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Cablegate: Sri Lanka: Investment Disputes and Expropriation Claims

VZCZCXRO5233
RR RUEHBI
DE RUEHLM #0848/01 1651302
ZNR UUUUU ZZH
R 141302Z JUN 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6264
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1090
RUEHKA/AMEMBASSY DHAKA 0202
RUEHIL/AMEMBASSY ISLAMABAD 7185
RUEHKT/AMEMBASSY KATHMANDU 5292
RUEHKP/AMCONSUL KARACHI 2198
RUEHCG/AMCONSUL CHENNAI 7771
RUEHBI/AMCONSUL MUMBAI 5431
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 COLOMBO 000848

SIPDIS

SENSITIVE

SIPDIS

EEB/IFD/OIA FOR HGOETHERT, L/CID FOR SMCDONALD AND SCA/INS
TREASURY FOR LESLIE HULL
COMMERCE FOR JONATHAN STONE

E.O 12958: N/A
TAGS: CASC EINV KIDE OPIC PGOV CE
SUBJECT: SRI LANKA: INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS
REPORT

REF: A) STATE 55422

1. (SBU) The following three claims are hereby submitted for 2007,
in accordance with reftel request:

2. (SBU) a. Claimant A

b. 2004

c. Claimant A had been contracted in June 2000 to provide power
to the national grid under a combined cycle agreement signed with
the state-owned Ceylon Electricity Board (CEB), which retains the
monopoly on power transmission. CEB, together with its subsidiary,
Lanka Electricity Company, has the monopoly on power distribution
in the country. Under the Power Purchase Agreement (PPA), the CEB
was required to establish two letters of credit with an aggregate
value of $20 million.

In March 2004, due to a fire that had shut down the Claimant's power
plant, and at the request of the Government of Sri Lanka (GSL), a
standstill agreement was signed between Claimant A, CEB, and the
Ministry of Finance (MOF) to operate the plant in open cycle mode.
In May 2004, the agreement was rendered invalid as the CEB did not
make full payment for energy generated under the terms of the open
cycle agreement. As a result $3 million was still owed to
Claimant.

Claimant met with the CEB, the Secretary of Finance, and the
Secretary of the Ministry of Power & Energy to discuss the

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outstanding payment. GSL officials requested a renegotiation and as
a result, Claimant offered a reduction of $ 2 million out of the
total $3 million outstanding. The Claimant received a new agreement
from the Attorney General's Department through the CEB, which
reflected the new payment terms. The Claimant accepted this new
agreement. Nonetheless, despite Cabinet approval and CEB Board
approval, the Chairman of the CEB refused to make the required
payment of $1 million. Establishment of letters of credit, as per
the original PPA, has also not been implemented to date.

Following an administration change in the GSL, the Ministry of
Finance began citing an Attorney General's opinion, claiming that
the GSL is not obligated to pay under the terms of the standstill
agreement (as later revised) because the agreement was entered into
"under duress." (Comment: Fear of political backlash from
potential blackouts may have caused the GSL to press Claimant to
continue operating under the less efficient and more expensive open
cycle method, instead of shutting down and quickly repairing the
closed cycle facility. But attempting to void a contract under this
legal theory, while creative, appears to have no merit.)

Post has made representations on this matter to the Finance
Secretary, the Minister of Power & Energy, the Minister of

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Enterprise Development & Investment Promotion, and the Presidential
Adviser on Economic Affairs. In fall 2006, the Ambassador and
Econoffs met with former Minister of Investment Promotion, Rohitha
Bogollagama (now Minister of Foreign Affairs) on numerous occasions
regarding this dispute. Bogollagama made serious attempts to resolve
the matter, but with his change in portfolio the efforts lost
momentum.

As of June, 2007, Claimant has continued to make representations to
the Ministry of Power & Energy, the CEB, and the Ministry of Finance
on the issues of the outstanding open cycle payment and the
establishment of letters of credit, as per the agreements.

The Embassy is engaging with the relevant government agencies to
resolve the issue. Ambassador and Claimant met together with the
Minister of Power & Energy on April 25, 2007. The Minister
acknowledged that Claimant should receive payment and the
outstanding letters of credit. The Minister said he would urge the
GSL-owned bank responsible for establishing the letters of credit on
behalf of the CEB to do so. Ambassador wrote to the Minister of
Power & Energy to follow up on the matter on May 24. He received no
reply to this letter. Ambassador called the Minister on June 14.
Claimant provided most recent update on this issue in June, 2007.


COLOMBO 00000848 002 OF 003


3. (SBU) a. Claimant B.

b. 2004

This is the first time for Post to report this case, which Post now
considers closed. Claimant B was awarded a multi-million dollar
tender by the GSL to establish vehicle emissions testing centers in
Sri Lanka. The draft agreement was approved by the Cabinet on
November 16, 2005, and was sent by the Commissioner General of Motor
Traffic (CMT), who is authorized to sign on behalf of the
government, to the Attorney General for ratification. However, the
Attorney General reportedly advised that only terms published within
the Request for Proposal could be included in the agreement and not
subsequently-negotiated clauses, despite Cabinet approval of the
additional clauses. On these grounds, the Attorney General refused
to conclude a contract with Claimant B.

Post met with the CMT and former Ambassador Lunstead met with the
Minister of Highways, the Minister of Transportation, the Minister
of the Environment, and the Secretary of Finance on this matter.
Although various officials assured the Ambassador that the issues
would be sorted out, there was no progress in the CMT on signing the
contract. In 2006, after spending approximately $300,000 and
extensive staff time on the development on this project, Claimant
pulled out as a direct investor in this project. Now, a new local
investor is taking the project forward with Claimant only providing
technical expertise and equipment.

Claimant last provided an update in February 2007. Post considers
this case closed.

4. (SBU) a. Claimant C

b. 2004

c. This is a newly reported case. Claimant C signed an agreement
with the Mahaweli Trust Fund (MTF), a government agency, to operate
a lottery in Sri Lanka. A key component of the agreement was for
proceeds from lottery ticket sales to be deposited into an escrow
account jointly held by Claimant and MTF. However, MTF never signed
this escrow agreement despite a resolution taken by the MTF Board to
do so. Claimant nevertheless began to operate the lottery in
accordance with the agreement, under the assumption that MTF would
eventually sign the escrow agreement.

According to Claimant, MTF officials used the non-signing of the
escrow as a bargaining tol to increase MTF's percentage of lottery
proceeds, despite the agreement's clear stipulation of the manner in
which proceeds would be shared. Claimant also declared that the MTF
blocked access to the network of lottery ticket dealers, thereby
breaching the contract in order to obstruct cash flow to Claimant.
Since commencement of operations, the escrow account accrued monies
from proceeds of ticket sales. However, Claimant was never paid its
share. The GSL is in breach of contract for not signing the escrow
account in order for Claimant to receive payment. Claimant has not
been paid for its products and services, despite meeting its
contractual obligations of installing and operating a trouble free
lottery for almost two years. Claimant has been compelled to cease
operations as it could no longer sustain the investment without
generating income. Claimant has invested approximately $15 million
in the project and is attempting to reach a settlement with GSL on
the issue.

The Ambassador and Econoff met with the Minister of Commerce and
Secretary of Commerce to discuss this matter in May 2007. The

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Secretary of Commerce indicated that the GSL is willing to arrive at

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a settlement with Claimant. Claimant prefers a settlement over a
court challenge, which would tie the matter up for years. Claimant
and Commerce Secretary are scheduled to meet soon to discuss a
possible settlement

5. (SBU) The Claimants are identified as follows:
- Claimant A: AES Kelanitissa (Private) Limited, a U.S.-owned
subsidiary. Claimant A has not signed a Privacy Act Waiver.
- Claimant B: Environmental Systems Products Holdings Inc., a U.S.
company. Claimant B has not signed a Privacy Act Waiver.

COLOMBO 00000848 003 OF 003


- Claimant C: GTECH Lanka (Private) Limited, a subsidiary of GTECH
Corporation. On August 29, 2006, GTECH Holdings Corporation;
Lottomatica, S.p.A., the license holder for the Italian National
Lottery; and the de Agostini Group, a privately held Italian holding
company that is Lottomatica's majority shareholder, announced the
merger of GTECH and Lottomatica. While this merger may result in
GTECH being an Italian company, Embassy understands that GTECH
continues maintaining offices in Rhode Island and is one of Rhode
Island's large employers. The U.S. Department of Commerce's
Advocacy Center evaluated these ownership changes and advised Post
to continue advocacy on behalf of GTECH for this dispute. Claimant
C has not signed a Privacy Act Waiver.

BLAKE

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