VZCZCXRO2404
RR RUEHLH RUEHPW
DE RUEHIL #2628/01 3011450
ZNR UUUUU ZZH
R 281450Z OCT 09
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 5728
INFO RUEHLH/AMCONSUL LAHORE 8036
RUEHKP/AMCONSUL KARACHI 2437
RUEHPW/AMCONSUL PESHAWAR 7080
RUEHLO/AMEMBASSY LONDON 1637
RUEHNE/AMEMBASSY NEW DELHI 5657
RUEHBUL/AMEMBASSY KABUL 1054
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RUEHIL/USDAO ISLAMABAD PK
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 06 ISLAMABAD 002628 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 2225 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG PREL PGOV PK
SUBJ: PAKISTAN-U.S. ENERGY DIALOGUE POINTS TO LONG-TERM SOLUTIONS 
FOR THE SECTOR 
 
¶1. (SBU) Summary: Delegations to the U.S.-Pakistan Energy Dialogue 
of October 23-24 discussed plans for moving beyond the current 
difficulties and strategies for addressing longer-term planning.  It 
was clear that Pakistan has made measurable progress in addressing 
the electricity sector's debt problems and has also taken important 
first steps to ensure pricing, structure, and operational 
efficiencies to provide the necessary full cost recovery to make 
service sustainable.  The GOP has the elements of a plan to address 
the short-term power needs and reduce shortages, but it is less 
clear that they have the capacity to carry it out. 
 
¶2. (SBU) For the longer-term, although the delegation recognized the 
increasing burden on Pakistan's economy of not resolving the energy 
situation, it is clear that any longer-term strategy is still at 
best piecemeal and/or incoherent.  The GOP continues to look for 
silver bullet solutions and foreign assistance as the best answer, 
and appeared unlikely to accept an independent recommendation to 
create a national energy authority.  While the GOP welcomed the 
range of support provided by U.S. agencies, they look forward to 
additional announcements of USG assistance.  End summary. 
 
A Range of Challenges in the Power Sector 
 
¶3. (SBU) On October 23-24, a U.S. interagency delegation led by the 
Secretary's Coordinator for International Energy Assistance (S/CIEA) 
David Goldwyn and David Lipton, NSC Senior Director for 
International Economics, met with a large Pakistani delegation, 
headed by Minister of Water and Power Raja Pervaz Ashraf, in a 
bilateral energy dialogue.  The GOP described its large and growing 
shortage of electricity as a constraint on economic development and 
a strain on public finances.  A range of representatives of various 
GOP ministries and public-sector entities outlined the combined 
effects of a prolonged failure to invest and maintain existing power 
infrastructure, misaligned economic incentives, diffuse regulatory 
and operational authorities, deficits in human resource capacity, 
and the accumulation of "circular debt."  These problems had all 
manifested themselves in a gap between supply and demand of 3,500 to 
4,000 MW during the peak summer season. 
 
Differing Views Within the GOP 
 
¶4. (SBU) With the Pakistan Electric Power Company (PEPCO) Managing 
Director Taheer Cheema as the main speaker, the GOP presented its 
plans to return the sector to a solid footing.  While various GOP 
presenters recognized the need to address the full range of issues, 
Cheema instead provided a somewhat unrealistic picture suggesting 
minimal operational issues (e.g. understating the problem of losses 
in the system, financial difficulties, and the limited financial and 
operating autonomy of the sectors' entities under the PEPCO 
umbrella.)  Beyond the financial issues, the GOP outlined a program 
to add some 4,500 MW of generation by the end of 2010 through a 
combination of rental power plants (between 850 and 2250 MW), new 
fast-tracked independent power projects (up to 2500 MW), and the 
rehabilitation of existing facilities (225 MW already underway and 
440 MW awaiting funding in Phase II.) 
 
¶5. (SBU) The GOP delegation was not unanimous in either its 
presentation of the facts or the best approach to increasing 
generation in the short term, especially with regard to the 
infrastructural intricacies of moving large volumes of fuel and the 
availability of more efficient (compared to fuel oil) natural gas 
supplies for generation.  The GOP comments also reflected 
differences among the representatives on the usefulness and 
prospects for completing the rental power projects.  A number of the 
projects included in the plan lacked financing commitments, which 
GOP representatives hoped would be taken up by donors or the 
international capital markets. 
 
The U.S. Response 
 
¶6. (SBU) In response, the U.S. Trade and Development Agency 
described project support for initiatives in Pakistan's energy 
 
ISLAMABAD 00002628  002 OF 006 
 
 
sector.  The Department of Commerce presented best practices for 
attracting foreign investment and upcoming events and efforts 
Commerce is undertaking that will benefit Pakistan.  The delegation 
presented support available for private sector financing in the 
power sector in Pakistan from the Overseas Private Investment 
Corporation.  USAID also reviewed the assistance it provides in 
Pakistan. 
 
GOP Leery of Abandoning Subsidies 
 
¶7. (SBU) The dialogue returned repeatedly to the straightforward 
concept of charging the full cost of producing and distributing 
electricity.  While both sides agreed on the need to support needy 
populations, the U.S. delegation presented examples used 
successfully in other countries that did not constrain the growth of 
the energy sector.  While the GOP clearly recognized the necessity 
of raising tariffs, participants were not yet ready to consider a 
system without direct or cross subsidies.  For example, the GOP 
noted that the unwillingness of citizens of the FATA region and much 
of Balochistan to pay any amount for energy would be a long-term 
burden on the economy.  The U.S. delegation acknowledged that some 
segments of society would be a burden on public coffers.  However, 
that did not obviate the fact that achieving full cost recovery by 
charging appropriate tariffs would make the power sector 
economically viable.[p1] 
 
¶8. (SBU) WAPDA Member Finance Abdul Qadeer stressed that there was 
wide variance between the collections of the successful distribution 
companies (DISCOS), primarily in Punjab province, and the rest. 
Indeed, the successful DISCOS had even neared completion of the 
financial paperwork to purchase power directly from the 
not-yet-operational Central Power Purchasing Agency (CPPA).  (Note: 
Under the unbundling plan for PEPCO assets, individual DISCOS were 
to buy power under a single purchaser model from the CPPA, which in 
turn would pay the generating companies.  Currently, however, PEPCO 
pools DISCO receipts, cross-subsidizing the DISCOS and hiding 
losses.  End note.)  Qadeer said the GOP planned to have the CPPA in 
operation, with the DISCOS gaining financial autonomy, by 
March/April 2010.  (Note: While WAPDA officials, including WAPDA 
Chairman Shakeel Durrani, want to see the unbundling of PEPCO, that 
is not the case for PEPCO officials and others in the GOP.  Indeed, 
the ADB notes that PEPCO has centralized its authority in recent 
months, taking further control of DISCO finances and human 
resources.  End note.) 
 
Sector Finance - the Debt 
 
¶9. (SBU) Finance Minister Shaukat Tarin and NSC Director Lipton led 
discussions on Pakistan's moves to resolve inter-corporate or 
"circular debt."  MinFin Tarin tied together the resolution of 
circular debt, righting the tariff pricing policies and electricity 
subsidies, and the sector's prudent governance as integral to the 
financial sustainability of the energy sector and, indeed, 
Pakistan's entire financial system.  While different numbers were 
presented by different entities, Finance Secretary Salman Siddique 
indicated that debt totaling 216 billion rupee ($2.6 billion) owed 
by the sector to banks is now being serviced by the GOP.  Another 92 
billion rupees ($1.1 billion), which largely covered FATA 
receivables, had recently been flushed out of the system through the 
issuance of term finance certificates.  [p2]Another 20 billion 
rupees ($240 million) is owed to PEPCO by provincial governments, 
and 39 billion rupees ($470 million) by Karachi Electric Supply 
Company (KESC).  The Ministry is working with PEPCO and the 
provinces to collect missing payments and recently reconciled 
successfully KESC receivables and payables.  Siddique indicated that 
these outstanding issues would be resolved soon. 
 
Sector Finance - the Tariffs 
 
¶10. (SBU) Responding to questions regarding the GOP's ability to 
manage the subsidy and tariff adjustments in a systematic manner, as 
well as the adequacy of the amounts budgeted for subsidies this 
 
ISLAMABAD 00002628  003 OF 006 
 
 
year, Tarin said the GOP is "wholly committed to success" in the 
financial context.  He said that RS 55 billion ($660 million) 
subsidy budgeted for FY 2009-10 "would have to suffice" to cover 
revenue shortfalls, even though that amount fell short of a number 
of projections for the revenue gap. 
 
¶11. (SBU) Lipton praised the GOP's progress in debt reorganization 
but noted that it had to be sustained.  He suggested that progress 
in the energy sector in other countries required the appointment of 
a powerful executive or "energy czar" in the face of such high risk 
priorities to coordinate and motivate an intergovernmental 
implementation mission. 
Upstream Elements: The Fuel Mix 
 
¶12. (SBU) The delegations reviewed the sources of primary energy in 
Pakistan and the approaches and policies to move beyond Pakistan's 
current heavy reliance on hydrocarbons.  Hydrocarbon Development 
Institute of Pakistan Director General Halal Raza called [m3]the 
country's heavy dependence on imported fossil fuels a strain on 
Pakistan's fiscal health: $12 billion (63 percent of Pakistan's 
export earnings) were spent on oil imports in FY 2008.  That total 
would rise to $60 billion by 2025 without policy adjustments.  Much 
of the rehabilitated generation that is planned will run on 
expensive and low efficiency residual fuel oil until natural gas 
supplies increase.  Discussion focused on how to correct these 
imbalances, as well as how to address the critical shortage of human 
resource capital. 
 
Natural Gas in Short Supply 
 
¶13. (SBU) The delegations shared best practices on exploration and 
production in the gas sector, how to obtain natural gas imports, as 
well as how to set up effective royalty systems, particularly in 
conflict-affected areas.  The GOP [p4]did not fully address 
conflicts with the provinces over gas exploration.  The GOP 
delegation explained ambitious plans for regional pipeline projects. 
 However, several GOP delegation members voiced skepticism, notably 
after Goldwyn reviewed U.S. sanctions as they might apply to an Iran 
pipeline, as well as the technical and commercial obstacles 
confronting such a project.  The Ministry of Petroleum indicated it 
sees an important role over the next 15 years for LNG imports (Note: 
The Minister of Petroleum and Natural Resources did not attend the 
Dialogue because of negotiations with gas suppliers in London. End 
Note)  Ministry of Petroleum and Natural Resources Secretary Mahmood 
Saleem Mahmood said the GOP hoped to conclude its LNG supply and 
terminal arrangements by December, with trade commencing in 2011. 
He did not indicate which of the several LNG projects would be 
chosen. 
 
Coal 
 
¶14. (SBU) On coal, Sindh Thar Coal Energy Board Director Ijaz Ali 
Khan discussed the possibilities of this underexplored deposit. 
Coal, as with gas, turned on the question of the immense 
infrastructure framework that must accompany any such project.  Khan 
described a range of Thar coal blocks that have been identified and 
awarded to different parties for development using varied 
approaches, including coal bed methane, gasification, and 
traditional mining.  He did not have concrete solutions for the many 
infrastructure challenges surrounding Thar exploration and presented 
some ideas that run contrary to GOP policy (e.g. private sector 
investments in transmission). 
 
Hydro and Alternative Energy 
 
¶15. (SBU) While some of the smaller, run-of-the-river projects are 
moving forward with private investment, the larger projects are 
having difficulty mobilizing for want of sufficient capital.  The 
GOP representatives presented an approach for private sector 
participation in smaller to medium-sized hydro sector projects that 
do not require significant new reservoirs[p5], several of them 
already advancing.  WAPDA Chairman Durrani outlined several mega 
 
ISLAMABAD 00002628  004 OF 006 
 
 
projects that would rely on financial contributions from the ADB and 
China, among others. 
 
¶16. (SBU) The Alternative Energy Development Board presented bold 
renewable energy goals that are now struggling to move beyond the 
concept phase.  The projects involve wind, solar, and biomass, and 
call for private sector financing.  Establishing an appropriate 
tariff for power generated from alternative energy sources remains a 
major obstacle. 
 
Regional Electricity Trade 
 
¶17. (SBU) The GOP also noted its continued interest in an 
electricity connection with Central Asia and outlined arrangements 
with Iran.  Existing electricity trade with Iran supplies 
Balochistan's border areas, as well as 30 MW to the Gwadar port; 
however, the GOP hopes that a current feasibility study will firm up 
a project to trade 1,000 MW with Iran in a connection to Quetta. 
 
Integrated Plan: Pulling it All Together? 
 
¶18. (SBU) The GOP presented the results of a blue ribbon private 
sector panel, commissioned by the Ministry of Finance, to develop an 
integrated energy plan.  This 15-year plan envisages a holistic, 
self-sufficient, and sustainable approach to energy that, at its 
core, seeks to create an enabling environment for the growth of 
Pakistan's energy economy.  While the authors admitted it needed 
further development, they put forward a useful set of policy 
recommendations.  The U.S. delegation responded favorably to the 
plan's range of issues and diagnosis, notably the key element of 
creating a national energy authority. Such a quasi-ministry would be 
charged with overseeing the coordinated implementation of the 
integrated plan, have transparent workings, and independent, 
qualified directors from federal, provincial, and private sectors. 
 
¶19. (SBU) Unfortunately, representatives of the established 
ministries and planning authorities seemed to consider the plan as 
only one set of ideas to be taken under advisement.  In the words of 
Pervaiz Butt, Member Energy of the Planning Commission, "it is not a 
reference document, merely a set of ideas."  The Planning Commission 
is now finalizing its own, competing five-year plan.  It described a 
more traditional list of power projects without a focus on 
structural and policy issues to make the plan viable or even a rank 
ordering of priorities.  Even more revealing was the Planning 
Division Secretary Ashraf Hayat's comment that the plan did not need 
to consider financing since the sector is "self-sustaining." 
 
Comment 
 
¶20. (SBU) The Energy Dialogue presented an important opportunity to 
have a frank exchange on the challenges Pakistan faces in its energy 
sector, as well as to examine some possible solutions.  In many ways 
this Dialogue was a forcing event for the GOP to clarify its 
direction in the face of crisis - it is possible this was the first 
time the various ministries and departments had talked about these 
issues directly to each other. 
 
¶21. (SBU) The GOP has all the elements it needs to deal with the 
immediate problems: the additional energy generation coming on line 
through year-end will be an important deliverable to offset the 
impact of tariff increases in the public mind, and the circular debt 
issue appears headed in the right direction.  However, implementing 
these plans fully will be the true test.  The ADB, in particular 
presented, the view that Pakistan's efforts on energy had stalled to 
the point that ADB might need to reconsider the breadth of its 
commitments to the power sector. 
 
¶22. (SBU) Although MinFin Tarin again demonstrated his comprehension 
of the situation and steps necessary to address it[m6], the same 
cannot be said of the array of other GOP entities that must 
contribute.  Indeed, some continued to deny the reality of the 
crisis.  PM Gilani announced the creation of an executive committee 
 
ISLAMABAD 00002628  005 OF 006 
 
 
to report to him with weekly energy updates.  While this could be a 
real step forward we note that an earlier ministerial level 
committee (also chaired by the PM) has not had significant impact of 
which we are aware.  Similarly[p7], while the integrated energy plan 
is encouraging, its characterization as ideas from a "think tank" 
show that many in the line ministries do not yet accept the need for 
a holistic approach to address Pakistan's energy woes and seem 
incapable of moving from goals to strategies - preferring instead to 
look for salvation in silver bullets and the development of major 
projects by friends.  Although the policy discussion was 
significant, GOP officials also returned to the need for the U.S. to 
demonstrate its commitment to Pakistan through projects.  While we 
and other international actors view a national energy authority as a 
critical step in the long term, the timing may not be appropriate 
for a bureaucratic reshuffling.  End Comment. 
 
¶23. (U) All formal presentations presented by both sides available 
from SCA/P on request. 
 
¶24. (U) S/CIEA Goldwyn, NSC Director Lipton and the S/SRAP office 
cleared this message. 
 
¶25.  (U) List of Participants 
 
Raja Pervez Ashraf, Minister for Water and Power 
Shaukat Tarin, Minister of Finance 
Hinna Rabbani Khar. Minister of State for Economic Affairs 
Shahid Rafi, Secretary, Ministry of Water and Power 
Salman Siddique, Secretary, Ministry of Finance 
Ashraf M. Hayat, Secretary, Planning Division 
Mahmood Saleem Mahmood, Secretary, Ministry of Petroleum and Natural 
Resources 
Sibtain Fazal Halim, Secretary, Economic Affairs Division 
Shahab Khawaja, Secretary, Privatization Commission 
Shakeel Durrani, Chairman WAPDA 
Zarar Aslam, Additional Secretary, Ministry of Water and Power 
Iqbal Awan, Additional Secretary, Ministry of Finance 
Tahir Basharat Cheema, Managing Director, PEPCO 
Fayyaz Elahi, Managing Director, PPIB 
Arif Allahuddin, CEO, AEDB 
Abdul Qadeer, Member, WAPDA 
Fazal Ahmad Khan, Member, WAPDA 
Razi Abbas, CFO, PEPCO 
Riaz Ahmad Khan, Advisor, Ministry of Water and Power 
Mr. Fazeel Asif, CEO, Power Holding Company 
Muhammad Imtiaz Tajwar, Secretary, WAPDA 
Zahoor Ahmad Barlas, Joint Secretary, Ministry of Water and Power 
Saif Ullah, Joint Secretary, Ministry of Water and Power 
Sohail Khan, Director General, Ministry of Foreign Affairs 
Masroor Qureshi, Director General, Ministry of Finance 
 
David Goldwyn, Coordinator for International Energy Affairs, S/CIEA 
David Lipton, NSC Senior Director for International Economics 
Robin Raphel, Economic and Development Assistance Coordinator 
Paul Hueper, Senior Advisor, S/CIEA 
Mary Beth Goodman, Senior Economics Advisor, S/SRAP 
Robert Deutsch, Senior Economic Advisor, SCA/P 
Brett Eggleston, Economic Advisor, SCA/P 
Thomas Cutler, Acting Director of European & Asian Affairs, DOE 
Russell Profozich, Economist, FERC 
Jacob Flewelling, Country Manager, USTDA 
Gordon Weynand, Senior Energy and Environment Officer, USAID 
Will Center, Commercial Counselor, FCS 
Jim Barnhart, Director for Economic Growth and Education, USAID 
Rosario Calderon, Energy Officer, USAID 
Robbie Marks, Deputy Economic Counselor 
Saeed Anwar, Economic Specialist 
 
 
 
[p1] 
[p2]TFCs went towards FATA debt?  since when? 
 
ISLAMABAD 00002628  006 OF 006 
 
 
[m3]MB, do you know who this is? 
[p4]or "the delegations"? 
[p5]"that do not require significant new resoirces??" 
[m6]I don't agree with this, but if Litpon does... 
[p7]Robbie - they announced this weeks ago; it isn;t new (even 
though we know it doesn;t actully do much or even probably meet)