PORT DEVELOPMENT DELAYED AS CONSTRUCTION OF LA UNION PORT NEARS COMPLETION

UNCLAS SAN SALVADOR 001333



STATE FOR WHA/CEN



SENSITIVE

SIPDIS



E.O. 12958: N/A

TAGS: ECON, EINV, EWWT, ES

SUBJECT: PORT DEVELOPMENT DELAYED AS CONSTRUCTION OF LA UNION PORT

NEARS COMPLETION



REF: SAN SALVADOR 1238



1. (U) Summary. El Salvador is nearing completion of a $160 million

project to develop the port at La Union (in the Gulf of Fonseca) but

is still working to define who will develop and manage the port.

The project aims to develop a "dry canal" to transport cargo across

Central America and attract value-added processing to the region. A

proposed port concession has been blocked by opposition parties who

want the GOES to manage the port. The debate is costing valuable

time and may reduce El Salvador's competitive advantage as

neighboring countries pursue competing port projects. We expect

further delays and fear the port will not live up to its early

expectations of establishing El Salvador as a regional logistics

hub. End Summary.



A STRATEGIC INVESTMENT

--------------



2. (U) The Salvadoran Port Authority (CEPA) is nearing completion of

a $160 million project to develop the port of La Union as the first

post-panamax port (capable of handling ships too large to enter the

Panama Canal) on the Pacific Coast between Panama and southern

Mexico. The Japan International Cooperation Agency (JICA) invested

$130 million and the GOES borrowed another $30 million from the

Central American Investment Bank (BCIE) to finance the project. The

port will include passenger and bulk cargo docks as well as a

container dock capable of handling the equivalent of 500,000

containers (TEUs) per year. The port is 95-97% complete, after

delays due to the toppling of a construction crane and rocky ground

used for land reclamation. It was expected to be completed and

ready for operation (using the docking ships' cranes) by the end of

2008.



3. (U) The port is a key component of El Salvador's plans to

establish the country as a regional logistics hub. The GOES is

working with neighbors to develop a "dry canal" alternative to the

Panama Canal, allowing goods from Asia to be shipped to El

Salvador's Pacific port at La Union, trucked to the Caribbean ports

in Honduras and Guatemala and shipped to the eastern United States

and Europe and vice versa. Eventually, CEPA wants to develop a

railway link between those ports to improve efficiency and lower

transport costs. The GOES believes the port will attract further

investment in processing operations that would add value to the

goods in transit. Right outside of the port, a recently-built

building owned by one local investor stands ready to be adapted for

use as a value-added processing facility and there is ample

additional land in the surrounding area. CEPA has also designated

an adjacent area for further tourism-related business development.





4. (U) CEPA Construction Manager Mario Orantes told Econ and

Commercial officers on November 14 that the nearby city of Cutuco

has already seen its population increase by 35-40% since the port

construction project started in 2005. U.S.-based AES, which

controls 80% of the electricity distribution in El Salvador, is

planning to build a 250 Megawatt coal-fired electricity generation

plant right outside the port facility. Cutuco Energy, another

U.S.-based company, plans to build a Liquid Natural Gas (LNG)

electricity generation plant nearby the AES plant. That plant would

generate electricity for El Salvador and the surrounding region.

About a quarter mile away, the Spanish-owned fishery company Calvo

has a tuna processing plant.



DREDGING PROBLEMS IN ACCESS CANAL

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5. (SBU) Several sources have raised serious questions about the

cost of additional dredging to maintain the access canal for

post-panamax vessels. Officials from the Maritime Port Authority

(AMP) earlier informed Emboffs that a Dutch dredging company was

involved in litigation with CEPA over the extra dredging work they

had to perform due to a faulty survey of the canal. Construction

managers downplayed this issue, but acknowledged that CEPA was still

working on how to ensure long-term maintenance of the canal. In a

separate meeting with Econoff, a JICA official explained that silt

was gathering in the access canal at a much quicker rate than

expected. As a result, the GOES needs to evaluate options to widen

the canal or reduce silting to limit canal maintenance costs. The

port authority contacted dredging specialists from the U.S. Army

Corps of Engineers to request their assistance in assessing and

managing canal maintenance.



WHO WILL MANAGE THE PORT?

--------------



6. (U) As the port nears completion, the GOES has struggled to

finalize plans to develop and manage the port. Since 2007, Vice



President Ana Vilma de Escobar played a prominent role in attracting

major port operators like Maersk, Dubai Port World and other

companies interested in bidding on a planned port concession

project. A draft concession law was presented to the National

Assembly in April 2008, but the proposal was blocked by the PCN, a

small swing party in the Assembly. PCN legislators questioned

whether the GOES was giving up too much in exchange for the private

concession and argued the GOES should retain majority control of the

port. To assuage these concerns, President Saca formed a commission

headed by Vice President de Escobar to study port management

options.



7. (U) The commission concluded that a private concession would

accelerate the port's development but proposed that CEPA retain a

10% stake in the port management company. Vice President de Escobar

and others that Econ officers have spoken with, including the head

of COEXPORT and respected economist Luis Membreno argue that the

GOES does not have resources to finance the more than 400 million

dollars in infrastructure development, e.g., cranes, dredging,

monitoring equipment. They emphasize that CEPA needs the expertise

of an internationally reputable company to attract the type of

business that is needed to take full advantage of the port. Some

observers have noted that El Salvador's other sea port in Acajutla

is already run by CEPA and it is one of the most inefficient ports

in Latin America.

8. (U) President Saca has endorsed the recommendation of the

commission but appears to be exploring other options. His party's

(ARENA) Vice Presidential Candidate Arturo Zablah, a former head of

CEPA, wants CEPA to run the port and contract out various services

to private companies. With the PCN continuing to oppose the

proposed concession, Saca appears to have deferred to Zablah and the

ARENA Presidential candidate Rodrigo Avila has also publicly

supported Zablah's position.

9. The National Development Commission (CND) brought various

international port operators to El Salvador November 26 to discuss

the port concession. In essence, they reached the same conclusion

as the Vice Presidential commission that the country needed a

profitable master concessionaire to turn the port into a world class

operation. As the participants from Uruguay noted, the Government

of Uruguay has only a 20 percent share of their successful port

operations. Despite criticism of his proposal, Zablah has remained

steadfast in opposing a private concessionaire.

10. (SBU) Vice President de Escobar's Private Secretary Ricardo

Suarez told Econ Counselor on November 18 that he feared El Salvador

would soon lose its competitive advantage to develop the port. He

said that Mexico, Guatemala, Peru and Ecuador all had plans to

develop post-Panamax port facilities in competition with El

Salvador. He was pessimistic that anything would be decided this

year, which would mean further delays in providing additional

infrastructure and management needed to run the port. In a similar

vein, economist and CND member Roberto Rubio stressed the

opportunity that the port represented for El Salvador. He noted

that container traffic in Latin America has been growing at an

annual rate of 15 percent. Both Rubio and CND Coordinator Sandra de

Barraza also called for a world class port operator to operate the

port and attract international shipping business. Current CEPA

President Albino Roman also favors a master concessionaire for the

port. However, as this process drags on, CEPA may try to operate

the port temporarily using shipboard cranes to unload containers.

COMMENT

--------------

11. (SBU) One of the principal economic development goals of the

Saca Administration was to make El Salvador a logistics and

transportation hub for the region. It already enjoys one of the

best airports in Central America, the best road infrastructure and

an excellent reputation for its dedicated and productive workforce.

The decision on the port's management should have been made months

ago. Yet, President Saca appears willing to defer the decision for

the next administration. If it is not done this year, it will

likely be delayed even more, due to upcoming legislative elections

in January and the March presidential election. A new presidential

administration will not take office until June 2009, likely

prompting further delays.

12. (SBU) Several economists and former government officials

familiar with VP candidate Zablah told us that Zablah's steadfast

refusal to accept a master concession despite several independent

assessments to the contrary is not a surprise. They added that it

is also an indication of how Zablah would govern and create problems

for Rodrigo Avila, should ARENA win the presidential election.

13. (U) The Saca administration is scrounging for money to pay for

electricity (and other) subsidies (reftel) and does not have the

money to develop the port at La Union. In the current credit crunch

it will also be difficult to find outside financing. Meanwhile,

Panama is moving forward with its Canal improvements and the

increased competition from other countries will make it harder for

El Salvador to achieve its goal of becoming a regional logistical

hub.







BLAU