LUGO-LULA AGREEMENT ON ITAIPU

UNCLAS ASUNCION 000473

SIPDIS
SENSITIVE

TO WHA/FO CMCMULLEN, WHA/BSC MDRUCKER, BFRIEDMAN,
MDASCHBACH, WHA/EPSC FCORNEILE

E.O. 12958: N/A
TAGS: ECON PREL EAGR EPSC PA
SUBJECT: LUGO-LULA AGREEMENT ON ITAIPU

REF: A. ASUNCION 295

B. ASUNCION 042


1. (SBU) SUMMARY: After more than 10 months of negotiations,
Paraguayan President Fernando Lugo and Brazilian President
Ignacio Lula da Silva signed on July 25 a thirty-one point
joint declaration on the bilateral Paraguay-Brazil
hydroelectric dam Itaipu worth almost USD 800 million (about
8 percent of Paraguay's USD 10 billion GDP). Brazil agreed to
increase Paraguay's compensation for Paraguay's share of
ceded electricity, opened the possibility for Paraguay to
sell electricity in the Brazilian market, and agreed to
finance a five hundred kilovolt electricity transmission line
from Itaipu to Asuncion. The joint declaration did not
address two critical negotiation points for Paraguay --
Itaipu's debt and Paraguay's desire to sell its share of
Itaipu,s electricity to third countries. Considering
Paraguay's reduced leverage in the negotiation process, the
agreement is a meaningful political victory for Lugo (at
least for now),and evidence of Lula's personal affinity for
Lugo. END SUMMARY.


2. (SBU) After more than 10 months of negotiations,
Paraguayan President Lugo and Brazilian President Lula da
Silva signed on July 25 a thirty-one point joint declaration
on the bilateral Paraguay-Brazil hydroelectric dam Itaipu
worth almost USD 800 million -- about 8 percent of Paraguay's
USD 10 billion GDP. Paraguay will receive USD 360 million
annually in compensation for excess electricity ceded to
Brazil, a 200 percent increase from the USD 120 million
Paraguay received when Lugo took office in August 2008.
(NOTE: Paraguayan critics complain that Paraguay is still not
adequately compensated. Paraguay's lead negotiator Ricardo
Canese previously predicted that Paraguay could get at least
USD 650 million from Brazil (reftel b). END NOTE).


3. (SBU) Brazil opened the possibility for Paraguay to
gradually sell electricity in the Brazilian open market. To
make it operational, Brazil will need to modify a law that
allows Paraguay's state-owned distribution company ANDE to
sell electricity in Brazil through Brazil's state-owned
ELECTROBRAS. Besides Itaipu's electricity, the
Paraguay-Brazil agreement also enables Paraguay to sell
electricity to Brazil from two smaller Paraguayan dams.


4. (SBU) Construction of a 500 kilovolt electricity
transmission line from Itaipu to Asuncion is also part of the
agreement. Itaipu will finance the USD 550 million project
at no cost to Paraguay. (NOTE: Despite being the most
important electricity producer in the region, Paraguay
suffers chronic electricity shortages and its few
transmission lines are on the brink of collapsing. END NOTE).


5. (SBU) The Brazil-Paraguay agreement failed to address two
of Paraguay's critical goals -- a restructuring of Itaipu's
debt (USD 19 billion, half which is Paraguay's
responsibility) and Paraguay's desire to commercialize its
share of Itaipu's electricity with third countries (reftels a
and b).


6. (SBU) Paraguay's lead Itaipu negotiator Ricardo Canese
told Econoff late July 27 that Paraguay will continue to
press its claims for debt restructuring and freedom to sell
its share of electricity with third countries. He said that
after Paraguay's Controller General completes its evaluation
of Itaipu's debt, the restructuring process could begin.
(NOTE: Paraguay's share of Itaipu's debt service payments
exceeds USD 800 million per year, and almost half of it is
questioned by Paraguay as illegal (reftel b)). According to
Canese, the option to sell electricity in the Brazilian
market helped balance Paraguay's demands for adequate
compensation (just price) and freedom to commercialize.
Canese said Paraguay's ability to sell its electricity in
Brazil is a good start, but not the end of Paraguayan efforts
to sell to third countries. He recognized that Paraguay's
ANDE lacks experience to immediately commercialize
electricity in Brazil, and it will take time before the
company builds the necessary operational capacity.


7. (SBU) COMMENT: With the joint declaration, Lula deflected
a sensitive issue with his next-door neighbor, enabling Lugo
to deliver on one of his most significant campaign promises.
This is clearly a big win politically for Lugo. But there is
one major wild card: that both the Paraguayan and Brazilian
congresses have to approve the deal. The Paraguayan congress
should not present any serious objections, and Lugo said he
would personally present the deal to Congress July 28. The
worry here, however, is that the Brazilian Congress could
render the agreement meaningless by voting against it. In any
case, considering Paraguay's reduced leverage in the
negotiation process, the agreement is a meaningful political
victory for Lugo (for now),and clear evidence of Lula's
personal affinity for Lugo. END COMMENT.
Shaker