TANZANIAN GOVERNMENT SEIZES U.S-BASED APR ENERGY'S POWER

UNCLAS SECTION 01 OF 02 DAR ES SALAAM 000071 SIPDIS SENSITIVE AF/E FOR JLIDDLE, AF/EPS FOR ABREITER, INR/RAA FOR FEHRENREICH PASS USTR FOR PATRICK COLEMAN, WILLIAM JACKSON COMMERCE FOR BECKY ERKUL TREASURY FOR REBECCA KLEIN NAIROBI PASS FCS E.O. 12958: N/A TAGS: PGOV ECON EINV ETRD TZ SUBJECT: TANZANIAN GOVERNMENT SEIZES U.S-BASED APR ENERGY'S POWER PLANT REF A: 2008 Dar es Salaam 130; B: 2008 Dar es Salaam 809 DAR ES SAL 00000071 001.2 OF 002 ¶1. (SBU) SUMMARY. On January 27, the Tanzania Revenue Authority (TRA) seized a 40 megawatt power generation plant owned by APR Energy, LLC, a Florida-based firm. TRA's action follows extensive efforts by APR to resolve a tax dispute related to a 2006 contract to provide power on an emergency basis. The Ministry of Finance and Economic Affairs (MOF),which in October 2008 agreed in principle to a resolution of the matter, withdrew its offer and demanded full payment of the disputed tax. Recent high-profile corruption prosecutions, including of the just-retired MOF Permanent Secretary, and the public uproar over procurement of another emergency power contract (involving U.S.-based Richmond Development Co.),have contributed to MOF's intransigence in the matter. Embassy has used its good offices to encourage the GOT to resolve the issue, but prospects for an accommodation are dim. END SUMMARY. Background: Power Crisis and Tax Dispute -------------- ¶2. (U) APR was contracted by Tanzania's parastatal energy company, Tanesco, to provide emergency power during the country's 2006 power crisis, the result of a long drought. APR commissioned its 40 MW plant near the northwestern city of Mwanza in early 2007. However, according to APR Project Coordinator Jake Kennedy, except for testing the plant did not provide power to the grid, because Tanesco, which under the contract was responsible for providing diesel fuel to generate power, did not do so. The power crisis eased in 2007 as rains enabled Tanzania's hydropower plants to increase capacity. (Note: A scandal over the procurement of another emergency power contract, awarded to U.S.-based Richmond Development Co., led to the resignation of the Prime Minister in February 2008. (ref a) End Note.) ¶3. (U) APR entered into its contract with Tanesco on the understanding that APR's operations would be tax-neutral (tax-exempt),and that Tanesco would be responsible for any taxes arising from the contract. During 2007, APR representatives wrote repeatedly to Tanesco and MOF to confirm and clarify the tax situation. In January 2008, TRA notified APR of income tax and VAT owed. APR's contract with Tanesco expired in March 2008. Following additional efforts by APR to resolve the tax issue, in July 2008 TRA issued a letter of intent to seize APR's plant unless the taxes at issue were paid. APR then contacted the Embassy to seek assistance. On July 16, Ambassador Green wrote to Prime Minister Pinda about the case, after which TRA agreed to suspend the seizure for 30 days while the parties sought a resolution. Negotiations, then compromise dashed -------------- ¶4. (SBU) On August 19, MOF Deputy Permanent Secretary Ramadhani Khijjah convened a meeting of representatives from TRA, Tanesco, the Ministry of Energy and Minerals (which oversees Tanesco),and APR, with Embassy representatives as observers. Khijjah reported that at an interagency GOT meeting, TRA had agreed to extend its suspension of the seizure. He said that pending an opinion of the Attorney General, Tanesco had provisionally acknowledged its responsibility for taxes on operations, including corporate tax and VAT, which would amount to approximately USD 8 million. However, the GOT would continue to demand approximately USD 1.5 million from APR for employment and withholding taxes. Following the meeting, APR offered USD 400,000 to settle the dispute; the GOT did not respond to the offer. ¶5. (U) On September 3, MOF notified APR that the Attorney General's office had issued an opinion that the contract did not exempt APR from taxes on profit and income. MOF requested APR to provide additional information that would lead to a different interpretation of Clause 3.4 of the contract, which relates to the tax issue. On September 13, APR provided MOF with a long list of documents supporting the contention that the contract should be considered tax-neutral. Ambassador Green wrote a second letter to the Prime Minister on September 22 regarding the case and the lengthening period during which APR remained unable to remove its property from Tanzania. DAR ES SAL 00000071 002.2 OF 002 ¶6. (SBU) Following an acrimonious October 16 meeting at MOF, with repeated arguments over the interpretation of the contract, on October 20 Kennedy informed Poloff that APR and MOF had reached an agreement in principle to resolve the dispute. APR would agree to pay withholding and employment tax, with exact amounts to be determined following review by APR and TRA; once APR had paid, TRA would approve export of the plant. MOF and Tanesco would settle all other tax issues. Kennedy said MOF Deputy Permanent Secretary Msongole advised him that other parties, including the Attorney General, would not object to the proposed settlement. ¶7. (SBU) In late November and early December, the political context changed. Gray Mgonja, just retired as MOF PS, was charged with corruption along with two former Finance Ministers (ref b). TRA seized the Dar es Salaam power plant of Aggreko, a UK-based company that had also been contracted to provide emergency power, over a similar tax dispute. On December 11, Kennedy informed Poloff that the GOT had rescinded its agreement in principle. Khijjah, now promoted to Permanent Secretary at MOF, confirmed to Poloff that the Attorney General's earlier opinion bound all power suppliers to pay corporate tax. ¶8. (SBU) At a January 8 meeting of MOF, TRA, APR and Poloff, DPS Msongole reaffirmed that the GOT was bound by the Attorney General's opinion, which he claimed not even the President could overturn. When Kennedy argued that APR was being punished because of the scandal over the Richmond contract, Msongole agreed, but said the GOT's hands were tied. Discussing what he called a bad contract, Msongole said Tanesco had misled bidders over the tax exemption, which was not in Tanesco's power to grant. However, he also said that with the Attorney General's opinion, Tanesco would not accept the liability for other taxes. Moreover, TRA demanded taxes from APR, not Tanesco. Msongole suggested that APR could pay one third of TRA's demand and file an appeal, as he said Aggreko had done. Otherwise, APR could file for arbitration. Msongole left open no avenue for APR to export its plant without paying the full tax demanded, unless the Attorney General's office would reconsider its opinion. (Note: APR, in its direct contacts with MOF prior to the meeting, had been led to believe the meeting would be to confirm the deal, not reject it completely. After the meeting, Kennedy joked darkly about destroying the plant rather than letting the GOT seize it. End Note.) ¶9. (SBU) TRA issued a new demand letter on January 14, then seized the plant on January 27. TRA gave APR fourteen days to settle outstanding taxes to avoid the auction of the plant. APR told us it was seeking an injunction to stop the seizure. APR also attempted to contact the Attorney General's office directly, in an effort to present evidence to refute the unfavorable opinion about the contract terms, but was told the request for a meeting was denied because APR is not a "client" of the AG. Ambassador Green, in his final call on President Kikwete, left a nonpaper on several issues, including the damaging effect the APR dispute would have on the investment climate for US companies in Tanzania. To date, State House has not responded. ¶10. (SBU) Comment: In the current political climate, it appears that the GOT would prefer to face APR in court or arbitration, despite the costs and potential costs of an adverse judgment, rather than appear to make a deal that contravenes an opinion of the Attorney General and a TRA demand. Within the GOT, concerns over the appearance of favoritism to a foreign company and the risk of public exposure outweigh worries over possible impact on future investment (or future assistance in the event of another power crisis). Even foreign assistance may be affected, since MOF's skittishness about issuing broad notices of tax exemption may result in delays to contracts under Tanzania's Millennium Challenge Compact. Embassy will remain in contact with APR about its legal strategy and possible approaches to the GOT. End Comment. ANDRE