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Cablegate: Energy Minister Khan Undermines Utility Progress

VZCZCXRO0624
RR RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0664/01 0540731
ZNR UUUUU ZZH
R 230731Z FEB 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 5777
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 02 KABUL 000664

SENSITIVE
SIPDIS

DEPT FOR S/SRAP, SCA/A AND EEB/ESC
PASS AID/ASIA/SCAA; AID/EGAT

E.O. 12958 N/A
TAGS: EAID ENRG SENV AF
SUBJECT: Energy Minister Khan Undermines Utility Progress

REFS: A. 09 KABUL 2852
B. 09 KABUL 3186

1. (SBU) Summary: Dr. Jalil Shams, CEO of the Afghan national
utility DABS, has called for President Karzai's help in maintaining
the utility's independence in the face of increasing interference
from Acting Minister of Energy and Water Ismail Khan. Dr. Shams
tells us that President Karzai was receptive and agreed to issue a
decree clearly stating that DABS is an independent agency. Without
independence, DABS faces a loss of donor support (including USD 570
million from the Asian Development Bank) and will not be able to
combat the corruption and inefficiency that currently plague the
sector. End summary.

Progress on DABS Independence
- - - - - - - - - - - - - - -

2. (SBU) Following the February 18 Inter-ministerial Commission for
Energy (ICE) meeting, Dr. Shams thanked the Embassy for our
continuing support on the issue of DABS' autonomy and for
coordinating donor support on this important subject (Refs A and B).
Dr. Shams said Acting Minister Khan treats DABS like another
Ministry of Energy and Water (MEW) department, intruding in daily
affairs and threatening its chief officers, including Dr. Shams.

3. (SBU) Dr. Shams said that in his meeting with President Karzai,
he informed the President of DABS' lack of independence and asked
that he intervene. Reportedly President Karzai said he would issue
a decree clearly stating that DABS is an independent agency and that
MEW should not interfere in its operations. According to Dr. Shams
this decree should be drafted on February 22. Dr. Shams added that
if he does not have clear support from the President, then he will
step down as CEO of DABS. He understands that the President wants
Khan as Minister of Energy and Water, but DABS' autonomy must be
maintained.

Situation Still Critical
------------------------

4. (SBU) Progress on the North East Power System (NEPS) has allowed
for an increase in the import of electricity from Uzbekistan, which
grew from 70 megawatts (MW) during 2009 to 120 MW during 2010.
About 30 MW of this power stays in the North (in Mazar-e-Sharif)
while the balance comes to Kabul. Expanding NEPS has dramatically
increased the availability of electricity in the capital and
demonstrated GIRoA's ability to improve public services. Further
improvement will be possible when USAID completes the reactive power
compensation facilities in December 2010. At that time, depending
on further power purchase agreements, Kabul should be able to
receive over 125 MW of Central Asian electricity, a significant
increase in low-cost power supply.

5. (SBU) In addition to increased electricity for Kabul, in December
2010 a new transmission line from NEPS to Nangarhar funded by the
ADB will be available. This line will make it possible to double
electricity supply to Jalalabad, and with additional investment in
transformers and transmission, it will be possible to supply
low-cost NEPS power to the Jalalabad Highway economic corridor.
USAID is rehabilitating Jalalabad's present power source (the
Darunta Hydro-Power Plant), planning for additional NEPS priority
projects in the region, and designing a new activity to improve the
efficiency of the Nangarhar utility.

6. (SBU) To achieve these dramatically positive developments, GIRoA
must continue to reform the national utility DABS (Da Afghanistan
Breshna Sherkat). The power struggle between reform-oriented and
anti-reform Afghan officials continues, and Acting Minister of Water
and Energy Ismail Khan is slowing and in some cases opposing efforts
to reduce corruption and improve financial sustainability of the
Afghan electricity sector.

7. (SBU) As they did in September 2009 (Ref B), donors have come
together to present a united and urgent front, insisting on DABS'
independence and good governance. If recent progress is reversed,
the Afghan electrical system will not have the funds needed to
maintain facilities put in place by donors, to fuel diesel
generators, or to pay for large volumes of Central Asian
electricity.

MEW: Reform Delays and Obstruction
- - - - - - - - - - - - - - - - - -

8. (SBU) Acting Minister Khan has a long history of blocking the
corporatization of DABS; his reluctance to sign the required
documentation almost brought about the collapse of the independent
utility in September 2009. At that time, only a unified donor
approach and the threat of loss of donor support forced Khan to
concede to the formal creation of DABS. Throughout the DABS
corporatization process, there was widely reported opposition from

KABUL 00000664 002 OF 002


Khan: Khan's MEW staff successfully resisted efforts to produce
complete financial statements, to implement improved metering,
billing and collection practices, and to introduce new management
practices.

9. (SBU) Following the signing of the DABS transfer on September 30,
2009, donors hoped that GIRoA would allow DABS to begin operation as
an autonomous, commercialized national electricity utility. In
support, USAID quickly launched a new USD 48 million activity to
improve utility technical and commercial efficiency within Kabul,
its largest distribution network. Unbeknownst to the donors,
however, during the September 30 meeting, Acting Minister Khan
executed a "side agreement" that effectively (illegally) transferred
some control of DABS to MEW. This side agreement also redirected
ADB- and World Bank-funded capital projects from DABS to MEW, in
violation of signed agreements between GIRoA and both of these donor
agencies.

Comment
- - - -

10. (SBU) President Karzai's willingness to defend DABS'
independence is a positive sign, but recent history has shown us
that donors must be watchful for MEW incursions in the utility's
independence. Experienced observers suspect that millions of
dollars are taken from the electricity sector annually by high-level
officials; coupled with technical and commercial losses, this leaves
the utility DABS in the red with little hope of becoming
self-sufficient in the near future. The Embassy has met with Acting
Minister Khan to explain our support for the Ministry of Energy and
Water and to urge respect for the utility's separate role.

11. (SBU) We've also briefed other reform-minded partners about our
concerns over DABS, including Minister of Finance Zakhilwal,
Minister of Mines Shahrani, and Minister of Economy Arghandewal, who
currently chairs the Inter-Ministerial Commission on Energy. Major
donors, including the World Bank, the Asian Development Bank, the
German Development Bank (KfW), and the USG are working together to
provide increased access to electricity for millions of Afghans, and
we will continue to work diligently to promote reform in the face of
delays and obstruction. For success, we'll need renewed commitment
and vibrant leadership to emerge from within the highest levels of
the GIRoA.

EIKENBERRRY

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