VZCZCXRO3814
OO RUEHLMC
DE RUEHTG #0534/01 0762301
ZNY CCCCC ZZH
O 172301Z MAR 06
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1504
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0331
RUEHME/AMEMBASSY MEXICO PRIORITY 6227
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC PRIORITY 0372

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 000534 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, AND WHA/CEN 
STATE FOR S, D, E, P, AND WHA 
TREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
NSC FOR DAN FISK 
 
E.O. 12958: DECL: 03/16/2016 
TAGS: EPET ENRG PGOV PREL PINR VZ HO
SUBJECT: HONDURAN FUELS:  THE SEARCH FOR A CALM DIALOGUE 
 
REF: A. (A) TEGUCIGALPA 482 
 
     ¶B. (B) TEGUCIGALPA 505 
     ¶C. (C) TEGUCIGALPA 521 
 
Classified By: Classified By: Ambassador Charles Ford for reasons 1.4 ( 
b) and (d). 
 
¶1. (C) Summary: At present the decision on if and how to 
implement the recent decision to have the GOH itself offer a 
public fuel tender rests with the GOH.  Over the coming 
weeks, however, Post plans to encourage both GOH and private 
sector interlocutors to engage in a process of calm and 
reasonable dialogue on next steps and alternatives.  The 
sense of urgency generated by the initial burst of activity 
-- including the snap GOH decision to implement the import 
scheme (ref A), a series of Congressional and Presidential 
public statements on the issue (ref B), and Ambassador's 
private demarche on President Zelaya (ref C) -- served to 
generate appropriate public debate, but such overt 
interventions have perhaps now run their course.  A public 
debate over the fuels issue, now in full swing (without any 
obvious Post involvement), has put many of the key issues on 
the table and seems to have slowed momentum towards 
precipitous GOH action.  While it is far too early to 
definitively say that the GOH is prepared to engage 
meaningfully in seeking a face-saving exit from this morass, 
it now seems appropriate to push behind the scenes for such a 
dialogue.  End Summary. 
 
¶2. (C) As reported ref C, Post seeks to offer President 
Zelaya USG engagement on his proposal to move the country 
toward a liberalized fuels market.  This process would be 
extremely delicate for the GOH both politically and 
economically, and would likely take three years or more to 
complete.  Fortunately, according to former Minister of 
Finance William Chong Wong, a World Bank study on market 
liberalization already exists, paving the way to open a 
discussion on that topic.  Moreover, according to IMF 
Resident Representative Hunter Monroe, the GOH's own 
Technical Petroleum Unit (UTP) statistics clearly indicate 
that in Central America liberalized markets enjoy lower fuel 
prices than managed ones. USG engagement on this topic would 
also be useful, but should, in Post's view, be confined to a 
limited role of impartial source of analysis and advice. 
 
¶3. (C) According to Esso Country Manager Daniel Mencia, the 
oil companies themselves would welcome such a move towards 
liberalized markets. Mencia notes, for example, that it 
remains a struggle for him to persuade his corporate 
management to invest in Honduras because of its managed 
market.  Liberalization would free him to compete more 
effectively, in his view.  He lamented to Post that he had 
repeatedly offered to discuss such issues with the GOH, but 
we note that, to date, Esso has not offered a credible plan 
as an alternative.  Esso has also offered to craft a joint 
public outreach campaign with the GOH to lay the foundations 
for such a move with the public, but this effort has been 
repeatedly rebuffed.  Post considers that this was part of 
was a deliberate political strategy on the part of the GOH to 
set the oil companies up as the bad-guys, and notes a number 
of occasions on which such overtures were rejected by the 
GOH.  The most egregious, per ex-Minister Chong Wong, was the 
GOH Commission of Notables refusal to take the above-cited 
World Bank study into account during its deliberations. 
According to Chong Wong, the Commission's consultant rejected 
the study because it did not fit his pre-conceived idea of 
moving to a state-managed system.  (In other words, Chong 
alleges, the Commission picked its facts to fit the 
conclusion they had already decided they must reach.) 
 
¶4. (C) That said, there are some encouraging signs that the 
GOH is realizing the difficult position it has placed itself 
in.  In conversations with oil company representatives, 
Minister of the Presidency Yani Rosenthal has begun 
distancing himself from the policy, noting that he is only 
following the Commission's recommendations.  Vice President 
Santos has long opposed the plan privately, and is now 
publicly managing-down expectations and generally showing 
 
TEGUCIGALP 00000534  002 OF 002 
 
 
greater leadership in the fuels policy debate.  Even 
President Zelaya -- a self-professed supporter of free trade 
-- now claims to be seeking political cover to move towards 
liberalized markets.  While we are not convinced the will is 
yet there to reverse the bid solicitation process, we are 
hopeful there is a growing willingness to consider 
alternatives.  As one businessman put it to Ambassador, the 
oil companies "need a Plan B." 
 
¶5. (C) There is no doubt that the GOH decision to abruptly 
change policy regarding oil imports was ill-conceived, poorly 
executed, and risks alienating and discouraging both current 
and potential investors.  On the eve of CAFTA entry into 
force, it was, put bluntly, a very poor policy choice.  Post 
remains committed to using this as a teaching opportunity for 
the GOH, to emphasize the vital importance of transparent and 
participatory decision-making, and of predictable, credible 
rule sets in maintaining investor confidence.  While the GOH 
actions do not imperil CAFTA, they certainly imperil its 
success to the extent that they cause investors to look 
elsewhere for their investment opportunities.  Many in the 
business community are now making this point publicly; Post 
will continue to make this point in its contacts with GOH 
officials as well. 
 
¶6. (C) Post has been equally frank with the oil companies 
themselves about the creative and constructive role they must 
play in resolving this situation.  While Post (and to a 
limited extent, Washington) can provide support and perhaps 
leverage at key moments, the companies are responsible for 
engaging with the GOH in crafting a plan and selling it to 
the public.  The GOH is in a box of its own making, but it is 
clearly in the oil companies' interest to help the GOH find a 
politically viable way out. (Comment: Nor can the companies 
rely on USG claims of expropriation.  The current petroleum 
import regime is based on licenses, which Mencia admitted 
could be legally revoked by the GOH.  Under those 
circumstances, it is far from clear that any expropriation 
has taken place, and Post feels it would be unwise for the 
companies to use that issue to pressurize negotiations.  End 
Comment.) 
 
¶7. (C) In a March 16 meeting between Ambassador, business 
magnate Freddy Nasser, and EconChief, Nasser agreed with 
Post's analysis of both the political and economic threats 
posed by this situation.  While Nasser could not present an 
exit strategy, he clearly grasped the fundamentally political 
nature of the problem.  That said, he noted that many in the 
Zelaya Administration are young and inexperienced, and 
passionate about improving the quality of life for Honduras' 
poor.  Educating them on the economic realities and risks 
posed by the GOH import plan will take time and patience.  In 
the meantime, Nasser said he is telling his own staff to 
"calm down." 
 
¶8. (C) Comment:  The GOH plan, and particularly the process 
that led to its adoption, is dangerous for Honduras and puts 
at risk its future growth.  The Zelaya team used a highly 
inflammatory social issue as political fodder, and is now 
paying the price.  The GOH must simultaneously find a way to 
calm public passions on fuels while identifying a technical 
solution to a long-standing and complex sectoral policy 
problem.  We don't believe the Zelaya team fully comprehends 
as yet how deep a hole they are in, but they are starting to. 
 We are cautiously optimistic that, once they do, they would 
accept an extended hand from the oil companies and others to 
help them climb out.  This will require creative and credible 
engagement by the companies, and genuine will (not political 
theatre) by the GOH. In the meantime, as Nasser sagely 
advised, both sides should take a deep breath and calm down. 
End Comment. 
 
Ford 
Ford