VZCZCXRO8540
RR RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0476/01 0390556
ZNR UUUUU ZZH
R 080556Z FEB 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 5434
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 03 KABUL 000476 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS AID/ANE; AID/EGAT 
 
E.O. 12958: N/A 
TAGS: EAID ENRG EINV AF
SUBJECT: Energy Minister Provides Update on Electricity Sector 
Commercialization 
 
REF: A) 09 Kabul 2852 
     B) 09 Kabul 3186 
 
¶1.  (SBU) Summary: Ambassador E. Anthony Wayne, Coordinating 
Director for Development and Economic Affairs, met with Acting 
Minister of Energy and Water (MEW) Ismail Khan on February 6 to 
discuss cooperation in Afghanistan's energy sector and to strategize 
on a path forward that would improve electricity service and reduce 
losses.  Emphasizing the importance of the energy sector for 
Afghanistan's economic development, Ambassador Wayne said the USG 
stands ready to continue working with the Ministry, Da Afghanistan 
Breshna Sherkat (DABS), the recently founded national electricity 
corporation, and other international donors.  Khan stressed the 
paucity of financial resources in the sector and its negative impact 
on access to electricity particularly in rural areas.  Noting that 
communication between MEW and DABS was not as it should be, Khan 
opined that Afghanistan should move gradually towards greater 
private sector investment.  Underscoring U.S. friendship for 
Afghanistan, Ambassador Wayne expressed USG readiness to work with 
MEW and DABS as they resolve their differences.  End Summary. 
 
- - - - - - - - - - - - - - - - - - - 
Afghanistan Energy Sector Priorities 
- - - - - - - - - - - - - - - - - - - 
 
¶2.  (U) The meeting, attended by Deputy Minister Ghulam Faruq, 
Deputy Minister Ziaie, Director of Planning Zia Gul, USAID Mission 
Director Frej, and USAID staff, was cordial.  In response to 
Ambassador Wayne's opening remarks, Acting Minister Khan stated that 
the USG and Afghanistan need to interact frequently at high levels 
on energy issues.  Noting that the energy sector is important for 
both countries, he lamented that MEW only receives about half of the 
needed budget for energy investments and that additional investment 
is needed in generation to increase supply and in transmission to 
allow increased power imports.  Rural electrification is an area 
that needs greater attention and major goals for the government 
include enhanced security and job creation, he stated. 
 
¶3.  (U) Khan said that energy sector progress has been slow, but the 
country had come a long way from just a few years ago when only a 
small proportion of the population was linked to the grid.  To 
provide energy access to all will take a long time, he emphasized, 
stressing that years of war and free government services had also 
caused the population to expect low prices, which in turn affected 
the pace of commercial reform and privatization.  The Afghan private 
sector also lacks the financial wherewithal to invest in the energy 
sector, and international firms are risk averse due to the security 
situation, he added. 
 
- - - - - - - - - - - - - 
US Support to the Sector 
- - - - - - - - - - - - - 
 
¶4.  (U) Noting that the energy sector was an important side-bar 
discussion in the recent London Conference, Ambassador Wayne stated 
that the USG plans to invest approximately $750 million in energy 
projects in Afghanistan over the next five years.  These projects 
will significantly increase power generation, increase the 
efficiency of transmission and distribution, improve capacity to 
operate and maintain infrastructure, and provide increased access to 
electricity to Afghans across the country.  Energy projects will 
lead to improvements in agriculture, health, education, economic 
development, and can contribute to improved revenue flow for the 
Government of Afghanistan, he emphasized. 
 
- - - - - - - - - - 
Donors on Same Page 
- - - - - - - - - - 
 
¶5. (SBU) Ambassador Wayne observed that donors are of like-minds in 
terms of what they believe is needed to advance energy reform, 
stressing that the World Bank and Asian Development Bank (ADB) among 
other donors have consistently supported commercialization efforts 
to improve service and increase revenues.  Over the next two years, 
USAID will provide approximately $50 million in assistance to DABS 
to support the utility's management reforms, improved customer 
service, and revenue collection, he added. 
 
- - - - - - - - - - - - - - - - 
Transition to Kabul Conference 
- - - - - - - - - - - - - - - - 
 
¶6. (U) Ambassador Wayne urged the Acting Minister to demonstrate 
progress in energy sector reform by the time of the Kabul 
Conference.  This would encourage additional investments by donors 
and private sector alike and help the sector become commercially 
viable.  Noting that it often takes time to establish new 
institutions like DABS properly, he reiterated USG support to help 
MEW in this process. 
 
KABUL 00000476  002 OF 003 
 
 
 
- - - - - - - - - - - - - - - 
Stresses between DABS and MEW 
- - - - - - - - - - - - - - - 
 
¶7.  (SBU) Acting Minister Khan stated that although he and current 
DABS head Dr. Jalil Shams had been friends for four years, DABS was 
not following the agreement Dr. Shams had signed with MEW in 
September 2009.  He said the agreement specifiet MEW should 
implement generation projects and that DABS should take over once 
the projects are complete.  DABS should only focus on the 
distribution of electricity and operation and maintenance of the 
infrastructure.  He said he had no problem whatsoever with DABS 
improving revenue collection and reducing losses but DABS should 
stick to the terms of the September agreement. 
 
¶8.  (SBU) Acting Minister Khan complained that DABS and ADB were not 
respecting these clear lines of authority and responsibility, 
delaying overall sector progress.  He cited $570 million in ADB 
investments that he did not want to go directly to DABS, but should 
be controlled by MEW.  Deputy Minister Faruq added that there are 
redundancies between MEW and DABS, with the same functions present 
in both organizations.  MEW Director of Planning Zia Gul noted as an 
example that ADB is creating a Project Management Unit (PMU) in DABS 
when a unit already exists in MEW.  Khan also observed that DABS 
salaries were significantly higher than those in MEW and that 
engineers who earned $200 per month in MEW now earned many multiples 
of this at DABS. 
 
¶9.  (SBU) (Comment:  According to ADB Afghanistan Director Craig 
Stevenson, the bank has structured its investment portfolio to 
support DABS and to contribute to ongoing reform.  The creation of a 
PMU in DABS is consistent with this approach and was intended to 
help ensure that funds were used for their targeted purpose.  In 
addition, structuring higher salaries in DABS is consistent with 
ongoing commercialization efforts and with civil service reform. 
End Comment.)  Ambassador Wayne commented that those employees with 
more responsibility could justifiably be paid higher salaries 
(within reason) and that public sector salaries in Afghanistan are 
too low. 
 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
Role for Inter-Ministerial Commission on Energy (ICE) 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶10.  (SBU) In describing investments necessary to transmit 
additional power from neighboring Tajikistan, Acting Minister Khan 
showed Ambassador Wayne a letter from the Government of Tajikistan 
reporting that good progress is being made on the transmission line 
that would allow power to be transmitted to the Afghan border and 
inquiring about transmission line progress on the Afghan side.  Khan 
complained that MEW did not know the ADB procurement plan for this 
important activity, which USAID said should be a subject for 
deliberation by the Inter-Ministerial Commission on Energy (ICE). 
Khan complained that ICE was not being used effectively, and that it 
should report to MEW, not the Minister of Economy.  Deputy Minister 
Faruq attributed this to the fact that DABS head Dr. Shams had been 
Minister of Economy and Deputy Minister of Energy.  (Comment:  The 
reporting relationship is the source of ongoing tension with MEW. 
ICE was created by Presidential decree and is chaired by the 
Minister of Economy on the grounds that the Ministry of Economy 
would provide more objective oversight.  MEW is a member of ICE 
along with the Ministries of Mines and Finance.  However, Khan views 
the ICE strategic planning and coordination functions as a better 
fit under his Ministry.  End Comment.) 
 
- - - - - - 
Next Steps 
- - - - - - 
 
¶11. (U) Ambassador Wayne emphasized continued U.S. support to the 
Afghan energy sector, urging the MEW to focus more on electricity 
distribution to reduce losses.  This would encourage other donors 
like the ADB to move forward with their commitments to the sector. 
Wayne offered that the Embassy would help bring DABS and MEW 
together on implementation of the September agreement, working with 
other donors.  The Embassy will follow up to coordinate approaches 
with the ADB and to better ensure that ICE is meeting MEW needs, he 
added.  Khan responded that there is no strong disagreement between 
MEW and DABS, that their goals are the same, but that they must work 
to understand each other better. 
 
¶12.  (SBU) USAID will organize donors to present a united front 
regarding support to DABS and energy sector reform, as it did in 
September 2009.  USAID will also present a non-paper to MEW 
expressing USG commitment to continue supporting MEW electricity and 
water projects, while stressing that this support should be linked 
to measurable progress in sector reforms, including: 
 
 
KABUL 00000476  003 OF 003 
 
 
--Independence between DABS and MEW as required by Afghan law. 
--Hiring of DABS staff by DABS, not MEW. 
--Regular DABS Board meetings. 
--Support for DABS' efforts for customer enumeration, installation 
of meters, and introduction of new IT systems. 
 
¶13.  (SBU) Comment:  Acting Minister Khan's description of the 
tensions between his ministry and DABS sounded in many respects like 
bureaucratic competition in other countries.  His actions do not 
match his verbal support for commercial reform of the energy sector, 
however.  We have also noted an uptick in the power struggle between 
reform-oriented and anti-reform Afghan officials, and there are some 
indications that opponents are winning.  However, Minister of 
Finance Zakhilwal told Ambassador Wayne in London that he would not 
allow reform to be turned back and that the Finance Ministry is the 
largest shareholder on the DABS board.  There is evidence that Khan 
and others in the government oppose efforts to reduce corruption and 
improve financial sustainability of the Afghan electricity sector. 
If they were to prevail, poor sector governance and corruption will 
cripple the sector.  It is important for donors to act expeditiously 
to prevent progress on electricity sector reforms from backsliding. 
If DABS fails and again comes under the direct control of MEW, the 
electricity sector will almost certainly suffer deteriorating 
service and a steady decline of power supply. With strong supporters 
of reform like Finance Minister Zakhilwal engaged, however, there is 
a good chance of success.  End Comment. 
 
Eikenberry