classification:
CONFIDENTIAL//NOFORN
destination:
07QUITO2571|08QUITO986|09QUITO59
header:
VZCZCXYZ0016
OO RUEHWEB
DE RUEHQT #0815/01 2542254
ZNY CCCCC ZZH
O 112254Z SEP 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0022
INFO RHMFISS/FAA NATIONAL HQ WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHBO/AMEMBASSY BOGOTA IMMEDIATE 0005
RUEHBR/AMEMBASSY BRASILIA IMMEDIATE 0001
RUEHCV/AMEMBASSY CARACAS IMMEDIATE 0005
RUEHGL/AMCONSUL GUAYAQUIL IMMEDIATE 0016
RUEHLP/AMEMBASSY LA PAZ SEP 0002
RUEHPE/AMEMBASSY LIMA IMMEDIATE 0005
----------------- header ends ----------------
C O N F I D E N T I A L QUITO 000815
SIPDIS
NOFORN
DEPARTMENT PASS TO OPIC, EXIM, USTR
E.O. 12958: DECL: 2029/09/11
TAGS: EAIR, ECON, EFIN, EC
SUBJECT: QUITO MAYOR STRUGGLES TO LAND NEW AIRPORT DEAL
REF: A) 08 QUITO 986; B) 07 QUITO 2571; C) QUITO 59
CLASSIFIED BY: Heather Hodges, Ambassador, Department of State,
Executive; REASON: 1.4(B), (D)
1. (C) Summary: Ecuador's recent Constitutional Court ruling that
all airport fees are government property threatens to derail
Quito's new airport. If implemented, the project lenders, including
OPIC and Ex-Im Bank, have indicated they will halt construction
funding and seek international arbitration. Quito Mayor Augusto
Barrera has pledged to satisfy the court ruling and renegotiate a
better concession contract for the municipality. Representatives
of OPIC and the IDB are scheduled to meet with Mayor Barrera and
senior Ecuadorian officials September 15-16 in order to reinforce
the urgent need to quickly find a response to the court ruling
which preserves the interests of the multilateral lenders and does
not weaken the concession agreement.
-----------------------------------
COURT THROWS A SPANNER IN THE WORKS
-----------------------------------
2. (SBU) On July 23, Ecuador's Constitutional Court (CC) issued
judgment 003-09-SIN-CC, ruling that airports and the fees derived
from them are the property of the central government. Per the
ruling, Quito's municipal government, under newly elected Mayor
Augusto Barrera, has jurisdiction of the Quito airport until
central government regulations are enacted. The CC ruling follows
on the heels of Ecuador's June 6 denunciation of the World Bank's
Convention on the Settlement of Investment Disputes (ICSID). Both
events constitute a breach of the airport concession contract held
by Quiport, a private consortium of three companies (Aecon of
Canada, Andrade Gutierrez of Brazil and Houston Airport Systems of
the U.S.) and the Canadian Commercial Corporation (CCC).
3. (SBU) Project financing for the construction of the new airport
is a mix of Quiport equity ($75 million), fees collected from the
current airport ($120 million), and loans from four lenders: $200
million from the Overseas Private Investment Corporation (OPIC), ,
$75 million from the Inter-American Development Bank (IDB), $64
million from the U.S. Export-Import Bank (Ex-Im), and $37.5 million
from Export Development Canada (EDC). The lenders control the
disbursement of funds (airport fees collected plus loans) to
Quiport from an offshore account.
4. (C) The lenders responded to the CC ruling by stopping
disbursements to Quiport for the construction of the new airport in
Tabala, east of Quito, but continued funding for current airport
operations. They also gave written notice to the Government of
Ecuador (GoE) on August 13 that the CC ruling and the ICSID
denunciation constituted "political events" under their Investor
Protection Agreement (IPA), which triggered a 45-day negotiation
period, at the end of which the project could legally be declared
in default. Tensions were heightened when the municipal government
issued letters on August 18 requiring Quiport to comply with the CC
ruling by depositing all airport fees directly into a municipal
account in the Central Bank. In August 18-19 meetings in Quito,
the lenders explained to Mayor Barrera and Coordinating Minister
for Strategic Sectors Galo Borja that any redirection of the
airport fees would terminate the concession contract and lead to
arbitration. To date the municipality has not attempted to enforce
the CC ruling.
-----------------
THE TICKING CLOCK
-----------------
5. (C) Time for negotiations is limited. In meetings with
econoffs, members of OPIC, Ex-Im, and EDC stated that they are
willing to extend the 45-day negotiation period if progress is
being made. However, Ecuador's withdrawal from ICSID provides the
lenders with only a six-month window to bring a case. Although the
ICSID window closes January 7, 2010, the lenders are likely to
initiate their case by late fall 2009, if negotiations with the
city of Quito fall through.
6. (C) On September 4 the CCC, which guarantees the construction of
the new airport, announced its intention to stop construction
activities due to the lenders' discontinuation of funding.
Stoppage of construction, which currently employs over 2,000
Ecuadorians, would be politically disastrous for Mayor Barrera and
threaten the project. (Note: one of the lenders stated that if
construction stops, they will immediately push for arbitration.
End Note.) In a series of tense conference calls the lenders
reminded the CCC of its contractual obligation to continue
construction activities for 60 days plus 30 days "wind down." On
September 8 the CCC agreed to maintain construction operations for
the "immediate future", although continuation of construction
through October appears increasingly unlikely unless the lenders
receive sufficient assurances from the Mayor of Quito and the GoE
that a legal accommodation to the CC ruling can rapidly be found.
------------------------------
COURT RULING HITS AIRLINES TOO
------------------------------
7. (C) In late August, many airlines serving Quito stopped paying
service fees (landing, illumination, etc.) to Quiport, supposedly
concerned that they could face legal action for not complying with
the Constitutional Court's ruling. Although most airlines have
since reinitiated payment, U.S. carriers Delta, American, and
Continental continue to withhold payment to Quiport. The lenders
have instructed Quiport to maintain services to the airlines in the
short term to avoid further complicating the negotiating
environment. Ex-Im is attempting to negotiate with the airlines'
corporate offices through contacts at Boeing. This is not the
first time that Quiport and the airlines have clashed over airport
fees (ref A).
-------------------
THE MAYOR'S DILEMMA
-------------------
8. (C) Mayor Barrera made his intention to renegotiate the airport
concession and seek a larger share of the airport revenue a part of
his election campaign. His assertion that the airport concession
is an unfair deal for the city of Quito, which receives about $1.5
million annually from airport operations, tracks with President
Rafael Correa's documented discontent with the airport concession.
Correa referred to the arrangement as "highway robbery" ("un
atraco") in a 2007 statement. (Ref B). In a lunch with econoffs
September 8, Philippe Baril (protect), the President of Quiport,
agreed that there is room for the Quito government to receive
additional money, although he did not offer any specifics as to the
amount. The lenders appear loath to reopen the concession,
believing that doing so would weaken their case should they
eventually opt for arbitration. However, they have expressed
willingness to let Quiport share a greater portion of the profits
with the GoE.
9. (C) All parties to the airport concession agree that the
President's office must authorize any new agreement related to the
airport for it to be valid. Thus far, however, the President and
the GoE have kept a low profile on the issue. In an August 19
meeting with the lenders, Coordinating Minster Galo Borja did not
communicate a position on the concession contract and indicated
that it was the Mayor's job to solve the problem of the CC ruling.
10. (C) During his August 19 meeting with the lenders and Quiport,
Mayor Barrera pledged to submit terms for a renegotiated contract
and possible measures to satisfy the CC ruling within a week.
Barrera has subsequently been quoted in the media as saying that
his proposal for a renegotiated contract is "with the lenders." To
date, the lenders have not received a proposal from Barrera, nor
any official indication of how the concession contract can continue
under the CC's ruling. During the September 8 meeting with
Econoffs, Quiport President Philippe Baril indicated that despite
several meetings with the Mayor, Barrera has not given specifics on
what the GoE or Quito municipality would want out of a renegotiated
concession contract.
11. (C) Barrera's attempt to find a way to follow the CC ruling
while not violating the terms of the concession contract appears a
work in progress. Barrera has consistently emphasized to the
lenders his need to comply with the CC ruling. In recent weeks,
contacts at the Canadian Embassy and Quiport have reported that
Barrera has developed a workable solution relieving Quiport from
having to deposit airport fees into a municipal account, a step the
lenders have said would force them into arbitration.
12. (C) According to Quiport, the Mayor is working with the
Comptroller's Office to identify terms that would satisfy the
court's ruling. The Comptroller is the same office that audited
airport operations in January 2009 (ref C), ultimately bringing to
the GoE's Attorney General a case against Quiport for
non-compliance with the constitution. Embassy contacts state that
the Attorney General's Office rejected their case, leading the
Comptroller to raise it directly with the CC, triggering the
ruling. Embassy contacts close to former Quito Mayor Pablo Moncayo
have described the Comptroller as being "about money."
-------
COMMENT
-------
13. (C) Failure to resolve the airport issue could have broader
consequences for U.S.-Ecuadorian relations. The GoE is a
counter-party to the Investment Protection Agreement. If the Quito
municipal government takes action that prevents Quiport from paying
back the lenders, forcing a default, the GoE should then assume the
project debt. A default by the GoE on Ex-Im and OPIC loans could
potentially trigger sanctions on future U.S. assistance under the
Brooke Amendment and Foreign Assistance Act Section 620(q).
14. (C) Comment continued: Although the "face" of the new Quito
airport project has traditionally been Canada, the majority of the
funding comes from American sources and a souring of the deal would
likely result in bad press for the U.S., giving President Correa an
easy target. In recent days Quiport and the Canadian Embassy have
reached out to the Embassy to urge we assist in pushing the lenders
to be more proactive in pursuing negotiations with the Mayor and
the GoE. OPIC and the IDB responded, holding a meeting with the
municipal government's lawyer in Washington and scheduling a trip
to Quito September 14 for two days of meetings. Our fear is that
neither the lenders nor the relevant branches of the Ecuadorian
government have clearly communicated their bottom line, and that
construction on the new airport might suddenly grind to a halt
despite a mutual desire to find an accommodation.
HODGES
=======================CABLE ENDS============================