New Quito Airport's Phoenix-like Rebirth; Action Request on

C O N F I D E N T I A L QUITO 000077 SIPDIS TREASURY FOR ALEX CORREA E.O. 12958: DECL: 2020/02/10 TAGS: EAIR EFIN ECON OPIC EXIM PREL IDB EC SUBJECT: New Quito Airport's Phoenix-like Rebirth; Action Request on IDB Strategy REF: QUITO 21; 09 QUITO 1061; QUITO 5; 07 QUITO 2571 CLASSIFIED BY: Heather Hodges, Ambassador, State; REASON: 1.4(B),(D) ¶1. (C) Department assistance requested; please see paragraph ¶12. ¶2. (C) Summary: President Correa met February 4 with the developers/financers of the new Quito International Airport (NQIA), including OPIC and Ex-Im bank officials, and reassured them that they had his full support for a renegotiated deal that will enable the conclusion of the $600 million airport project. The meeting, a highpoint of ongoing discussions since August 2009 to save the airport deal, followed two and a half days of negotiations between the developers, project lenders, and Quito Mayor Barrera, which resulted in a new commercial agreement delivering immediate economic benefits to Quito. The two sides hope to finish a new Strategic Alliance Agreement and airport concession agreement this week and submit them to Ecuador's constitutional court for approval. Although the agreement is not yet at a point where the four lenders backing the project will release additional construction funds, President Correa's support of the new economic deal appears to have put the project back on the path to completion. The actions of the Inter-American Development Bank remain inscrutable to those involved in the renegotiation, and the Embassy requests State and Treasury assistance with determining the IDB's position and encouraging it to play a more constructive role. End Summary. New Commercial Agreement Triggers GoE Assurances to Lenders ¶3. (C) After the Ambassador's meeting with Quito's Mayor Barrera January 14 (ref A),representatives of the four lenders for the new Quito airport project, the Overseas Private Investment Corporation (OPIC),the U.S. Export-Import Bank (Ex-Im),the Inter-American Development Bank (IDB),and Export Development Canada (EDC),urged Quiport, the private consortium that has the concessions on the current and new Quito international airports, to propose a new commercial arrangement to the mayor. (Quiport is comprised of Aecon and Airport Development Corporation, both of Canada, Andrade Gutierrez of Brazil, and Houston Airport Systems Development Corporation of the U.S.). ¶4. (C) Quiport's latest offer, which the Mayor accepted, provides the municipality with 26% of the airport's estimated profits. This was the amount Mayor Barrera believed had been agreed in meetings in November 2009 (ref B),and which he later complained was not accommodated when the verbal agreement was translated to paper. The new offer, which approximates 11% of the airport's regulated revenues (12% in the last five years of the concession),will provide the municipality with approximately $9.2 million dollars in the first year of airport operations, with the amount climbing during subsequent years. (The prior offer, from November 2009, paid the Municipality out of profits, meaning the city would have received the majority of its payments between years 11 and 35 of the concession - likely well after Mayor Barrera would have departed office.) According to Quiport's CFO Barry Morocho, in nominal terms the money earned by Quito is little changed from the deal reached in November, but the net present value of the new deal is much higher for the municipality (because payments are more front-loaded). Morocho noted that under the old deal, Quito would have received roughly $65 million over the first ten years of the contract, whereas the new deal will likely pay out over $120 million during that period. ¶5. (C) Quiport and the lenders behind the NQIA met February 2 with Mayor Barrera and his team to discuss the new commercial offer. During this meeting the Mayor, pleased by the new commercial agreement, offered a road map to the lenders and Quiport that explained which conditions precedent (CP) could be met by the municipality and which the central government would need to do. (The CPs are requirements of Quiport and the lenders that must be met prior to the signing of a new Strategic Alliance Agreement and the release of construction funds; among other protections, they provide protections in case of default or expropriation.) Previously the Mayor had appeared to show little interest in satisfying the lenders and Quiport's demands for the CPs. ¶6. (C) In mid-January, after consultations with Canada and OPIC, the Embassy requested a meeting with President Correa for the four lenders, Quiport, and the U.S. and Canadian Ambassadors. Although granted for January 28, the Embassy requested a one-week delay to accommodate continuing negotiations over the commercial deal. Following the February 2 meeting and the more lucrative airport deal, Mayor Barrera, who had previously opposed a meeting with President Correa, volunteered to lead the group, absent the Ambassadors, to meet Correa. President Blesses Airport Deal, Promises Support ¶7. (C) The half-hour meeting took place February 4, featuring President Correa, the Mayor and Vice Mayor of Quito, Minister of Foreign Affairs PatiC1o, Coordinating Minister of Production Nathalie Cely, Minister of Industry Abad, the head of Ecuador's Civil Aviation department, and Alexis Mera, the President's confidant and legal secretary. According to Quiport General Manager Philippe Baril, the President stated that the project would have "all his support for a rapid conclusion," while Alexis Mera said that whatever document the lenders needed to be signed or reaffirmed-referring for example to the investment protection agreement (IPA) that guarantees access to international arbitration -- would be signed. ¶8. (C) The President also told the visitors - one representative from each of the lenders, a representative from the Canadian and Brazilian firms building the project, and two representatives from Quiport - that although he was originally opposed to the deal, which he once called "highway robbery" (ref D),he was assured by the Mayor that the new deal was satisfactory and he was behind it. The lenders told the President that they might need his help to deal with some of the remaining outstanding issues, and OPIC's representative explicitly enumerated the most critical of the guarantees the lenders would need to resume disbursements for construction (i.e., the IPA). The President stated that Industries Minister Abad would be the GoE's lead on completing all necessary guarantees and agreements. ¶9. (C) President Correa, in his Saturday address February 6, and the Mayor, in a press conference February 8, praised the new airport deal, with the President calling it "extraordinary news," calling the original arrangement "terrible," and stating that "when investors see that Ecuador has clear ideas, when they see a strong position, they respect us." Headlines in the press focused on the Mayor's assertion that Quito would receive an additional $582 million over the life of the 35-year concession, with the municipality's total take rising to $877 million from $295 million in the original contract. ¶10. (C) Econoffs met February 8 with Philippe Baril, Barry Morocho, and Sandra Reed (Quiport's local counsel),to discuss the current status of the airport deal. According to Reed, the new economic deal received its final signature February 8 and is considered agreed. The lawyers from all sides are currently working to finalize drafts of the Strategic Alliance Agreement (SAA),revised airport concession, and the brief to the constitutional court requesting the court bless the new arrangements. The goal is to submit the paperwork this week to the court. Presuming the court rules positively on the package, Quiport expects to sign the SAA with the Mayor, and the lenders will then begin to release construction funding. The lenders have set a March 15 deadline for the GoE to complete all of the requirements in the SAA. ¶11. (C) Comment: We have reached the end of the beginning of the renegotiation. With a new economic deal offering Quito, and its Mayor, a sweetened pot, efforts to overcome the remaining CPs of the lenders have begun in earnest. We believe that the President's blessing of the project, surrounded by heads of ministries whose support will be needed, was a crucial step forward. The selection of Minister Abad as the GoE's point person for the airport project is also good news, as he has traditionally been an ally of the project, and actually negotiated the original IPA earlier in this decade. The President and his legal advisor's acceptance of international arbitration for the project, albeit under UNCITRAL rules and not ICSID, bodes well for resolving other difficult issues, such as a prosecutor's charge that the awarding of the municipal guarantee by Quito was a form of fraud. Having publicly put their stamp of approval on the airport project, we are cautiously optimistic that the President and the Mayor will now use their influence to ensure its success. ¶12. (C) Assistance Request: Although the IDB is one of the four lenders to the NQIA project, its current stance towards the project is unclear, and according to OPIC, Ex-Im, EDC, and Mayor Barrera, the IDB's current Washington-based negotiating team has taken increasingly obstructionist positions in recent months, supporting neither negotiations with the Ecuadorans to save the deal nor lenders' efforts to protect their interests by filing (and staying) arbitration cases. In contrast with its Washington-based team, the local IDB country representative has consistently backed the project, has striven to provide information and play a helpful role where possible, and told Econoffs this week that the Correa meeting had injected "a new enthusiasm" to the negotiations. Embassy Quito requests State and Treasury assistance in cautiously engaging the IDB in Washington to determine its position on the NQIA project, and also to inquire if the bank is aware that - according to the other three lenders - the current team is refusing to cooperate fully with its co-lenders in the project. We have an opportunity now to resolve this long-standing dispute, which has complicated Ecuador's relationships with both the IDB and the U.S. and Canadian governments, but a more proactive and constructive attitude from the IDB could be important to making this happen. HODGES