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