Selling the Wind, or How Honduras Will Finance Its Debt

The government of Honduras wants to sell you the wind. Literally.

The proposal is for a new kind of investment instrument.

On July 20, the Honduran Congress passed a law called the Ley de promocón del desarrollo y reconversion de deuda publica, which can be read here in its entirety. 

The newly passed law, proposed by the Executive Branch, creates a special commission of trustees sited in the Central Bank of Honduras.  That commission, which includes the Minister of Natural Resources, will identify "idle" assets.  It will also create a technical committee to analyze the financial potential and return on such assets, and oversee the concession of assets to private parties.

So what are these "idle resources" that Honduras proposes selling?  The wind, for wind power; the rivers and the land for hydroelectric power; and mineral rights - gold, silver, and iron in particular, though it also just sold petroleum exploration rights. They can be pretty much anything not already under the control of the Comisión para la Promoción de la Alianza Público-Privada (COALIANZA).

Once the resource is identified as idle, the government will seek to lease it in concession to a third party. The lease process will involve estimating the income-producing potential of the asset, both for the party leasing it, and for the government.

The lease will produce, among other things, a future income stream for the government for the length of the lease. The leasing part of the law merely makes references to the processes used by COALIANZA for its concessions.  The same rules will apply.

Normally income from a lease would trickle in to the government coffers over the length of a lease, producing income for both the present and future governments of Honduras. 

But the new law empowers the Central Bank, or someone delegated by it, to securitize this future income stream and sell it to others, based on the discounted present value of that future income stream. 

This discounted present value of the future income stream will come to the government in a lump sum, rather than as several smaller payments over the lease duration.

The law specifies that it must be used to pay down the Honduran government's debt.

The Financial Minister, Wilfredo Cerrato, argued that the state would be getting the future income that this resource would generate over longer periods, like 20 years, but getting it all now instead of year by year over the 20 years, and that the money would then be used to pay down the national debt, because at least for now, the law prohibits it to be used to pay current expenses. 

Cerrato added:

What we want is to pay the internal debt, which is short term at high interest rates, to achieve what the law's title says, "reconversion of the debt".

Cerrato characterized the "idle resources" that are covered by the new law as not generating wealth but rather producing poverty.  He suggested that Honduran pension plans would be likely purchasers of the assets.

The law, which originated with Lobo Sosa's executive branch, was introduced and passed during a Congressional session held in Lempira rather than the capital of Tegucigalpa. 

The bill had not previously been disclosed or put through committee.  Its content was unknown to most at the start of this Congressional session.

Because the session was held outside the capital, fewer members attended, and those who did attend were primarily National Party members.

During the Congressional session, Congress voted to suspend the requirement for three debates and to hold only one debate on this law.  It then passed the law in a single debate. This has brought about much grousing from almost all sectors.

The law, by not going through the committee review, passed pretty much as it was submitted by the Executive Branch.  It was not publicly disclosed, so there was no discussion about what Congress was enacting. That seems to have been by design.

As Ralph Flores, an executive of the Foro Social de la Deuda Externa y Desarrollo de Honduras (FOSDEH) stated, the people should have been consulted.  FOSDEH is one place where the Honduran public gets to comment on proposed government policy.

Flores said that he thought the law probably was a good financial move, but that the government of Honduras shouldn't be managed like a private company.  As these are resources belonging to all the citizens, he said, probably they should have been consulted before the law was approved:

Unfortunately here they only talk about this type of activity as beneficial.  There needs to be an objective balance.  There are methodologies to analyze if an investment is positive or negative for the economy or for a society.  Here we only look at the financial stream as a positive element.

Mauricio Oliva, the new head of Congress, says that such lease arrangements are nothing new, that the approach has been used successfully by many other countries, and points to Costa Rica and Colombia. 

Cerrato vehemently defends the law, claiming that without it Honduras won't make payroll for government employees in November.  That in turn suggests they already have assets identified and potential buyers of concessions lined up and presume they can bring securities on these assets to market before November.

Hugo Noé Pino, who represents the  Instituto Centroamericano de Estudios Fiscales (ICEFI) in Honduras, told La Prensa that the law was suspicious because not only of the rapidity with which it was proposed and passed, but for the lateness in Lobo Sosa's term.  This made him suspect that there were some ulterior motives.  He said the law sells Honduras in pieces:

"The most worrying part of this affair, given that the government has not shown itself to be trustworthy, is that  through this hurried law, just as with the model cities, [it has] committed all the resources of the state of Honduras without leaving to the next government any possibility of structuring its own recovery and investment plan for the country.  The next government will have its hands tied by these decisions."

Lobo Sosa says the law helps, not hinders, future governments.  Lobo Sosa goes on to claim this will not benefit his government one bit, a statement seemly contradicted by his Finance Minister's statement that without this law the government will not be able to meet the November payroll, implying income to this government, surely a benefit.

By using the processes specific to COALIANZA, the government avoids its own contracting law which would impose a greater transparency on the process.  It was this process that resulted in COALIANZA signing an MOU with Michael Strong for a model city somewhere other than where Congress had stated it wanted model cities (eg, San Pedro Sula instead of Puerto Cortes). 

COALIANZA's processes are not transparent nor do they always work towards the same goals as the government, as the model cities bungle demonstrated.  Civil society has no input into what the new commission decides to license. 

All resource-based projects involve expropriation (with long delays in payment in cases like the Patuca III dam project now underway). They may involve the dislocation of populations living on the concession, without any compensation.

There are no controls on either the number of employees, or the budget of the oversight commission set up in the new law.  It is unconstrained, and at this time, unfunded. Future governments will have to allocate it a budget for salaries and operations.
 
Civil society should pause at the statements of the Finance Minister that employee pension funds should invest in these financial instruments, which are effectively unsecured bets where a payment to the government up front gives the lease holder the "right" to profits from exploitation of a resources that may or may not be successful.

It has been an expressed goal of Honduran governments since at least 2009 to use the large government employee pension funds to improve the liquidity of the central government. It sounds like Cerrato sees this as one such mechanism.

This is just the latest of a series of laws passed by this administration that takes control of national assets and turns them over to private parties. 

These include the original model cities law, and the COALIANZA law that has sold concessions to airports, roadways, and railways. It includes the ZEDE law (aka model cities 2) which creates private economic development zones that can have their own laws, as well as the new mining law, which pretty much gives mining companies permission to do what they want on their concession.

There apparently is nothing that the Lobo Sosa government won't privatize.

Even the wind.

Not Really Model Cities Again

Juan Orlando Hernandez is determined to get new legislation approving Regimenes Especiales de Desarrollo (RED), what people have been calling "model cities", through the session of the Honduran Congress that ends this month.  To that end, he has introduced a new package of legislation.

He says this draft law takes into account the objections raised by the Supreme Court that made the previous law unconstitutional.  Uncommented on is why he did this, since he later got Congress to illegally dismiss the justices that found the law unconstitutional.  Might it be that they were right?  Oh my!

What he proposes is the establishment of 12 special kinds of entities:

international finance centers
international logistics center
autonomous cities
special economic zones
international commercial courts
special investment districts
renewable energy districts
zones with their own legal system
special agro-industrial zones
special tourist zones
mining zones
forest zones.

What Juan Orlando Hernandez has done is change the name, change the function, and keep the acronym.  This is meant to preserve the mental link to model cities, but this legislation is not about model cities.

The proposed entities are nothing like the previous Regiones Especiales de Desarollo proposed under the  unconstitutional law. Nor are these any kind of model city using either Paul Romer's or Michael Strong's definitions.  Forget everything you've read.  This is something very different.

These zones will all supposedly have "functional and juridical autonomy", although later in El Heraldo's brief description of this new system they say that conflicts will be handled either through arbitration or through a new branch of the existing Judicial system.  So that's clear, right?

There's a twist, though given Honduran electoral politics, not much of one: these new entities can only be established by a referendum and once established their charter can only be modified by a referendum of those who live within them.

The law will modify the Honduran constitution, which is why it's urgent to get it passed in the next few days, before this legislative session ends.  In Honduras, constitutional amendments must be passed by two successive sessions of Congress. More or less what Juan Orlando Hernandez plans is to bring this up as soon as January 19, then again right after January 25th when the new Congressional session begins. 

Article 294 of the constitution would be modified to divide the national territory into Departments (the existing administrative units, equivalent to states) and special zones:

The national territory will be divided into Departments and zones subject to special rules in conformity with Article 329 of this constitution.  Their creation and boundaries will be decreed by the national Congress.  The Departments will be divided into autonomous municipalities administered by officers elected by the people, as governed by law.

Also due to be modified is Article 329. It currently gives the government the power to develop economic plans, in consultation with its citizens and to set up whatever mechanisms are necessary to achieve these goals. El Heraldo does not give us the new language of this constitutional modification, but it will be the key to understanding these new special development regimes.  However, later in the day, Tiempo published the proposed language of Article 329 which seems to contain no changes to the existing language.

The new law would modify Article 303 of the Honduran Constitution, changing the rules governing how justice is administered.  The new Article 303 would read:

The ability to impose justice comes from the people and it is offered freely for the state, by magistrates and independent judges, only subject to the Constitution and the laws.  The Judicial branch is made up of a Supreme Court, special jurisdictions in regions of the national territory subject to special rules created by the Constitution of the Republic, by appeals courts, the courts and other dependencies indicated by law.

Again the modification here is to add the reference to special rules zones.  The key will be how justice in those special rules zones articulates with the Judicial branch, which notably is not spelled out in this change.

Along with Hernandez, the new law is being pushed forward by Congressman Rodolfo Irias Navas, a National party member and owner of TV stations (Channel 8 in Tela, Channel 45 in La Ceiba) and radio stations (Communicaciones del Atlantico, Radio El Patio of La Ceiba, Stereo 92 FM, Stereo 102.5 F, and Romantico 103.5 in La Ceiba, Radio Aguan in Colon, 91.5 and 92.7 FM in Tela).

(Irias Navas was also one of the spokespeople for the 2009 coup, who kept saying that the international community wasn't listening and would understand if they would only listen.)

Anyone who can read should see that this is not anything like the previous legislation, and that it's not about real development.  It's a law designed to benefit the monied class in Honduras that's responsible for underdevelopment, the class that sees the government of Honduras as its reliable income stream.

We're not the only ones to see it that way.

Analyst Raul Pineda pointed out that the reason this law is being rushed through is the urgent need for some in the oligarchy who owned or speculatively purchased lands they expected to be appropriated under the unconstitutional model cities law, to sell those properties for financial reasons.

Or as he put it: it's because a few people need to do business.

Model Cities definitively unconstitutional

The Supreme Court of Honduras ruled today that the Honduras legislation establishing charter or model cities was unconstitutional.  A ruling two weeks ago from the constitutional branch of the court established by a 4-1 vote that the law was unconstitutional. Because that decision was not unanimous, the entire Supreme Court had to consider and vote on the issue.

The full court voted 13-2 that decreto 283-2010 which reformed two constitutional articles to enable the model cities legislation violated the constitution.  

The court will release the reasoning behind its finding tomorrow. 

Grupo MGK reacted to the constitutional branch decision on October 8, stating:

We hope and expect that whether or not the full Supreme Court chooses to invalidate particular articles of the Constitutional Statute, that they will preserve enough of it intact that Grupo MGK along with other organizations will be able to create hundreds of thousands of jobs in Honduras.

While Honduras's model cities initiative was on hold, we learned a little more about Grupo MGK.  It is not a fully formed business entity, but rather is said to be part of a newly formed Nevada limited partnership that is not fully set up under the laws of Nevada.

La Prensa reported that Grupo MGK is part of Grupo de Desarrollos Especiales LLC, a company registered with the state of Nevada on September 4, 2012, by Kevin Lyons, a business partner of Michael Strong..  Like MGK, this is a newly registered company, with no track record.  It has until October 31 to file its list of officers, pay fees, and obtain a Nevada business license

Kevin Lyons was also responsible for setting up Grupo Ciudades Libres, a never-legally-established Nevada company whose goal was to set up a Free City in Honduras, according to The Economist.  Grupo Ciudades Libres LLC's filing as a partnership was revoked by the state of Nevada for not paying any of the associated legal fees that were due as part of establishing the company in 2011.

Now that the full Supreme Court has invalidated the Model Cities law, it will be interesting to see whether Grupo MGK persists in its efforts to create a free business colony in Honduras. Meanwhile, we would be willing to bet that the legal arrangements for Grupo de Desarrollos Especiales LLC won't be completed by October 31.

Model Cities Update

The Honduran press has been full of news about Model Cities over the last couple of weeks.

As our readers will recall, the oversight and transparency commission, headed by Paul Romer resigned en masse because they were shut out of the negotiations with Grupo MGK, and when they asked, denied permission to review the Memorandum of Understanding between Honduras and this group.

This lack of transparency seems not to bother Porfirio Lobo Sosa one bit.  With the removal of Romer and the other "transparency commission" members from the oversight and approval process, this means that the Honduran Congress has all the oversight  and approval power in the Model Cities process.

In a 50 minute interview with Michael Strong on a libertarian internet radio program on September 10, we learned that Strong plans that his model city will be in the valley around San Pedro Sula, and is not interested in the other locations being discussed.  So much for idea that model cities would be in uninhabited areas: the San Pedro Sula area is the business and industrial center of the country, a region already host to many free enterprise zones (maquilas). San Pedro itself is the country's second-largest city.

Michael Strong is not proposing to build Paul Romer's vision of a model city.

Strong's vision differs, he says, in four key ways.  First, it is based on the entrepeneurial model he says rules in Silicon Valley:  start small and when that works, scale it up.  In Strong's Free City, residents have access to the best laws without having to be governed by foreigners.  Strong sees this as more respectful of local autonomy and sovereignty than Romer's model. Third, the governor, a Honduran, chooses what legal systems are available to the residents. Thus residents can have contracts based on Honduran law, or, as Strong advocated in the interview, on Texas business law, because that is the closest to the 19th century ideal he favors.  Strong says, finally, that his model does not rely on a land grant from the Honduran government, but rather purchases the land to increase its size as needed.

There are signs that this normally rubber-stamp Honduran Congress is restless about the Model Cities project, however.

Juan Orlando Hernandez, the head of the Congress, and  a presidential candidate for the National Party, announced this week that any vote establishing the bounds of the land for Grupo MGK would be delayed until after the primary elections in November.  Ostensibly, the reason was that there were then 24 legal challenges to the law filed with the Supreme Court-- a number now much, much higher.

Practically, model cities are a political hot potato with the electorate.  Moving the vote after the primary elections may also be intended to prevent voter backlash.

Meanwhile, Hernandéz main legislation writing proxy in the Congress is hard at work, trying to fix the flaws in the law, presumably so that after the primaries, Hernandéz and company can proceed with their ever-evolving introduction of new colonialism in Honduras.

Where is Lempira when you need him?

Behind the Model Cities Memorandum of Understanding

There's a lot of misinformation floating around about who is behind the Honduras Model Cities memorandum of opportunity (MOU).  This is the agreement, announced by Juan Orlando Hernandez of the Honduran Congress, that would authorize a specific group of investors to build the first such enclave in Honduras.

So here's what we can find out:

Grupo MGK  (note, not NKG, NGK, or MKG as the careless or perhaps terminally dyslexic Honduran papers keep reporting) is the consortium behind the memorandum of understanding signed last week with Honduras to develop a model city.

The group, whose bare bones generic website grupomgk.com (in English and Spanish) was hastily erected in the last week, claims to have developed plans for a model city-like project in Estonia, but shelved it upon hearing of the Honduran opportunity.

Their new website has already been updated since it was first made public. Michael Strong registered the domain name with GoDaddy on September 8. The website was last updated on September 21.

There are currently four public faces for Grupo MGK:  Michael Strong, Gabriel Delgado, Robert Haywood, and Nadine Spencer.

Michael Strong reportedly studied economics at the University of Chicago, but dropped out of the graduate program when he was offered a job teaching his socratic training seminar to teachers in Homer, Alaska. This in turn, led to a 15 year career in education consulting.

Strong met John Mackey, the founder of Whole Foods, during this period, and together they founded Freedom Lights Our World (FLOW), dedicated to the proposition that entrepeneurs and markets were the most effective way of creating a better world.  They have since moved on to more targeted projects: Conscious Capitalism, Radical Social Entrepeneurs, and Peace Through Commerce.

Strong is also a founder of the Free Cities Institute, whose website, described as "gorgeous" in this announcement of its founding, has since disappeared.  Free Cities were the focus of a conference held in Guatemala in April 2011, sponsored by the Universidad Francisco Marroquin, in Guatemala.

All of these movements share the idea that bad legal systems create poverty by keeping poor people from founding businesses and therefore keeping them off the road to wealth and success.

Robert Haywood is Director of the World Economic Processing Zones Association (WEPZA), a collective for Free Trade Zones world wide.  WEPZA was founded by Richard Bolin, who performed the economic studies that led to the development of Mexico's maquila industry.  WEPZA is a dependency of Bolin's Flagstaff Institute.  Haywood is said to have participated in the design and development of Honduras's maquilas as well.

Nadine Spencer is an entrepeneur, born in Jamaica, who is founder and CEO of Nadine Spencer, Inc. a gourmet food and lifestyles conglomerate.  Her expertise is in marketing.  She particularly supports work to develop women entrepeneurs.

Gabriel Delgado is described as a telecommunications entrepeneur and fellow in the Aspen Institute, an education and policy studies nonprofit that is generally described as "centrist".  He reportedly founded and developed IT companies in Chile, Guatemala, and Mexico.

On the website, Strong and Delgado are described as the "Leadership" while Haywood and Spencer are described as "advisors".  Delgado was added to the Leadership section in a round of revisions to the website.  His name has not previously appeared associated with Grupo MGK.

Grupo MGK lists a single investor, Calidad Immobiliria, a real estate development company located in Guatemala and El Salvador, a branch of Grupo Entero. The real estate company specializes in urban development projects.

Grupo Entero is a Guatemalan company founded using the principles of Stephen Covey's The Seven Habits of Highly Effective People to develop its own staff.  They focus on commercial and residential real estate, construction, and health in large parts of Latin America.

Legal Challenges to Model Cities Law Proliferate

The law in Honduras that enables the Regiones Especiales de Desarrollo (RED), better known in English as model cities, is facing increasing opposition from Honduran citizens. 

The constitutionality of the law was first challenged in October, 2011 by the Asociación de Juristas para la Defensa del Estado de Derecho (Association of Jurists for the Defense of the Rule of Law).

Fourteen challenges against the model cities enabling law were filed on September 18, 2012. These fourteen challenges were filed on behalf of 14 separate individuals, including Miriam Miranda Chamorro, head of Organización Fraternal Negra Hondureña  (OFRANEH), a Garifuna organization.

On September 18, the Public Defender of the Constitution, a prosecutor with the Public Prosecutor's office, filed a brief with the Supreme Court on an October 2011 case challenging the constitutionality of the law. The Honduran Supreme Court solicits the opinion of the Defender of the Constitution whenever there is a constitutional challenge present in a case before the Supreme Court.  A legal countdown clock has now started, that by law gives the Supreme Court's Constitutional group of five judges just 20 days to render an opinion in that first legal challenge from October, 2011.

Nine more challenges to the constitutionality of the law were filed with the Honduran Supreme Court on September 21, 2012.  Eight of these were filed by the Consejo Cívico de Organizaciones Populares e Indígenas de Honduras (COPINH, the Civic Council of Popular and Indigenous Organizations) and the nineth by Father Fausto Milla, a Catholic priest in the Lenca region of Honduras.

On September 25, the LGBT community filed 30 more challenges to the constitutionality of the Regiones Especiales de Desarrollo law.

On September 26, a further 22 challenges against the law were filed.  One of these was by the Colectivo de Mujeres Hondureñas (Collective of Honduran Women), and the rest by individuals challenging the legislation.

For those of you keeping score, that's 76 separate challenges to the constitutionality of the RED legislation.

And that's not the only bad news. The Honduran Congress apparently agrees that the law, as written, is unconstitutional.

Oswaldo Ramos Soto, who drafted the existing RED law and is  Juan Orlando Hernandez's go-to guy for writing legislation, is preparing to introduce an amendment which will "fix" the unconstitutional parts of the law.

Ramos Soto wants to change Article 1 of the RED law to make it clear that the judicial system in the RED is still answerable to the Supreme Court, which is the court of last resort in Honduras.

Ramos Soto also wants to strip away the treaty-making power granted the model city in the existing law.  He proposes changing Article 18 to remove any mention of treaties, and to give to Congress the power to appoint judges in the model city. 

Ramos Soto also proposes changing Article 19 to make the legal system in a RED part of the Honduran judicial system, under the authority of the Supreme Court.

The net effect of Ramos Soto's proposed changes would be to gut one of the key features of Paul Romer's model cities: their judicial independence from the host country.

Both Romer and Michael Strong have argued that it is the legal systems in the host countries that are in part responsible for the poverty in them and the lack of economic development.

The experiment seems to be on the way to being over before it even began.

Agreement for a Model City

Juan Orlando Hernandez, the head of the Honduran National Congress announced Tuesday afternoon that COALIANZA, the Comisión para la Promoción de Alianzas Público-Privadas, had signed an agreement for the first of three model cities in Honduras.

The agreement will cover one of the regions being discussed as possible locations for a model city.  The three regions mentioned as possibilities for model cities are:  near Puerto Cortés, the Agalteca Valley or the Sicaya-Paulaya valley near Puerto Castilla, and Choluteca. According to COALIANZA, it must be located near to both an airport and a port.

Hernandez told the press:

"It should be noted that these model cities will be established in depopulated areas of Honduras.  It does not imply the displacement of people or social groups."

None of these regions is completely vacant. Reading between the lines, what Hernandez is saying is that there are no large cooperatives or powerful landowners in these regions, groups that might vocally protest the expropriation of the land on which they live and work. 

La Tribuna reports that a funding partner for this model city will be the US company MKG Group, which has agreed to invest some 15 million lempiras ( or $7.8 million dollars ).  Michael Strong, identified an executive with the company, is reported to have said:

"The future will remember this day as that day that Honduras began developing.  We believe this will be one of the most important transformations in the world, through which Honduras will end poverty by creating thousands of jobs."

We were unable to locate any information on MKG Group, though the Michael Strong in question is, we believe, the Michael Strong associated with FLOW and the Free Cities Institute. Strong formed the Grupo Ciudades Libres LLC, a Nevada Company, with Kevin Lyons in 2011. 

Another group that claims to be involved is the Future Cities Development Corporation, one of whose founders is Patri Friedman, grandson of Milton Friedman, nobel laureate in economics. This group has previously been linked by The Economist to the Model Cities project in Honduras.

Hernandez said that the main funding partner of the project, whose identity will be revealed later, is a Canadian company that has been investing in development regions worldwide for the last 15 years, but he would not identify the company.

According to COALIANZA, the project will provide 5000 direct and indirect jobs this year, 15,000 next year, 30,000 in 2014, and 45,000 in 2015.

The agreement must still be approved by the rubber-stamp Honduran Congress, and the Executive Branch must appoint a governor.