AES CONCERNED ABOUT GOP ACTIONS ON PANAMA'S

UNCLAS PANAMA 000657 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON ENRG PM EINV PGOV SUBJECT: AES CONCERNED ABOUT GOP ACTIONS ON PANAMA'S INVESTMENT CLIMATE -------------- Summary -------------- ¶1. (SBU) AES representatives informed the DCM that they are concerned that the Martinelli Administration may jeopardize their $856 million dollar investment in Panama by unilaterally changing the contracted price of water for hydroelectric generation plants owned by AES and others. The Martinelli Administration's actions toward hydroelectric generators have been preceded by similar actions towards other groups of businesses. These actions have the potential to erode confidence in the investment climate in Panama. -------------- AES - Largest U.S. Investor in Panama -------------- ¶2. (SBU) The DCM and Econoff met with Jaime Tupper, VP of Central America and Caribbean for AES, Humberto Gonzalez, General Manager of AES Changuinola, and Scarlett Alvarez, AES Regional Managing Director for Investor & External Relations, on August 25 to discuss possible GOP measures to increase payments from hydroelectric plant operators to the GOP. AES is the largest U.S. investor in Panama with an investment of $856 million in several hydroelectric plants. AES, which provides 28% of Panama's electricity, and Fortuna dominate the hydroelectric generation market (which provides 53% of Panama's installed electrical capacity of 1,645 Megawatts). AES sells electricity to the government either by direct long-term contract or in the spot market in which prices and quantities are fixed by a GOP electricity dispatch center. ETESA, a GOP owned company, has a monopoly on the transmission of electricity, and two companies distribute electricity, Union Fenosa and Elektra Noreste. -------------- Martinelli's Measures -------------- ¶3. (SBU) According to AES reps and newspaper reports, President Martinelli and his cabinet on August 23 adopted measures to raise the price of water for hydroelectric plant operators to 2 cents per kilowatt hour (a 14,000 % increase for AES) and to lower the cost of power for electricity consumers. The extra money from the operators will directly go to the consumers. These measures are not enforceable until either GOP Agencies issues relevant decrees or the National Assembly takes action. -------------- Effect on AES -------------- ¶4. (SBU) AES reps believe the 2 cent per kilowatt hour increase in payments will cost AES $35 million and will dramatically change the cost structure for their significant investments in Panama. Depending on the hydroelectric generation plant, AES's profit will either drop to zero or go negative. The effect on AES is greater than simply profits on operations in Panama; rating agency Fitch already requested a meeting to discuss Fitch's rating on $300 million dollars worth of bonds which are financing AES's largest project in Panama. AES reps are worried that their bonds will lose their current investment grade rating and their stock price will fall. ¶5. (SBU) According to AES reps, AES accepted a $10 million loss on electricity sold this August, in order that the cost savings would be directly passed to consumers and help Martinelli. Government officials were upset when electricity bills mailed to consumers in August had higher electricity rates than in July and blamed AES and other suppliers of manipulating the market. AES reps counter that they do control the transmission nor the distribution of electricity and that their August reduction would not show up until September billing cycles. AES reps speculated GOP officials do not understand the market and/or have an overly simplistic view of their operations. -------------- Pattern Is Clear -------------- ¶6. (SBU) AES's situation is not unique under the eight week old Martinelli Administration. To applause from a majority of the public, Martinelli has methodically rolled out similar efforts and tactics against owners of property in the former Canal Zone (specifically the Amador Causeway),the Casino Industry, the Colon Free Trade Zone, and the Port Operators. Generally, Martinelli's modus operendi is to make a very public, bombastic announcement against a certain group that outlines the government's possible actions against the group. He does not communicate with the group for several days, in order to exert pressure and create uncertainty. He then grants an audience with the group and negotiates an agreement, then announces it while publicly chastising his perceived foe. -------------- Martinelli's Motivation - Unknown -------------- ¶7. (SBU) According to Ministry of Economy and Finance officials and some press reports, President Martinelli's motivation is to bring fairness and justice to the tax system. The Martinelli Administration takes the position that, under previous administrations, concessions and other contracts awarded were tainted due to cronyism, bribery, and incompetence - GOP attorneys and experts were bested by professional private-sector contract attorneys and experts. The newly collected money is apparently destined for Martinelli's ambitious public investment plans and support his campaign promise to lower consumer prices. Non-official attributions of Martinelli's motivations are often less flattering and range from settling old business and political scores, to Martinelli supporters wanting to take over the now "less profitable" business. -------------- Comment -------------- ¶8. (SBU) While Martinelli has a pro-business reputation due to his campaign rhetoric and self-made fortune, his actions have the potential to significantly erode one of Panama's competitive advantages -- a predictable investment environment that consistently attracts 10% of its GDP in foreign direct investment. Regardless of his true motivation(s),Martinelli's aggressive tactics to unilaterally change contracts/concessions is worrying to the Embassy and to some in the American business community. Post already advocated on behalf of the half-billion dollar American-owned Manzanillo International Terminal (MIT) when the GOP tried to ignore several amendments (which were approved by Presidents and National Assemblies) to MIT's original concession. According to a grateful MIT rep, the crisis has been averted, because the GOP is now in negotiations with MIT. Post will similarly advocate on behalf of AES and any other American investors whose investments are jeopardized by a possible change in the rules of the game. STEPHENSON