US embassy cable - 03ABUJA1812

UNCLAS SECTION 01 OF 02 ABUJA 001812 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE PASS TO OPIC (CONAL DUFFY AND JIM WILLIAMS) 
 
 
E.O. 12958: N/A 
TAGS: ENRG, ECON, EFIN, EINV, NI 
SUBJECT: NEPA INVOKES FORCE MAJEURE IN AES CONTRACT 
 
 
SENSITIVE BUT UNCLASSIFIED  LEASE PROTECT ACCORDINGLY 
 
 
1. (SBU) Summary: Nigeria's National Electric Power Authority 
(NEPA) on October 7 invoked force majeure and informed AES that 
it (NEPA) would be unable to pay approximately 18 million USD 
due on the Lagos Emergency Power Barge Project (the Ebute 
plant).  Overseas Private Investment Corporation (OPIC) has 
provided $200 million of political risk for AES's equity 
investment in the project and is thus concerned about the 
problems the project is now encountering.  The notification 
could also have a significant adverse impact on the GON's 
efforts to attract foreign investment and could hamstring 
privatization efforts.  AES informed us on October 17 that it is 
moving "in the right direction" in talks with NEPA.  AES has not 
requested USG assistance, and its interests may conflict with 
those of the USG.  End summary. 
 
 
Background to Ebute 
------------------- 
 
 
2. (SBU) The Ebute plant is located about 35 miles east of 
Lagos, close to the 1,320 MW Egbin power plant.  Ebute consists 
of nine floating barge units and provides a total of 290 MW. 
 
 
3. (SBU) The GON, Lagos State, and NEPA are the parties to the 
Power Purchasing Agreement (PPA) with AES.  A 60 million dollar 
letter of credit (LOC) issued by Citibank provides payment 
security to AES Nigeria Barge Limited and may be drawn in the 
event NEPA's payments are more than 15 days late.  As of October 
17, the Nigerian parties were approximately 18 million USD in 
arrears  bout three and a half months' worth of payments. 
 
 
4. (SBU) Enron started the project in response to a request 
received from the governor of Lagos State in September 1999. 
The project was initially scheduled to commence commercial 
operations in June 2000.  However, for various reasons, 
including the changing of the project site from Lagos to its 
present location, the initial project commissioning was delayed 
until June 2001.  AES acquired the barge project from Enron in 
the fall of 2000 for 58 million USD.  The project reached 
completion in March 2002.  Total project costs, including the 
acquisition fee, were approximately 225 million USD.  OPIC's 
Board of Directors (on which the Department of State is 
represented) approved the 200 million dollar political risk 
insurance coverage in May 2001. 
 
 
Tension within the GON: who should pay, and how? 
--------------------------------------------- --- 
 
 
5. (SBU) NEPA's letter does not appear to be the last word. 
Econoff met separately on October 7 with Minister of Finance 
(Dr.) Ngozi Okonjo-Iweala and Minister of Power and Steel 
(Senator) Liyel Imoke.  Both made clear that the GON itself is 
struggling with two highly charged questions.  First, who should 
be held responsible for the payments - the Federal Government, 
NEPA or the Lagos State government?  Second, can the GON justify 
to itself and to the public the seemingly exorbitant rates being 
charged by AES for the Ebute output. 
 
 
6. (SBU) NEPA also has ideas about who should pay.  According to 
Tom Simpson, an AMCIT energy consultant resident in Abuja, NEPA 
complains that federal government entities regularly fail to pay 
their electric bills.  In NEPA's view, says Simpson, the federal 
government is thus largely to blame for NEPA's inability to pay 
on the AES PPA.  (Simpson works for Nexant, a London based 
energy sector consulting firm that has just completed a USAID- 
sponsored, pre-privatization assessment for NEPA.  Extensive 
media reporting during the last year likewise aired NEPA's 
grievances over non-payment by federal government entities.) 
 
 
7. (SBU) AES officials told CDA in September (in London) that 
they believed the Lagos State Government had likewise fallen 
behind on making payments to NEPA and that this was contributing 
to NEPA's woes. 
 
 
8. (SBU) Whether AES is charging exorbitant rates, as Minister 
of Finance Okonjo-Iweala claimed, is a matter of opinion.  The 
barge option was significantly more expensive (per KWH) than the 
conventional power plant option but was chosen as a means to 
more quickly supplement existing power supplies and alleviate 
critical power shortages in Lagos.  Moreover, AES negotiated a 
take or pay arrangement, which means it gets paid for everything 
it produces, regardless of whether the power is used.  Okonjo- 
Iweala complained also about this. 
 
 
9. (SBU) That said, the tariff under the PPA is 2.7 cents per 
KWH, less than a third of the tariff that NEPA is charging its 
customers and about a quarter of what various experts have 
estimated it costs NEPA to generate power. 
 
 
Ramifications for privatization and investment 
--------------------------------------------- - 
10. (SBU) The USG interest is twofold.  Firstly, OPIC could be 
required, in the event of non-payment of an arbitration award, 
to pony up as much as 200 million dollars.  Although this is 
still a long ways down the road, it is not a pleasant prospect. 
 
 
11. (SBU) Secondly, non-payment by NEPA and/or the Lagos State 
Government and the GON could have severely adverse repercussions 
for investment and privatization in Nigeria.  If OPIC gets 
burned, other insurers (some of whom may be more risk averse 
than OPIC) will be less willing to back projects in Nigeria. 
And without political risk insurance, few if any companies are 
likely to invest in Nigeria's planned privatizations. 
 
 
AES's interests versus USG interests 
------------------------------------ 
 
 
12. (SBU) AES is playing this close, and was not entirely 
comfortable meeting with us October 7 (they ran into us 
unexpectedly at the Ministry of Power and Steel).  They had not, 
as of October 17 (ten days later), informed OPIC of the force 
majeure letter, which letter is quite arguably a material event 
about which the contract would require notification. 
 
 
13. (SBU) Econoff spoke October 17 with AES Ebute plant manager 
Mark Miller (an AMCIT), who said that AES has acquired from NEPA 
assurances that partial payments on arrears would resume 
sometime toward the end of October or in November.  Miller 
characterized this as "movement in the right direction."  He 
added that AES had officially notified NEPA that it considered 
the force majeure claim to be without legal basis.  He said that 
AES did not at present require USG assistance but agreed to keep 
us apprised. 
 
 
14. (SBU) It is quite possible that AES views publicity of 
NEPA's payment difficulties as adverse to their own interests. 
If so, this could well weaken AES's hand in any discussions with 
NEPA.  Miller mentioned to Econoff that AES is interested in 
moving forward on other financing deals and that it is therefore 
in AES's interest to quickly reach an acceptable arrangement 
with NEPA.  The reference to other deals tracks in general tenor 
with comments AES officials made to CDA in London in September. 
 
 
Comment: Clarify legal issues and relative interests first 
--------------------------------------------- ------------- 
 
 
15. (SBU) We recommend that Department (E, AF and possibly L) 
sit down with OPIC to discuss the legal ramifications of any 
action on our part.  From there, we can proceed in a manner that 
best protects the USG interests described above.  Post will 
report any significant developments on this end. 
 
 
MEECE