VZCZCXRO5928
PP RUEHMA RUEHPA
DE RUEHDK #0034/01 0131821
ZNR UUUUU ZZH
P 131821Z JAN 09
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1680
INFO RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC
RUEHLMC/MCC WASHDC
RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 03 DAKAR 000034 
 
SIPDIS 
 
STATE FOR EB/IFD/ODF, EB/ESC/IEC, AF/EPS AND AF/W 
DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS 
 
E.O. 12958: N/A 
TAGS: ENRG EFIN ECON EPET EINV BTIO SG
SUBJECT: SENELEC'S FINANCIAL BLACKOUT WORSENS SENEGAL'S ECONOMIC 
CONDITIONS 
 
REF:  08 DAKAR 1450 
 
DAKAR 00000034  001.2 OF 003 
 
 
¶1.  Summary:  The recent deterioration of Senegal's national 
electricity company's financial situation has returned much of Dakar 
to frequent electricity shortages, causing electricity outages in 
households and businesses for several hours a day.  The situation is 
negatively impacting Senegal's economic recovery by slowing GDP 
growth and adding strain to the country's already fragile public 
finances.  On October 14, Senelec agreed to a major restructuring 
program, which includes significant new assistance from the World 
Bank and the French Development Agency (AFD), who will provide $80 
million and $45 million, respectively.  Much of this money will be 
used to help the company reduce its current debt, estimated at the 
time at over USD 125 million.  Based on the plan, Senelec will also 
divide itself into independent operating units for power generation 
and electricity distribution.  Further restructuring, including a 
possible full or partial privatization of the parastatal is also 
likely.   Time will tell whether real reform is being pursued or if 
the country's power sector will continue to be abused by political 
influence and poor management.  End summary. 
 
SMALL INDUSTRIES HIT HARDEST 
----------------------------- 
¶2.  According to a variety of sources, recent increases in 
electricity outages have resulted in a record number of small and 
medium enterprises (SME) to suspend or cease activities, 
particularly in the food processing, textile, and tourism sectors. 
Chronic electricity shortages reached crisis proportions between 
July and November.  Long and unscheduled outages of 12 to 15 hours 
have become common throughout the country.  Generators and candles 
have become two of the most sought after commodities for those with 
adequate disposable income.  Larger companies are reporting declines 
in output averaging 30 percent. 
¶3.  Today, only 33 percent of Senegal's 12 million people have 
direct access to electricity, and 57 percent of those customers are 
in urban centers.  Even though overall access is limited, thousands 
of families are now spending a huge share of their income on energy. 
 As a result, they have been forced to reduce their consumption of 
other goods and services to pay higher energy bills.  Senegalese are 
now forced to think twice before buying anything that needs to be 
kept cold.  With mass power cuts suddenly the rule rather than the 
exception, refrigeration, streetlights, and all things relying on 
electricity are now difficult to sustain.  As reported in Reftel, 
Imams from some of Dakar's poorer neighborhoods have been publically 
agitating for lower energy prices and better service.  These 
religious leaders encouraged the local population to not pay their 
electricity bills.  This civil unrest led President Wade to fire 
Senelec's General Manager, Latsoukabe Fall. 
DRAG ON ECONOMIC PERFORMANCE 
------------------------------- 
¶4.  Between 2005 and 2007, the government spent as much as USD 400 
million on direct and indirect subsidies for the energy sector 
(mostly for electricity, but also some allocations for fuel and 
butane cooking gas).  These subsidies contributed to Senegal's 
worsening budget deficit in 2006 and 2007 and also played a role in 
the current stock of arrears to the private sector.  Many observers 
have noted that the subsidies diminished budget allocations for 
poverty reduction, while benefitting Senegal's relatively well-off 
populations. 
 
¶5.  In presenting Senegal's 2009 budget to the national assembly in 
December, Finance Minister Abdoulaye Diop confirmed a lowering of 
projected GDP growth in the coming year from 5.8 to 3 percent (and 
possibly lower).  Diop placed much of the blame on the impact of 
chronic electricity shortfalls. 
 
¶6.  Several estimates from the National Agency of Statistics and the 
Employer Association blame Senelec's financial and production 
difficulties as largely being responsible for the country's current 
downturn in economic growth, as well as adding to Senegal's 
significant budget deficit, which has compromised the funding of 
social priorities in health and education. 
DONORS AND GOVERNMENT'S SUPPORT 
-------------------------------- 
¶7.  Senelec has a long history of financial difficulties and cash 
flow problems.  In August, the government ended electricity subsidy 
payments to Senelec, which then proceeded to raise prices to 
customers by an average of 17 percent.  Despite this move, the 
company's debt reached an estimated USD 126 million in the fourth 
quarter of 2008.  In October 2008, Senelec received a fresh infusion 
of money to help cover is debts and begin long-promised structural 
reforms.  The French government granted a loan of USD 45 million, 
the World Bank began disbursing its new USD 80 million in support, 
 
DAKAR 00000034  002.2 OF 003 
 
 
and the government of Senegal injected fresh cash of USD 40 million 
thanks to a loan from the Compagnie Bancaire de l'Afrique de l'Ouest 
(CBAO). 
¶8.  Under the program with the World Bank and the AFD, the 
government has agreed to split Senelec's activities into three main 
entities:  a production subsidiary, a distribution subsidiary, and a 
transport subsidiary.  The production and distribution subsidiaries 
are to be privatized with possible local and foreign participation, 
and perhaps with shares also being offered publically and to the 
company's employees.  The transportation group will continue to be 
controlled by the government as the main strategic partner with the 
participation of local and foreign private investors. 
 
¶9.  This division of the parastatal is supposed to happen in early 
2009, and the three new subsidiaries are scheduled to begin 
operations in June 2009, with new operating and consumer protection 
regulations to be put in place by then.  The selection process of 
private partners for the three subsidiaries should begin in the 
first quarter of 2009. 
¶10.  Other donor assistance in the energy sector includes a USD 48 
million soft loan from China to finance a new 90 KV distribution 
network to increase capacity and reduce wastage and the USD 90 
million Kounoune power plant inaugurated in January 2008 and 
financed by the Bank Group and other development partners such as 
the International Finance Corporation (IFC), the West African 
Development Bank (BOAD), and the West African Banking Corporation 
(CBAO). 
 
¶11.  The Kahone-2 power plant, a CFA 32 billion project, financed by 
the Inter-American Develoment Bank(Bid), the Banque d'Investissement 
et de Developpement de la CDEAO (Bidc), the Banque Ouest Africaine 
de Development (Boad) and Senelec, with a capacity of 60MW has been 
operational since November.  It is expected to increase electricity 
production capacity by 13 percent and provide electricity to more 
than 20,000 homes in the country.  Senelec's strategic plan calls 
for mobilizing more than USD 1 billion from revenue, investors, and 
donors for new energy investments between 2007-2015. 
 
PURSUING ENERGY DIVERSITY 
------------------------- 
¶12.  In addition, Senelec is pursuing new and diverse energy sources 
in order to reduce its dependence on oil and plans to increase its 
productive capacity by 2012.  The GOS is promoting possible 
investments in biofuels, initially to run electricity generation 
units, and currently has a pilot project in northern Senegal using 
sugarcane-based ethanol.  In 2007 the government signed a 
partnership with Brazil and India to launch a biofuel production 
program.  Through public-private partnerships, Brazil will provide 
scientific and technological know-how, Indian entrepreneurs will 
supply the capital, and Senegal will offer land and labor. [In 
November, Senegal joined the U.S.-Brazil Biofuels Cooperation 
program.] 
SENELEC'S FINANCES IN DIRE STRAIGHT 
---------------------------------- 
¶13.  In a press conference held on November 10, Latsoukabe Fall, the 
then-Senelec General Manager, told the press that his company faces 
its worse financial crisis in its history.  "Our cumulative 
financial loss reached USD 100 million, between 2005 and 2007," said 
Fall.  Despite government cash injections of USD 130 million to 
recapitalize the company in 2008 and a credit facility with local 
banks, Senelec continues to have difficulties in paying its 
suppliers and meeting electricity demand, including reimbursements 
for electricity supplied by General Electric's Dakar independent 
power station, GTI. 
 
¶14.  According to the World Bank, Senelec's customers are pying one 
of West Africa's highest rates for elecricity, an average of CFA 
100 per KWh (this is a2007 average).  However, the company claims 
thatits revenues are still insufficient to cover the copany's 
financial needs and continued government ubsidies and donor support 
to cover its operatioal expenses are required.  With the higher 
electicity prices and limited connectivity to Senelec'spower grid, 
illegal tapping of power lines is a gowing problem, causing 
additional problems to th company's bottom line. 
 
¶15. Under Senegalese law, Senelec is the sole supplier of fuel for 
electricity production.  GTI, for example, cannot go to the markets 
and seek competitive bids to acquire its own fuel supply and 
frequently faces a supply shortage due to Senelec's inability to 
supply fuel in a timely manner.  Currently Senelec consumes 1,500 
metric tons of heavy fuel per day for a total monthly cost of USD 36 
million.  In 2007 Senegal imported almost USD 290 million worth of 
fuel of which USD 214 million (73.7 percent) was in the form of 
 
DAKAR 00000034  003.2 OF 003 
 
 
diesel for electric production. 
AND EQUIPMENT IS OBSELETE 
-------------------------- 
¶16.  Senelec's generation plants and transmission equipment are 
predominantly old, inefficient, poorly maintained, and costly to run 
(about 30 percent of Senelec's production facilities are more than 
25 years old).  Transmission losses are very high. 
 
¶17.  Senelec's facilities cannot meet the rapidly growing domestic 
demand for power, growing annually by 25-30 MW.  Senelec has been 
unable to meet peak electricity demand since 2004.  Electricity 
production is mostly generated at thermal plants, the majority of 
which rely on diesel rather than cheaper, heavier fuel.  Senelec has 
wants to convert some plants to flex-fuel generation, and has 
promised GTI financing assistance to do the same.  Until that 
happens, Senegal will fail to take advantage of available natural 
gas resources produced by the Houston-based Fortesa/Africa On-Shore 
Drilling, which has a promising (if modest) supply capacity from its 
fields 20 miles from Dakar. 
 
¶18.  Hydroelectricity accounts for only about 10 percent of 
production, although there is a long-standing plan for regional 
cooperation which is searching for donor or private investment to 
begin the project. 
 
¶19.  Senegal currently has no coal-fired plants, although the GOS 
has a commitment from a private consortium, led by the Swedish group 
Nykomb Synergetics to build a 125 MW plant approximately 30 miles 
from Dakar.  Senelec also recently signed a controversial contract 
with the same company to build a second 125 MW coal plant, which 
required a waiver of Senegal's public procurement regulations for 
open and competitive tenders.  The government hopes that these two 
plants will not only cover Senegal's near-term electricity demand, 
but will also allow additional capacity to be sold to neighboring 
countries. 
COMMENT 
------- 
¶20.  Senelec has long needed management and operational reform, and 
we hope that the World Bank/AFD program will be fully implemented. 
The cash infusion provided under this program should help the many 
suppliers whose cash flow has been drained by Senelec's lack of 
payments.  Equally important is a significant improvement in 
electricity supply and quality, and, in theory, better pricing.  All 
this is necessary to help Senegal's beleaguered and cash-strapped 
private sector and bring much needed improvements to the country's 
investment climate.  We suspect that France's support for Senelec is 
largely motivated by pressure from French companies in Senegal. 
However, we remain concerned for the sector due to Senelec's long 
history of poor fiscal and technical management and the continuing 
interventions of Energy Minister Samuel Sarr (who used to run 
Senelec), as witnessed by the closed-door deal struck for the second 
coal power plant. 
 
BERNICAT