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Cablegate: Sri Lanka: U.S. Investor Aes Receives Long- Overdue Letters

VZCZCXRO1886
RR RUEHBI RUEHLMC
DE RUEHLM #0609 1761131
ZNR UUUUU ZZH
R 241131Z JUN 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8321
INFO RUEHKA/AMEMBASSY DHAKA 0965
RUEHIL/AMEMBASSY ISLAMABAD 7954
RUEHKT/AMEMBASSY KATHMANDU 6126
RUEHNE/AMEMBASSY NEW DELHI 2124
RUEHKP/AMCONSUL KARACHI 2362
RUEHCG/AMCONSUL CHENNAI 8560
RUEHBI/AMCONSUL MUMBAI 6005
RUCPDOC/USDOC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS COLOMBO 000609

SENSITIVE

SIPDIS

STATE FOR SCA/INS, EEB/IFD/ODF, 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: U.S. INVESTOR AES RECEIVES LONG- OVERDUE LETTERS
OF CREDIT

REF: A. COLOMBO 509 B. 2007 COLOMBO 1002 C. 2007 COLOMBO 622 D.

2007 COLOMBO 848 E. COLOMBO 584

1. (SBU) Summary: U.S. power producer AES has received two
long-overdue standby letters of credit to protect against
non-payment by the state-owned Ceylon Electricity Board. Issuance
of the letters of credit mostly resolves the Embassy's top priority
advocacy case, which Ambassador has pressed for since his arrival
nearly two years ago. Taking the case to presidential advisor and
brother Basil Rajapaksa finally yielded progress after the energy,
investment, and trade ministers were unable to deliver results. End
summary.

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

2. (SBU) AES operates a $104 million 163 megawatt power plant in Sri
Lanka. Since beginning production in 2003, AES never received
contractually-required standby letters of credit from the
state-owned Ceylon Electricity Board (CEB). The letters of credit
are to protect AES against three months' non-payment by the CEB.
Without the letters of credit, AES's lenders had been unwilling to
allow AES and its co-investors to take profits from the project.

3. (SBU) Following Ambassador's ref A engagement with presidential
advisor and brother Basil Rajapaksa, the CEB's bank, People's Bank,
issued the two letters of credit on the strength of a secondary
guarantee from the Sri Lankan Treasury. It was this Treasury
guarantee that finally assured the state-owned People's Bank that it
would not end up owing millions to AES if the money-losing CEB
defaulted.

4. (SBU) AES Project Director Shahid Khan was out of the country
when AES received the letters of credit, but he called EconOff to
report the news and express appreciation. He was not concerned that
the total amount covered by the letters (a combination of Rupees and
Dollars totaling about $16 million) was less than the contractually
stipulated three months of payment protection.

COMMENT: WELCOME RESOLUTION OF TOP ADVOCACY CASE
--------------------------------------------- ---

5. (SBU) AES is satisfied with this outcome. We wish it had been
possible to resolve our highest priority advocacy case with fewer
fruitless meetings with an array of ministers (refs B-D). We also
wish we could be optimistic about AES ever receiving the $3 million
it is owed for power it produced under a temporary contract
following a 2004 plant fire (ref E). However, AES has repeatedly
emphasized that the letters of credit were more important than the
$3 million payment, so we will only press for the payment if AES
asks us to do so.

6. (SBU) Despite this positive resolution, the problems AES
experienced illustrate two significant features of the current
investment climate in Sri Lanka: first, that investors doing
business with the government can have little expectation of fair,
transparent treatment according to the terms of their contracts; and
second, that if problems arise, resolution likely requires going
over the relevant ministries to President Rajapaksa or one of his
brothers.
MOORE

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