NICARAGUA: GOVERNMENT GOES AFTER FLAGSHIP BEACH RESORT

UNCLAS MANAGUA 000803 SENSITIVE SIPDIS STATE FOR WHA/CEN, EB/IFD/OIA, AND L/CID STATE ALSO FOR WHA/EPSC STATE PASS TO USTR TREASURY FOR INL AND OWH USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR E.O. 12958: N/A TAGS: ECON EINV NU SUBJECT: NICARAGUA: GOVERNMENT GOES AFTER FLAGSHIP BEACH RESORT REFS: A) MANAGUA 698, B) 07 MANAGUA 2376, C) MANAGUA 1789, D) MANAGUA 1663, E) MANAGUA 889 SUMMARY -------------- ¶1. (SBU) Barcelo Hotels and Resorts, the Spanish company that owns the Montelimar Beach and Resort, Nicaragua's flagship tourist destination, is under pressure from the Government of Nicaragua (GON) to pay a "fee" worth $1.5 million for allegedly not honoring a contractual agreement pertaining to the hotel's annual occupancy rate. Barcelo management asserts that the Sandinista National Liberation Front (FSLN) via the GON has fabricated this issue to pressure the company to relinquish the hotel's airfield and 173 acres of beachfront property for the FSLN's private business and personal interests. The GON's action against Montelimar is alarming investors in the tourism and real estate sectors, heightening their perception that investing in Nicaragua is unfortunately characterized by more risk than reward. NICARAGUA'S FLAGSHIP RESORT UNDER ATTACK BY GON -------------- -- ¶2. (U) Since February, the Nicaraguan newspapers have regularly reported on the contractual dispute between Barcelo-Montelimar and the GON. Attorney General Hernan Estrada claims that Barcelo owes the GON $1.5 million for having exceeded the average annual occupancy rate of 60 percent, a contingency stipulated in the original privatization contract. Barcelo contends that it honored its contractual agreement to the letter, and has dispatched senior executive management from Spain to discuss what it considers is a misunderstanding by the GON. The Spanish Ambassador has publicly defended Barcelo, asserting that he is sure that the company is right. ¶3. (U) Business associations have publicly voiced concerns about the dispute and have urged dialogue between Barcelo and the GON to resolve the matter. Many investors complain that the dispute is discouraging investment in Nicaragua's real estate and tourism sectors. They also worry about the Ortega administration's respect for the rule of law. From the GON's point of view, it is "righting the wrongs of past administrations in how they applied or misinterpreted the law" (Refs A-E). FIRST LARGE FOREIGN INVESTOR AFTER FSLN RULE IN 1980S -------------- -------------- ¶4. (SBU) On June 10, Econoff met with Walter Martino (protect), General Manager of the Montelimar Beach and Resort, Nicaragua's flagship tourist destination, to discuss its business dispute with the GON. Martino noted that Barcelo was the first significant foreign investor in Nicaragua when FSLN rule ended in 1990 and Nicaragua at that time was considered a very risky place to do business. In 1993, Barcelo signed a contract with the GON to purchase Montelimar for $3.03 million (Before the revolution in 1979, the property was owned by former Nicaraguan dictator Anastasio Somoza. The Sandinista government confiscated the property and using some European loans constructed a GON resort, of sorts). By 2006, the company had invested an additional $5.6 million to develop the hotel, beachfront, and related infrastructure, bringing its total investment to $8.63 million. ¶5. (SBU) Martino explained that the Chamorro administration offered a number of investment incentives to Barcelo, including a bargain price. Barcelo agreed to pay an annual contingency fee if the hotel averaged an occupancy rate of more than 60 percent in any given year from 1996-2006. Price Waterhouse Coopers conducted annual audits confirming that Montelimar never enjoyed an average annual occupancy rate more than 60 percent during the contractual period. Indeed, CORNAP, the government's property management company, sent Barcelo letters every year stating that the company had complied with the terms of its contract. ALLEGED CONTRACTUAL DISPUTE OVER OCCUPANCY RATES -------------- --- ¶6. (SBU) In November 2006, Martino attempted to document the conclusion of the contractual commitment, but officials in the outgoing Bolanos administration chose to pass the matter onto the Ortega government. In December 2007, Attorney General Hernan Estrada sent a letter to Martino claiming that Barcelo owed $1.5 million to the state for having exceeded the average annual occupancy rate of 60 percent. ¶7. (SBU) In April, a Managua civil court approved Estrada's request to prevent Barcelo from selling Montelimar while the GON sought to recover $1.5 million from the company. The GON has been pressuring the company, both publicly and privately, to pay. FSLN SEEKS PROPERTY TO CONTROL TOURISM INDUSTRY -------------- -- ¶8. (SBU) Martino believes the pressure to pay is nothing more than a negotiating tactic to take control of a small airfield on the Montelimar property, and perhaps 173 acres of beachfront property. Bayardo Arce, Economic Advisor to President Ortega, has "suggested" to Martino that Barcelo sell the airfield and beachfront property as a way to end the dispute. [Note: On June 13, President Ortega ratcheted the pressure further when he publicly ordered Mario Salinas, the President of Institute of Tourism, to see whether the state had a legal right to take possession of Montelimar. End note.] BARCELO INTENDS TO PROTECT ITS PROPERTY -------------- ¶9. (SBU) Martino reported that Barcelo will contest the charge that it breached its contract and launch a public relations campaign that will include Canada, Europe, and the United States, in addition to Nicaragua. Martino notes that the sales contract states that any dispute must be resolved through mediation by the World Bank. Martino explained that management believes Barcelo's reputation is on the line. Not taking a stand in Nicaragua could jeopardize its other investments throughout the world [Note: Barcelo Hotels and Resorts is the 24th largest hotel chain in the world with nearly 43,000 rooms. Montelimar is Nicaragua's largest hotel with 202 rooms. End note]. Ironically, Barcelo is about to finish construction of a luxury hotel in Managua. COMMENT -------------- ¶10. (SBU) Bacelo's difficulties with the GON have attracted the attention of business chambers and the rest of the tourism sector. Jose Adan Aguerri, the President of COSEP, the umbrella business organization, has urged the two sides to resolve their misunderstanding. Lucy Valenti, the President of the National Chamber of Tourism (CANATUR),has stated that the dispute is hurting the tourism sector and should be resolved as soon as possible. The move against Barcelo is the latest in a series of GON actions that have cast a pall over the tourism and real estate sectors. Few investors trust the Ortega administration's underlying motives for going after Montelimar. The GON's continuing ham-handed treatment of foreign investors has only heightened the growing perception among potential dealmakers that investment in Nicaragua is characterized by much more risk than reward. End comment. TRIVELLI