Identifier
Created
Classification
Origin
09YAOUNDE590
2009-07-02 08:10:00
CONFIDENTIAL
Embassy Yaounde
Cable title:  

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

Tags:  ENRG EINV ECON ETRD KCOR CM 
pdf how-to read a cable
VZCZCXRO4660
RR RUEHBZ RUEHDU RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHYD #0590/01 1830810
ZNY CCCCC ZZH
R 020810Z JUL 09
FM AMEMBASSY YAOUNDE
TO RUEHC/SECSTATE WASHDC 0057
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFISS/HQ USAFRICOM STUTTGART GE
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.

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