US embassy cable - 05TEGUCIGALPA363

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 000363 
 
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: 02/14/2015 
TAGS: EWWT, ETRD, ECPS, EINV, PGOV, KMCA, HO 
SUBJECT: HONDURAS:  PORT FEES:  THE HONDURAN PRIVATE SECTOR 
GIRDS ITSELF FOR BATTLE 
 
REF: A. A) 04 TEGUCIGALPA 331 
     B. B) 04 TEGUCIGALPA 341 
     C. C) 04 TEGUCIGALPA 2165 
     D. D) 04 TEGUCIGALPA 2267 
 
Classified By: Economic Chief Patrick Dunn for reasons 1.4 (b) and (d) 
 
1. (C) Summary:  The GOH has recently approved a USD 55 per 
container fee for x-ray scanning at Puerto Cortes (Ref A). 
This fee, if passed on to port users, would nearly double 
port costs, rendering the port uncompetitive and resulting in 
trade and investment diversion away from Honduras (Ref B). 
The private sector has united in opposing this new fee, 
though there is deep pessimism that the GOH can be convinced 
to discuss these fees and their potentially catastrophic 
impacts in good faith.  End Summary. 
 
2. (C) Background:  In December 2004, the GOH National 
Congress approved legislation agreeing to pay a hefty 
per-container fee of USD 18 for empty containers and USD 37 
for loaded containers for x-ray scanning.  The current law 
obligates the Ministry of Finance to 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 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. 
 
Private Sector: "We will not obey." 
----------------------------------- 
 
3. (C) In a marathon 3 hour strategy session on February 10, 
members of Honduras' economic elite met to discuss their 
response to the impending port fees.  Representatives of the 
Honduran Private Enterprise Council (COHEP), the Honduran 
Industrialists Association (ANDI), the Chamber of Commerce of 
Cortes, and AmCham members Dole and Chiquita were joined at 
the meeting by economic and political heavyweights Miguel 
Facusse, Adolfo Facusse, and Congressman Oswaldo Ramos Soto. 
Little dissent was heard around the table, as all present 
agreed on their opposition to the new fees as non-transparent 
and potentially economically devastating. 
 
4. (C) Chairing the meeting and, characteristically, leading 
the charge, Adolfo Facusse, President of ANDI, laid out the 
private sector's objections to the proposed fees.  First of 
all, he said, the UNDP-managed bid solicitation was 
non-transparent and the private sector's "right" to know what 
was going on was violated.  (Comment:  This is a favorite 
complaint of Facusse's (Refs C and D), but this debate has 
long since been closed and is not at the heart of the present 
problem.  It is unsurprising that he took this opportunity to 
rail once again against the UNDP-managed bid solicitation 
process, but the others present wisely decided that basing 
their port-fees complaint on this stale issue would be a 
losing strategy.  End Comment.)  But at the heart of this 
shared concern, he said, is that the high fees will price 
Honduran ports and Honduran producers out of the market. 
With these new fees, Facusse said, "it will cost more to ship 
from Puerto Cortes to New Orleans than from Hong Kong to Los 
Angeles -- and that conspires against free trade." 
 
5. (C) Facusse then highlighted complaints about the scope, 
goals, and process of the port scanning project.  He noted: 
The objective of scanning 100 percent of containers is too 
costly, and goes well beyond what any other country does.  If 
the goal is to increase customs revenues, then the increased 
collections and fines for evaders should be used to finance 
the project.  If the goal is security, the GOH itself should 
be responsible for the fees, and the process should be run 
through the Port Security Commission, not the tax authority 
(the DEI) as is currently planned.  More attention should 
likewise be paid to regulating the scanning contractor, since 
the government is in effect establishing a monopoly 
enterprise.  While the private sector supports increased 
security and a crackdown on customs fraud, he continued, 
implementing these measures only at Puerto Cortes will not 
accomplish these goals, and will make the port less 
competitive both nationally and regionally.  Finally, he 
said, there is no defined relation between the cost of the 
project and the fees.  His conclusion, he said, is that this 
is a sweetheart contract for someone close to the GOH. 
Summing up his position, Facusse defiantly declared that, "we 
will not obey this law, even if that means we need to go 
elsewhere" for port services. 
6. (C) The COHEP representative concurred and, calling the 
fees "extremely onerous," asked why exporters and legitimate 
importers should have to pay.  These high fees are, for fruit 
producers, "the difference between staying in the market or 
not."  Moreover, he noted, estimates seemed to indicate that 
the machinery would cost USD 4.0 million to install, and USD 
1.5 million per year to operate, but at current volumes the 
contract would gross USD 10.5 million per year.  Why are the 
fees so high, he asked.  He closed by noting that the private 
sector was promised an opportunity to present its views and 
analyses to Congress before the contract was to be 
considered, but never received that chance.  Instead, the 
contract was rushed through late at night near the end of the 
legislative session, as though it were urgent. 
 
The Big Lie: "The U.S. Made Us Do It" 
------------------------------------- 
 
7. (C) The urgency, Congressmen were told, was because the 
security equipment was required by the U.S.  Former tax 
director Mario Duarte reportedly testified that if the GOH 
failed to install this x-ray equipment, the U.S. "would 
de-certify Puerto Cortes the next day."  Congressman Ramos 
echoed this version of events, saying that the entire 
Congressional ratification debate had centered on security 
and certification issues.  The contract was passed, he said, 
"without the Congress understanding the consequences." 
(Note:  Ramos then took the opportunity to bash the UNDP, 
and, even less helpfully, to again raise the red-herring of 
port scanning equipment posing a radiological hazard.  End 
note.)  Several others present took this as their cue to 
denounce the "fraud" behind the contract and to call for 
voiding the contract on this basis. 
 
8. (C) EconChief then carefully clarified port security 
requirements and the USG role in port certification.  Basic 
port security standards, he pointed out, are set by the 
International Maritime Organization (IMO).  Certification of 
the port is actually a self-certification by the host-country 
government.  The GOH self-certified in July 2004.  The U.S. 
Coast Guard periodically checks foreign ports to verify they 
are in compliance with the IMO standards, but they are not 
responsible for "certifying" the port.  Finally, there is no 
current IMO requirement for non-intrusive inspection (NII -- 
that is, x-ray or gamma-ray scanning).  Therefore, any GOH 
claim that the scanners are required under current 
obligations or that the USG would "de-certify" Cortes without 
them are entirely incorrect. 
 
9. (C) However, EconChief went on to say, some in the GOH and 
in the private sector have raised the possibility of applying 
for entry into the Container Security Initiative (CSI).  To 
apply for this program, the port must indeed have NII 
available on site.  Honduras is not currently a participant 
in CSI, and, as a small port, is unlikely to be added in the 
near future, according to the Department of Homeland 
Security.  If the GOH intends to seek membership in CSI, it 
would then be accurate to say the USG requires scanning 
equipment.  Upon hearing EconChief's explanation, one 
participant noted that it confirmed his understanding that 
there is no current requirement for this equipment, and any 
claims to such are "fraud."  Even if the machinery is 
intended for a future CSI, he said, the costs and competitive 
disadvantages will be incurred today.  "It's like preparing 
for your daughter's quinceanera (coming out party at age 15) 
by buying her a wedding dress." 
 
GOH Belatedly Offers to Talk Price 
---------------------------------- 
 
10. (C) Several present noted the sharp price differential 
these fees would create vis-a-vis other regional ports (see 
Ref B), and agreed with Facusse that if the fees are passed 
on to port users they might stop using Puerto Cortes in favor 
of one of the other ports.  However, as former ports Director 
Fernando Alvarez pointed out to EconChief on January 28, 
there's not enough spare capacity at these other ports to 
absorb Cortes' traffic.  These physical realities dictate 
that most private sector shippers cannot, in fact, simply 
abandon Cortes.  The only short-term solution, he said, will 
be negotiated rates for x-ray scanning. 
 
11. (C) Such negotiations have already been launched by the 
GOH.  EconChief spoke on January 31 with Arturo Alvarado, 
former Minister of Finance and the man charged with chairing 
the working group to explore how these rates will be 
assessed.  Alvarado said that the focus of the group will be 
on determining if any current activities and their fees can 
be eliminated once scanning begins.  In this way he seeks to 
identify, and minimize, the incremental cost of the new 
service.  Ideally, he said, there would be no net impact on 
importers and exporters.  Alvarado gently criticized the 
business community for its outspoken condemnation of the new 
fee even before talks had begun, though he admitted that as 
long as the issue remains unresolved they will be 
"concerned."  However, he said, to discuss the matter 
intelligently, the working group first needs cost data and 
has set itself the task of collecting these data. 
Unfortunately, said Alvarado, the private sector has yet to 
even name its two representatives to the working group, much 
less begin data collection.  Though the draft contract gives 
the consortium up to eight months to begin operations, 
Alvarado understands the current plan calls for start-up in 
May.  There is little time to reach an agreement on the fees, 
he noted, and much work yet to be done. 
 
12. (C) When informed in sidebar of Alvarado's views, the 
COHEP representative disputed Alvarado's claims, saying that 
COHEP had named its participants to the commission and had 
already gathered its own data on port costs.  He rejected as 
a waste of time repeating the data gathering exercise jointly 
with the Commission.  Even if they were to do so, he doubted 
the various entities at the port would be likely -- with the 
former Minister of Finance standing there -- to give a full 
accounting of all the "hidden costs" of getting a container 
through port.  He also rejected Alvarado's assertion that 
cuts in other costs would make up for a significant part of 
the new fees.  There is simply no way, he said, to reduce the 
current USD 8 security fee enough to make up for the new USD 
55 fee.  (Note:  In a separate conversation on February 8, 
Port Authority Economist Mohaad Merzkani made similar remarks 
when he observed that the GOH currently inspects only 30 
percent of containers.  Even if the GOH offered to pick up a 
similar percentage of the cost of the new program, that would 
leave 70 percent of the costs on the shoulders of port users 
-- still more than enough to inflict serious damage on Puerto 
Cortes' market share, and on importers' and exporters' 
profitability.  End note.) 
 
13. (C) ANDI's representative to Alvarado's commission then 
spoke, outlining the work of the commission to date.  If this 
is already the law, Facusse asked, "What can be done?   The 
Congress was fooled."  The ANDI representative responded that 
while the contract has been approved by Congress and signed 
by the President, it will not enter into force until 
publication.  Unfortunately, the only person who can stop 
publication now is the President himself, and he wants it to 
go forward, so seeking a delay in publication is unlikely to 
work.  The appropriate question for the commission, he said, 
is who pays and how the cost to the private sector can be 
minimized.  "While we sit here and debate, the government (of 
Honduras) is finalizing this contract."  Once that happens, 
he said, the GOH is locked in because of high breach of 
contract penalties. 
 
14. (C) But that will not be the end of the battle.  The 
contract does not specify that the fees will be passed from 
the GOH to port users.  With little hope of stopping the 
contract itself, he said, the private sector should focus its 
efforts on minimizing the cost passed through to port users. 
The COHEP representative agreed that stopping the contract 
would be difficult, saying it would be pointless to raise 
this with Minister of the Presidency Luis Cosenza or Minister 
of Finance William Chong Wong, since they are "absolutely 
convinced" of the correctness of the project and are not 
listening to the private sector's concerns.  COHEP has made 
these arguments to Cosenza before, he said, but Cosenza is 
"obstinate" in his desire to move the project forward. 
(Note:  Cosenza had displayed this same dismissive attitude 
when EconChief raised these concerns with him on January 21. 
End Note.) 
 
So What Now? 
------------ 
 
15. (C) This apparent consensus to the contrary, the group 
quickly determined that it should nevertheless try to block 
publication of the contract, to prevent its entry into force. 
 Immediately following the meeting the group drafted an 
urgent appeal for a meeting with President Maduro, to ask him 
to delay publication of the contract until the fees can be 
analyzed and a method for apportioning them worked out.  To 
reinforce the urgency of the matter, various members will 
grant interviews to the press, and the group will seek to 
publish an op-ed on the subject in the major newspapers.  The 
group is still investigating the possibility of a court 
challenge, with some opining that it is worth pursuing. 
Others felt that if the law hasn't been published it does not 
officially exist, and therefore cannot be challenged in 
court, but once it is published it is too late and the damage 
is done.  (The way to stop GOH publication of the new 
contract, Facusse half-joked as the meeting broke up, would 
be to have the workers at the printing plant suddenly go on 
strike.  Those labor leaders always loudly oppose CAFTA, he 
said, "why don't they do something useful for a change?") 
 
16. (C) In sidebar conversations following the meeting, 
EconChief suggested that the group clearly separate the 
question of the value of port scanning from the cost of such 
a system.  Arguing against improved security or reduced 
customs fraud, he said, is unlikely to be a persuasive 
approach.  Better to focus on the economic impacts, the loss 
of competitiveness, and the possible diversion of productive 
investment if the fees are set too high.  Finally, he 
recommended the group participate meaningfully in Alvarado's 
commission, and come prepared with well-researched 
projections of economic and financial impacts to buttress 
their case.  Both the U.S. and Honduras have an interest in a 
flourishing Honduran economy, and a competitively priced 
Puerto Cortes is key to this goal.  Post has raised this 
concern with the GOH already, and will continue to do so, but 
it is up to the Honduran private sector itself to forcefully 
drive home the point that Cortes must remain competitive if 
Honduras is to survive and prosper. 
 
Pierce 
Pierce