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