NIGERIA: AES CORPORATION TO PURSUE INTERNATIONAL

UNCLAS SECTION 01 OF 02 LAGOS 000143

SIPDIS

SENSITIVE BUT UNCLASSIFIED - HANDLE ACCORDINGLY
SIPDIS

DEPT FOR AF/W
DEPT PASS TO TDA
DEPT PASS TO OPIC FOR JOAN EDWARDS
DOE FOR PARSON

E.O. 12958: N/A
TAGS: ENRG EINV ECON NI
SUBJECT: NIGERIA: AES CORPORATION TO PURSUE INTERNATIONAL
ARBITRATION

REF: A. 07 LAGOS 147


B. 07 LAGOS 507

Sensitive But Unclassified; Business Propriety Information;
Handle Accordingly.


1. (SBU) Summary: During a March 28 meeting with EconOffs,
U.S. company AES Corporation said it will pursue
international arbitration if the Government of Nigeria (GON)
does not pay an owed USD 17.5 million and honor the terms of
a power purchase agreement between AES and the Power Holding
Company of Nigeria (PHCN). The Mission previously advocated
on behalf of AES in 2006 and 2007 to the Ministry of Finance
for non-payment by PHCN. AES Managing Director fears the
Nigerian Presidential Committee on the Accelerated Expansion
of the Electrical Power Sector has not done a thorough
analysis of solutions to Nigeria,s power problem. He
suspects a forthcoming recommendation for public private
partnerships will result in the transfer of billions of
dollars worth of turbines and other equipment to well-placed
insiders. End Summary.


2. (SBU) AES Corporation Managing Director Ahmer Nadeem met
with Pol/Econ Section Chief and EconOff on March 28 to
discuss the GON,s failure to pay more than USD 17.5 million
in fees owed AES for power generated by the company. The USD
17.5 million is over 30 days due, and while the GON makes
periodic payments, it continues to dispute the total amount.
AES had obtained a one year waiver from its lenders to avoid
drawing on a USD 60 million letter of credit it has with
Citibank while attempting to resolve tax and other problems
with the GON.


3. (SBU) Nadeem believes the negotiations over the company,s
tax exemption provision have reached a dead end. The company
met with President Yar,Adua in July 2007, and the President
said provisions of their contract providing for a 14 year tax
exemption conflict with existing law which allows a maximum
five year tax exemption. The President could not change the
law for a single company and asked that they submit a
proposal complying with current law. The company submitted a
proposal to adjust its tariff upward and the GON hired the
accounting firm KPMG to audit the company,s calculated tax
liabilities. However, at the end of this protracted process,
the Federal Inland Revenue Service told the company there was
nothing it could do and referred the company back to PHCN
where the dispute began. PHCN demanded that AES pay 50
percent of the tax and reduce its tariffs, terms which AES
refused.


4. (SBU) Nadeem said the company planned to initiate
international arbitration on or about April 14. AES has also
sent a letter to President Yar,Adua requesting a meeting in
early May to find a peaceful resolution to the dispute. On
pursuing international arbitration, Nadeem believes the
company,s rights under the contract are clear, and the GON
may be persuaded to pay the amounts in question when it
realizes its case before the arbitrator is weak. He
contended that the GON,s desire to attract private
investment in the power sector will act as an incentive for
the GON to settle before there is an arbitration decision.


5. (SBU) Nadeem reported that the Presidential Committee on
Accelerated Expansion of the Electrical Power Sector has
already submitted its report without having seriously
considered how adequate power could be achieved. The
committee plans to fund the completion of the Nigerian
Independent Power Project (NIPP) by raising USD 3.5 billion
and engaging in public private partnerships. Nadeem
underscored that it would be difficult at best to raise this
large amount, particularly if the committee seeks funding
from GE Capital with local banks providing bridge loans.
Regarding public private partnerships, he posited that
influential insiders have already been identified to take
over the NIPP assets, including the 18 turbines purchased
from GE, which will be the public sector contribution to the
partnerships.


6. (SBU) AES representatives lamented that U.S. companies are
criticized for their unwillingness to accept risks, but the
GON fails to recognize that risks must be hedged. In a
functioning market, the risk of getting enough fuel for a

LAGOS 00000143 002 OF 002


plant is hedged by the multiplicity of buyers and sellers.
In Nigeria, where there is no functioning market, the
government needs to back projects by providing risk guarantee
schemes. Nadeem attributed the GON,s overconfidence to the
empty promises made by Chinese investors and to the
ill-founded advice offered by local consultants.


7. (SBU) Comment: The Mission has been engaged in advocacy
efforts on behalf of AES for several years. The GON routinely
threatens non-payment and complains about the cost of the
electricity generated by AES. We have consistently passed
the message to the GON that contracts should be honored and
that not paying AES will not improve Nigeria,s image as a
country with a difficult business climate. End comment.


8. (U) Embassy Abuja has cleared on this cable.
BLAIR