UPDATE ON FIDELITY INTERNATIONAL CEMENT PRODUCTION PROJECT

C O N F I D E N T I A L SECTION 01 OF 07 KABUL 001193

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E.O. 12958: DECL: 05/09/2013
TAGS: EINV ECON ETRD AF PTGOV
SUBJECT: UPDATE ON FIDELITY INTERNATIONAL CEMENT PRODUCTION
PROJECT

Classified By: AMBASSADOR ROBERT P. FINN FOR REASONS
1.5 (B) AND (D)


1. (U) This is an action request. Please see paragraph 15.


2. (C) Summary: From April 22 to 29, Texas-based Fidelity
International was in Kabul to pursue a $1.8 billion cement
deal with the Afghan government. Substantial progress was
made, including the granting of an investment license by the
High Commission for Investment. Given the size and impact of
the proposed deal, the terms are being reviewed at the
highest levels of the Afghan government. Among the chief
Afghan concerns was Fidelity,s request for market
exclusivity that they perceive will create a &monopoly8 in
the cement sector. Fidelity, for its part, appears willing
to negotiate but is growing frustrated by what it views as
the Afghan government renegotiating the deal repeatedly due
to unclear decision-making authority. A four-minister Task
Force led by the Minister of Reconstruction is currently
preparing the Afghan government,s counterproposal to
Fidelity,s terms. The Task Force is scheduled to complete
its work and offer its counterproposal o/a May 7. Despite
many ups and downs, the deal for this critically needed
investment in a key reconstruction sector is still very much
alive. End Summary.


3. (C) The principal investors from Fidelity International
visited Kabul from April 22 to 29. Fidelity International,s
management team includes several of the American businessmen
who made up the failed Box-Alcali cement investment proposal
that has languished in the Ministry of Mines and Industries
since March 2002. The new firm, Fidelity, now includes W.
Tompie Hall, whose experience includes reconstruction efforts
in post-Gulf War Kuwait in the early 1990s. Box
International is now responsible for the feasibility study
and the operation of the cement factories. Box,s former
Turkish joint venture partner, Alcali, is no longer involved
in the project. In advance of this visit, Fidelity
Representatives Tompie Hall and Terry Ritter met with
officials at the Departments of State and Commerce. In
addition, they made clear early on that they wanted to work
closely with the Embassy ) an omission from the Box-Alcali
proposal that they wished to remedy.


4. (C) Substantial progress was made between 4/22 and 4/29.
The negative feelings that the failed Box-Alcali deal had
created were overcome. (Note: The Box-Alcali deal rubbed
both Minister Ghani and the late Minister of Mines and
Industry Mohammedi the wrong way due to lease provisions
which conveyed the required land for one dollar. Also, the
Alcali side of the deal employed a purported fixer who
misrepresented his influence with the Afghan government and
raised suspicions of Box-Alcali,s legitimacy through his
clumsy application of political pressure. End note.) The
Fidelity team met early on with the Ambassador and the
Minister of Commerce. The Minister of Commerce discussed the
message immediately with President Karzai, who strongly
supported the project. Karzai appointed Minister of
Reconstruction Farhang to finalize the deal.


5. (C) Minister Farhang convened a meeting on April 23 to
hear the proposal,s terms in detail and raise preliminary
points requiring further discussion. In addition to
Fidelity,s senior and in-country representatives and
Econ/Commoff, also attending were Acting Minister of Mines
and Industry Nadi, Minister of Commerce Kazemi and working
level representatives from the Ministry of Foreign Affairs
and the Ministry of Planning. Fidelity presented its
proposal, which called for the creation of the National
Afghan Cement Company, in which the Afghan Government would
hold a 15 percent share. The project was set to begin with a
program for rehabilitating one of the two defunct state-owned
cement factories in Pol-e Khomri while concurrently
conducting feasibility studies for the construction of three
other cement factories in other regions of the country.
Fidelity was prepared to provide a 25MW power plant for each
factory. In addition, Fidelity was prepared to develop,
excavate and transport required raw materias ) all of which
it was prepared to pay for at fair market rates. Fidelity
estimated that the project would create 8,000 direct jobs and
up to 90,000 indirect jobs. The total estimated investment
for the four factories is $1.8bn.


6. (C) While the Afghan government representatives had
several technical issues of concern, the only truly
contentious issue was Fidelity,s request for market
exclusivity for its product. Fidelity maintained that, since
it would essentially develop the entire infrastructure for
the cement industry in Afghanistan, it would be unfair to
allow others to come in later and take advantage of all of
Fidelity,s preparatory work and significant investment.
Also, Fidelity was concerned over the continued Pakistani
practice of predatory cement dumping on the Afghan market and
its negative effect on its expected market share. In
response to Afghan concerns over monopoly, Fidelity insisted
that it would maintain a fair market price for their cement.
Fidelity added that the commercial viability of the project
would be eroded substantially without such a provision.


7. (C) After making the changes requested by the Afghan side,
including revised exclusivity terms, Fidelity presented their
&conveyance agreement8 and investment license for approval
to the High Commission for Investment. On April 26, the High
Commission for Investment called in Fidelity, joined by the
Econ/Commoff, for a review of its license application. The
High Commission was composed of the Minister of Commerce, the
Minister of Foreign Affairs, the Minister of Reconstruction,
the Acting Minister of Mines and Industry, the Minister of
Justice, and the Deputy Minister of Planning. After
extensive discussion with the Fidelity parties over the terms
of the agreement, mostly pertaining to the still-troublesome
&monopoly8 provisions contained in the agreement, the High
Commission convened privately and approved the investment
license.


8. (C) After informing Fidelity that their license was
approved by the HCI, Fidelity sought clarification of the
meaning of the license and accompanying agreement ) was it
merely an MOU or did it constitute a binding contract? The
HCI responded that the license and attached agreement was
only an MOU. Fidelity responded that a binding agreement
would be required to arrange necessary financing for the
deal. The HCI concluded that for the agreement to constitute
a contract, given the size and impact of the deal, it would
have to be reviewed by the &Coordination Council8 ) a
senior body chaired by President Karzai, which apparently
served as an economic version of the National Security
Council. For this to be possible, the HCI requested that
Fidelity have the agreement translated into Dari for
presentation and review by the Ministry of Justice and the
Ministry of Mines and Industry the following day. Justice
wanted to make certain that the appropriate Dari terms were
used in the agreement, and Mines and Industries wanted to
confirm that the &technical terms8 were clear.


9. (C) On April 27, the Coordination Council deliberated over
the Fidelity agreement. Vice President Amin Arsala served as
President Karzai,s representative for the meeting. The
Coordination Council raised additional concerns, including:
needing additional bona fides for the Fidelity principals;
clarifying language defining TISA responsibilities to support
the project ) which could be interpreted as creating a
sovereign guarantee; specifying raw materials involved;
providing a more specific definition of what the 15% Afghan
government share entailed; resolving outstanding loans due to
the former Czechoslovakia on the Pol-e Khomri factories ($20m
and $40m); overcoming lingering concerns about monopoly
terms; and establishing performance benchmarks.


10. (C) The Coordination Council created a task force to
prepare the Afghan governments rejoinder to Fidelity,s
proposed terms within 10 days. The task force was led by
Minister of Reconstruction Farhang and included the Ministers
of Light Industries, Urban Development, and Mines &
Industries Ministers. The Fidelity principles, Mr. Hall and
Mr. Ritter left Kabul the day after the Coordination Council
meeting frustrated by their perception that the Afghan
government kept reopening previously negotiated terms. They
were reluctant to continue negotiations for much longer.


11. (C) Daoud Yaqoub of the National Security Council
contacted Econ/Commoff on 4/28 to discuss the status of the
Fidelity deal. Daoud met briefly with Econ/Commoff and then
accompanied him to a meeting with Minister Farhang. Farhang
emphasized that the deal was still alive, and that the TISA
only wanted to ensure that it was fair to Afghanistan.
Farhang noted that he felt 90-95 percent sure that there
would be a positive result within 10 days. Farhang wrote to
Mr. Tompie Hall on May 4 thanking him for Fidelity,s visit
and explaining the task force,s efforts to resolve
outstanding issues. Farhang concluded by saying: Begin
quote: I would like to stress that the government of
Afghanistan views your proposal favorably and wishes to see
implementation as soon as possible and we look forward to
resolving the few remaining issues so that this urgently
needed work can commence. End quote.


12. (C) Meanwhile, the German advisor to the TISA on trade
and investment issues, Dr. Stephen Kinneman, returned to
Kabul from Germany and reviewed the agreement. Kinneman,s
conclusion was that the deal was not sufficiently fair to the
Afghan side. In a May 5 meeting with Ambassador, Kinneman
spelled out his concerns over the deal as presently
structured. While Kinneman acknowledged that such a sizable
investment would greatly benefit Afghanistan and that under
current conditions Afghanistan would have to offer premium
terms to attract capital, the agreement was nonetheless too
slanted towards Fidelity. His chief concern was the creation
of a &quasi-monopoly8 for NACC. Kinneman was also
concerned that the agreement lacked performance benchmarks,
offered no guarantees regarding job creation, and placed
undue burdens on the Afghan government. Ambassador agreed
that foreign investment was absolutely essential to
rebuilding Afghanistan. This was the only way to introduce
Afghanistan to modern open economic practices and overcome
command economy mindsets. While the deal may not be fairly
balanced, it was, however, more likely the Afghan
government,s lack of experience and expertise in negotiating
terms was more to blame for the imbalance than any
overreaching by Fidelity. Econ/Commoff added that
international businesses could hardly be expected to
negotiate against themselves to make their terms more
attractive for Afghanistan.


13. (C) What Kinnemann suggested was for the Afghan
government to employ legal counsel with sufficient expertise
to gain more balanced terms for Afghanistan ) not only for
the Fidelity deal, but for all such investment deals.
Kinneman suggested this would be possible through pro-bono
work by interested attorneys. Kinneman confirmed to
Ambassador that he was not opposed to the project as a German
who was looking for German firms to enter the market ) he
simply wanted the deal to be fair for Afghanistan.
Econ/Commoff noted that Afghanistan could not expect 50/50
balance in terms ) otherwise investors could seek such
returns in much more secure markets. Kinneman agreed, noting
that something closer to 70/30 would be preferable. If the
current deal could be portrayed as unreasonably slanted in
favor of Fidelity, Ambassador concluded that private advice
might help Afghanistan remedy this imbalance.


14. (C) Concerns about Fidelity,s bona fides are rumored to
have arisen during TISA discussions of the deal, although
internal Embassy background checks uncovered no derogatory
information. Econ/Commoff has asked Fidelity,s in-country
representatives to secure additional biographic and
background materials on both Fidelity officials and investors
involved in raising the substantial capital the deal purports
to deliver. Fidelity has asked that the Department
discretely relay the information regarding their investors to
the Embassy for the Ambassador,s information. On May 2,
Fidelity forwarded additional biographic materials (C.V.s and
company information) to Embassy, which were passed to
Fidelity, who provided them to the Ministry of
Reconstruction. The reason bona fides have taken such
prominence in this case is that Fidelity is a new company
created to pursue this project and other similar
reconstruction-related projects in the region. As such,
company history is lacking. Therefore, the Afghan government
will place substantially more weight on the bona fides of
Fidelity officials and investors.


15. (C) Action Request: Embassy requests that Department
forward any such information received from Fidelity through
secure media to Ambassador and/or Econ/Commoff for
appropriate use.


16. (C) Comment: The Task Force,s response was due on May 7.
Post will provide status updates at appropriate intervals.
FINN