SURINAME'S STATE-OWNED ELECTRICITY COMPANY NEARING

UNCLAS SECTION 01 OF 03 PARAMARIBO 000141

SIPDIS

SIPDIS

STATE FOR WHA/CAR: LLUFTIG, EB/ESC/IEC

E.O. 12958: N/A
TAGS: ENRG ECON TRGY KTDB NS
SUBJECT: SURINAME'S STATE-OWNED ELECTRICITY COMPANY NEARING
BANKRUPTCY

REF: 05 PARAMARIBO 213

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Summary
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1. News that Suriname's state-owned electric utility
company, EBS, will need to file for bankruptcy unless the
Government of Suriname (GOS) quickly intervenes to prevent
a shutdown has jostled Surinamers. The Minister of Natural
Resources, Gregory Rusland, has asked the government's
accounting office (CLAD) to undertake a full investigation
of EBS financial records. Government officials have tried
to calm fears of those who remember frequent blackouts. End
Summary.

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EBS's Financial Woes
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2. According to an Ernst & Young report, EBS posted a
consolidated loss in 2004 of approximately 8.6 million USD,
compared to a loss of 5 million USD in 2003. Internal
company figures indicate that the 2005 loss is expected to
reach 18 million USD. The losses have had a serious effect
on the company's cash flow, dropping retained earnings from
the positive range to negative 3.6 million USD. The
negative trend is expected to worsen when losses from 2005
are fully reported. The ongoing cash flow shortage will
make it impossible for the company to meet outstanding debt
payments, and the company has already exhausted most of its
usual sources of credit. The company's long-term (more
than five year) debt stood at 58 million USD and its short-
term debt at 43 million USD. Capital repayments and
interest on the short-term debt stood at 11 million USD in

2004. EBS further owes its pension fund an undisclosed but
significant amount. Ernst & Young has refused to place its
audited seal on the current report citing "technical
difficulties," apparently arising from inaccurate or
incomplete data in 1995-2003 financial statements from EBS.


3. The government's response was for the Minister of
Natural Resources, Gregory Rusland, to state that the
government would continue to guarantee the nation's energy
supply. Rusland hired experts, undefined, to help resolve
the financial crisis but has been unable to indicate when
the situation at EBS would be stabilized. On February 25,
"Dagblad Suriname" reported that the Minister had asked the
government's central accounting office (CLAD) to conduct a
thorough investigation of EBS's finances. A team of
experts from CLAD, the InterAmerican Development Bank (IDB)
and the Energy Commission of the Ministry of Natural
Resources were also ordered to conduct an evaluation of the
tariff structure EBS uses, factoring in the effect of the
last round of price increases in November 2005 which were
supposed to resolve the company's cash flow problems.

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Beyond Financial Problems Capacity Shortfall
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4. EBS' problems go beyond its immediate financial woes.
The company has been unable to keep up with the growing
demand for energy. Household demand for electricity over
the last 20 years has increased at peak periods from 35MW
to 125MW an increase of more than 200 percent. Energy
experts estimate current shortfall in supply anywhere from
100 to 150 megawatts. EBS itself forecasts growth in
demand at approximately 10 percent annually. The average
waiting time for a newly constructed house to be connected
to the power grid runs anywhere from 6 months to a year,
and requires the concomitant stamina to navigate a very
cumbersome bureaucracy. Many businesses complain about
severe setbacks in expanding or establishing operations
because of the power shortage. Manufacturing companies
often purchase their own electric generators to maintain
production levels. Larger enterprises in Suriname, Suralco
(Alcoa subsidiary),BHPBilliton and Staatsolie have even
gone so far as to take their companies off the grid,
establishing their own power generating systems to ensure
consistency. Households and smaller businesses often incur
losses due to rolling blackouts, which cause damage to
equipment and merchandise.


5. Another major problem is deteriorating infrastructure.
Eighty percent of Suriname's electricity is produced by the

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hydroelectric plant at the Afobakka dam (Suralco managed).
The electricity is transported to the city through an
outdated and inefficient 161 KV transmission line. Experts
estimate that approximately 8 percent of electricity is
lost due to leakage. The secondary source of energy, EBS's
diesel generating plant, is costly and inefficient.
Designed to produce 53.6 MW through 10 diesel-powered
generators, the plant currently produces only 26.5 MW of
energy.


6. In late 2004/early 2005, drought caused the water levels
in the lake feeding the turbines of the hydroelectric plant
to drop dramatically. Suralco, as the wholesale supplier
of electricity, was unable to deliver the full 100 MW it
had contracted to provide. This event surfaced an ongoing
controversy over who is ultimately responsible for
supplying electric energy to Suriname, Suralco or EBS.
Suralco leased 30 diesel-powered generators (Agrekko model)
to produce 25 MW of electricity to cover the shortfall.
These generators operated for approximately six months at a
price tag of two million USD per month. Who is responsible
for payment, Suralco or the state utility company, remains
unsolved and will probably go to arbitration.


7. EBS, as a parastatal has been subject to political
interference. The position of general manager, vacant
since 2001, has been assumed by Oemar Chiragally, chairman
of the Board of Supervisors. Chiragally was appointed by
current President Ronald Venetiaan as a result of his
connections to the President's NPS party. The term of the
current Board expired in January 2005 and no replacements
have been named. For years, service on EBS's board was
considered political plum, as salaries and perks were high
and management experience seemed a minor detail. Minister
Rusland has told the press that his ministry is working on
a new structure of management, which still needs "political
backing" and approval of the Council of Ministers.

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Attempted Solutions
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8. A long-range investment plan, estimated cost 100
million USD, was drafted to chart the company's future. As
part of this, in 2002, EBS signed an agreement with a
consortium of six companies from Suriname, Germany and the
Netherlands to expand the transmission and distribution
network in and around Paramaribo. Initially budgeted at 11
million Euros, this project is currently in progress.
Through an 18.9 million USD credit line with India, EBS has
also ordered a new 161 KV transmission line to be built
from Afobakka to Paramaribo. This transmission line will
transport 100 MW of electricity from the dam to the city
without leakage. To upgrade its diesel-powered plant, EBS
purchased 3 8-MW generators from Germany for approximately
seven million USD each. EBS has also signed a contract to
purchase electricity from the 15 MW power plant Staatsolie
is building (See Reftel).


9. Staatsolie (Suriname's most successful parastatal)
turned over approximately 80 million USD in income tax and
dividends to the government in 2005. According to Minister
Rusland, part of this money will be used to help tide over
EBS until the depth of its financial and administrative
problems are clarified by CLAD study. Private sector
organizations like the chambers of commerce (KKF and VSB)
and the labor unions have called for an increase in the
price of electricity and a better distribution of the
tariff structure as long-range solutions, although Rusland
stated that there would be no increase until expert
evaluation has been completed.


10. The situation is dire enough that there have been
calls to split the company up into several smaller more
manageable companies with each taking the responsibility
for one sub step in the process of power generation and
supply, or to sell EBS to a foreign investor with the
capital and expertise to keep it afloat.

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Comment
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11. Suriname is at a crossroad in addressing its energy
needs and must carefully rectify the problems of the state
utility company to not only stave off a looming energy

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supply crisis but also chart the proper course for the
long-term electricity needs of a growing economy. Lack of
reliable power is hammering business expansion and putting
some foreign investment on hold. EBS is another example of
a parastatal which has been politicized and mismanaged to
the detriment of the Surinamese population. The government
faces politically tough choices: stir outrage now with rate
increases and install new professional management, or
continue business as usual which involves postponing
decisions for as long as possible. One business group
claims to have prepared an options paper for the President
which explains just how costly decisions deferred will be;
they estimate failure to act could leave the government
financing an EBS deficit of 35-40 million USD a year by the
time of the next elections.

BARNES