Pinocchio and SFO

Once upon a time, there were airport officials who wanted to spin tall tales, spend $745,000 on Honduran boondoggling, and not explain very much

But Third World airports are a risky business, liability-wise. To protect San Francisco from liability for the company's activities, the company would have to be completely separate from city government. To ensure that separation, the private firm's books and other activities would need to be kept secret from most city officials, airport officials argued at the time.

As I reported earlier, Costas, who was put in charge of the new corporation, exploited the "secrecy" portion of this argument and all but sneered at the "separate books" portion. He ignored promises that the firm, SFO Enterprises LLC, would support itself, and turned it into a vacuum that sucked city time and money into a private money sack. Public records I obtained last year showed Costas and his lieutenants diverting at least $900,000 in city funds to the benefit of SFO Enterprises without obtaining specific permission from the Board of Supervisors, in apparent violation of the state laws on official misconduct and federal law on the use of airport money.

SFO Enterprises spent hundreds of thousands of dollars on trips to Rome, Paris, Oman, Jamaica, and elsewhere, attempting to win airport privatization contracts. Costas and Martin hired professionals with expertise relevant to airport privatization, put them on the city payroll, then flew them around the world on behalf of SFO Enterprises, brazenly commingling city and private funds along the way. In the end, the city-paid workers for this "private" enterprise succeeded in just one project: winning the October 2000 bid to take over management of Honduras' four main airports.

To gain the Honduras contract, SFO Enterprises "employees" committed what Honduras government officials and business leaders now call a brazen act of deception.

Bidding rules set up to govern the privatization of Honduras' airports -- a privatization Honduras was compelled to undertake as part of conditions for loans from the International Monetary Fund -- required that lead partners of the bidding consortia have experience managing major international airports. To this end, SFO Enterprises assembled a consortium called "Interairports," made up of various Latin American airport service and infrastructure companies. The consortium then included in its bidding materials a set of catalogs, annual reports, and other materials pertaining to the San Francisco International Airport -- creating the impression that our city's airport was backing the Interairports Honduras privatization bid.

Honduran government officials, business leaders, and consortium members -- and even some officials at the U.S. Embassy in Tegucigalpa -- had become convinced that if Interairports managed Honduras' airports, the country would get access to the expertise and financial power of SFO. Actually, however, SFO Enterprises, and its subsidiary, SFO Honduras, had no formal organizational relationship with San Francisco International Airport. SFO Enterprises was a start-up company with $10,000 in capital, and no experience conducting any sort of business at all.

"You ask anybody; everyone was certain that San Francisco would run our airports," Jose Maria Agurcia, director of the Tegucigalpa chamber of commerce, said last week.

When Interairports, the SFO Enterprises consortium, won the bidding, it suddenly had a system of Third World airports to run, and no money to do it with. So Costas and airport accountant Leo Fermin embarked on what appeared to be a systematic diversion of city money. As I described in September, they obtained walking-around money through a highly unusual $40,000 advance from the city budget, and piggybacked on San Francisco's treasury through extensive use of city personnel and travel funds.

Eventually, though, San Francisco airport officials all but withdrew from Honduras, leaving SFO Enterprises' contractual obligations -- which involved drafting a variety of airport plans and manuals -- to Miami consultants. Most of the work was done by young, inexperienced Honduran architects, with the Miami consultants showing up time and again to review their work, regulators in Honduras told me.

Within this system, according to the Superintendencia de Concesiones, Interairports has done a feeble job of managing the airports of Honduras, increasing fees on everything from passengers to cargo but investing very little. The Superintendencia has fined Interairports $10,000 for failing to live up to contractual benchmarks for improving airport operations. Interairports has sued the agency in Honduran courts, claiming the Superintendencia lacked authority to levy the fine, according to Honduran newspaper reports.

Regardless of the outcome of that lawsuit, Honduran regulators clearly believe Interairports has failed to live up to its obligations. There is at least some evidence to that effect. In the city of San Pedro Sula, for instance, tropical rains often cause much of the airport to flood.

"There are four huge pumps at the airport's low point to avoid flooding, and we've insisted they be kept in working order, but it appears [Interairports] waited until the rainy season is full upon us to attend to repairs -- it's always something like this," according to one report by a Honduran government official, which followed a November report by the International Civil Aviation Organization critical of Interairports' management of its Honduran facilities. "Is this how they operate airports in San Francisco? They never take preventative measures. They're always corrective."

Honduran government officials, business leaders, and others with direct knowledge of SFO Enterprises' management of Honduras' privatized airports paint a picture far different than the small, safe investment vehicle described by Martin. SFO Enterprises is faced with hostile partners, angry regulators, and a Honduran business community whose representatives say they feel the country was defrauded -- by San Francisco.

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