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Cablegate: Deterioration of Panama's Business Climate Under President

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RR RUEHWEB

DE RUEHZP #0071/01 0412244
ZNY CCCCC ZZH
R 102244Z FEB 10
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 0434
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHZP/AMEMBASSY PANAMA

...C O N F I D E N T I A L PANAMA 000071

SIPDIS

E.O. 12958: DECL: 2020/02/10
TAGS: ECON PM COM EINV ENRG
SUBJECT: Deterioration of Panama's Business Climate Under President
Martinelli

REF: 2008 PANAMA 405; 2009 PANAMA 657; 2009 PANAMA 757
2009 PANAMA 803

CLASSIFIED BY: Stephenson, Ambassador; REASON: 1.4(B), (D)

Summary

1. (C) The Government of Panama (GOP) disadvantaged at least two
American companies in a $55.5 million dollar improperly implemented
emergency licitation procedures for electrical generators to
fortify Panama's electrical generation capacity in anticipation of
El Nino. This improper licitation in December 2009 adds to the
body of evidence of a deterioration of the business climate in
Panama under the Martinelli Administration.

Supply and Demand for Electricity

2. (U) Due to rapid economic growth over the past decade, Panama's
peak demand for electricity grew by 3.9% per year. A regulatory
regime that allows any qualified electric generation company to
enter the market has kept Panama's peak demand for electricity from
outstripping its supply. [ETESA, a state-owned company, owns and
operates 100% of the transmission lines and EDEMET (operated by
Spanish-owned Union Fenosa), EDECHI (operated by Union Fenosa), and
Elektra Noreste (operated by British-owned Ashmore (aka AEI)) have
concessions to distribute electricity in specific geographic
areas.] While Panama's demand has not outstripped supply, there
have been plenty of close calls and temporary public campaigns to
cut electricity consumption. See reftel A.

Solution to El Nino's Effect

3. (U) The late December through April dry season is expected to be
longer than normal in 2010 due to the El Nino weather phenomenon.
If the dry season is extended, the reservoirs for several large
hydro-electric generators may fall below levels to operate the
generators. (53% of installed generation capacity is hydro and 60%
of the produced electricity is hydro.) To mitigate the effect of
El Nino, the government is encouraging companies with large backup
generators to use them during peak hours, requesting consumers to
cut back on energy usage, and purchasing 100MW of capacity from
portable generators.

Questionable Licitation Procedures

4. (C) Due to the reported desire to quickly bring on 100MW of
capacity, the Secretary of Energy Juan Urriola invoked emergency
licitation procedures in December 2009 that allowed him to invite
companies to bid over the course of 10 days. Three companies were
invited to bid, but only Aggreko International submitted a bid.
(Aggreko is listed on the FTSE and has corporate offices in
London.) As a result, Aggreko International won the contract for
$55.5 million. The bidding process was closed after only six days
instead of the required 10 days and two U.S. companies, Caterpillar
and APR, separately told emboffs that they would have bid on the
contract if offered the chance.

5. (C) When reporters questioned the licitation procedures and
asked why Caterpillar was not invited to bid, Urriola publicly
stated Caterpillar did "disastrous work." (Caterpillar's heavy
equipment dominate the Panamanian market. Caterpillar also is
building a Demonstration Center for its equipment in Panama and
located a regional headquarters in Panama.) After the bad press
Caterpillar received, APR decided not question the licitation due
to their desire to win possible future contracts. Based upon
quotes in a major newspaper - La Prensa, Urriola had a prior
business relationship with Aggreko.


Comment

6. (C) The Investment Climate for American firms has deteriorated
since the Martinelli Administration took office on July 1. Events
that contributed to the deterioration are:

* The GOP procured approximately $100 million through
sole-source contracts between July 1 and September 25, 2009 under
emergency licitation procedures; some of the contracts were for the
expansion of the coastal highway ($55 million), purchase of a
Presidential airplane ($21.9 million), and procurement of twenty
ambulances ($1.7 million).

* The GOP passed a law that eliminates contract concession
changes by reverting contracts back to the original non-amended
concession if the company harmed the people of Panama; thereby
eliminating years of business predictability to contract holders.
See reftel C. This law primarily targets port concessions,
including Manzanillo International Terminal - one of the largest
U.S. investors in Panama.

* The GOP now charges hydro-electric generators for use of
water, which was not part of the original concession agreements.
AES, an American firm, supplies almost one-third of Panama's
electricity through hydro power and lost investment grade rating
for $300 million in bonds for a project in Panama. See reftel B.

* Royal Caribbean, a U.S. operated pipeline, and several
other U.S. and foreign companies have expressed concern about the
evolving business investment climate in Panama to emboffs.

* Even small U.S. investors experienced great angst when
the Martinelli Administration proposed a law that changed the cost
of titling rights of possession on coastal lands and islands from
nominal administrative fees to an arbitrary GOP decided "fair
market value." See reftel D. After extensive engagement by the
Embassy and Panamanian civil society, there was an exemption
inserted for rights of possession holders with less than five
hectares. However, some American citizens have more than five
hectares; one American informed econoff that he intends to invoke
the Bilateral Investment Treaty due to the possible indirect
expropriation.

The Embassy will continue to actively advocate on behalf of U.S.
companies and encourage the GOP to provide a predictable investment
climate and to strengthen the rule of law.
STEPHENSON

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