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### Viewing cable 08MANAGUA803, NICARAGUA: GOVERNMENT GOES AFTER FLAGSHIP BEACH RESORT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08MANAGUA803 | 2008-06-24 14:26 | 2011-06-23 08:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Managua

`

    VZCZCXYZ0000
    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

`