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Cablegate: Sri Lanka: Embassy Makes Headway On Letters of Credit For

VZCZCXRO4836
RR RUEHBI RUEHLMC
DE RUEHLM #0509/01 1491121
ZNR UUUUU ZZH
R 281121Z MAY 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8178
INFO RUEHKA/AMEMBASSY DHAKA 0915
RUEHIL/AMEMBASSY ISLAMABAD 7904
RUEHKT/AMEMBASSY KATHMANDU 6081
RUEHNE/AMEMBASSY NEW DELHI 2063
RUEHKP/AMCONSUL KARACHI 2355
RUEHCG/AMCONSUL CHENNAI 8517
RUEHBI/AMCONSUL MUMBAI 5962
RUCPDOC/USDOC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 02 COLOMBO 000509

SENSITIVE

SIPDIS

STATE FOR SCA/INS AND EEB/CBA
STATE PLEASE PASS TO USTR FOR V KADER
COMMERCE FOR JONATHAN STONE AND EROL YESIN
TREASURY FOR LESLIE HULL

E.O 12958: N/A
TAGS: ECON EINV PGOV PREL CE
SUBJECT: SRI LANKA: EMBASSY MAKES HEADWAY ON LETTERS OF CREDIT FOR
U.S. INVESTOR AES

REF: A. 2007 COLOMBO 1002 B. 2007 COLOMBO 622 C. 2007 COLOMBO 848

1. (SBU) Summary: Following Ambassador's intervention with senior
presidential advisor Basil Rajapaksa, the Government of Sri Lanka
has acted to resolve its longstanding failure to provide standby
letters of credit to U.S. investor AES. AES operates a $104 million
163 megawatt power plant in Colombo, but has never received
contractually-required letters of credit for about $14 million to
guarantee against non-payment by the state-owned Ceylon Electricity
Board. Rajapaksa's involvement led to a GSL decision to provide a
Treasury counter-guarantee to state-owned People's Bank, which is
now to issue the letters of credit on behalf of its client the
Ceylon Electricity Board. Although no one in the GSL has ever
contested the obligation to provide the letters of credit, this is
the first movement towards doing so since Post began advocacy over
two years ago. AES predicts it will take a month or two before the
Electricity Board and bank lawyers draft and finalize the letters of
credit. In May 29 Trade and Investment Framework Agreement talks,
the USG should welcome this progress, but emphasize the importance
of actually delivering the letters of credit. End summary.

ELEVATING AES CASE TO PRESIDENT'S BROTHER
PRODUCES TENTATIVE RESOLUTION
-----------------------------------------

2. (SBU) Ambassador called on Senior Advisor to the President Basil
Rajapaksa May 7 to continue Embassy advocacy on behalf of U.S.
independent power producer AES Kelanitissa (Private) Limited. AES
has been operating a $104 million 163 megawatt power plant in Sri
Lanka since 2003, but has never received contractually-required
standby letters of credit from the state-owned Ceylon Electricity
Board (CEB). The letters of credit would protect AES against three
months' (or about $14 million) non-payment by the CEB. Without the
letters of credit, AES's lenders have been unwilling to allow AES
and its co-investors to take profits from the project.

3. (SBU) Ambassador told Rajapaksa that 21 months of advocacy with
the concerned ministries had not yet produced any progress in what
Post considers the top priority investment problem to resolve
(reftels). Rajapaksa reported he had received the Ambassador's
April letter about the matter and that he had asked for an
explanation from state-owned People's Bank, which handles the CEB's
finances. He passed the Ambassador a letter from People's Bank
citing the CEB's negative balance sheet (it sells power for less
than it pays to produce or purchase it, so is perennially in the
red) as explanation for why it could not issue the letters of
credit. The letter recited People's Bank two-year position on the
matter: it would only provide the letters of credit if it received a
counter-guarantee from the Treasury to protect it against CEB
bankruptcy. Rajapaksa promised the Ambassador he would raise the
matter with Treasury Secretary P.B. Jayasundera.

4. (SBU) On May 16, Rajapaksa called the Ambassador to inform him
that the Treasury had agreed to provide the counter-guarantee to
People's Bank. He faxed the Ambassador a letter from People's Bank
to CEB stating that the bank would proceed with issuing the letters
of credit on the strength of the Treasury guarantee, and asking the
CEB to provide it with legal details and the exact amounts the
letters should guarantee.

AES PLEASED; EXPECTS ACTION WITHIN TWO MONTHS
---------------------------------------------

5. (SBU) EconOff conveyed the People's Bank-to-CEB letter to AES
Project Director Shahid Khan, who responded positively to the news,
noting that a Treasury guarantee had long been the only likely way
to break through People's Bank's unwillingness to issue the letters
of credit for CEB. He was confident that the matter would now be
resolved, but expected it to take one or two months for CEB to
convey exact financial details to People's Bank and for the bank's
lawyers to draft the letters of credit in accordance with the terms
specified in AES's power purchase agreement with CEB.

COMMENT: THIS WILL REQUIRE FURTHER PRESSURE TO COMPLETE
-------------------------- ----------------------------


COLOMBO 00000509 002 OF 002


6. (SBU) Getting the letters of credit drafted involves probably
just a couple of days' accounting and legal work, but Post agrees
with Khan's assessment that it will take the lethargic CEB and
People's Bank accountants and lawyers a month or more to do it. For
this reason, we intend to continue tracking the matter closely until
it is truly resolved. In light of the GSL having made the right
decision but not yet having completed action on it, Post recommends
that Washington agencies participating in May 29 Trade and
Investment Framework Agreement (TIFA) talks welcome this progress,
but likewise emphasize the importance of actually delivering the
letters of credit.

7. (SBU) Post also notes that this is not the only contractual
problem AES is trying to resolve with the CEB. As reported in our
2007 Investment Disputes and Expropriation Claims Report (ref C),
AES also is owed $3 million for power it produced under a 2004
contract separate from its original power purchase agreement
following a plant fire. The CEB disputes this claim, saying the
contract it signed with AES to purchase power at a higher than usual
rate is invalid because it was done "under duress" (the
then-government was facing an election and was eager to avoid power
cuts). AES had made a strategic decision to pursue the letters of
credit as a first step, both because it considered the matter easier
to resolve and because it was more important to AES's investors that
they begin seeing returns on their investments. Post will continue
advocacy for AES on this outstanding payment when the letters of
credit issue is fully resolved.
MOORE

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