SENELEC'S FINANCIAL BLACKOUT WORSENS SENEGAL'S ECONOMIC

UNCLAS SECTION 01 OF 03 DAKAR 000034 SIPDIS STATE FOR EB/IFD/ODF, EB/ESC/IEC, AF/EPS AND AF/W DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS E.O. 12958: N/A TAGS: ENRG EFIN ECON EPET EINV BTIO SG SUBJECT: SENELEC'S FINANCIAL BLACKOUT WORSENS SENEGAL'S ECONOMIC CONDITIONS REF: 08 DAKAR 1450 DAKAR 00000034 001.2 OF 003 ¶1. Summary: The recent deterioration of Senegal's national electricity company's financial situation has returned much of Dakar to frequent electricity shortages, causing electricity outages in households and businesses for several hours a day. The situation is negatively impacting Senegal's economic recovery by slowing GDP growth and adding strain to the country's already fragile public finances. On October 14, Senelec agreed to a major restructuring program, which includes significant new assistance from the World Bank and the French Development Agency (AFD),who will provide $80 million and $45 million, respectively. Much of this money will be used to help the company reduce its current debt, estimated at the time at over USD 125 million. Based on the plan, Senelec will also divide itself into independent operating units for power generation and electricity distribution. Further restructuring, including a possible full or partial privatization of the parastatal is also likely. Time will tell whether real reform is being pursued or if the country's power sector will continue to be abused by political influence and poor management. End summary. SMALL INDUSTRIES HIT HARDEST -------------- ¶2. According to a variety of sources, recent increases in electricity outages have resulted in a record number of small and medium enterprises (SME) to suspend or cease activities, particularly in the food processing, textile, and tourism sectors. Chronic electricity shortages reached crisis proportions between July and November. Long and unscheduled outages of 12 to 15 hours have become common throughout the country. Generators and candles have become two of the most sought after commodities for those with adequate disposable income. Larger companies are reporting declines in output averaging 30 percent. ¶3. Today, only 33 percent of Senegal's 12 million people have direct access to electricity, and 57 percent of those customers are in urban centers. Even though overall access is limited, thousands of families are now spending a huge share of their income on energy. As a result, they have been forced to reduce their consumption of other goods and services to pay higher energy bills. Senegalese are now forced to think twice before buying anything that needs to be kept cold. With mass power cuts suddenly the rule rather than the exception, refrigeration, streetlights, and all things relying on electricity are now difficult to sustain. As reported in Reftel, Imams from some of Dakar's poorer neighborhoods have been publically agitating for lower energy prices and better service. These religious leaders encouraged the local population to not pay their electricity bills. This civil unrest led President Wade to fire Senelec's General Manager, Latsoukabe Fall. DRAG ON ECONOMIC PERFORMANCE -------------- ¶4. Between 2005 and 2007, the government spent as much as USD 400 million on direct and indirect subsidies for the energy sector (mostly for electricity, but also some allocations for fuel and butane cooking gas). These subsidies contributed to Senegal's worsening budget deficit in 2006 and 2007 and also played a role in the current stock of arrears to the private sector. Many observers have noted that the subsidies diminished budget allocations for poverty reduction, while benefitting Senegal's relatively well-off populations. ¶5. In presenting Senegal's 2009 budget to the national assembly in December, Finance Minister Abdoulaye Diop confirmed a lowering of projected GDP growth in the coming year from 5.8 to 3 percent (and possibly lower). Diop placed much of the blame on the impact of chronic electricity shortfalls. ¶6. Several estimates from the National Agency of Statistics and the Employer Association blame Senelec's financial and production difficulties as largely being responsible for the country's current downturn in economic growth, as well as adding to Senegal's significant budget deficit, which has compromised the funding of social priorities in health and education. DONORS AND GOVERNMENT'S SUPPORT -------------- ¶7. Senelec has a long history of financial difficulties and cash flow problems. In August, the government ended electricity subsidy payments to Senelec, which then proceeded to raise prices to customers by an average of 17 percent. Despite this move, the company's debt reached an estimated USD 126 million in the fourth quarter of 2008. In October 2008, Senelec received a fresh infusion of money to help cover is debts and begin long-promised structural reforms. The French government granted a loan of USD 45 million, the World Bank began disbursing its new USD 80 million in support, DAKAR 00000034 002.2 OF 003 and the government of Senegal injected fresh cash of USD 40 million thanks to a loan from the Compagnie Bancaire de l'Afrique de l'Ouest (CBAO). ¶8. Under the program with the World Bank and the AFD, the government has agreed to split Senelec's activities into three main entities: a production subsidiary, a distribution subsidiary, and a transport subsidiary. The production and distribution subsidiaries are to be privatized with possible local and foreign participation, and perhaps with shares also being offered publically and to the company's employees. The transportation group will continue to be controlled by the government as the main strategic partner with the participation of local and foreign private investors. ¶9. This division of the parastatal is supposed to happen in early 2009, and the three new subsidiaries are scheduled to begin operations in June 2009, with new operating and consumer protection regulations to be put in place by then. The selection process of private partners for the three subsidiaries should begin in the first quarter of 2009. ¶10. Other donor assistance in the energy sector includes a USD 48 million soft loan from China to finance a new 90 KV distribution network to increase capacity and reduce wastage and the USD 90 million Kounoune power plant inaugurated in January 2008 and financed by the Bank Group and other development partners such as the International Finance Corporation (IFC),the West African Development Bank (BOAD),and the West African Banking Corporation (CBAO). ¶11. The Kahone-2 power plant, a CFA 32 billion project, financed by the Inter-American Develoment Bank(Bid),the Banque d'Investissement et de Developpement de la CDEAO (Bidc),the Banque Ouest Africaine de Development (Boad) and Senelec, with a capacity of 60MW has been operational since November. It is expected to increase electricity production capacity by 13 percent and provide electricity to more than 20,000 homes in the country. Senelec's strategic plan calls for mobilizing more than USD 1 billion from revenue, investors, and donors for new energy investments between 2007-2015. PURSUING ENERGY DIVERSITY -------------- ¶12. In addition, Senelec is pursuing new and diverse energy sources in order to reduce its dependence on oil and plans to increase its productive capacity by 2012. The GOS is promoting possible investments in biofuels, initially to run electricity generation units, and currently has a pilot project in northern Senegal using sugarcane-based ethanol. In 2007 the government signed a partnership with Brazil and India to launch a biofuel production program. Through public-private partnerships, Brazil will provide scientific and technological know-how, Indian entrepreneurs will supply the capital, and Senegal will offer land and labor. [In November, Senegal joined the U.S.-Brazil Biofuels Cooperation program.] SENELEC'S FINANCES IN DIRE STRAIGHT -------------- ¶13. In a press conference held on November 10, Latsoukabe Fall, the then-Senelec General Manager, told the press that his company faces its worse financial crisis in its history. "Our cumulative financial loss reached USD 100 million, between 2005 and 2007," said Fall. Despite government cash injections of USD 130 million to recapitalize the company in 2008 and a credit facility with local banks, Senelec continues to have difficulties in paying its suppliers and meeting electricity demand, including reimbursements for electricity supplied by General Electric's Dakar independent power station, GTI. ¶14. According to the World Bank, Senelec's customers are pying one of West Africa's highest rates for elecricity, an average of CFA 100 per KWh (this is a2007 average). However, the company claims thatits revenues are still insufficient to cover the copany's financial needs and continued government ubsidies and donor support to cover its operatioal expenses are required. With the higher electicity prices and limited connectivity to Senelec'spower grid, illegal tapping of power lines is a gowing problem, causing additional problems to th company's bottom line. ¶15. Under Senegalese law, Senelec is the sole supplier of fuel for electricity production. GTI, for example, cannot go to the markets and seek competitive bids to acquire its own fuel supply and frequently faces a supply shortage due to Senelec's inability to supply fuel in a timely manner. Currently Senelec consumes 1,500 metric tons of heavy fuel per day for a total monthly cost of USD 36 million. In 2007 Senegal imported almost USD 290 million worth of fuel of which USD 214 million (73.7 percent) was in the form of DAKAR 00000034 003.2 OF 003 diesel for electric production. AND EQUIPMENT IS OBSELETE -------------- ¶16. Senelec's generation plants and transmission equipment are predominantly old, inefficient, poorly maintained, and costly to run (about 30 percent of Senelec's production facilities are more than 25 years old). Transmission losses are very high. ¶17. Senelec's facilities cannot meet the rapidly growing domestic demand for power, growing annually by 25-30 MW. Senelec has been unable to meet peak electricity demand since 2004. Electricity production is mostly generated at thermal plants, the majority of which rely on diesel rather than cheaper, heavier fuel. Senelec has wants to convert some plants to flex-fuel generation, and has promised GTI financing assistance to do the same. Until that happens, Senegal will fail to take advantage of available natural gas resources produced by the Houston-based Fortesa/Africa On-Shore Drilling, which has a promising (if modest) supply capacity from its fields 20 miles from Dakar. ¶18. Hydroelectricity accounts for only about 10 percent of production, although there is a long-standing plan for regional cooperation which is searching for donor or private investment to begin the project. ¶19. Senegal currently has no coal-fired plants, although the GOS has a commitment from a private consortium, led by the Swedish group Nykomb Synergetics to build a 125 MW plant approximately 30 miles from Dakar. Senelec also recently signed a controversial contract with the same company to build a second 125 MW coal plant, which required a waiver of Senegal's public procurement regulations for open and competitive tenders. The government hopes that these two plants will not only cover Senegal's near-term electricity demand, but will also allow additional capacity to be sold to neighboring countries. COMMENT -------------- ¶20. Senelec has long needed management and operational reform, and we hope that the World Bank/AFD program will be fully implemented. The cash infusion provided under this program should help the many suppliers whose cash flow has been drained by Senelec's lack of payments. Equally important is a significant improvement in electricity supply and quality, and, in theory, better pricing. All this is necessary to help Senegal's beleaguered and cash-strapped private sector and bring much needed improvements to the country's investment climate. We suspect that France's support for Senelec is largely motivated by pressure from French companies in Senegal. However, we remain concerned for the sector due to Senelec's long history of poor fiscal and technical management and the continuing interventions of Energy Minister Samuel Sarr (who used to run Senelec),as witnessed by the closed-door deal struck for the second coal power plant. BERNICAT