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Cablegate: Central Asia-to-South Asia Regional Energy Market

VZCZCXRO4855
PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #3908/01 3300121
ZNR UUUUU ZZH
P 260121Z NOV 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 1527
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0556
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNDT/USMISSION USUN NEW YORK 4283

UNCLAS SECTION 01 OF 03 KABUL 003908

SIPDIS

DEPT FOR SCA/FO, SCA/RA, AND SCA/A
DEPT PASS AID/ANE
DEPT PASS USTR FOR GERBER AND KLEIN
DEPT PASS OPIC FORZAHNISER
DEPT PASS TDA FOR STEIN AND GREENIP
CENTCOM FOR CSTC-A
NSC FOR JWOOD
TREASURY FOR LMCDONALD, ABAUKOL, BDAHL, AND MNUGENT
OSD FOR SHIVERS
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH

SIPDIS

E.O. 12958 N/A
TAGS: ENGR ECON EPET ETRD KPWR EAID PGOV AF
SUBJECT: Central Asia-to-South Asia Regional Energy Market
(CASAREM)- The Electricity Corridor Project is a Go

1. Summary. The four countries working to create an electricity
transmission corridor between Central and South Asia took a major
step forward in their Third Ministerial Conference in Kabul,
November 14-16, 2007. Representatives agreed on the scope and
preliminary technical definition of the project, on guidelines for
cost- and risk-sharing, to establish a Council and Secretariat to
oversee work in the next phases, on a plan of actions needed to
bring the system online in 2011, and on an approach to financing the
required investment (estimated at USD 500 million). The
international financial institutions (IFIs) demonstrated a
continuing commitment to organize financing for the effort. This
project is on track to provide major economic opportunities for the
countries involved. The next significant milestone, formal
signature of an inter-governmental agreement, is scheduled to take
place at the next Ministerial Conference in Bishkek (Summer 2008).


2. Just as important as the decisions themselves, this conference
marked the first time the countries took responsibility for the
project and negotiated amongst themselves without the direct
engagement of the U.S. or the Multilateral Development Banks (MDB)
staffs. The private sector, led by the World Bank's International
Finance Corporation (IFC), showed a somewhat enhanced interest in
the project, which took the countries by surprise and caused them to
demonstrate significant resistance to a real private sector equity
role. While decisions made during the conference do not preclude a
significant private sector role, they may limit their flexibility;
the countries will continue to digest some of the private sector
suggestions. End Summary.

3. The ministers who met November 14-16, 2007 in Kabul to negotiate
the creation of a Central Asia-to-South Asia electricity market,
concluded that feasibility assessments (conducted by consultants on
their behalf) demonstrated that a project to build a transmission
line to carry 1000 megawatts of electricity from Kyrgyz Republic and
Tajikistan to Afghanistan and Pakistan is technically and
economically feasible, and signed a memorandum of understanding to
proceed to realize the project. Progress made during the conference
represented a major step forward in defining a project long promoted
by the United States working with the four countries and
international institutions, to connect energy-hungry South Asia to
the rich potential in Central Asia.

4. The project now moves into an even more active stage where the
parties begin to organize the institutions which will regulate the
multi-country facility, negotiate a series of agreements that will
structure the facility, and assemble the financing to execute the
project. The representatives laid out a timeline and a program of
work that would launch construction early in 2009 and project
completion of the transmission facility by the end of 2011.

5. The four countries were represented at Ministerial level. Host
nation, Afghanistan, was represented by Minister of Energy and Water
Ismail Khan; and Minister of Economy and Chairman of the
Interministerial Committee on Energy Dr. M.J. Shams. Tajikistan's
delegation was led by Ministerial-rank envoy, Sharif Rahimzoda,
Chairman of the State committee on Investments. Pakistan's
delegation was led by Alternate Secretary of Power, Yusuf Memon; and
Kyrgyzstan's delegation was led by Deputy Minister of Energy,
Tiumenbaev. The Afghan delegation was joined by a large number of
governmental officials and Parliamentarians throughout the
conference. Representatives of the Asian Development Bank, Islamic
Development Bank, and the World Bank (International Finance
Corporation) participated, as did a USDel led by the State
Department's Robert Deutsch, Senior Advisor (Economic Integration),
Bureau of South and Central Asian Affairs with the active
participation of the Embassy (ECON, ARG, and USAID) and USAID

KABUL 00003908 002 OF 003


Washington. A representative of the German assistance agency GTZ
also attended the opening session. Private sector companies which
had expressed an interest in the project also attended, including
AES (U.S.), RAO Inter UES (Russia), the Aga Khan Network, and Xenel
Industries (Saudi Arabia).

6. After reviewing the pre-feasibility work prepared for the
conference by technical economic consultants SNC Lavalin (funded by
the Asian Development Bank) and commercial consultant team of
Fieldstone, Chadbourne, & Parke and Nexant (funded by the World
Bank), the conference discussed a number of points concerning the
scope and structure of the project. The IFIs questioned the
economic viability of the inclusion of a 300 mega-watt offtake
capability in Kabul at a cost of USD 72 million, because of limited
capability to use the electricity (and summer-only power in the
early years of the project); they also questioned the economic
viability of a Kyrgyz-Tajikistan interconnection (originally
estimated at USD 270 million, but revised down to USD 70 million by
Kyrgyz suggestions for simplification of the work) given limited
electric surpluses to be carried. The consultants provided updated
analysis which convinced the countries to maintain these elements in
the project scope. For the project comprising these elements in
addition to the basic line from southern Tajikistan to northern
Pakistan, the total investment is estimated on the order of USD 500
million.

7. The countries also analyzed the potential structures for
organizing the eventual operation. The IFC offered to make a small
initial investment to fund development work into a company to be
formed to represent the eventual operator of the transmission link,
given that the countries have repeatedly indicated they wanted
private sector partners and had a preference for a public-private
partnership. However it became clear that all of the countries
involved were uncomfortable with the idea of significant private
sector control of the envisaged transmission system and resisted
making structural decisions that would significantly enhance the
likelihood of participation of the private sector in the project.
The issue of private participation was further reviewed with the
four private sector attendees. While they were briefed generally on
the progress made to date in defining the transmission project and
its structures, the companies' request for complete access to the
pre-feasibility work was denied, as was their suggestion that they
might still yet be able to put together an alternate structure for a
privately developed project. Pakistan, in particular, was unwilling
to release the range of data in the feasibility reports, while
several countries (particularly Afghanistan) appeared unconvinced
both about the need for substantial private sector investment in
this infrastructure as well as in the credibility of the private
sector option. The spurt of interest by these companies contrasted
sharply with the tepid response to the Commercial Consultant's work
to identify private sector interest and the experience with AES and
RAO, which have both been examining and assembling the pieces of
this project independently for some two years.

8. The discussion also focused on the potential for financing the
investment in the power lines. The three development banks had
suggested that they could be able to fund the majority of the
effort; however, funding the full scope of the project would require
additional lenders or investors. The countries debated how to
divide responsibility for the financing since much of it would
involve sovereign guarantees. Pakistan resisted strongly any
arrangement under which it would be responsible for any investments
that were beyond its territory. Afghanistan resisted outcomes that
would have it responsible for the bulk of the required assets given
that more of the benefit seemed to accrue to the other countries and
because of the constraints on its access to assistance or finance.
In this, the first negotiation that occurred among the four
participating countries alone (IFIs and donors excluded from the

KABUL 00003908 003 OF 003


discussion), the national representatives agreed on responsibility
for assets in their territories, but that an effort would have to be
made - regarding the manner in which the funds were raised, relative
pricing, and transmission/royalty fee allocation - to offset
Afghanistan's opportunity costs.

9. In the MOU the countries concluded that:

o The work would move into the institutional formation and
negotiation stage;

o Mutual Benefits would be a guiding principle;

o They would form an intergovernmental council to regulate the
project and operation, with a small secretariat based in Kabul;

o That a special purpose company would develop, construct and
operate the system;

o That each country would be responsible for financing and owning
the assets on its territory, which would be leased to the operating
company;

o That they would seek financing from the IFIs and donors, with a
special emphasis on mitigating the opportunity cost to Afghanistan;

o That the transmission system would operate as a common carrier,
with pricing based on international norms; and,

o That the Inter-governmental Council, with the help of the
Consultants, would proceed to launch the series of negotiations
required to take the project to full implementation.

10. Comment: The Kabul conference represents a major step forward
towards creating a Central-South Asia electricity transmission
corridor. For the first time, the country delegations took the
issues into their own hands rather than being pushed and pulled
along by the U.S. and the IFIs. They committed to spend some of
their own money shortly in the staffing and operation of the small
IGC secretariat. It is still a learning process for all involved in
how a major system like this is developed, financed and operated as
a commercial proposition internationally, as demonstrated by the
resistance to the private sector options. However, it is clear that
the discussions are creating understanding among the participating
senior officials and Ministers, which will have a broader impact on
their approaches to the electricity sector. The Conference
concluded with agreement on the relatively intense range of work
ahead and selection of one of the participants, Pakistan's
transmission company head Qazi, rather than an IFI or consultant to
take responsibility for pressing the countries to complete the
actions required over the next 30 days to form the IGC. End
comment.

11. This message was drafted by SCA Senior Advisor, Robert
Deutsch.

WOOD

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