VZCZCXYZ0000
PP RUEHWEB

DE RUEHMU #0803/01 1761426
ZNR UUUUU ZZH
P 241426Z JUN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC PRIORITY 2793
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHMD/AMEMBASSY MADRID 0491
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

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