Cablegate: 2006 Report On Investment Disputes and Expropriation

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RR RUEHWEB

DE RUEHLM #1515 2570930
ZNR UUUUU ZZH
R 140930Z SEP 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4259
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS COLOMBO 001515

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA/JPROSELI AND L/CID/EDAUGHTRY

SENSITIVE

E.O. 12958: N/A
TAGS: CASC EFIN EINV KIDE OPIC PGOV CE
SUBJECT: 2006 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION
CLAIMS

REF: STATE 60294

1. The following dispute is being submitted for 2006 as per section
527 of the Foreign Relations Authorization Act (FRAA) for Sri
Lanka:

(A) Claimant A

(B) 2004

(C) Claimant had been contracted in June 2000 to provide power to
the national grid under a combined cycle agreement signed with the
Ceylon Electricity Board (CEB), which retains the monopoly on power
transmission and, 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 (LC) 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, 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 US$3million was still owed to the
claimant.

Claimant met with CEB, Secretary to the Treasury and Secretary to
the Ministry of Power & Energy to discuss the outstanding payment.
GSL officials requested a renegotiation and as a result, claimant
offered a reduction of US$600,000 out of the total US$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 has refused to make the required payment of
US$2.4 million. Establishment of Letters of Credit (LC), as per the
original PPA, has also not been implemented to date.

Post has made representations on this matter to the Secretary to the
Ministry of Finance, Minister of Power & Energy and the Presidential
Adviser on Economic Affairs. These officials have assured Post that
the matter is being looked into and claimant will be remunerated for
the outstanding payment. However, no payment has been made nor LC
established thus far. Claimant provided most recent update on this
issue on September 13, 2006.

2. Claimant A: AES Kelanitissa (Private) Limited, a US-owned
subsidiary. Claimant has not signed a Privacy Act Waiver.

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