Mixed Signals from GOE Complicate New Airport Negotiations

C O N F I D E N T I A L QUITO 000899

NOFORN
SIPDIS
STATE PASS OPIC AND EX-IM

E.O. 12958: DECL: 2019/10/23
TAGS: EAIR ECON EFIN PREL BR CA IDB OPIC EXIM
SUBJECT: Mixed Signals from GOE Complicate New Airport Negotiations

CLASSIFIED BY: Heather Hodges, Ambassador, State; REASON: 1.4(B),(D)


1. (C) Summary: Meetings on October 14 and 15 between project
lenders, Quiport, and the Quito Mayor's office resulted in a
one-page protocol that, if ratified by all parties, would allow the
Mayor's office to comply with a recent Constitutional Court
proclamation and avoid pushing the new Quito international airport
project into arbitration. OPIC and Ex-Im were quietly optimistic
that the protocol would lay a path for a renegotiated concession
contract, a notion seconded by Mayor Augusto Barrera in an October
16 meeting with Ambassador Hodges (septel). However, ratification
of the protocol hit a snag on Oct 19 when Ecuador's Comptroller
General, Carlos Polit, published a full-page letter in the Quito
daily "El Comercio" proclaiming the original airport concession
unconstitutional and certain guarantees issued by the municipality
criminal. The lenders in writing to Mayor Barrera on October 22
requested clarification of the Comptroller's statements and also
assurances that all Ecuadoran state institutions will respect the
lenders' rights under the original contract. End Summary.



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Two Steps Forward

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2. (U) On July 23, Ecuador's Constitutional Court, prompted by
Controller General Carlos Polit, ruled that under the new
constitution all airports and their fees are property of the
central government (ref B). The ruling, if implemented, threatened
to throw the new Quito international airport project into default.
Quiport, per the concession contract, uses the collection of
airport fees to service project debt held by four lenders: the
Overseas Private Investment Corporation (OPIC),the Inter-American
Development Bank (IDB),the Export-Import Bank (Ex-Im),and Export
Development Canada (EDC). A ray of hope came when the
Constitutional Court issued a follow-up "proclamation" on September
29 designed to clarify its July 23rd ruling. The September 29
proclamation defined a "period of transition" during which Quito
Mayor Barrera would have discretion over the airport fees while the
concession contract was renegotiated to bring it into compliance
with the new constitution. This allowed Barrera the legal
maneuvering room to keep airport fees in the hands of the lenders
so long as a process of renegotiation continued. In return, the
lenders and the project's guarantor, the Canadian Commercial
Corporation (CCC),agreed to continue funding construction on the
new airport.




3. (SBU) A second positive step occurred on October 14 and 15 when
the lenders met with Quiport and the Mayor's office to develop a
plan of action for renegotiating the concession contract. (Note:
For U.S. lenders, December may impose another deadline for any
potential arbitration filing, as Ecuador withdrew from the World
Bank's Convention on the Settlement of Investment Disputes (ICSID)
on June 6, and a six-month grace filing period expires in January

2010. End Note.) The meetings were organized around four working
groups focusing on the legal, financial, regulatory, and
construction aspects of the new airport. The result was a one-page
protocol that would provide structure and a time line, including a
mid-December deadline, for renegotiating the concession contract.
Representatives of the lenders returned home with the intention of
reviewing and ratifying the protocol by October 23. Members of
OPIC and Ex-Im expressed guarded optimism that the meetings had
laid a path to a workable solution to the airport debacle, noting
that a ratified protocol would uphold existing protections for
lenders during the designated renegotiation period.




4. (C) In an October 16 meeting with the Ambassador (septel),
Barrera echoed the positive sentiment of the lenders regarding the
October 14 and 15 meetings and the protocol. Barrera noted that a
signed protocol would "protect" him from the Constitutional Court's
July 23 ruling requiring public ownership of airport fees, and said
that he expected the lenders would ratify the protocol by
Wednesday, October 21. Barrera indicated his strong commitment to
seeing the airport project to completion and told the Ambassador
that he was investing all of his "political capital" in the
renegotiation process. He emphasized that since the municipal
government had kept airport fees in the hands of Quiport and the
lenders, he expected the lenders to maintain funding for new
airport construction. At the end of the meeting Barrera admitted
that the airport access roads were likely "two and a half" years

from completion (although he estimated two years during a
subsequent radio interview) but added that the new airport was now
8 months behind schedule. He blamed Quiport rather than the
renegotiation process for the delay.



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....And Two Steps Back

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5. (C) Hopes for a ratified protocol suffered a setback on October
19 when Quito daily "El Comercio" ran a full page declaration from
Comptroller General Carlos Polit. Polit, in the name of
"transparency," published findings from his office's investigation
of the airport project in 2007 that claimed the concession contract
and project guarantees were unconstitutional and criminal.
Although the finding had been subsequently refuted by the Attorney
General, Polit's newspaper stunt was enough to stop the lenders
from ratifying the protocol. The lenders reportedly are concerned
that Polit's declaration calls into question whether Barrera is the
point person on the airport project and has full authority to
renegotiate the contract, as he has claimed. According to the
Canadian Embassy, Polit is a supporter of former president
Gutierrez who might be seeking to embarrass the Correa government
with the failure of the airport.




6. (SBU) On October 22, the lenders, through their offshore
collateral agent Bank of America, N.A., requested in writing
clarification from the Mayor's office on the Comptroller General's
statement, and also asked for assurances that Ecuadoran authorities
will ensure that "all relevant State Institutions respect the
rights and remedies of the Secured Parties during both the
transitional period and afterwards." The lenders' letter informs
the Mayor's office that they will not be able to sign the proposed
protocol until this issue is resolved.




7. (C) Comment: Mayor Barrera has repeatedly stated that the
continuation of construction activities is a precondition for
renegotiating the concession. Given that shutting down
construction would start a cycle of layoffs, negative press, public
accusations, and political recrimination, we believe that failure
to disburse the construction funds and sign the new protocol would
reverse recent gains and place the project on a path to
arbitration.
HODGES