U.S. COMPANY AES AT CENTER OF CAMEROON'S ENERGY

C O N F I D E N T I A L SECTION 01 OF 03 YAOUNDE 000590 SIPDIS COMMERCE FOR ITA- K BURRESS TREASURY FOR PETERS AND BOYE E.O. 12958: DECL: 06/15/2019 TAGS: ENRG EINV ECON ETRD KCOR CM SUBJECT: U.S. COMPANY AES AT CENTER OF CAMEROON'S ENERGY CHALLENGES Classified By: Political Officer Tad Brown for Reasons 1.4 b and d. ¶1. (SBU) Summary. American power company AES, having won the 2001 concession to manage SONEL, the former parastatal that operated Cameroon's power production and distribution networks, continues to struggle to improve its image and performance in the face of diverse challenges, from bad weather and ubiquitous illegal hook-ups to political corruption and commercial favoritism. AES-SONEL General Manager Brian Rich told the Ambassador on June 8 that AES remained committed to improving customer service throughout the network and completing $500 million in capital investment by 2012. Two new facilities scheduled to come on line in the coming months will eliminate the need to continue with load-shedding for the foreseeable future. AES remains deadlocked in negotiations with Anglo-Australian mining giant Rio Tinto, which is lobbying aggressively for even deeper power subsidies for its current aluminum refinery and planned future expansion. End summary. SONEL Privatized, Kind Of -------------- ¶2. (U) In 2001, Arlington-based AES won a World Bank-supported tender for the 20-year concession to manage the Societe Nationale d'Electricite (SONEL),the parastatal that managed Cameroon's power production and transmission. Under the terms of the deal, AES has a 51% share in the company, the GRC retains a 44% stake, and the remaining 5% is held collectively by AES-SONEL personnel. The Secretary General of the Ministry of Economy and Planning is the Chairman of the Board of AES-SONEL and other GRC officials sit on the board. Despite AES' position as the majority shareholder and the supposed privatization of SONEL, conversations with AES and GRC officials make it clear that GRC officials still consider AES to be a para-public entity that should bend to the GRC's demands. ¶3. (SBU) AES-SONEL General Manager Brian Rich and other AES officials have complained about GRC interference in SONEL decisions, including demands to hire relatives of GRC officials or give contracts to favored firms. GRC officials have demanded that AES shut down portions of the power grid in order to keep the current flowing in particular neighborhoods, including in Yaounde during the visits of the Pope and French Prime Minister. Rich said he had identified a Cameroonian national who was qualified to replace the recently departed General Manager of the Kribi Power Development Corporation (KPDC) but that Minister of Energy and Water Bernard Sindeu insisted that AES bring an American to head the corporation, undercutting Rich's goal of maximizing local employment in management positions. Improving Customer Service -------------- ¶4. (U) Despite these challenges, Rich said his priority is improving service to the customer, and he was unflinching in his criticism of AES' performance to date. "We make it too hard for customers to give us their money," he said. To improve its service, AES has hired more cashiers, expanded the days and hours that customers can pay their bills, and opened new customer service centers. Rich said the hydrology as of June has made 2009 one of the worst years in the past decade for power production, lamenting that AES had been carrying out load shedding of about 120 MW (or more than 10 percent of Cameroon's current production levels) in the past weeks. Rich noted that the rains in the north have resolved the problem, so there should be no more need for load-shedding. ¶5. (U) Nevertheless, AES faces pervasive challenges. According to the World Bank's annual Doing Business survey, Cameroon remains one of the most difficult economies for business activity, everything from labor relations to contract enforcement. AES inherited a largely depleted infrastructure, including substandard transmission lines and pylons. Illegal hooks-up are ubiquitous and visible in great quantities in many neighborhoods. Although AES is responsible for power production and transmission, it is held accountable in the court of public opinion for the performance shortfalls of other agencies that are still controlled by the GRC, including the Agency for Rural Electrification. Rich said he is focused on tackling these challenges, a task that leaves him scant time and energy to pursue the goal, shared by AES and the GRC, of positioning YAOUNDE 00000590 002 OF 003 Cameroon as an exporter of energy to Chad, Nigeria and the Central African region. KPDC: A Good Idea at the Time... -------------- ¶6. (U) Under the terms of its concession, AES' power production is capped at 1000 MW, which is roughly its current level of production. When AES was asked to add new production at Kribi and Dibamba, therefore, AES formed a subsidiary, the Kribi Power Development Company (KPDC),to manage the project. At the time, KPDC was hailed for its innovative financing, which brought together the World Bank, the IFC, European investment banks and, notably, Cameroonian and other African banks. ¶7. (U) KPDC's two projects--the construction of a new gas-fired plant at Kribi and a heavy-fuel operated (HFO) plant at Dibamba, on the outskirts of Douala--were driven by the need to augment national production in order to meet the growing demand and the need for consistent supply for ALUCAM, the aluminum refinery in Edea owned by Anglo-Australian mining giant Rio Tinto jointly with the GRC. Dibamba, Logbaba: Burning Heavy Fuel -------------- ¶8. (U) The first four units of the Dibamba facility will be brought on line in the first week of August, with the remaining four operational in the second half of October. Dibamba will add 86 MW to the grid, but the facility is a heavy-fuel operation (HFO) meaning that it is relatively expensive (depending on the price of oil) and polluting. AES is also bringing online Logbaba II, another HFO facility in the Littoral Region, that will add 16 MW to the grid. The high relative cost of the facilities will mean that AES will only operate them during the dry season, when the lack of hydro-generation causes supply shortages. With these two facilities, Rich explained, there is no longer an energy deficit in Cameroon, assuming average hydrology and that ALUCAM consumes only 100 MW of power. The Hold Up at Kribi, and Why it Matters for the National Grid -------------- ¶9. (C) Rich said that the Kribi power plant has been mired in the GRC's own indecision and poor management about how to handle the project. Specifically, the GRC has delayed signing the financing package for almost one year. In 2008, Minister of Finance Essimi Menye convoked representatives from the lenders to Yaounde to sign a final agreement, only to have the GRC withdraw its approval on the day of signing, on the orders of Secretary General at the Presidency Laurent Esso, according to AES and other sources. The contentious issue has been the price of gas along the chain, from the Perenco (an Anglo-French company that has rights to the resources) to the National Hydrocarbons Company (SNH) to KPDC and then the price of the power to ALUCAM. The problem, said Rich, is that the GRC made conflicting promises, promising AES that it could pass along the increase in the gas price to end customers (including ALUCAM) and to ALUCAM that it would not have to pay the higher tariffs required by the higher gas prices. "The difference, said Rich, is that we (AES) got our promise from SNH in writing." ¶10. (C) In a recent meeting with both AES and Rio Tinto officials, according to Rich, Sindeu admitted that the GRC had made contradictory commitments to the two companies. In the meantime, however, financing for Kribi remains stalled until SNH and Perenco reach a final agreement on the price of gas. Rich believes the negotiations are stalled on two points: the price of the gas and Perenco's insistence that SNH guarantee a purchaser for the gas, in case the Kribi deal falls through. ¶11. (SBU) The delay in developing the Kribi project has led the agencies financing Dibamba to demand that AES shift Dibamba from AES' balance sheet to KPDC. If Kribi is not ready, however, AES will be forced to treat the two projects separately, something AES would prefer to avoid doing (because they have to pay double fees for the financing) but which cannot be avoided unless Kribi is quickly brought up to speed. ¶12. (C) Comment. The GRC's management of the Kribi saga is YAOUNDE 00000590 003 OF 003 another in a long line of stories of economic mismanagement and poor governance at the highest levels of government. SNH's decision to ink an agreement with AES while making impossible verbal commitments to Rio Tinto while not having secured the underlying asset--the gas--is evidence that political pressure (to move the Kribi project ahead, assuring ALUCAM an adequate supply of cheap energy) is driving policy, not deliberate planning decisions. The mere inclusion of SNH in a deal that logically should be directly between Perenco and AES is further sign of the GRC's unwillingness to surrender its iron grip on Cameroon's economy. End comment. Rio Tinto's Contract Will Shape the Future of Cameroon's Power -------------- ¶13. (C) Rich explained that AES has been providing power to ALUCAM free of charge since the beginning of the 2009, in order to satisfy a clause of an intermediary contract AES and ALUCAM concluded a few years ago. Rich said AES' position in the negotiation with Rio Tinto is simple: "We simply will not promise them power we can not provide them." Rich said AES will commit to providing ALUCAM with all the power it needs at concessional prices during the rainy season and would continue to do so during the dry season, but at premium prices. According to Rich, Rio Tinto makes $100 per ton of aluminum if it produces at today's world prices. The favorable terms under the current contract, however, mean that ALUCAM earns $400 per ton if it does not produce aluminum, as a result of the punitive payments AES has to pay ALUCAM if it fails to deliver adequate electricity to the ALUCAM site. ALUCAM currently consumes about 40% of the national production, but pays 14 times less than the average consumer. Since ALUCAM is consuming in bulk and at low voltage, it makes sense that ALUCAM pays lower rates, but the appropriate ratio would be closer to 7 times lower than the retail rate, or twice the current tariff, according to Rich. How it All Ties Together -------------- ¶14. (C) The challenge of Cameroon's power sector is largely that decision-making is all so interlinked and complicated, especially by political considerations. Most of the pressure to increase domestic power production, and do so quickly, comes from the narrow economic interests of ALUCAM. Certainly, the development of Cameroon's hydro-potential, said to be the second largest on the continent after D.R. Congo, is important for economic growth, but the pace and nature of the decisions are driven more by ALUCAM's narrow economic interest than by the dictates of proper planning and implementation. GARVEY