US embassy cable - 05TEGUCIGALPA1742

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 001742 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN 
TREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, EFIN, ELAB, EPET, PGOV, HO 
SUBJECT: HONDURAS: PEPE LOBO FLIRTS WITH POPULISM ON ENERGY 
RATES; FINANCE MINISTRY REINS HIM IN 
 
1. (U) On August 10, President of the National Congress (and 
Nationalist Party presidential candidate) Porfirio "Pepe" 
Lobo submitted a legislative initiative to eliminate the fuel 
adjustment surcharge from household electricity bills.  Lobo 
justified the action by saying, "The most recent price 
reached by a barrel of oil is highly alarming and without a 
doubt affects the pocketbooks of the people..."  National 
Party Congressional Whip Juan Orlando Hernandez quickly added 
that the proposal would require both a legal and technical 
finding ("dictamen") by the Congressional Energy Committee 
and a finding from the Ministry of Finance on fiscal impacts, 
but said Congress would request that these findings be 
expedited.  Public comment by Congressmen from rival parties 
-- including two former heads of national electric company 
ENEE -- has been universally supportive, though with caveats 
about the need to also protect ENEE. 
 
2. (U) Angelo Botazzi, Director of the parastatal electricity 
company ENEE, has said that unless Congress finds a way to 
fully compensate ENEE for the lost revenues, the elimination 
of the surcharge could ruin the company.  CGT trade union 
Secretary General Daniel Duron echoed these concerns, noting 
 
SIPDIS 
that if cutting the surcharge further weakens ENEE, it puts 
union jobs at risk.  Miguel Aguilar, President of the ENEE 
Worker's Union, spoke out publicly against the proposal, 
saying it would damage ENEE, which he called "part of the 
national patrimony."  Botazzi underscored that ENEE's current 
contracts with private power generators (70 percent of which 
are thermal) allow the generators to pass-through to ENEE any 
increase in the cost of fuel.  Therefore, as fuel prices 
continue to rise globally, the surcharge to customers becomes 
vital to ENEE's ability to honor its power purchase 
contracts. 
 
3. (U) In public statements reacting to the proposal on 
August 11, Finance Minister William Chong Wong said, "The 
elimination of the adjustment is possible as long as it is 
compensated for by cutting other expenditures or increasing 
tax collection."  The current budget already includes two 
energy subsidy programs, totaling 390 million lempiras 
(approximately USD 21 million) for users of less than 300 
kilowatts of electricity per month.  Chong is investigating 
how much of the energy subsidy has already been obligated, 
and told EconChief that if the cost of the program is less 
than the subsidy funds remaining, there should be no fiscal 
impact (that is, the subsidies could be reprogrammed to the 
new proposal).  If the cost of the new initiative is greater 
than available funds, Chong said, the Congress would have to 
cut other GOH programs to offset the loss of revenue. 
Finally, he said, if the cost exceeds 600 million lempiras 
(approximately USD 32 million), as some are estimating, 
eliminating the fuel adjustment surcharge would be "out of 
the question." 
 
4. (U) Whatever the initiative's cost, Chong told EconChief, 
it must meet the Constitutional requirement that new proposed 
expenditures also identify revenues to pay for it (similar to 
USG PAYGO requirements).  If the Congress were to pass the 
legislation without identifying where they would get the 
funding, the Executive could petition the Supreme Court to 
rule the measure unconstitutional.  (According to Chong, the 
GOH has used this tactic three times in the Maduro 
administration to halt budget-breaking proposals passed by 
Congress with a veto-proof majority.) 
 
5. (U) Chong also made it clear that Lobo's proposal must be 
vetted with the International Monetary Fund (IMF), which he 
said has already contacted the GOH about the proposal and has 
expressed "some concerns."  The Fund is seeking additional 
information about the proposal, in particular, confirmation 
that it would not lead the GOH to break its agreement with 
the Fund on fiscal responsibility.  Chong assured EconChief 
that the President would not approve any proposal that did 
not fit within the IMF agreement. 
 
6. (SBU) Comment:  While politically popular, Lobo's proposal 
makes little economic sense.  The fuel surcharge was put in 
place to offset the increased fuel costs passed through to 
ENEE by electricity generators.  To remove that surcharge as 
fuel inputs hit record high prices would leave ENEE in dire 
financial straits unless offsetting payments from the GOH 
were forthcoming.  The Executive's clear dedication to fiscal 
discipline -- in the form of requiring offsetting cuts or 
revenue elsewhere in the budget to fund this initiative -- is 
welcome.  However, even if a revenue-neutral mechanism were 
found to pay for Lobo's populist flight of fancy, the result 
would still be to dismantle a targeted energy subsidy that 
helps the poor and replace it with what is, in effect, an 
untargeted subsidy.  Even if economically a wash, the new 
policy would be socially regressive and a step backwards from 
the status quo ante.  In his private comments, Chong agreed 
with this criticism, considering Lobo's proposal little more 
than irresponsible campaign tactics.  Now, Chong said, Lobo 
"will have to figure out a way to get himself off this hook." 
 In the meantime, Post hopes that Congress, faced with the 
necessity of cutting subsidies to the poor to fund this 
extravagant initiative, will come to its senses and quietly 
shelve this proposal.  End Comment. 
 
Williard 
Williard