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Cablegate: Nicaragua: Government Goes After Flagship Beach Resort

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PP RUEHWEB

DE RUEHMU #0803/01 1761426
ZNR UUUUU ZZH
P 241426Z JUN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC PRIORITY 2793
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHMD/AMEMBASSY MADRID 0491
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS MANAGUA 000803

SENSITIVE
SIPDIS

STATE FOR WHA/CEN, EB/IFD/OIA, AND L/CID
STATE ALSO FOR WHA/EPSC
STATE PASS TO USTR
TREASURY FOR INL AND OWH
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: N/A
TAGS: ECON EINV NU
SUBJECT: NICARAGUA: GOVERNMENT GOES AFTER FLAGSHIP BEACH RESORT

REFS: A) MANAGUA 698, B) 07 MANAGUA 2376, C) MANAGUA 1789, D)
MANAGUA 1663, E) MANAGUA 889

SUMMARY
-------

1. (SBU) Barcelo Hotels and Resorts, the Spanish company that owns
the Montelimar Beach and Resort, Nicaragua's flagship tourist
destination, is under pressure from the Government of Nicaragua
(GON) to pay a "fee" worth $1.5 million for allegedly not honoring a
contractual agreement pertaining to the hotel's annual occupancy
rate. Barcelo management asserts that the Sandinista National
Liberation Front (FSLN) via the GON has fabricated this issue to
pressure the company to relinquish the hotel's airfield and 173
acres of beachfront property for the FSLN's private business and
personal interests. The GON's action against Montelimar is alarming
investors in the tourism and real estate sectors, heightening their
perception that investing in Nicaragua is unfortunately
characterized by more risk than reward.

NICARAGUA'S FLAGSHIP RESORT UNDER ATTACK BY GON
--------------------------------------------- --

2. (U) Since February, the Nicaraguan newspapers have regularly
reported on the contractual dispute between Barcelo-Montelimar and
the GON. Attorney General Hernan Estrada claims that Barcelo owes
the GON $1.5 million for having exceeded the average annual
occupancy rate of 60 percent, a contingency stipulated in the
original privatization contract. Barcelo contends that it honored
its contractual agreement to the letter, and has dispatched senior
executive management from Spain to discuss what it considers is a
misunderstanding by the GON. The Spanish Ambassador has publicly
defended Barcelo, asserting that he is sure that the company is
right.

3. (U) Business associations have publicly voiced concerns about the
dispute and have urged dialogue between Barcelo and the GON to
resolve the matter. Many investors complain that the dispute is
discouraging investment in Nicaragua's real estate and tourism
sectors. They also worry about the Ortega administration's respect
for the rule of law. From the GON's point of view, it is "righting
the wrongs of past administrations in how they applied or
misinterpreted the law" (Refs A-E).

FIRST LARGE FOREIGN INVESTOR AFTER FSLN RULE IN 1980S
--------------------------------------------- --------

4. (SBU) On June 10, Econoff met with Walter Martino (protect),
General Manager of the Montelimar Beach and Resort, Nicaragua's
flagship tourist destination, to discuss its business dispute with
the GON. Martino noted that Barcelo was the first significant
foreign investor in Nicaragua when FSLN rule ended in 1990 and
Nicaragua at that time was considered a very risky place to do
business. In 1993, Barcelo signed a contract with the GON to
purchase Montelimar for $3.03 million (Before the revolution in
1979, the property was owned by former Nicaraguan dictator Anastasio
Somoza. The Sandinista government confiscated the property and
using some European loans constructed a GON resort, of sorts). By
2006, the company had invested an additional $5.6 million to develop
the hotel, beachfront, and related infrastructure, bringing its
total investment to $8.63 million.

5. (SBU) Martino explained that the Chamorro administration offered
a number of investment incentives to Barcelo, including a bargain
price. Barcelo agreed to pay an annual contingency fee if the hotel
averaged an occupancy rate of more than 60 percent in any given year
from 1996-2006. Price Waterhouse Coopers conducted annual audits
confirming that Montelimar never enjoyed an average annual occupancy
rate more than 60 percent during the contractual period. Indeed,
CORNAP, the government's property management company, sent Barcelo
letters every year stating that the company had complied with the
terms of its contract.

ALLEGED CONTRACTUAL DISPUTE OVER OCCUPANCY RATES
--------------------------------------------- ---

6. (SBU) In November 2006, Martino attempted to document the
conclusion of the contractual commitment, but officials in the
outgoing Bolanos administration chose to pass the matter onto the
Ortega government. In December 2007, Attorney General Hernan
Estrada sent a letter to Martino claiming that Barcelo owed $1.5
million to the state for having exceeded the average annual
occupancy rate of 60 percent.

7. (SBU) In April, a Managua civil court approved Estrada's request
to prevent Barcelo from selling Montelimar while the GON sought to
recover $1.5 million from the company. The GON has been pressuring
the company, both publicly and privately, to pay.

FSLN SEEKS PROPERTY TO CONTROL TOURISM INDUSTRY
--------------------------------------------- --

8. (SBU) Martino believes the pressure to pay is nothing more than a
negotiating tactic to take control of a small airfield on the
Montelimar property, and perhaps 173 acres of beachfront property.
Bayardo Arce, Economic Advisor to President Ortega, has "suggested"
to Martino that Barcelo sell the airfield and beachfront property as
a way to end the dispute. [Note: On June 13, President Ortega
ratcheted the pressure further when he publicly ordered Mario
Salinas, the President of Institute of Tourism, to see whether the
state had a legal right to take possession of Montelimar. End
note.]

BARCELO INTENDS TO PROTECT ITS PROPERTY
---------------------------------------

9. (SBU) Martino reported that Barcelo will contest the charge that
it breached its contract and launch a public relations campaign that
will include Canada, Europe, and the United States, in addition to
Nicaragua. Martino notes that the sales contract states that any
dispute must be resolved through mediation by the World Bank.
Martino explained that management believes Barcelo's reputation is
on the line. Not taking a stand in Nicaragua could jeopardize its
other investments throughout the world [Note: Barcelo Hotels and
Resorts is the 24th largest hotel chain in the world with nearly
43,000 rooms. Montelimar is Nicaragua's largest hotel with 202
rooms. End note]. Ironically, Barcelo is about to finish
construction of a luxury hotel in Managua.

COMMENT
-------

10. (SBU) Bacelo's difficulties with the GON have attracted the
attention of business chambers and the rest of the tourism sector.
Jose Adan Aguerri, the President of COSEP, the umbrella business
organization, has urged the two sides to resolve their
misunderstanding. Lucy Valenti, the President of the National
Chamber of Tourism (CANATUR), has stated that the dispute is hurting
the tourism sector and should be resolved as soon as possible. The
move against Barcelo is the latest in a series of GON actions that
have cast a pall over the tourism and real estate sectors. Few
investors trust the Ortega administration's underlying motives for
going after Montelimar. The GON's continuing ham-handed treatment
of foreign investors has only heightened the growing perception
among potential dealmakers that investment in Nicaragua is
characterized by much more risk than reward. End comment.

TRIVELLI

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