NEPAL: 2008 REPORT ON INVESTMENT DISPUTES AND

UNCLAS SECTION 01 OF 02 KATHMANDU 000704 SIPDIS E.O. 12958: N/A TAGS: CASC EINV KIDE OPIC PGOV NP SUBJECT: NEPAL: 2008 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS REF: SECSTATE 43784 ¶1. Post's submission of its 2008 "Report on Investment Disputes and Expropriation Claims" follows: Begin Text. NEPAL The United States Government is aware of two (2) claims of United States citizens that may be outstanding against the Government of Nepal (GON). ¶1. a. Claimant A b. 2006 c. Claimant A performed services for the Nepal Electric Authority (NEA) under a consulting contract agreement for construction design and supervision related to the Kali Gandaki "A" hydroelectric project. The Kali Gandaki project has been operational since June 2002 and was formally inaugurated on January 22, 2004, by then King Gyanendra. On March 7, 2006 Claimant A sent a letter to NEA, requesting the contract be closed and the final retention moneys paid. Claimant A asserts that all of its contract obligations have been fulfilled, including the submission of a final report and as-built drawings. The amount due is USD 234,366.58. Since October of 2006, Claimant A has sent six follow-ups requesting the final retention payment. The last request was dated May 7, 2008. Since 2006, the NEA has asserted that Claimant A was not entitled to full payment because Claimant A had failed to fulfill all of its contract obligations. However, in response to Post's inquiries in June of 2008, NEA stated that payment of the retention amount had been approved. However, due to financial problems, NEA would be able to release the funds until its new budget is approved. (Note: The NEA has reportedly included provisions for the payment to Claimant A in its budget for the next fiscal year which will begin July 15, 2008. End Note) Claimant A has reportedly been notified through informal channels of the NEA's intentions to send payment at the start of the next fiscal year. ¶2. a. Claimant B b. 2001 c. On July 21, 1996, Claimant B and the Nepal Electricity Authority (NEA) entered into a project for a 36 MW hydropower generation project on the Bhote Koshi river in Nepal's Sindhupalchowk District. Claimant B was to build and operate the facility, while the NEA was to purchase all 36 MW of generated power. In May 2001, Claimant B issued an invoice to NEA for the period of May 14-June 14, 2001. NEA did not pay the invoice in full and provided no justification for the reduced payment. Claimant B protested the short payment but received no formal written response. According to Claimant B, NEA has continued to underpay for the generated power ever since. As of March 2007, the amount due was reportedly over USD 5.4 million. Since 2001, Embassy representatives have met periodically with the Managing Director of NEA and the Secretary of Water Resources to urge resolution of the dispute and in late 2002 and early 2003, Embassy representatives and the Ambassador, at the request of Claimant B, asked the Prime Minister, the Finance Minister, the Foreign Minister, and the Water Resources Minister to address the payment dispute. In response to the Embassy's efforts, the Department of Energy Development (DED),under the Ministry of Water Resources (MoWR),issued a letter in early May 2003 addressed to both Claimant B and the NEA urging them to resolve their dispute. In late May 2003, Claimant B and NEA sent separate letters to the MoWR and the DED asking them to clarify their request. The Charge then discussed the dispute with the Water Resource Minister, again urging an amicable settlement. During the rest of 2003, Claimant B tried to settle the dispute; however, the NEA rejected all efforts to do so. KATHMANDU 00000704 002 OF 002 Throughout late 2003 and 2004, the Embassy remained in close regular contact with Claimant B's local office and with the hydropower plant itself. Embassy representatives, the Ambassador and Charge, as well as visiting State Department officials, raised this dispute whenever possible at high levels within the Government of Nepal. In late April 2004, Claimant B requested that the Embassy alert the Government of Nepal that it planned to make one last attempt to reach an agreement with NEA prior to activating the dispute resolution clause in the project agreement. In March 2005, the MoWR formed a subcommittee comprised of representatives from the MoWR and the NEA. The subcommittee submitted a recommendation to the NEA Board with a divided opinion (two in favor of Claimant B and two in favor of NEA). In response, the NEA Board, in May 2005, constituted an independent committee, including the Water and Energy Commission Secretariat Executive Director, the Joint Secretary from the Ministry of Law and Justice and the Joint Secretary of the Ministry of Finance, to investigate the dispute. The committee met several times and set a June 13, 2005 deadline, but that was disbanded when one of the senior members retired. On March 24, 2006, a private Nepalese energy company, which owned 10 percent of the shares, purchased an additional 75 percent from the original U.S. investor. A year later on March 28, 2007, the Nepalese company further increased its ownership with the acquisition of an additional 10 percent from the International Finance Corporation (IFC),a member of the World Bank Group. (Note: An American engineering company owns the remaining 5 percent.) In May 2007, after the Nepalese energy company had acquired a 95 percent ownership interest, Claimant B re-started negotiating with the Nepal Electricity Authority and the Ministry of Water Resources to work out an amicable settlement of the payment dispute, with the aim of avoiding litigation. On June 11, 2008, Claimant B and the NEA reached an agreement to settle the seven-year-old dispute over the purchase of what was characterized as "excess power." Claimant B agreed to renounce its claim for past payments for the "excess power" and NEA agreed to purchase all of the "excess power" generated at a new agreed upon rate. The party's original Power Purchase Agreement (PPA) was for 36 MW of electricity, yet when at full capacity Claimant B produces 45 MW of electricity. To date, NEA has refused to purchase the additional watt hours under the original PPA. The new agreement will reportedly be finalized after Claimant B renews its license and signs a new Power Purchase Agreement (PPA) reflecting the full generating capacity of the plant. END TEXT POWELL