso's reaction
will be "very strong." Mencia did not leave Honduras, as
other companies' executives have done, and Esso lawyers
discarded the possibility of closing gasoline service
stations, fearing that would give the GOH legal grounds for
more radical actions. (Note: Similarly, Texaco service
stations also opened on time and are selling gasoline at the
new prices. End Note.) Regarding future deliveries, Mencia
confirmed that Esso has tanker deliveries scheduled through
April. Unless ordered to stop by the GOH, Mencia intends to
continue servicing his consumers, lest he breach existing
contractual obligations. Mencia admits, however, that his
headquarters could decide otherwise, or that the GOH could
order Esso to halt such deliveries.


4. (C/NF) Mencia indicated that he felt betrayed by the GOH

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action, coming as it did in the midst of ongoing negotiations
over how to resolve the current fuel import situation
amicably. The President's representative to those talks,
Arturo Corrales, had even called Esso's Vice President in the
U.S. to confirm that he was the GOH's lead on this issue and
that he was carrying out President Zelaya's personal
instructions in this matter. That call was placed on Friday
night, January 12. The following day, the President
announced his intention for the GOH to forcibly take control
of those same assets. Despite apparently having his
credibility destroyed by this turn of events, Corrales has
remained loyal to the President, though his remarks subtly
chastise the executive for his ill-considered actions. In a
January 14 interview, Corrales felt that the damage from the
takeovers could be contained if the GOH walked this policy
back and moved promptly towards liberalization of the sector.
If the GOH were to act immediately to reverse it, perhaps
the announced takeovers would be dismissed by observers as a
negotiating tactic, he speculated. (Comment: Post is
pleased to see Corrales continues to seek an exit to this
worsening crisis, but finds his assessment altogether too
sanguine that the GOH has not already done severe damage to
its image and its investment climate with this announced
seizure of assets and inventories. End Comment.)


5. (C/NF) On January 15, EconChief again spoke with DIPPSA
President Henry Arevalo, who said he is "extremely worried"
about the situation. He confirmed that he will keep his
January 15 meeting with the GOH. That meeting had been
intended to continue talks over leasing his storage
facilities, but Arevalo will now use the opportunity to learn
more about the seizure decree and the GOH's plans for
executing it. Arevalo will also deliver a strong message
that he rejects the announced takeovers, and that the only
course remaining to the GOH is to move towards liberalization
of the fuels market. Arevalo also made his opposition public
in a January 15 interview in which he decried the lack of GOH
respect for private investments and said that in Honduras
"there is no juridical security." (Comment: Arevalo also
gets credit for one of the wittiest published attacks on the
fuel bid solicitation process, when he told reporters that
the savings from the solicitation process would barely be
enough for the GOH to pay-off the reporters to report that
the solicitation was a success. End Comment.)


6. (SBU) Surprisingly, the Honduran private sector has nearly
universally denounced the GOH action, fearing that it will
"send the wrong signal" to investors. According to both
press accounts and private discussion, the Honduran
Manufacturer's Association (AHM),the Industrialists
Association (ANDI),the Chamber of Private Enterprise
(COHEP),and the two largest Chambers of Commerce have all
come out against the announced takeovers.


7. (U) Similarly, the Honduran political class is skeptical.
Congressional leader of the minority Nationalist Party, Juan
Orlando Hernandez, questioned the move, saying, "This is an
extremely sensitive matter, because we do not want to appear
to the rest of the world like a state that, when something
doesn't go its way, simply takes the investments away from
investors, whether domestic or international. That scares
away investment." Leader of the tiny but centrist opposition
party PINU, Olban Valladares, also questioned the move,
saying, "The cure could be worse than the disease."


8. (C/NF) In an ironic twist, even the Association of
Independent Gas Station Owners (ADHIPPE) has come out against
the move. Following brisk winter vacation fuel sales, many
independent gas station owners had recently refilled their
tanks. The new decree, by forcing them to sell below cost,
will inflict significant financial losses on these small
businesses. ADHIPPE President Sarahi Silva has given both
print and radio interviews highlighting this problem, and
lamenting the fact that ADHIPPE members should be negatively

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impacted by the GOH actions when ADHIPPE has been one of the
staunchest supporters of the GOH move to nationalize fuel
imports.

Williard



FORD