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TO RUEHC/SECSTATE WASHDC IMMEDIATE 7587
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0584
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C O N F I D E N T I A L TEGUCIGALPA 000086

SIPDIS

SIPDIS

STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, WHA/CEN, STATE PASS TO
USTR

E.O. 12958: DECL: 01/28/2018
TAGS: EPET EFIN ENRG PREL PGOV VE HO
SUBJECT: PETROCARIBE AS HONDURAN POLITICAL THEATER

REF: A. REF A: 07 TGG 1798
¶B. REF B: 07 TGG 1818
¶C. REF C: 08 TGG 0057
¶D. REF D: 08 TGG 0084

Classified By: Ambassador Charles Ford for reasons 1.4 (b) and (d)

¶1. (C) Summary: Local media report President Manuel Zelaya
will sign an agreement today (January 28) to import
Venezuelan fuel on concessional terms through Petrocaribe.
Venezuelan President Hugo Chavez reportedly signed the
agreement in Caracas over the weekend. The Honduran Congress
approved the outlines of an agreement January 24, even though
President of Congress Roberto Micheletti is known to oppose a
Petrocaribe deal. However, key details were left undefined,
and Post understands Congress will still need to approve the
actual contract -- if one exists -- before it can take
effect. Embassy considers this back and forth over
Petrocaribe to be part of the ongoing Honduran political
theater. It may or may not result in the supply of
Venezuelan oil to Honduras. But it will definitely affect
the balance of Zelaya's term and the campaign to succeed him
in 2009. Meanwhile, we suspect the political price for this
Venezuelan "free lunch" is already being collected. End
Summary.

-------------------------------
Zelaya to Sign Petrocaribe Deal
-------------------------------

¶2. (U) Honduran news media reported January 28 that President
Chavez signed the draft PetroCaribe agreement, discussed
during his January 15 visit to Tegucigalpa (ref C), over the
weekend at the conclusion of the sixth Bolivarian Alternative
for the Americas (ALBA) summit in Caracas. Foreign Minister
Milton Jimenez, who attended the summit as an observer, has
reportedly brought the agreement back to Honduras for Zelaya
to sign. Zelaya told the press he would sign it Monday
(January 28).

----------------
What's the Deal?
----------------

¶3. (U) According to press reports and Embassy sources, the
two-year deal would initially involve purchase of 100 percent
of the bunker fuel (heavy fuel oil) that Honduras uses to
generate 70 percent of its electricity, with automotive fuel
possibly to be included later. Presentations to Congress and
to donors imply the GOH would incur USD 345 million in debt
during the first year of the deal, of which USD 285 million
is expected to fall during 2008 (implying fuel supply would
commence in April). Honduras would be required to pay 60
percent within 90 days, with the balance financed at 1
percent interest over 25 years with a two-year grace period.
During his visit, Chavez said at least part of the bill could
be paid in milk or other agricultural commodities, although
Honduran agriculture reps have said the country does not
currently have an exportable supply.

¶4. (C) According to Liberal Party Congressman Jose Azcona, a
close associate of Congressional leader Micheletti, as
originally proposed by Zelaya's team in November (ref B), the
deal contemplated importing 100 percent of bunker fuel and 30
percent of automotive fuel. The deal currently being
discussed is limited to bunker, possibly to comply with a
debt ceiling being negotiated with the IMF (ref D) or
possibly because of logistical and legal obstacles to
importing gasoline and diesel.

¶5. (SBU) The proceeds to the GOH from the deal (from
acquiring the fuel with 60 percent down, then selling it to
power plants at full price) are to be put into a trust fund
at the Central Bank, to be used for investments under the
supervision of a "committee of notables." Thirty percent
would be used to recapitalize the ailing state electric
utility ENEE, 40 percent to construct hydroelectric plants
and 30 percent for "social investments," primarily in
agriculture. The trust fund idea appears to be in part to
satisfy the IMF (which wants the funds to be used only for
productive investment and prefers that they be sequestered at
the Central Bank), in part to satisfy domestic critics in
Congress and the private sector (who have criticized the
principle of incurring debt for consumption) and in part to
coopt certain private-sector leaders by giving them authority
to spend the funds.

------------------------------------------
Cure for what Ails Honduran Energy Sector?
------------------------------------------

¶6. (SBU) Honduras faces fiscal crises both in electricity
supply and maintaining subsidies for automotive fuel. ENEE
is losing an estimated USD 300 million a year, roughly 3
percent of GDP (ref A). ENEE's rates, despite recent
increases, do not cover costs, and arrears to private power
producers are estimated at 6 billion lempiras (USD 317
million). Enrique Flores Lanza, formerly Presidential Legal
Advisor and now Minister of the Presidency, recently said the
GOH was spending 10 million lempiras a day (USD 194 million a
year) to subsidize gasoline and diesel fuel -- another 2
percent of GDP. President Zelaya has said publicly that his
administration cannot maintain fuel subsidies without a
PetroCaribe deal. He is running political ads on local TV
taking credit for keeping pump prices low and seeking
support for "further measures" to keep them that way -- a
clear reference to Petrocaribe.

¶7. (SBU) However, we understand Petrocaribe requires that
proceeds be used for anti-poverty programs and public
investments, not subsidies or current spending, and the GOH
has committed to the IMF and to Congress that it will comply
with those terms (see above). In fact, Zelaya's own new ENEE
director, Ricci Moncada, stated to TV reporters (carried
January 28) that a Petrocaribe deal would not affect pump
prices but contribute to investments for long-term economic
growth.

--------------------------------------------- -----
Political Theater -- Will Congress Approve a Deal?
--------------------------------------------- -----

¶8. (C) Political sources, including those close to former
President and Liberal Party kingmaker Carlos Flores, tell us
that Zelaya had hoped to sign a PetroCaribe deal during
Chavez's January 15 visit. However, the Venezuelan
delegation reportedly balked on the grounds that too many
logistical details were undefined, and Chavez did not want to
be blamed if he could not implement the deal. Zelaya then
sent to Congress a draft boilerplate agreement, void of
details, hoping Congress would reject it. That would have
allowed Zelaya to blame Congress when he inevitably has to
raise pump prices in the near future. He reportedly even
asked Micheletti to "stick it in the drawer" until details
could be fleshed out. Instead Micheletti, a political rival
of Zelaya's and a leading aspirant to succeed him in 2009,
pushed the decree through the Congress January 24. This put
the ball back in Zelaya's court, placing the onus on him to
negotiate a viable agreement that meets the country's
pressing energy needs while staying within IMF parameters.

-------
Comment
-------

¶9. (C) We suspect this latest turn in Zelaya's on-again,
off-again flirtation with PetroCaribe reflects:

-- his unwillingness to take needed steps to rationalize the
energy sector, or desire to assign political blame for those
steps to others (by sending an unworkable Petrocaribe deal to
Congress, then, when they reject it, blaming them for what
follows),

-- an effort to energize his populist base by aligning
himself more closely with Chavez, and

-- per ref D, an effort to secure enough cash to skate
through the final two years of his Presidency.

Zelaya may also think he can evade the conditions of both
Petrocaribe and other donors and divert the funds to cover
current spending, for corrupt ends or for the political
campaign of his preferred successor, Patricia Rodas.

¶10. (C) As for why Chavez waited until 10 days after his
visit to sign the agreement, we strongly suspect this was to
extract the political "price" for the deal. This came in the
form of: 1) participation as an observer at the ALBA summit,
and 2) stating publicly that Honduras does not consider
Colombia's FARC to be a terrorist group (ref D). End Comment.






FORD IC