NEPA INVOKES FORCE MAJEURE IN AES CONTRACT

UNCLAS SECTION 01 OF 02 ABUJA 001812

SIPDIS


SENSITIVE


STATE PASS TO OPIC (CONAL DUFFY AND JIM WILLIAMS)


E.O. 12958: N/A
TAGS: ENRG ECON EFIN EINV NI
SUBJECT: NEPA INVOKES FORCE MAJEURE IN AES CONTRACT


SENSITIVE BUT UNCLASSIFIED LEASE PROTECT ACCORDINGLY



1. (SBU) Summary: Nigeria's National Electric Power Authority
(NEPA) on October 7 invoked force majeure and informed AES that
it (NEPA) would be unable to pay approximately 18 million USD
due on the Lagos Emergency Power Barge Project (the Ebute
plant). Overseas Private Investment Corporation (OPIC) has
provided $200 million of political risk for AES's equity
investment in the project and is thus concerned about the
problems the project is now encountering. The notification
could also have a significant adverse impact on the GON's
efforts to attract foreign investment and could hamstring
privatization efforts. AES informed us on October 17 that it is
moving "in the right direction" in talks with NEPA. AES has not
requested USG assistance, and its interests may conflict with
those of the USG. End summary.


Background to Ebute
--------------



2. (SBU) The Ebute plant is located about 35 miles east of
Lagos, close to the 1,320 MW Egbin power plant. Ebute consists
of nine floating barge units and provides a total of 290 MW.



3. (SBU) The GON, Lagos State, and NEPA are the parties to the
Power Purchasing Agreement (PPA) with AES. A 60 million dollar
letter of credit (LOC) issued by Citibank provides payment
security to AES Nigeria Barge Limited and may be drawn in the
event NEPA's payments are more than 15 days late. As of October
17, the Nigerian parties were approximately 18 million USD in
arrears bout three and a half months' worth of payments.



4. (SBU) Enron started the project in response to a request
received from the governor of Lagos State in September 1999.
The project was initially scheduled to commence commercial
operations in June 2000. However, for various reasons,
including the changing of the project site from Lagos to its
present location, the initial project commissioning was delayed
until June 2001. AES acquired the barge project from Enron in
the fall of 2000 for 58 million USD. The project reached
completion in March 2002. Total project costs, including the
acquisition fee, were approximately 225 million USD. OPIC's
Board of Directors (on which the Department of State is
represented) approved the 200 million dollar political risk
insurance coverage in May 2001.


Tension within the GON: who should pay, and how?
-------------- ---



5. (SBU) NEPA's letter does not appear to be the last word.
Econoff met separately on October 7 with Minister of Finance
(Dr.) Ngozi Okonjo-Iweala and Minister of Power and Steel
(Senator) Liyel Imoke. Both made clear that the GON itself is
struggling with two highly charged questions. First, who should
be held responsible for the payments - the Federal Government,
NEPA or the Lagos State government? Second, can the GON justify
to itself and to the public the seemingly exorbitant rates being
charged by AES for the Ebute output.



6. (SBU) NEPA also has ideas about who should pay. According to
Tom Simpson, an AMCIT energy consultant resident in Abuja, NEPA
complains that federal government entities regularly fail to pay
their electric bills. In NEPA's view, says Simpson, the federal
government is thus largely to blame for NEPA's inability to pay
on the AES PPA. (Simpson works for Nexant, a London based
energy sector consulting firm that has just completed a USAID-
sponsored, pre-privatization assessment for NEPA. Extensive
media reporting during the last year likewise aired NEPA's
grievances over non-payment by federal government entities.)



7. (SBU) AES officials told CDA in September (in London) that
they believed the Lagos State Government had likewise fallen
behind on making payments to NEPA and that this was contributing
to NEPA's woes.



8. (SBU) Whether AES is charging exorbitant rates, as Minister
of Finance Okonjo-Iweala claimed, is a matter of opinion. The
barge option was significantly more expensive (per KWH) than the
conventional power plant option but was chosen as a means to
more quickly supplement existing power supplies and alleviate
critical power shortages in Lagos. Moreover, AES negotiated a
take or pay arrangement, which means it gets paid for everything
it produces, regardless of whether the power is used. Okonjo-
Iweala complained also about this.



9. (SBU) That said, the tariff under the PPA is 2.7 cents per
KWH, less than a third of the tariff that NEPA is charging its
customers and about a quarter of what various experts have
estimated it costs NEPA to generate power.


Ramifications for privatization and investment
-------------- -

10. (SBU) The USG interest is twofold. Firstly, OPIC could be
required, in the event of non-payment of an arbitration award,
to pony up as much as 200 million dollars. Although this is
still a long ways down the road, it is not a pleasant prospect.



11. (SBU) Secondly, non-payment by NEPA and/or the Lagos State
Government and the GON could have severely adverse repercussions
for investment and privatization in Nigeria. If OPIC gets
burned, other insurers (some of whom may be more risk averse
than OPIC) will be less willing to back projects in Nigeria.
And without political risk insurance, few if any companies are
likely to invest in Nigeria's planned privatizations.


AES's interests versus USG interests
--------------



12. (SBU) AES is playing this close, and was not entirely
comfortable meeting with us October 7 (they ran into us
unexpectedly at the Ministry of Power and Steel). They had not,
as of October 17 (ten days later),informed OPIC of the force
majeure letter, which letter is quite arguably a material event
about which the contract would require notification.



13. (SBU) Econoff spoke October 17 with AES Ebute plant manager
Mark Miller (an AMCIT),who said that AES has acquired from NEPA
assurances that partial payments on arrears would resume
sometime toward the end of October or in November. Miller
characterized this as "movement in the right direction." He
added that AES had officially notified NEPA that it considered
the force majeure claim to be without legal basis. He said that
AES did not at present require USG assistance but agreed to keep
us apprised.



14. (SBU) It is quite possible that AES views publicity of
NEPA's payment difficulties as adverse to their own interests.
If so, this could well weaken AES's hand in any discussions with
NEPA. Miller mentioned to Econoff that AES is interested in
moving forward on other financing deals and that it is therefore
in AES's interest to quickly reach an acceptable arrangement
with NEPA. The reference to other deals tracks in general tenor
with comments AES officials made to CDA in London in September.


Comment: Clarify legal issues and relative interests first
-------------- --------------



15. (SBU) We recommend that Department (E, AF and possibly L)
sit down with OPIC to discuss the legal ramifications of any
action on our part. From there, we can proceed in a manner that
best protects the USG interests described above. Post will
report any significant developments on this end.


MEECE