US embassy cable - 05TEGUCIGALPA331

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 000331 
 
SIPDIS 
 
STATE FOR EB/TRA, WHA/EPSC, AND WHA/CEN 
STATE FOR EB/TRA (DHAYWOOD) 
TREASURY FOR DDOUGLASS 
COMMERCE FOR AVANVUREN, MSIEGELMAN 
STATE PASS AID FOR LAC/CAM 
 
E.O. 12958: DECL: 02/11/2015 
TAGS: EWWT, ETRD, ECPS, EINV, PGOV, KMCA, HO 
SUBJECT: HONDURAS:  ONEROUS PORT FEES COULD THREATEN 
SUCCESS OF MCC AND CAFTA EFFORTS (PART I) 
 
REF: A. A) 04 TEGUCIGALPA 2165 (UNDP PROCUREMENT I) 
 
     B. B) 04 TEGUCIGALPA 2267 (UNDP PROCUREMENT II) 
 
Classified By: Economic Chief Patrick Dunn for reasons 1.4 (b) and (d) 
 
1. (C) Summary: In December 2004, the GOH National Congress 
approved legislation obligating the government to pay a hefty 
per-container fee of USD 18 for empty containers and USD 37 
for loaded containers for x-ray scanning.  The law dictates 
that the Ministry of Finance pay these fees to the service 
provider but is silent on the question of whether these costs 
will then be passed on in whole or in part to importers and 
exporters.  The GOH has attempted to paint private sector 
concerns about these fees as reactionary by stressing that 
there is no requirement for such cost-sharing.  We consider 
this disingenuous, since the GOH has already begun 
exploratory talks with the private sector on passing along 
these fees.  Effectively a tax on both imports and exports, 
if passed on in full, these fees would nearly double total 
costs to port users and render Puerto Cortes the most 
expensive port by far in the region.  This hidden tax would 
also threaten the anticipated benefits of CAFTA ratification 
and of the pending 200 million-dollar Millennium Challenge 
Account grant.  It is too early to tell how much of the fee 
will be passed on to port users, but history suggests it will 
be substantial.  Post has conveyed the message to several 
senior GOH officials that passing too steep a fee on to users 
could seriously impede job creation, economic growth, foreign 
investment, and continued development assistance. 
 
2. (C) Summary (cont'd):  This is the first part of a two 
part report on the port fees issue, examining the claims and 
counter-claims in the ongoing public debate and the potential 
impacts on export-driven growth.  Part two will look more 
closely at port costs and the potential for trade diversion 
caused by the new fees.  End Summary. 
 
Background: Terms of the Contract 
--------------------------------- 
 
3. (C) Throughout the final months of 2004, the GOH, assisted 
by the UNDP, sought to procure x-ray scanning services for 
Puerto Cortes, on Honduras' northern Atlantic coast.  The 
announced goal was to increase customs collections and 
decrease customs evasion by improving inspections.  This bid 
solicitation proved highly controversial (refs A and B) and 
was used as a weapon in politically-charged debates over port 
privatization and UNDP-managed procurements.  Overshadowed by 
the fiery rhetoric at that time were the private sector's 
concerns over the pricing structure of the proposed x-ray 
scanning project.  In December 2004, the GOH announced the 
award of the project to the consortium of Honduran firm 
CAMOSA and U.S. firm SAIC.  The decree containing the 
contract terms and fees, already approved by the National 
Congress, was transmitted in mid-January to President Maduro, 
who signed it despite a written request from the national 
umbrella group for private enterprise (COHEP) strongly urging 
him to veto the bill.  The Presidency has now sent it on to 
the Ministry of Finance to be published in the Gazette (the 
GOH Federal Register equivalent).  Upon publication, the 
contract takes effect. 
 
4. (C) The legislation, passed by the National Congress 
(Decree 194-2004) in December 2004, obligates the Ministry of 
Finance to pay the consortium USD 18 for scanning each empty 
container and USD 37 for each loaded container, both incoming 
and outgoing.  The bill is silent on whether these costs will 
then be passed on to importers and exporters, though the GOH 
clearly intends that some or all of the fees will in fact be 
passed on.  The private sector maintains that this USD 55 
increase in costs would raise the total cost of using Puerto 
Cortes to the highest cost structure in the region and would 
be more than sufficient to divert trade (and perhaps even 
investment) from Honduras. 
 
Fees: Who Should Pay, and How Much? 
----------------------------------- 
 
5. (C) On January 28 EconChief raised this issue with Daisy 
Pastor, General Manager of Seaboard Marine, the largest 
shipper active in Honduras.  Pastor said that it was her 
position that no fees whatsoever should be passed to the port 
users, since this is a project designed to raise customs 
revenue and to improve security.  Both functions should be 
financed by the state, as happens in other ports around the 
world.  Furthermore, she pointed out, following the GOH 
imposition of an additional fee for security upgrades, only 
two months ago the private sector had negotiated with the GOH 
a flat rate for all security-related costs at Cortes of USD 
12 per container.  While this would seem to undermine 
Pastor's own argument that the GOH should unilaterally 
shoulder security costs, it does provide ample precedent to 
lead the private sector to believe that the GOH will seek to 
push off on them much or all of the costs of this security 
upgrade as well. 
 
6. (C) This fee hike is all the more galling to the private 
sector, given its belief that the fees are unjustified to 
begin with.  According to the bid solicitation, the x-ray 
contract was sought to improve customs enforcement and reduce 
tax evasion by importers.  As such, in the private sector's 
view, there is no reason to scan export containers at all and 
certainly not 100 percent of all outgoing containers, even if 
empty, as is currently proposed.  Instead, a random sample of 
incoming containers could be scanned, with steep fines for 
violators.  The resulting increased customs revenues and 
revenues from fines could be used to pay for the x-ray 
service contract, with the remainder used to pay for port 
improvements or to fund general treasury expenses.  In their 
view, there is no strong reason why the private sector, and 
particularly the export sector, should be charged onerous 
additional fees for a service that is designed to increase 
tax revenue and that should be self-financing. 
 
7. (C) To counter the argument that "customs is the 
beneficiary so customs should pay," the GOH has also stressed 
-- perhaps overstressed -- the security and counter-drug 
contributions of the scanning program.  For example, Post has 
been told that the National Congress approved these fees only 
after hearing from outgoing Tax Director Mario Duarte that 
this technology is required by the U.S. and without it Cortes 
would lose its security certification.  This claim, if made, 
is entirely false, and Post questions Duarte's motives in 
distorting the facts to push so aggressively for the new 
fees.  Post has repeatedly clarified with the private sector, 
with UNDP, and with the Ministries of Finance (home of the 
tax and customs bureaus) and Transportation (home of the Port 
Commission) that no such requirement currently exists.  No 
member of Congress contacted Post to seek to verify Duarte's 
alleged false claims.  A more subtle justification, that the 
GOH is merely going beyond the letter of the law in search of 
greater security, is belied by the fact that no port other 
than Cortes is subject to these fees or inspections and that 
no similar tightening of security has been made at land 
crossings.  (Note: In point of fact, the GOH continues to 
demonstrate denial and defiance in the face of overwhelming 
evidence of corruption in the customs service so pervasive 
that it renders border security meaningless. End Note.) 
 
Minister Cosenza Belittles Private Sector Concerns 
--------------------------------------------- ----- 
 
8. (C) On January 27 EconChief spoke with Minister of the 
Presidency Luis Cosenza about this issue.  Cosenza expressed 
his "disappointment" with the private sector's attitude and 
its "lack of long-term vision."  He complained that the 
private sector always rejects any new fees as unbearable. 
(In a separate conversation with EconChief, Vice Minister of 
Transportation Rigoberto Funes was equally dismissive of 
private sector concerns in this regard, calling them, in not 
so many words, whiners.)  Cosenza stressed that the recently 
passed legislation is silent on who will pay the fees and 
obligates only the Ministry of Finance.  The GOH is 
discussing with the private sector the matter of who will pay 
the new fees only because the government cannot guarantee 
that customs revenue increases generated by the new system 
would be sufficient to pay the costs of the service contract. 
 Therefore, it could be necessary to have a mechanism for 
passing on part of the costs to the importers and exporters. 
 
 
9. (C) EconChief outlined the concerns over a sharp increase 
in fees that would price Puerto Cortes out of the regional 
market and the threat such a move would pose to export-led 
growth and to the viability of the numerous assistance 
programs predicated on it.  Furthermore, because all 
containers are x-rayed, the fee is a de facto export tax, 
with all the strongly negative consequences that implies for 
a developing economy.  Cosenza took these concerns on board 
but then turned again to criticizing the private sector, 
saying that they have also failed to consider the cost 
savings that arise from x-ray inspection.  For example, 
because x-raying is non-intrusive, pilferage by customs 
officials will decrease, as well as the need to hire private 
security to escort the containers while in inspection.  (In 
other words, apparently importers and exporters should be 
happy to pay the GOH a steep fee in exchange for reduced 
theft by GOH officials.) 
 
10. (C) (Comment:  Cosenza's first impulse was to deny the 
private sector concerns entirely, noting that there was no 
provision in the law saying they would be charged the fees. 
Yet, in the next breath, he admitted the GOH is in talks with 
the private sector over how much they will have to pay.  This 
is also inconsistent with his implication that the private 
sector will only be asked to pay what the tax authority 
cannot cover from increased revenues, as a last resort. 
Clearly the GOH is planning to saddle the private sector with 
some portion of the fees.  On the other hand, by assuming 
they will be forced to pay the full costs, the private sector 
has chosen to base its protest on the most extreme 
possibility.  Yet, given Cosenza's less-than-forthright 
discussion of the fees and manifest annoyance with the 
business community for raising the question, they are likely 
correct to be wary.  End Comment.) 
 
Potentially Undermining CAFTA and MCC Benefits 
--------------------------------------------- - 
 
11. (C) If set too high, these fees threaten the benefits of 
CAFTA, MCC, and other development programs.  MCC, for 
example, is in the midst of negotiating a grant ("Compact") 
with the GOH of approximately USD 200 million over five years 
to improve roads and production of value-added agriculture. 
The MCC's mandate is to promote poverty reduction through 
economic growth.  The current proposal does so by shifting 
subsistence farmers toward non-traditional agricultural 
exports and by investing in roads (the "dry canal") to 
facilitate delivery of these and other export goods to the 
international market via Puerto Cortes.  Thus, the GOH's 
proposed MCC project directly supports export-driven economic 
growth led by the value-added agricultural and maquila 
sectors.  In complete contradiction of these goals, the 
onerous port fees contained in the new legislation would 
threaten to render these nascent industries uncompetitive. 
By steeply increasing costs at Cortes (the destination of the 
increased production spurred by MCC), these fees would risk 
dramatically reducing the anticipated benefits.  If these 
fees are passed on in large part to exporters and importers, 
exports will not prosper, jobs will not be created, and the 
sustainable growth sought by the GOH and the MCC will not 
take hold.  A similar logic applies to the benefits of CAFTA 
and to any future trade agreements with the EU.  According to 
industry representative, these fees would render moot the 
current debates over whether Honduran textiles or bananas can 
compete:  with these added fees, they likely could not. 
 
Comment and Next Steps 
---------------------- 
 
12. (C) Post has demarched appropriate senior-level officials 
to encourage the GOH not to pass along steep additional fees 
that would render the port or the exporters who use it 
uncompetitive regionally and internationally.  Post will 
monitor this issue carefully as it develops and will continue 
to impress upon the GOH that the proposed fees are export 
taxes in thin disguise (and therefore economically damaging), 
that they potentially undermine the benefits of both CAFTA 
and the MCC program, and that they will result in growing 
diversion of trade and investment away from Honduras.  In 
Post's view, the fee should be paid largely or entirely from 
increased customs revenues, or at least should be minimized 
for importers, while exporters, the growth engine of this 
economy, should be exempted entirely. 
 
Pierce 
 
Pierce