AES LOSES BID FOR MEKONG HYDROPOWER PROJECT IN

C O N F I D E N T I A L SECTION 01 OF 02 VIENTIANE 000390

SIPDIS

SIPDIS

STATE FOR EAP/MLS BESTIC
STATE FOR EEB/ESC
STATE FOR L/EEB JOHN SCHNITKER
STATE PASS USTR FOR DAVID BISBEE
STATE PASS TO USED WORLD BANK
MANILA FOR USED ADB
COMMERCE FOR H.P.PHO
COMMERCE FOR ADVOCACY CENTER
PACOM FOR POLAD

E.O. 12958: DECL: 05/09/2017
TAGS: ENRG ETRD EINV EWWT ECON SENV PREL LA
SUBJECT: AES LOSES BID FOR MEKONG HYDROPOWER PROJECT IN
XAYABURY

REF: A. VIENTIANE 351


B. VIENTIANE 312

Classified By: Ambassador Patricia M. Haslach for reasons 1.4 (b) and (
d)


1. (C) Summary: CH Karnchang Public Company of Thailand (CK)
was awarded the right conduct a feasibility study to develop
a 1260 megawatt (MW) run of the river hydropower plant in
Xayabury by the Government of Laos (GOL). According to an
article in the Vientiane Times May 8, the GOL and CK signed a
Memorandum of Understanding May 4 granting CK 30 months to
prepare a survey of the project, the first major hydropower
project on the Lao section of the Mekong. Active USG
lobbying for American power producer AES, including personal
appeals from the Ambassador and a letter from the Secretary
of Commerce (Ref A),were ultimately unsuccessful. While
there are some rumors of possible corruption in the process
that ended with the choice of CK, we note that AES also could
have done more and had some weaknesses in their strategy.
During a meeting May 10 with the Ambassador, Vice Foreign
Minister Phongsavath Boupha raised the issue of Laos not
qualifying for Eximbank guarantees. The Ambassador countered
by expressing disappointment that AES, which could have asked
for Eximbank guarantees, was not awarded the contract to the
Xayabury project. End Summary.


2. (U) An article in the Vientiane Times May 8 described a
signing ceremony held May 4 to award CK of Thailand the right
to prepare a survey of the Xayabury hydropower site on the
Mekong. Assuming it is similar to what AES was seeking, the
Memorandum of Understanding signed between CK and the GOL in
essence gives CK the right to develop the site after it has
carried out feasibility studies. Despite the projected size
and scope of the project, the article never actually stated
that the project was to be on the Mekong itself, a curious
omission. It might have been deliberate to avoid drawing
environmental NGO attention to the project at this early
date. According to the World Bank, this project will face
even stricter attention from NGO groups because it will be
the first on the Mekong proper and because Nam Ngum II has
been declared an environmental disaster. And notwithstanding
intensive lobbying by the U.S. Government on behalf of AES,
there was no notification to either the Embassy, nor to AES,
that the contract had been awarded to another company, or
that a signing ceremony was to be held just four days after
the Ambassador had called on the President for the Committee
for Planning and Investment of Laos to lobby for AES (Ref A).
The Xayabury project site is estimated at 1260 MW--larger
than the well-publicized World Bank funded Nam Theun II
dam--and was hotly contested by three companies including AES
and another Thai company MBK. (Ref A and B).


3. (C) In a meeting with the Ambassador April 27, AES
representatives had mentioned they feared under-the-table
connections might be undermining AES's bid. CK has
previously built, poorly, the Nam Ngum II dam, and
connections made during that endeavor would have been likely
conduits for corruption. While it is entirely possible that
some payments were made irregularly to help CK win the
contract, we have no proof of that and AES's bid and lobbying
were not ideal.


4. (C) From the Embassy point of view AES made a number of
strategic mistakes.


A. AES did not include an energy marketing plan within its
bid proposal; nor did it begin to develop a relationship with
Thai electrical authority EGAT, the most likely purchaser of
the majority of electricity from the project.

B. Nor did AES include a marketing plan for Vietnam in its
proposal, despite AES having a $1.5 billion energy investment
in Quana Ninh province.

C. AES representatives did not speak with either the local
head of the World Bank (or the regional representative in
Bangkok) or the local head of the Asian Development Bank
(ADB). Either would have pointed out the critical need for
an energy marketing plan and might have offered information

VIENTIANE 00000390 002 OF 002


based on their direct experience with Nam Theun II to help
strengthen the bid.

D. They attempted to lobby people such as Deputy PM
Lengsavad, a powerful member of the government (and former
Foreign Minister) known for his dislike of the United States,
whose attention to the situation could well have been
counterproductive.

E. AES did not place a full-time staff member in Laos to
build a broader range of relationships than can be achieved
with visiting representatives. (Note: There is no guarantee
the outcome of the process would have been different if AES
had taken these steps. CK has experience in Laos and a broad
range of contacts (even without under-the-table connections).
We will seek opportunities to reinforce the importance of
these points with any future U.S. bidders. End Note).

--------------
Eximbank
--------------


5. (C) On May 10 the Ambassador paid a farewell call on Vice
Foreign Minister (VFM) Phongsavath Boupha. VFM Boupha urged
the USG to grant Eximbank the right to operate in Laos and
requested the Ambassador carry that message with her back to
Washington. After stating her disappointment that AES was
not awarded the Xayabury project, the Ambassador pointed out
that AES was just the type of American company likely to
request Eximbank guarantees.


6. (C) In a telephone conversation with econoff May 10, AES
representatives indicated that while they were disappointed
with the outcome, they intended to continue looking for
investments in Laos and would be returning shortly to
approach the GOL for feedback on what went wrong and what
they could improve. Econoff shared a number of suggestions
based on the checklist above, and they were receptive. When
told that CK might not have the capability to complete the
project, and might be looking for either a partner or to
sell, the AES representatives were non-committal. (Comment:
It is our impression that AES prefers to operate
independently in Laos. End Comment)
HASLACH