VZCZCXYZ0007
OO RUEHWEB
DE RUEHZP #0657/01 2391750
ZNR UUUUU ZZH
O 271750Z AUG 09
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3702
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS PANAMA 000657
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: ECON ENRG PM EINV PGOV
SUBJECT: AES CONCERNED ABOUT GOP ACTIONS ON PANAMA'S
INVESTMENT CLIMATE
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Summary
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1. (SBU) AES representatives informed the DCM that they are
concerned that the Martinelli Administration may jeopardize
their $856 million dollar investment in Panama by
unilaterally changing the contracted price of water for
hydroelectric generation plants owned by AES and others. The
Martinelli Administration's actions toward hydroelectric
generators have been preceded by similar actions towards
other groups of businesses. These actions have the potential
to erode confidence in the investment climate in Panama.
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AES - Largest U.S. Investor in Panama
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2. (SBU) The DCM and Econoff met with Jaime Tupper, VP of
Central America and Caribbean for AES, Humberto Gonzalez,
General Manager of AES Changuinola, and Scarlett Alvarez, AES
Regional Managing Director for Investor & External Relations,
on August 25 to discuss possible GOP measures to increase
payments from hydroelectric plant operators to the GOP. AES
is the largest U.S. investor in Panama with an investment of
$856 million in several hydroelectric plants. AES, which
provides 28% of Panama's electricity, and Fortuna dominate
the hydroelectric generation market (which provides 53% of
Panama's installed electrical capacity of 1,645 Megawatts).
AES sells electricity to the government either by direct
long-term contract or in the spot market in which prices and
quantities are fixed by a GOP electricity dispatch center.
ETESA, a GOP owned company, has a monopoly on the
transmission of electricity, and two companies distribute
electricity, Union Fenosa and Elektra Noreste.
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Martinelli's Measures
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3. (SBU) According to AES reps and newspaper reports,
President Martinelli and his cabinet on August 23 adopted
measures to raise the price of water for hydroelectric plant
operators to 2 cents per kilowatt hour (a 14,000 % increase
for AES) and to lower the cost of power for electricity
consumers. The extra money from the operators will directly
go to the consumers. These measures are not enforceable
until either GOP Agencies issues relevant decrees or the
National Assembly takes action.
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Effect on AES
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4. (SBU) AES reps believe the 2 cent per kilowatt hour
increase in payments will cost AES $35 million and will
dramatically change the cost structure for their significant
investments in Panama. Depending on the hydroelectric
generation plant, AES's profit will either drop to zero or go
negative. The effect on AES is greater than simply profits
on operations in Panama; rating agency Fitch already
requested a meeting to discuss Fitch's rating on $300 million
dollars worth of bonds which are financing AES's largest
project in Panama. AES reps are worried that their bonds
will lose their current investment grade rating and their
stock price will fall.
5. (SBU) According to AES reps, AES accepted a $10 million
loss on electricity sold this August, in order that the cost
savings would be directly passed to consumers and help
Martinelli. Government officials were upset when electricity
bills mailed to consumers in August had higher electricity
rates than in July and blamed AES and other suppliers of
manipulating the market. AES reps counter that they do
control the transmission nor the distribution of electricity
and that their August reduction would not show up until
September billing cycles. AES reps speculated GOP officials
do not understand the market and/or have an overly simplistic
view of their operations.
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Pattern Is Clear
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6. (SBU) AES's situation is not unique under the eight week
old Martinelli Administration. To applause from a majority
of the public, Martinelli has methodically rolled out similar
efforts and tactics against owners of property in the former
Canal Zone (specifically the Amador Causeway), the Casino
Industry, the Colon Free Trade Zone, and the Port Operators.
Generally, Martinelli's modus operendi is to make a very
public, bombastic announcement against a certain group that
outlines the government's possible actions against the group.
He does not communicate with the group for several days, in
order to exert pressure and create uncertainty. He then
grants an audience with the group and negotiates an
agreement, then announces it while publicly chastising his
perceived foe.
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Martinelli's Motivation - Unknown
---------------------------------
7. (SBU) According to Ministry of Economy and Finance
officials and some press reports, President Martinelli's
motivation is to bring fairness and justice to the tax
system. The Martinelli Administration takes the position
that, under previous administrations, concessions and other
contracts awarded were tainted due to cronyism, bribery, and
incompetence - GOP attorneys and experts were bested by
professional private-sector contract attorneys and experts.
The newly collected money is apparently destined for
Martinelli's ambitious public investment plans and support
his campaign promise to lower consumer prices. Non-official
attributions of Martinelli's motivations are often less
flattering and range from settling old business and political
scores, to Martinelli supporters wanting to take over the now
"less profitable" business.
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Comment
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8. (SBU) While Martinelli has a pro-business reputation due
to his campaign rhetoric and self-made fortune, his actions
have the potential to significantly erode one of Panama's
competitive advantages -- a predictable investment
environment that consistently attracts 10% of its GDP in
foreign direct investment. Regardless of his true
motivation(s), Martinelli's aggressive tactics to
unilaterally change contracts/concessions is worrying to the
Embassy and to some in the American business community. Post
already advocated on behalf of the half-billion dollar
American-owned Manzanillo International Terminal (MIT) when
the GOP tried to ignore several amendments (which were
approved by Presidents and National Assemblies) to MIT's
original concession. According to a grateful MIT rep, the
crisis has been averted, because the GOP is now in
negotiations with MIT. Post will similarly advocate on
behalf of AES and any other American investors whose
investments are jeopardized by a possible change in the rules
of the game.
STEPHENSON