VZCZCXRO0826
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHDR #0071/01 0331402
ZNR UUUUU ZZH
R 021402Z FEB 09
FM AMEMBASSY DAR ES SALAAM
TO RUEHC/SECSTATE WASHDC 8234
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MCC WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHNR/AMEMBASSY NAIROBI 1137
RUEHKM/AMEMBASSY KAMPALA 3304
RUEHLGB/AMEMBASSY KIGALI 1232
RUEHJB/AMEMBASSY BUJUMBURA 2788

UNCLAS SECTION 01 OF 02 DAR ES SALAAM 000071 
 
SIPDIS 
SENSITIVE 
 
AF/E FOR JLIDDLE, AF/EPS FOR ABREITER, INR/RAA FOR FEHRENREICH 
PASS USTR FOR PATRICK COLEMAN, WILLIAM JACKSON 
COMMERCE FOR BECKY ERKUL 
TREASURY FOR REBECCA KLEIN 
NAIROBI PASS FCS 
 
E.O. 12958:  N/A 
TAGS: PGOV ECON EINV ETRD TZ
SUBJECT: TANZANIAN GOVERNMENT SEIZES U.S-BASED APR ENERGY'S POWER 
PLANT 
 
REF A: 2008 Dar es Salaam 130; B: 2008 Dar es Salaam 809 
 
DAR ES SAL 00000071  001.2 OF 002 
 
 
¶1. (SBU) SUMMARY. On January 27, the Tanzania Revenue Authority 
(TRA) seized a 40 megawatt power generation plant owned by APR 
Energy, LLC, a Florida-based firm.  TRA's action follows extensive 
efforts by APR to resolve a tax dispute related to a 2006 contract 
to provide power on an emergency basis.  The Ministry of Finance and 
Economic Affairs (MOF), which in October 2008 agreed in principle to 
a resolution of the matter, withdrew its offer and demanded full 
payment of the disputed tax.  Recent high-profile corruption 
prosecutions, including of the just-retired MOF Permanent Secretary, 
and the public uproar over procurement of another emergency power 
contract (involving U.S.-based Richmond Development Co.), have 
contributed to MOF's intransigence in the matter.  Embassy has used 
its good offices to encourage the GOT to resolve the issue, but 
prospects for an accommodation are dim.  END SUMMARY. 
 
Background: Power Crisis and Tax Dispute 
---------------------------------------- 
 
¶2. (U) APR was contracted by Tanzania's parastatal energy company, 
Tanesco, to provide emergency power during the country's 2006 power 
crisis, the result of a long drought.  APR commissioned its 40 MW 
plant near the northwestern city of Mwanza in early 2007.  However, 
according to APR Project Coordinator Jake Kennedy, except for 
testing the plant did not provide power to the grid, because 
Tanesco, which under the contract was responsible for providing 
diesel fuel to generate power, did not do so.  The power crisis 
eased in 2007 as rains enabled Tanzania's hydropower plants to 
increase capacity.  (Note: A scandal over the procurement of another 
emergency power contract, awarded to U.S.-based Richmond Development 
Co., led to the resignation of the Prime Minister in February 2008. 
(ref a) End Note.) 
 
¶3. (U) APR entered into its contract with Tanesco on the 
understanding that APR's operations would be tax-neutral 
(tax-exempt), and that Tanesco would be responsible for any taxes 
arising from the contract.  During 2007, APR representatives wrote 
repeatedly to Tanesco and MOF to confirm and clarify the tax 
situation.  In January 2008, TRA notified APR of income tax and VAT 
owed.  APR's contract with Tanesco expired in March 2008.  Following 
additional efforts by APR to resolve the tax issue, in July 2008 TRA 
issued a letter of intent to seize APR's plant unless the taxes at 
issue were paid.  APR then contacted the Embassy to seek assistance. 
On July 16, Ambassador Green wrote to Prime Minister Pinda about the 
case, after which TRA agreed to suspend the seizure for 30 days 
while the parties sought a resolution. 
 
Negotiations, then compromise dashed 
------------------------------------ 
 
¶4. (SBU) On August 19, MOF Deputy Permanent Secretary Ramadhani 
Khijjah convened a meeting of representatives from TRA, Tanesco, the 
Ministry of Energy and Minerals (which oversees Tanesco), and APR, 
with Embassy representatives as observers.  Khijjah reported that at 
an interagency GOT meeting, TRA had agreed to extend its suspension 
of the seizure.  He said that pending an opinion of the Attorney 
General, Tanesco had provisionally acknowledged its responsibility 
for taxes on operations, including corporate tax and VAT, which 
would amount to approximately USD 8 million.  However, the GOT would 
continue to demand approximately USD 1.5 million from APR for 
employment and withholding taxes.  Following the meeting, APR 
offered USD 400,000 to settle the dispute; the GOT did not respond 
to the offer. 
 
¶5. (U) On September 3, MOF notified APR that the Attorney General's 
office had issued an opinion that the contract did not exempt APR 
from taxes on profit and income.  MOF requested APR to provide 
additional information that would lead to a different interpretation 
of Clause 3.4 of the contract, which relates to the tax issue.  On 
September 13, APR provided MOF with a long list of documents 
supporting the contention that the contract should be considered 
tax-neutral.  Ambassador Green wrote a second letter to the Prime 
Minister on September 22 regarding the case and the lengthening 
period during which APR remained unable to remove its property from 
Tanzania. 
 
 
DAR ES SAL 00000071  002.2 OF 002 
 
 
¶6. (SBU) Following an acrimonious October 16 meeting at MOF, with 
repeated arguments over the interpretation of the contract, on 
October 20 Kennedy informed Poloff that APR and MOF had reached an 
agreement in principle to resolve the dispute.  APR would agree to 
pay withholding and employment tax, with exact amounts to be 
determined following review by APR and TRA; once APR had paid, TRA 
would approve export of the plant.  MOF and Tanesco would settle all 
other tax issues.  Kennedy said MOF Deputy Permanent Secretary 
Msongole advised him that other parties, including the Attorney 
General, would not object to the proposed settlement. 
 
¶7. (SBU) In late November and early December, the political context 
changed.  Gray Mgonja, just retired as MOF PS, was charged with 
corruption along with two former Finance Ministers (ref b).  TRA 
seized the Dar es Salaam power plant of Aggreko, a UK-based company 
that had also been contracted to provide emergency power, over a 
similar tax dispute.  On December 11, Kennedy informed Poloff that 
the GOT had rescinded its agreement in principle.  Khijjah, now 
promoted to Permanent Secretary at MOF, confirmed to Poloff that the 
Attorney General's earlier opinion bound all power suppliers to pay 
corporate tax. 
 
¶8. (SBU) At a January 8 meeting of MOF, TRA, APR and Poloff, DPS 
Msongole reaffirmed that the GOT was bound by the Attorney General's 
opinion, which he claimed not even the President could overturn. 
When Kennedy argued that APR was being punished because of the 
scandal over the Richmond contract, Msongole agreed, but said the 
GOT's hands were tied.  Discussing what he called a bad contract, 
Msongole said Tanesco had misled bidders over the tax exemption, 
which was not in Tanesco's power to grant.  However, he also said 
that with the Attorney General's opinion, Tanesco would not accept 
the liability for other taxes.  Moreover, TRA demanded taxes from 
APR, not Tanesco.  Msongole suggested that APR could pay one third 
of TRA's demand and file an appeal, as he said Aggreko had done. 
Otherwise, APR could file for arbitration.  Msongole left open no 
avenue for APR to export its plant without paying the full tax 
demanded, unless the Attorney General's office would reconsider its 
opinion.  (Note: APR, in its direct contacts with MOF prior to the 
meeting, had been led to believe the meeting would be to confirm the 
deal, not reject it completely.  After the meeting, Kennedy joked 
darkly about destroying the plant rather than letting the GOT seize 
it. End Note.) 
 
¶9. (SBU) TRA issued a new demand letter on January 14, then seized 
the plant on January 27.  TRA gave APR fourteen days to settle 
outstanding taxes to avoid the auction of the plant.  APR told us it 
was seeking an injunction to stop the seizure.  APR also attempted 
to contact the Attorney General's office directly, in an effort to 
present evidence to refute the unfavorable opinion about the 
contract terms, but was told the request for a meeting was denied 
because APR is not a "client" of the AG.  Ambassador Green, in his 
final call on President Kikwete, left a nonpaper on several issues, 
including the damaging effect the APR dispute would have on the 
investment climate for US companies in Tanzania.  To date, State 
House has not responded. 
 
¶10. (SBU) Comment: In the current political climate, it appears that 
the GOT would prefer to face APR in court or arbitration, despite 
the costs and potential costs of an adverse judgment, rather than 
appear to make a deal that contravenes an opinion of the Attorney 
General and a TRA demand.  Within the GOT, concerns over the 
appearance of favoritism to a foreign company and the risk of public 
exposure outweigh worries over possible impact on future investment 
(or future assistance in the event of another power crisis).  Even 
foreign assistance may be affected, since MOF's skittishness about 
issuing broad notices of tax exemption may result in delays to 
contracts under Tanzania's Millennium Challenge Compact.  Embassy 
will remain in contact with APR about its legal strategy and 
possible approaches to the GOT.  End Comment. 
 
ANDRE