Monday, July 29, 2013

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.


John (Juancito) Donaghy said...

It's already beginning. According to yesterday's La Prensa, Lobe says that they will be giving out 280 concessions.

RAJ said...

We noted that-- and are going to follow up with another post.