US embassy cable - 02TEGUCIGALPA3184

AES AND ELECTRICITY TENDER: GOH AWARDS TO LUFUSSA DESPITE FAILURE TO COMPLY WITH BID REQUIREMENTS

Identifier: 02TEGUCIGALPA3184
Wikileaks: View 02TEGUCIGALPA3184 at Wikileaks.org
Origin: Embassy Tegucigalpa
Created: 2002-11-21 15:29:00
Classification: CONFIDENTIAL
Tags: ENRG BEXP EINV ECON EAID PREL HO
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 05 TEGUCIGALPA 003184 
 
SIPDIS 
 
STATE FOR WHA, WHA/CEN AND EB/CBA 
GUATEMALA FOR COMATT: DTHOMPSON 
 
E.O. 12958: DECL: 11/21/2012 
TAGS: ENRG, BEXP, EINV, ECON, EAID, PREL, HO 
SUBJECT: AES AND ELECTRICITY TENDER: GOH AWARDS TO LUFUSSA 
DESPITE FAILURE TO COMPLY WITH BID REQUIREMENTS 
 
REF: A. (A) 01 TEGUCIGALPA 2872 
 
     B. (B) TEGUCIGALPA 02207 
     C. (C) TEGUCIGALPA 02857 
 
Classified By: Ambassador Larry Palmer; Reasons 1.5 (B) and (D). 
 
------- 
SUMMARY 
------- 
 
1. (C) The Honduran state-owned electricity company ENEE 
announced that Honduran company Lufussa was the winner of the 
210MW electricity tender, ignoring Lufussa's failure to 
comply with bid requirements and serious allegations of 
impropriety.  ENEE's decision represents a heavy blow for 
U.S. company AES, which seeks to build a USD 600 million 
combined cycle plant producing 850 MW of energy, fueled by 
liquefied natural gas.  AES has identified a number of 
weaknesses in the decision and plans to challenge the 
contract award through administrative and judicial channels, 
if necessary.  The GOH has not adequately explained these 
apparent discrepancies to date.  Embassy recommends that the 
USG support AES in its challenge of the bid results.  While 
post does not necessarily recommend a direct linkage between 
this issue and USG assistance, it would be helpful to delay 
any announcements of new assistance or initiatives at this 
time.  End Summary. 
 
--------------------------------------------- -------------- 
ENEE ANNOUNCES LUFUSSA BEAT OUT AES, WITHOUT SUBSTANTIATION 
--------------------------------------------- -------------- 
 
2. (C) On November 15, the Board of Directors of the 
state-owned electricity company ENEE announced Honduran 
company Lufussa (owned by the Kafie family) was the winner of 
the 210MW electricity tender.  ENEE indicated that Lufussa 
had provided the lowest evaluated price per kilowatt hour of 
$.04638, followed by Comercial Laeisz at $.04797, AES at 
$.04825, ENERSA at $.04847, NAINSA at $.05078 and El Triunfo 
at $.05337.  No documentation was provided on the assumptions 
underlying these calculations.  The official notification of 
the results was delivered to the bidders on November 19. 
 
3. (C) ENEE's decision, if not overturned, represents a heavy 
blow for U.S. company AES, which seeks to build a USD 600 
million combined cycle plant producing 850 MW of energy, 
fueled by liquefied natural gas.  Successful acquisition of 
this contract would have provided AES sufficient security of 
demand, along with its contracts in El Salvador, to complete 
financing arrangements and begin construction of the plant 
and LNG terminal.  AES is concerned about perceived 
irregularities and a lack of transparency in the evaluation 
process.  They continue to seek the supporting documentation. 
 Post expects the company to issue a challenge to the bid 
award by November 26.  If the appeal is denied and AES 
decides to sue in the courts for redress, this challenge 
could tie up the tender for months or even years, thus 
delaying the GOH's phase-out of extremely expensive 
short-term electricity contracts. 
 
4. (C) The USG (both at the Embassy and in Washington) has 
heavily advocated for a fair and transparent process (ref c). 
 In the past month, Embassy approaches have been complemented 
by letters from Commerce Secretary Evans and Under Secretary 
of State for Economic, Business and Agricultural Affairs Alan 
Larson.  EmbOffs have been repeatedly assured by numerous 
high level Honduran officials, including President Maduro, of 
their commitment to a transparent and technically correct 
process.  Nonetheless, serious flaws in the GOH's management 
of the process have emerged. 
 
5. (C) On November 18, Minister of the Presidency Luis 
Cosenza and presidential counselor Ramon Medina Luna met with 
Ambassador and DCM to explain the GOH's position on the 
results of the project.  Cosenza started by explaining the 
process used to ensure fairness and transparency - the 
Evaluation Committee included representatives from Probidad 
Administrativa (the GOH's ethics office), the Attorney 
General's office, and the Controleria (akin to the OMB or 
GAO).  A transparency committee of outside observers was also 
formed to certify that all procedures were followed 
correctly.  There was unanimity among all the representatives 
on the results of the bid.  Given this unanimity, Cosenza 
asserted that there was no defendable way for the Board of 
Directors of ENEE to disregard the recommendation or for the 
President to refuse to sign off on it.  Cosenza also 
explained that there was a five-week delay in announcement of 
the bid results to accommodate a request from new officials 
in Probidad Administrativa to have time to review the whole 
process.  Although the GOH was aware that the delay would add 
to questions about the fairness of the process, it was 
necessary to let Probidad's review take its course. 
6. (C) During the meeting with Cosenza, Ambassador and DCM 
questioned the lack of availability of the data on which the 
decision was based, the lack of action on allegations of 
impropriety, and the failure to disqualify national firms 
early in the process who failed to meet the minimum 
requirements of the bid.  Cosenza was apparently nervous and 
defensive throughout the meeting, but did not acknowledge GOH 
failings in these areas.  At the end of the meeting, Cosenza 
offered to send the members of the transparency committee to 
the Embassy to brief the Ambassador personally.  The meeting 
is scheduled to take place on Friday morning, November 22. 
 
---------------- 
AREAS OF CONCERN 
---------------- 
 
7. (C) AES has identified a number of categories of problems 
in the transparency and fairness of the bid process, 
including lack of transparency and data, unfair evaluation 
criteria, and a lack of action by the GOH on possible 
corruption among the participants in the evaluation.  The 
GOH's responses have been legalistic and vague, to date. 
 
Unsubstantiated Price Calculations 
---------------------------------- 
 
8. (C) AES alleges a lack of transparency and fairness on the 
calculation of evaluated price: no documentation regarding 
price analysis or methodology has been received to date.  In 
response to separate Embassy and AES inquiries, the GOH has 
promised that the transparency committee, established by ENEE 
to monitor the evaluation committee's work, will give 
briefings on the process.  This clearly begs the question. 
Customarily, an evaluation of price consists of application 
of a formula based on price bids, estimates on fuel costs and 
estimates of transmission loss. 
 
9. (C) AES calculates that with some assumptions, Lufussa 
could have had a lower evaluated price before transmission 
loss, but after transmission loss is taken into account 
(since its transmission losses should be about 20 percent 
lower than Lufussa's) AES would come into first place albeit 
at a small margin.  According to AES' calculations, there are 
no scenarios under which Comercial Laiesz could have had a 
lower cost.   Note: Minister of the Presidency Cosenza and 
ENEE General Manager Botazzi, although both are electrical 
engineers, have professed lack of familiarity with the 
evaluation formula and the results.  They claim to have 
relied totally on the results of the Evaluation Committee and 
the Transparency Committee.  AES terms it "incredible" that 
the GOH would have announced a winner without even doing a 
cursory view of the calculations or having the information 
ready.  End Note. 
 
Lack of Disqualification of top bidders for failures of their 
bids to meet tender package requirements 
--------------------------------------------- ----------- 
 
10. (C) AES has strongly argued all along that Lufussa should 
have been disqualified by ENEE for failure to include in its 
offer a transmission line and all related infrastructure. 
Clause 2.1 of the draft contract and Addendum 4 of the 
package, required transmission lines and all related 
infrastructure needed to deliver committed capacity and 
energy be included.  According to AES, Lufussa did not make a 
commitment to build the $20 million transmission line until 
it received the second round of requests for clarification by 
the evaluation committee.  In the case of Comercial Laeisz, 
AES believes that the company's offer of 155 separate 1.7 MW 
motors does not meet the intent of the ENEE to receive bids 
for "base load" capacity. 
 
11. (C) GOH officials (including Cosenza, ENEE leadership and 
all participants in the evaluation and transparency 
committees) are insisting that Honduran law allows Lufussa to 
remedy the initial lack of transmission capability in a later 
round of clarifications.  AES flatly refutes this, noting 
that transmission capability was a required technical 
parameter and a variable that impacts the economic offer and 
that Lufussa should have been disqualified at that point. 
The GOH has given no explanation of the lack of 
disqualification of Comercial Laiesz. 
 
Price Evaluation Methodology 
---------------------------- 
 
12. (C) ENEE issued changes to the price evaluation 
methodology throughout the spring of 2002, in light of 
comments and questions made by participants in the tender. 
AES contested the key points in the methodology (fuel 
evaluation, variable costs, economic dispatch and others) in 
a letter on June 5 but received no response from ENEE as 
required under bid terms. 
 
13. (C) AES complains that one of these changes allowed high 
fuel prices in April 2002 to give a 16 percent advantage on 
variable fuel costs to the evaluated prices of bidders using 
bunker fuel (a counterintuitive result since high oil prices 
should not make a bidder more attractive).   Variable fuel 
costs represent approximately one-half of the overall price. 
AES' competitors were also given a large advantage when ENEE 
decided not to take into account the fact that AES' total 
variable costs are 45 percent lower than Lufussa because of 
the efficiency of combined cycle technology.  The GOH's bland 
response to these arguments is that ENEE tried to be balanced 
in deciding on the evaluation criteria, adding that "while 
some decisions may have worked to AES' disadvantage, others 
worked in their favor" (e.g. the decision to allow 24 months 
for plant construction). 
 
GOH Allowed Opportunities for Manipulation of the Process 
--------------------------------------------- ------------ 
 
14. (C) AES reports that on at least four separate occasions, 
individuals purporting to either represent other bidders or 
to have influence with the GOH have contacted AES regarding 
the possibility of a negotiated solution, such as dividing 
the bid among certain participants or suggesting that AES 
Honduras could be allowed to win, for a fee.  On two other 
occasions, internal documents belonging to the evaluation 
committee were offered for sale to AES Honduras (and 
refused).  GOH officials acknowledged that they were aware of 
these allegations but because "they did not affect the final 
decision" took no action to investigate.  AES argues that 
this lack of action, combined with the GOH's continuous 
insistence that the process was transparent, sent a message 
that there would be no serious consequences for such action. 
 
 
AES had the better project 
-------------------------- 
 
15. (C) AES argues that any of the above factors should have 
allowed the ENEE and GOH to award the contract to AES.  In 
addition, AES thinks that the government should have 
considered the additional benefits of the AES project: the 
AES project would entail a USD 600 million investment, three 
times the size of the closest competition, with attendant 
benefits for government tax revenue, export promotion, 
foreign exchange earnings, regional integration, energy 
diversification and competitiveness of Honduran industry. 
 
16. (C) GOH officials, however, have not been in agreement 
with this concept.  In conversations with Ambassador and DCM 
over the last few months, they have repeatedly emphasized 
that the bids need to be decided on the basis of the 
evaluation criteria established in the tender package.  This 
argument is somewhat disingenuous.  ENEE is a state-owned 
company and should have designed evaluation criteria that 
would attract the best possible project. 
 
---------------------------------- 
PUBLIC REACTION AND PRESS COVERAGE 
---------------------------------- 
 
17. (U) Reporting on this issue ranges from straight 
reporting to wait-and-see to critical.  El Heraldo and La 
Prensa have been especially caustic, reporting that the 
winning company had failed to meet the requirements of the 
solicitation and that it should never have been allowed to 
participate.  Reporting on the Ambassador's comments to media 
following his November 18 meeting with Cosenza and Medina, an 
HRN radio editorial agreed with the Ambassador that the 
decision could have an adverse impact on foreign investment 
and would make it more difficult for average citizens to 
receive a low-priced, efficient and environmentally clean 
energy system.  HRN also said that it had warned people that 
various sectors of society had an interest in having the 
contract go to Lufussa, in spite of its failure to comply 
with the norms.  The program director of Hoy Mismo, a widely 
respected national television news program, discussed the 
Ambassador's comments with COHEP president Regalado on the 
evening program yesterday.  The director said that there were 
many questions about the process, among them the question of 
who had appointed the Commission on Transparency and what 
their qualifications were.  He asked why COHEP was not asking 
some of the same questions about the process and was told 
that the government had assured COHEP that the process was 
transparent and fair. 
18. (U) An editorial in his newspaper, Tiempo, by Jaime 
Rosenthal -- Congressional deputy, businessman and long-time 
critic of the AES project -- predicted that within a year, 
the government would open another bidding process for an 
additional 200 megawatts, since he doesn't think that Lufussa 
can produce additional electricity with the outdated plants 
that they will have to continue using.  He also said that a 
culture of suspicion is the sad reality of Honduras and 
worse, that the trials take place in the media, (not in the 
courts). 
 
---------------------- 
NEXT STEPS OPEN TO AES 
---------------------- 
 
19. (C) AES and other bidders have the right to appeal the 
tender award within five to ten days of the official 
notification of the result.  The appeal would be decided by 
the Board of Directors of ENEE.  Once the appeal is received, 
ENEE would have 40 to 60 days to decide on the motion.  Once 
administrative procedures are completed, AES would be free to 
present its case to the lower courts and eventually the 
Supreme Court. (Note: the periods and procedures listed here 
are imprecise because attorneys are uncertain of the effect 
of a newly adopted Simplification of Administrative 
Procedures law, which is only now entering into force). 
 
20. (C) Upon announcement of the decision on November 15, 
members of the transparency committee took it upon themselves 
to discourage any challenges by losing companies.  AES has 
taken exception to this action.  Luis Cosenza told Ambassador 
on November 18 that this discouragement of appeals was 
regrettable.  The GOH reasserted the right of all bidders to 
pursue potential administrative and legal avenues. 
 
21. (C) AES Honduras representatives are in close and 
frequent contact with the Embassy.  They have asked for 
continued support and advocacy, and in particular, to 
highlight in our public statements our concerns about 
potential discrepancies.  While their first impulse is to 
appeal the decision both administratively and legally, 
company representatives also are starting to think about 
creative redress solutions that could be negotiated (such as 
a second tender offer for fuel sources other than bunker and 
diesel). 
 
---------------------------------- 
EMBASSY COMMENT AND RECOMMENDATION 
---------------------------------- 
 
22. (C) The Embassy has always viewed this electricity 
contract as a bellwether project.  If done correctly, the 
government's management of this process could have held the 
potential to reduce electricity costs dramatically, improve 
government finances, improve Honduran competitiveness, 
provide a large infusion of investment at a time of stagnant 
economic activity, and in addition demonstrate to the inward 
looking private sector that rent-seeking behavior would no 
longer be tolerated. 
 
23. (C) Instead, the GOH has now painted itself into a corner 
from which no easy escape appears possible.  First, by 
failing to provide clear leadership and guidance in the 
development of the evaluation criteria, the GOH has allowed 
ENEE to tilt the playing field toward the domestic companies. 
 Representatives of Duke Energy, another U.S. company that 
had been following the tender with interest, told 
then-Ambassador Almaguer in March that the company would 
probably not participate in the tender because of this 
tendency (and Duke in fact decided not to bid).  Second, by 
allowing Lufussa to win the bid despite an obvious attempt to 
escape a commitment to build the costly transmission lines, 
the GOH seriously discredits government procurement rules. 
Third, by not making available the data on which the 
evaluated prices were determined, the government has raised 
the specter of real manipulation of the numbers (with the 
collusion of all parts of the GOH) while at the same time 
undermining its constant assertions that the process was 
transparent.  Fourth, the GOH has requested USG assistance on 
many economic fronts (a donation of wheat, help in urging 
flexibility with the IMF, technical assistance in trade 
capacity building, money laundering, tax administration, and 
in a variety of other fields) at the same time that it 
appears to be placing domestic political accommodation above 
fairness to U.S. investors. 
 
24. (C) Embassy recommends that the USG support AES in its 
challenge of the bid results.  The USG should be supportive 
of AES' attempt to obtain the documentation underlining the 
ENEE decision and continue to highlight publicly our 
questions about the fairness of the process.  We will also 
encourage the GOH to review the decision carefully and to be 
willing to overturn it if mistakes were made.  Allegations of 
impropriety should be investigated by the GOH ambitiously. 
While Post does not necessarily recommend a direct linkage 
between this issue and USG assistance or support with 
international financial institutions, it would be helpful to 
delay any announcements of new assistance or initiatives at 
this time. 
PALMER 

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