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. 
 
------------------------------------- 
AES - Largest U.S. Investor in Panama 
------------------------------------- 
 
¶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 
--------------------- 
 
¶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. 
 
---------------- 
Pattern Is Clear 
---------------- 
 
¶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. 
 
--------------------------------- 
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