US embassy cable - 05TEGUCIGALPA1970

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 001970 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, AND EB/ESC 
STATE FOR DS/IP/WHA - MFLYNN, DS/ITA - KHALL, DS/DSS/OSAC - 
CMEDEIROS 
COMMERCE FOR MSEIGELMAN 
TREASURY FOR DDOUGLAS 
ENERGY FOR IA 
DOL FOR ILAB 
 
E.O. 12958: DECL: 09/22/2015 
TAGS: EPET, ECON, ELAB, PGOV, KSAC, HO 
SUBJECT: HONDURAN FUEL SECTOR CONCERNED ABOUT GOH GASOLINE 
PRICE FREEZE AND OTHER PROPOSED RESTRICTIONS 
 
REF: A. A) TEGUCIGALPA 1851 
 
     B. B) TEGUCIGALPA 1873 
     C. C) TEGUCIGALPA 1910 
     D. D) TEGUCIGALPA 1958 
 
Classified By: ECONCHIEF PDUNN FOR REASONS 1.5(B AND D) 
 
1. (C) Summary. Gasoline prices in Honduras remain in limbo, 
as a de facto price freeze appears to remain in effect, but 
with no GOH decree mandating such a policy.  Some in Congress 
have suggested price caps should remain in place until 
December 31, with importers being forced to pick up the tab, 
since they are perceived to be the ones profiting most from 
the current spike in gasoline prices.  This is a red-herring, 
as importers have the smallest profit margins of any 
participant in the value-chain.  However, no political will 
exists to take on the politically powerful transport 
companies or gas station operators to reduce their excessive 
guaranteed margins.  The industry might have little choice 
but to go along with a plan presented by President Maduro 
that would subsidize fuel purchases by taxis and buses.  The 
precise mechanism for implementing such a plan remains 
undefined.  Political theater aside, little has been done to 
establish a viable long-term fuel pricing strategy, and 
industry is concerned that changing the rules of the game 
unilaterally and without warning could hamper investment or 
even cause fuel shortages.  Post believes that the long-term 
solution must be a move away from government price controls 
and toward increased competition and improved consumer 
protection through rigorous anti-trust enforcement.  End 
Summary. 
 
2. (C) Gasoline prices in Honduras remain in limbo, as a de 
facto price freeze appears to remain in effect, but with no 
GOH decree mandating such a policy.  As reported refs A-C, 
the GOH rolled back fuel prices on September 7 to 
pre-Hurricane Katrina prices and froze those prices for a 
period of ten days.  The cost differential was to be 
reimbursed by the GOH directly to gasoline retailers.  In the 
meantime, a Commission of Notables was established to review 
and revise the fuel pricing formula, and given ten days to 
report their results.  The Commission report did not succeed 
in revising the fuel pricing formula, and went well beyond 
the Commission mandate -- by suggesting reviews of 
electricity contracts, state intervention in fuel imports, 
and other policies -- prompting a number of Commission 
members to resign (ref D.)  Since the expiry of the initial 
ten day freeze, the price freeze has remained in effect, but 
without benefit of a Congressional decree.  Thus, there is no 
formal justification for the freeze and, more worrisome, no 
determination of who will pay for it. 
 
3. (C) Members of the National Congress have suggested over 
the last several days that "fuel importers" should be forced 
to absorb any losses incurred by the price freeze, and some 
have gone so far as to suggest the freeze should be extended 
through December 31, 2005.  Both politicians and the media 
have loudly accused the "transnational companies" of 
profiteering, and mistakenly feel these companies have more 
than ample margins to absorb this additional cost.  The 
fundamental misinformation in this debate was graphically 
demonstrated in a September 22 article in the newspaper El 
Heraldo, which explained the profit margins of each stage of 
the fuel delivery and marketing chain.  Despite the 
accompanying pie-chart that clearly showed that importing 
firms have the smallest profit margins by far, the headline 
read: "Importers gain the most." 
 
4. (C) Seeking a politically viable exit strategy, President 
Ricardo Maduro called petroleum sector representatives to his 
office the evening of September 20.  According to Texaco 
Country Manager Luis Mayorga, who was present at the meeting, 
Maduro proposed that the gasoline retailers agree to freeze 
prices for taxis and buses only, while selling to the public 
at market prices.  Maduro said the plan would remain in 
effect until December 31, or until total costs had reached 70 
million lempiras (approximately USD 3.7 million).  In 
exchange, Maduro said, the GOH would reimburse gasoline 
retailers for losses stemming from the second 10-day period 
(from September 17 to 26) of price freezes.  Mayorga told 
EconChief that this plan would cost his company an estimated 
USD 750,000. 
 
5. (C) Petroleum sector representative responded that they 
would examine the request, and expressed concerns that if 
they yielded in Honduras, other countries would seek similar 
sacrifices.  They encouraged Maduro to think long-term and to 
guarantee predictability of investment rules.  They also said 
they are concerned about maintaining a level playing field 
and about changing the rules governing investments in 
mid-course.  The ultimate consequences of such behavior, they 
warned, could be a drop in investment in Honduras (for 
example, no new or expanded gas stations or distribution 
infrastructure) or even a fuel shortage.  In what could be 
viewed as a shot across the bow of industry, the Commission 
of Notables has reminded importers that if they choose not to 
cooperate, the state could import directly and use private 
industry storage to supply the domestic market. 
 
6. (C) Industry has also told the GOH that if they are to go 
along with the President's proposal, they require a formal 
decree to be issued outlining the specifics of the plan, the 
duration, the cost, and the terms under which those costs 
will be absorbed by each party.  Under U.S. anti-trust law, 
colluding on prices, subsidizing foreign governments, or 
offering differential pricing to distinct segments of the 
public are illegal.  The companies could not contemplate 
cooperating in the new scheme unless ordered to do so by the 
GOH, and even then they will need to refer the matter to 
their lawyers. Moreover, industry has also suggested that a 
tiered price regime at the pump level (one set of prices for 
taxis, another for consumers) would be an administrative 
nightmare.  (In an interesting bit of frankness, President of 
the National Transport Union Jorge Lopez told reporters that 
he feared such a scheme would encourage taxi drivers to stop 
hauling passengers and instead get into the gasoline resale 
business.)  To minimize fraud, the GOH contemplated limiting 
taxis to six gallons per day at the controlled price.  Far 
easier and less subject to abuse, the petroleum industry is 
promoting a system administered by the Ministry of 
Transportation (SOPTRAVI) that simply would reimburse all 
registered taxi drivers the equivalent of the price 
differential for six gallons per day.  A database of 
registered taxi and bus drivers already exists and could be 
used for this purpose.  (Comment:  Post was thinking along 
similar lines, and notes another potential benefit: 
unlicensed taxis would not benefit from the subsidy, 
assisting the GOH in its apparent crackdown on these 
operators.  Other recent actions by the GOH Council of 
Ministers seem similarly targeted at taking advantage of the 
current crisis to impose some order on the taxi and bus 
sector, and in particular to weed-out unlicensed operators 
currently clogging Tegucigalpa traffic (ref D).  End 
Comment.)  Minister of Trade and Industry Irving Guerrero 
told EconChief on September 23 that such an arrangement is 
already under study, with SOPTRAVI coordinating with the 
Ministry of Finance to identify beneficiaries and establish 
modalities. 
 
7. (C) Regarding the current formula by which the GOH manages 
fuel prices, Mayorga said the formula works sufficiently well 
when prices are below USD 50 per barrel.  As prices have 
climbed, however, the formula has become increasingly 
unpopular.  IMF ResRep Hunter Monroe separately told 
EconChief that the underlying problem is two-fold:  First, 
the lack of competition in the sector in Honduras has led to 
very high pre-tax prices for fuel (which is then exacerbated 
by some of the highest fuel taxes in the region.)  Second, he 
said, the GOH formula reacted too quickly to price swings in 
the market, mimicking the upside volatility of the price 
increase, but not adjusting down quickly enough.  Mayorga 
echoed this sentiment, noting that in El Salvador (which has 
a freely competitive gasoline market), prices only increased 
by seven cents, versus the nearly one dollar swing seen in 
Honduras.  In large part, Mayorga said, this reflects 
industry understanding that price volatility (especially 
panic buying due to storms and other sudden exogenous shocks) 
is both natural and temporary, and that retail prices should 
not spike every time the market does.  By waiting a day or 
two for the markets to settle, retailers in El Salvador 
reportedly were able to raise prices appropriately, but not 
so sharply as in Honduras, thereby avoiding the public outcry 
and civil unrest that accompanied that price shock. 
 
8. (C) The current pricing formula establishes profit margins 
for each link in the fuels value chain, from importation 
through retail sales.  On a gallon of gasoline, for example, 
profits are as follows: 
 
GOH          USD 1.15 
Transport    USD  .85 
Retailer     USD  .25 
Wholesaler   USD  .11 
Importer     USD  .04 
 
Two facts are readily apparent from the above.  First, 
importers -- easy political targets because they are often 
foreign multinationals -- make the least of any of the 
participants in the process.  (Mayorga told EconChief that 
four cents per gallon is a good profit, but not excessive, 
and certainly not the biggest profit margin in the value 
chain.)  Second, aside from GOH tax revenues, the largest 
profits are made by the transport companies.  According to 
Monroe, Article 18 of the Honduran Transportation Law 
requires that only natural-born Honduran citizens can own 
transport trucks, and joint venture trucking companies must 
be majority Honduran-owned as well.  This lack of competition 
has led, predictably, to price gouging.  (Privately, the 
Minister of Industry referred to the trucking companies as 
"pirates.") 
 
9. (C) Nor do the foreign firms make windfall profits as 
retailers.  Of the approximately 450 gasoline stations in 
Honduras, for example, 98 are Texaco.  Of those 98, only 13 
are owned and operated by the company, while 27 are 
company-owned and dealer operated, and 58 are dealer owned 
and operated.  The operators receive the 25 cent per galllon 
profits, not Texaco.  Esso has a similar ownership mix 
(owning and operating only 14 out of 68 stations), while both 
DIPPSA (a Honduran company) and Shell (the other two major 
brands in the Honduran market) gasoline stations are all 
company owned but dealer operated.  Mayorga also pointed out 
that a 25 cent per gallon margin for operators is extremely 
generous -- the industry average in the region is 12 to 15 
cents per gallon.  According to Mayorga, while this is the 
obvious place to cut prices in the formula, the GOH fears 
offending the politically powerful elites that operate these 
stations (including Juan Ferrera, one of the members of the 
Notables Commission).  ADHIPPE, the Honduran association that 
represents gasoline station owners, meanwhile has gone on the 
offensive, accusing multinational companies of unfair 
competition, loudly proclaiming that (even with their grossly 
bloated profit margins) their members are barely making a 
living, and threatening to march on Tegucigalpa if the GOH 
seeks to adjust those profit margins downward. 
 
9. (C) Comment:  It is disappointing but perhaps not 
surprising that the Commission of Notables has failed to 
address the core concern of fuel prices.  With no technical 
expertise in the sector, the Commission was unlikely to 
arrive at such a solution, particularly in just ten days. 
Even so, the squabbling and politicization of the issue has 
done little to ameliorate the situation.  By not taking 
action on many of the Commission's suggestions and instead 
interacting with the petroleum sector directly, the GOH 
Council of Ministers seems implicitly to recognize that the 
Commission has not lived up to expectations.  The industry, 
fearing an even worse alternative to the present price 
controls, is willing to go along in the short-term, but sees 
a clear need for a long-term approach that is predictable and 
guaranteed.  Post believes the long term strategy must 
include increased competition and improved consumer 
protection.  With a newly passed anti-trust law on the books, 
the GOH is on its way to developing the regulatory capacity 
to crack down on monopolistic pricing.  Opening the gasoline 
market to competition should drive prices and margins down to 
levels commensurate with the rest of the region, and any 
attempts to exert market power (whether by transnationals or 
domestic firms) should be met with strong penalties.  That 
said, the GOH is far from having the technical capacity to 
undertake such enforcement, and it is our view that the 
political will for such a bold move -- on the eve of a 
Presidential election -- is simply not there.  We will 
continue to watch as events develop, encouraging a short-term 
policy that protects both investors and consumers, and a 
long-term move towards free competition.  End Comment. 
 
Williard 
Williard