Identifier
Created
Classification
Origin
06BAKU669
2006-05-03 10:31:00
CONFIDENTIAL
Embassy Baku
Cable title:
CONSULTANT FORSEES SERIOUS PROBLEMS FOR
how-toVZCZCXRO2155 PP RUEHDBU DE RUEHKB #0669 1231031 ZNY CCCCC ZZH P 031031Z MAY 06 FM AMEMBASSY BAKU TO RUEHC/SECSTATE WASHDC PRIORITY 0273 INFO RUCNCIS/CIS COLLECTIVE PRIORITY RUEHAK/AMEMBASSY ANKARA PRIORITY 1594 RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY RUEAIIA/CIA WASHINGTON DC PRIORITY RUEKDIA/DIA WASHDC PRIORITY RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L BAKU 000669
SIPDIS
SIPDIS
E.O. 12958: DECL: 05/03/2016
TAGS: EPET ENRG EAID PREL AJ AM TX KZ
SUBJECT: CONSULTANT FORSEES SERIOUS PROBLEMS FOR
AZERBAIJAN'S ELECTRICAL GRID
Classified By: Acting DCM Joan Polaschik, reasons 1.4 (b),(d) and (e).
C O N F I D E N T I A L BAKU 000669
SIPDIS
SIPDIS
E.O. 12958: DECL: 05/03/2016
TAGS: EPET ENRG EAID PREL AJ AM TX KZ
SUBJECT: CONSULTANT FORSEES SERIOUS PROBLEMS FOR
AZERBAIJAN'S ELECTRICAL GRID
Classified By: Acting DCM Joan Polaschik, reasons 1.4 (b),(d) and (e).
1. (C) SUMMARY. A consultant working on a USAID contract
predicted serious difficulties for Azerbaijan's power sector
in the coming years. The Barmek crisis has scared away
private sector investment, and the GOAJ will be forced to
rely on loans from IFIs. The consultant recommends that any
such loans be conditioned on serious changes, including
privatization, reorganization, and the creation of an
independent regulator. The GOAJ has recently refused IFIs
loans due to their conditionality. END SUMMARY.
2. (C) Energy officer met with a consultant from a USAID
implementing partner working on domestic power regulation
issues. The contractor had put together a plan and draft
legislation for Azerbaijan to create an independent energy
regulator, which the GOAJ ultimately declined to do. For
this reason the project is being shut down this summer. The
consultant predicts the problems plaguing the electrical grid
here -- government and public corporations not paying their
bills, absurd rates, and ancient equipment that is neither
maintained nor upgraded -- will continue to mount.
3. (C) The entry of a private company into the electric
distribution business would help the situation, said the
consultant. However, the extremely negative experience of
Turkish distribution company Barmek (facing a tax
investigation and criminal charges, which many observers
believe stem from the company's ties to jailed ex-Minister
Farhad Aliyev) will scare most investors away. The only
companies willing to enter the market, the consultant
speculated, will be Russian ones. The consultant said that
Russian companies will most likely behave the way he sees
them as having behaved in the Georgian energy market: they
will "keep things going" but will not perform maintenance or
upgrades, and will in the end abandon the market.
4. (C) The end result of the above, says the consultant, is
that Baku will begin to face power outages in the next year
or two and the countryside will suffer more severe and
prolonged shortages. Eventually, he believes, the GOAJ will
come to the IFIs for loans for a solution. Energy officer
asked why the GOAJ would seek undoubtedly condition-laden
loans from international institutions when it has billions in
energy revenue in the State Oil Fund. The consultant
responded that investing in domestic electric power
generation is "not on the radar screen" of the State Oil
Fund, and the State Oil Fund may already have obligated its
monies to other projects when this crisis strikes (COMMENT:
The GOAJ has made a distinct move away from IFIs' conditional
lending in the last year; it is hard to envision a scenario,
even one this serious, where it would turn again to the IFIs
and their conditions).
5. (C) The consultant believes that when the above situation
comes to pass, the IFIs should grant loans only if the GOAJ
agrees to meet the following six conditions:
--the leadership of Azerbaijan's power sector must be changed
(the consultant specifically named AzerEnergy chief Etibar
Pirverdiyev),
--power distribution must be privatized,
--a truly independent energy regulator must be created,
--BakuGaz must be privatized,
--AzerEnergy should be reorganized, with its transmission
department being separated the its power-generation
department, and;
--Azerbaijan's grid should reintegrate with Armenia's.
6. (C) Energy officer observed that the sixth condition is
highly unlikely to be met. The consultant agreed, and
explained that he suggested it for two reasons. First, the
power distribution system in the south Caucasus was designed
by the Soviets to function as a single unit, and that really
is the most efficient way for it to operate. More
importantly, the sixth condition is a negotiating tactic.
The GOAJ will never agree to integration with Armenia, said
the consultant, and will be so focused on removing that
condition from the package that they will end up accepting
the other five points. Only that kind of extreme tactic, in
the consultant's view, will get GOAJ to agree to do what it
has refused to do so far, and make the necessary reforms in
the domestic power sector -- even when conditions get as bad
as he predicts in the coming years.
HYLAND
SIPDIS
SIPDIS
E.O. 12958: DECL: 05/03/2016
TAGS: EPET ENRG EAID PREL AJ AM TX KZ
SUBJECT: CONSULTANT FORSEES SERIOUS PROBLEMS FOR
AZERBAIJAN'S ELECTRICAL GRID
Classified By: Acting DCM Joan Polaschik, reasons 1.4 (b),(d) and (e).
1. (C) SUMMARY. A consultant working on a USAID contract
predicted serious difficulties for Azerbaijan's power sector
in the coming years. The Barmek crisis has scared away
private sector investment, and the GOAJ will be forced to
rely on loans from IFIs. The consultant recommends that any
such loans be conditioned on serious changes, including
privatization, reorganization, and the creation of an
independent regulator. The GOAJ has recently refused IFIs
loans due to their conditionality. END SUMMARY.
2. (C) Energy officer met with a consultant from a USAID
implementing partner working on domestic power regulation
issues. The contractor had put together a plan and draft
legislation for Azerbaijan to create an independent energy
regulator, which the GOAJ ultimately declined to do. For
this reason the project is being shut down this summer. The
consultant predicts the problems plaguing the electrical grid
here -- government and public corporations not paying their
bills, absurd rates, and ancient equipment that is neither
maintained nor upgraded -- will continue to mount.
3. (C) The entry of a private company into the electric
distribution business would help the situation, said the
consultant. However, the extremely negative experience of
Turkish distribution company Barmek (facing a tax
investigation and criminal charges, which many observers
believe stem from the company's ties to jailed ex-Minister
Farhad Aliyev) will scare most investors away. The only
companies willing to enter the market, the consultant
speculated, will be Russian ones. The consultant said that
Russian companies will most likely behave the way he sees
them as having behaved in the Georgian energy market: they
will "keep things going" but will not perform maintenance or
upgrades, and will in the end abandon the market.
4. (C) The end result of the above, says the consultant, is
that Baku will begin to face power outages in the next year
or two and the countryside will suffer more severe and
prolonged shortages. Eventually, he believes, the GOAJ will
come to the IFIs for loans for a solution. Energy officer
asked why the GOAJ would seek undoubtedly condition-laden
loans from international institutions when it has billions in
energy revenue in the State Oil Fund. The consultant
responded that investing in domestic electric power
generation is "not on the radar screen" of the State Oil
Fund, and the State Oil Fund may already have obligated its
monies to other projects when this crisis strikes (COMMENT:
The GOAJ has made a distinct move away from IFIs' conditional
lending in the last year; it is hard to envision a scenario,
even one this serious, where it would turn again to the IFIs
and their conditions).
5. (C) The consultant believes that when the above situation
comes to pass, the IFIs should grant loans only if the GOAJ
agrees to meet the following six conditions:
--the leadership of Azerbaijan's power sector must be changed
(the consultant specifically named AzerEnergy chief Etibar
Pirverdiyev),
--power distribution must be privatized,
--a truly independent energy regulator must be created,
--BakuGaz must be privatized,
--AzerEnergy should be reorganized, with its transmission
department being separated the its power-generation
department, and;
--Azerbaijan's grid should reintegrate with Armenia's.
6. (C) Energy officer observed that the sixth condition is
highly unlikely to be met. The consultant agreed, and
explained that he suggested it for two reasons. First, the
power distribution system in the south Caucasus was designed
by the Soviets to function as a single unit, and that really
is the most efficient way for it to operate. More
importantly, the sixth condition is a negotiating tactic.
The GOAJ will never agree to integration with Armenia, said
the consultant, and will be so focused on removing that
condition from the package that they will end up accepting
the other five points. Only that kind of extreme tactic, in
the consultant's view, will get GOAJ to agree to do what it
has refused to do so far, and make the necessary reforms in
the domestic power sector -- even when conditions get as bad
as he predicts in the coming years.
HYLAND