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,

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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

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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