US embassy cable - 05TEGUCIGALPA1708

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 001708 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, WHA/EX, WHA/PPC, EB/OIA/IFD 
TREASURY FOR DDOUGLASS 
STATE PASS AID (LAC/CAM) 
STATE PASS USTR FOR ANDREA MALITO 
GUATEMALA FOR COMMAT: MLARSEN 
 
E.O. 12958: DECL: 08/15/2015 
TAGS: ETRD, SENV, EINV, ECON, PGOV, HO 
SUBJECT: HONDURAN ENVIRONMENT MINISTRY CONTINUES TO STYMIE 
INVESTMENT; U.S. FIRM ABANDONS USD 5M DEAL IN FRUSTRATION 
 
 
Classified By: Classified by EconChief PDunn for reasons 1.5(b,d) 
 
1. (C) Summary: Despite the professed GOH expectation that 
CAFTA will encourage increased U.S. investment into Honduras, 
the Ministry of Environment and Natural resources (SERNA) 
continues to make many such investments difficult or 
impossible.  This is the first in a series of cables 
detailing the numerous recent examples of SERNA blocking or 
even overturning significant investment projects.  The 
problem appears to be lack of political will by the Minister 
herself, though in at least one case corruption is also 
alleged.  This cable examines the case of Tajo Minerals, a 
firm that, after more than a year of bureaucratic run-around 
by SERNA, has decided to withdraw its application and cancel 
its proposed $8 million investment.  Future cables will 
examine similar cases in geothermal energy, wind-generated 
electricity, and affordable housing.  End Summary. 
 
2. Mayan Gold is an American mining company, incorporated in 
Nevada, but with its only mining operations in Honduras.  The 
firm has invested an estimated $2.5 million preparing the 
POTOSI Metallic Mining Project site in Choluteca Department, 
conducting studies, building access roads, and training 
workers.  To date, Tajo has been unable to begin operations 
at POTOSI because they lack final approval of their 
environmental license.  The company currently operates 
another successful and well-established mine at Clavo Rico. 
They will continue to operate this mine, but in light of the 
recent developments have no plans to expand it and are slowly 
withdrawing equipment from the site.  The company employs 
over 40 local workers, and has good relations with the 
neighboring communities. The firm has been seeking to begin 
operations at its existing POTOSI concession and also to 
acquire three new mining concessions. 
 
3. (C) However, two decisions by the Minister of Environment, 
Patricia Panting, halted these plans in their tracks.  First, 
she has refused to take final action in signing the 
environmental license, despite technical level approvals by 
all of her staff and extensive positive outside reviews of 
the project.  Second, on July 28, 2004, SERNA published in 
the Gazeta (Federal-Register equivalent) Regulation 473-2004, 
which reads in part:  " ...hereby instructs the Executive 
Directorate for Mining Promotion (DEFOMIN)...to suspend, 
effective upon publication of this regulation, the awarding 
of concessions for metallic mining and beneficiation.  This 
measure...will remain in force until the Executive approves a 
National Plan for Sustainable mining that includes proposals 
for the reform and modernization of the mining sector."  That 
rule remains in force today, more than one year later.  Post 
inquired as to the status of the National Plan on August 10 
and was informed by DEFOMIN (part of SERNA) that the document 
-- which for the last several months has allegedly been 
circulating for comment and stakeholder buy-in -- is not 
publicly available.  (Note:  Post already has a copy of an 
earlier draft of the document.  End Note.) 
 
4. (SBU) In this context, Tajo Mining has been trying for 
over a year to obtain permission to initiate operations and 
secure new concessions.  Ironically, Tajo has already 
completed the kinds of outreach and social auditing of its 
project that the new National Plan seeks to institutionalize. 
 Where some mining companies have admittedly demonstrated 
poor performance in environmental controls, labor 
protections, or community support, Tajo has not only passed 
all its reviews with flying colors, it has also secured (and 
SERNA has verified) community support for the project.  In 
support of the project, EconOffs have attended several 
meetings between Tajo and DEFOMIN, Tajo and SERNA, and even 
Tajo and the Minister.  The Ambassador also expressed his 
concerns orally and in writing to Minister Panting and to 
then-Minister of Industry Norman Garcia.  Despite all of 
these efforts, Tajo has been unable after more than a year to 
obtain final approval from Minister Panting to begin work on 
the existing concession.  Meanwhile, any action on requests 
for new concessions have been frozen by the 2004 regulatory 
decree. 
 
5. (SBU) For these reasons, Tajo has now thrown in the towel, 
walking away from what would potentially have been (in its 
first phase) an $8 million dollar investment. In a letter to 
Minister Panting dated July 18, Tajo declared it had had 
enough and would in effect be giving up on Honduras.  The 
letter expresses the company's frustration and 
disappointment, and conveys its request for a refund of a 
Performance Bond on deposit with the GOH Treasury.  An 
informal translation of the text of the letter from Tajo 
Minerals to Minister of Environment Patricia Panting follows: 
 
Begin text 
 
(Complimentary opening) 
 
Minister Panting, as you are well aware, our firm has been in 
the process of obtaining an Environmental License for the 
POTOSI Metallic Mining Project, located in the municipality 
of Concepcion de Maria, in the Department of Choluteca.  This 
process began in June 2004, with the delivery of an 
Environmental Impact Assessment for the review and approval 
of the Environmental Controls and Evaluation Directorate 
(DECA).  During the process, our company met every 
requirement, presented the project to the neighboring 
communities, obtained stakeholder buy-in within the 
Municipality and in the zones bordering the project, 
discussed the project with representatives of the National 
Autonomous University of Honduras and the Catholic University 
of Honduras, with the National Human Rights Commission, and 
responded to all questions and concerns on the part of the 
technical experts of DECA and of the Executive Directorate 
for Mining Promotion.  Moreover, we deposited a Guarantee 
Bond in the amount determined by the Supreme Audits Tribunal 
(TSC) to be the cost of reclamation of the site. 
 
The process advanced, such that it was approved and favorably 
recommended by every authority that had input into the 
process until it arrived at your desk for your signature. 
Even after numerous meetings on this topic, to date your 
approval has not been forthcoming.  For this reason, our 
investors have decided to pull out of the project, citing 
their frustration at this administrative negligence, and have 
requested the return of the funds deposited as guarantee. 
 
For this reason, and in accordance with the Right to Withdraw 
Applications (Derecho de Desistimiento) authorized in the 
Administrative Procedures Code of Honduras, this company 
hereby WITHDRAWS ITS APPLICATION to obtain an Environmental 
License for the POTOSI Metallic Mining Project, and hereby 
requests in the most respectful manner that the necessary 
permissions be granted to release the Guarantee Bond that was 
deposited in the name of the General Treasury of the Republic. 
 
(Complimentary close) 
 
End Text 
 
6. (C) Comment:  Post shares Tajo's frustration and 
disappointment.  Post will continue to work with Tajo on this 
case to ensure that, at a minimum, the Performance Bond is 
refunded promptly and in full.  However, Post is increasingly 
concerned that SERNA actions in this and other cases threaten 
the prospects for attracting the foreign investment 
contemplated by CAFTA and so urgently needed in Honduras.  In 
this case, as in several others, the obstacle appears to be 
Minister Panting herself.  Paralyzed by her concerns that 
policies (including nearly any policy in the key sectors of 
mining, forestry, and energy) could become contentious, 
Panting appears to have decided not to make any policy 
decisions whatsoever. (She reportedly told representatives of 
Tajo Gold in their last meeting that "I am the Minister, and 
neither the President nor the U.S. Ambassador are going to 
tell me what to do.")  In our infrequent meetings with 
Panting she has shown a marked defensiveness, but more often 
she simply refuses to meet or return calls to either Post 
officers or private sector representatives. She even recently 
failed to appear at a Congressional hearing specifically 
convoked to inquire why SERNA has failed to take any action 
on 18 of 21 pending renewable energy projects, in an era when 
Honduras desperately needs additional investment in this 
sector. Post will continue to support U.S. investors, but 
will also seek new approaches to break the logjam SERNA has 
become.  End Comment. 
 
Williard 
Williard