REGIONAL INTEGRATION: TAJIKISTAN'S FIRST PRIVATE-PUBLIC

C O N F I D E N T I A L SECTION 01 OF 03 DUSHANBE 001594

SIPDIS

SIPDIS

SCA FOR DEUTSCH; NSC FOR MERKEL; E FOR HENGEL AND DUNCAN; EMBASSY MANILA PLEASE PASS TO ADB AMBASSADOR SPELTZ

E.O. 12958: DECL: 8/21/2016
TAGS: PGOV PREL ECON ENRG EFIN TI AF
SUBJECT: REGIONAL INTEGRATION: TAJIKISTAN'S FIRST PRIVATE-PUBLIC
ENERGY MESSY AT BEST

REF: 05 DUSHANBE 1553

CLASSIFIED BY: Tom Hushek, Charge d'Affaires, U.S. Embassy,
Dushanbe, State.
REASON: 1.4 (b),(d)




1. (C) SUMMARY: Pamir Energy, Tajikistan's first
private-public energy joint venture, manages at best 40% cost
recovery and faces a local government that refuses to enforce
collection. In a theatrical August 19 site visit with cameras
rolling and an audience including Deputy Assistant Secretary
Evan Feigenbaum, Tajikistan's Energy czar, Deputy Prime Minister
Ghulomov, loudly blamed the losses on Pamir Energy for not
installing enough meters, and argued for greater government
oversight of the company. The head of Aga Khan Development
Network (AKDN),Pamir Energy's primary backer, called the
project "a mess~but a success" and sanguinely suggested that
Ghulomov's antics were playing to the pre-election public.
Pamir Energy presents a case study and cautionary tale of the
challenges facing private investors in Tajikistan's energy
sector. Tajikistan needs to do much to improve the business
climate and protect foreign investment, but the Deputy Prime
Minister's blame-the-investor-tactics indicate the top Tajik
leadership may still not understand what private investors need
in terms of rule of law to enter the Tajik market. END SUMMARY.

PAMIR ENERGY: CASE STUDY FOR PRIVATE INVESTMENT


2. (C) Touted as a an innovative "success story" of
private-public energy sector financing at the U.S. Trade and
Development Agency's June "Energy Without Borders" conference in
Istanbul, Pamir Energy is a 28 MW project in Khorog, capital of
the mountainous Gorno-Badakhshan autonomous region (GBAO).
Financed by Aga Khan's Fund for Economic Development (AKFED),
the IFC, World Bank, and the Swiss government, Pamir Energy was
the first major private investment in Tajikistan and aimed to
bring reliable electricity to GBAO, which is cut off from
Tajikistan's main grid.


3. (C) Before the project came on line in October 2005
(reftel),Pamir Energy had an agreement with the government of
Tajikistan to raise tariffs gradually, moving towards eventually
recovering the actual price of production. The Swiss provided a
fund to subsidize energy costs in GBAO as Pamir Energy phased in
the new tariffs, ensuring that customers only paid 2.1 cents/kW
hour per month of the 4.5 cents/kWh per month necessary to make
the project commericially viable. The government had originally
agreed to raise tariffs nationwide, but then elected not to
implement the change, leaving energy customers in GBAO feeling
as if they were paying too much for their electricity compared
to Tajiks in other parts of the country. (NOTE: Before Pamir
Energy upgraded its two hydropower stations, Khorog residents
had only four-six hours of electricity per day. Now,
electricity is available 24 hours per day. END NOTE.) Pamir
energy then introduced a "lifeline tariff" for those households
that could not afford the subsidized 2.1 cent tariff. Even with
the reduced tariffs, Pamir Energy estimates it currently collect
only around 40% of production costs.


4. (C) According to several Pamir Energy expatriate staff, the
poor recovery rate stems from theft, losses and the GBAO
government's unwillingness to prosecute over 600 cases of theft.
Gerry Basten, Managing Director of Pamir Energy reported 55% of
homes have meters, but many users simply tap into existing
unmetered lines. Mahedi Lalani, Head of Corporate
communications and Public Affairs, says Pamir Energy has turned
the supply off for non-payments, but thieves figure out a way to
hook themselves up again. The real problem, he lamented, was

DUSHANBE 00001594 002 OF 003


the GBAO governor's unwillingness to support Pamir Energy in the
courts. Residents know there are no consequences to theft or
non-payment, and have no incentive to pay their bills.

GLOVES OFF, CAMERA ROLLING


5. (C) During an August 19 tour of Pamir Energy, Deputy
Assistant Secretary Evan Feigenbaum asked Gerry Basten about
the company's cost recovery rates. In front of Ghulomov, GBAO
governor Niezmamadov, Merali, and various other local officials,
Basten quietly shook his head and replied, "Not good." He
listed the problems with outstanding court cases, theft and line
loss as reasons for Pamir Energy's poor rate of return, but
noted they were taking steps to analyze the problem, and would
continue to install meters.


6. (C) In response to Basten, the Deputy Prime Minister lifted
a few inches in his shoes, puffed out his chest and launched an
imperious 20-minute diatribe against Pamir Energy while a video
camera from the local government filmed. "You've made a
mistake," he boomed. "It's losses, not theft." Ghulomov spoke
at length about the technical problems that would lead to
losses, including low voltage lines or improper transmission
wire width. "I get into the details on this," said Ghulomov.
"This is my specialty." (NOTE: Although President Rahmonov
appointed Ghulomov to coordinate energy policy, Ghulomov's
background is in construction. END NOTE.) Basten seethed, while
occasionally trying to interject. Ghulomov repeatedly asserted
his technical knowledge and experience from analyzing
electricity losses in other parts of Tajikistan.


7. (C) Ghulomov seized on the fact that Pamir Energy had only
installed meters in half the Khorog homes. "That's the problem,
not theft!" he cried. "You need more meters." He said it hurt
him to hear suggestions that Pamiris were less than honest. "I
know these people. During the war, if the allocation had been
100 grams of bread per person, no Pamiri would ever take more
than his share."


8. (C) Basten again tried to clarify that "we aren't just
sitting here on our backsides doing nothing." He reported that
Pamir Energy was bringing in a team of specialists in late
August to conduct a two-month survey to determine the "hot
spots. He rejected Ghulomov's demand to upgrade immediately the
low voltage lines. "There's no point in improving the lines if
we don't know where the problems are." Basten later pulled
aside DAS Feigenbaum to relay his side of the story.

AFGHANISTAN


9. (C) No doubt playing to the presence of DAS Feigenbaum and
U.S. interest in regional integration, Ghulomov then launched
into a lecture on how Pamir Energy should be exporting
electricity to Afghanistan. (NOTE: A small amount of
electricity is transmitted over the river from Khorog, and Pamir
Energy intends to run transmission lines to Afghanistan's
Badakhshan region. They are still in the preliminary phases of
planning and research. Said Ghulomov, "We must help our brothers
across the border. I will personally call (Afghan Minister for
Power and Water) Ismail Khan and have him come over to sign the
agreement."

HOMEWORK


10. (C) Ghulomov turned to AKDN head Merali and suggested that
Pamir Energy needed better specialists and managers. "The next
director you appoint-I want to see his papers. You bring all
his documents to the government for our approval and then he
should have to swear an oath or something." Ghulomov regretted

DUSHANBE 00001594 003 OF 003


the departure of former Pamir Energy director Ivan Chunkov. "Now
there was a guy we could work with! He used to call me
directly!" (NOTE: Pamir Energy fired Chunkov in late 2005 for
stealing. AES allegedly removed Chunkov from a project in
Kazakhstan years ago. END NOTE.) He tasked Merali with drafting
a plan to analyze and address the losses and ordered him to
submit it to Ghulomov's office by October 28 "at 5 pm."


11. (C) After more than half an hour, Merali attempted to
diffuse the situation by noting that since Pamir Energy was the
first project of its kind, all sides were learning. He thanked
Ghulomov for his hard work and support on the project, and
praised government support for Pamir I and other AKDN projects
and noted that Pamir Energy would work with the government to
develop a three to five year strategy. He later shrugged off
Ghulomov's diatribe, telling PolOff in the car, "He is
campaigning for the President and needs to say these things. We
do not fight back in public. Behind closed doors, we will work
on the tougher issues."

COMMENT


12. (C) Ghulomov's pointed remarks raise concerns for all
private investment in Tajikistan. He revealed that the
government is more inclined towards the politically popular but
economically unviable choices, and may not support its own
agreements once serious investments are on the ground.
Ghulomov's visit demoralized Pamir Energy's leadership, but they
have no choice but to continue to work with their governmental
partner at this point. Many Aga Khan projects are underway in
Tajikistan and GBAO, including Pamir Energy, a Serena Hotel and
Ismaili Center under construction in Dushanbe, and the First
Microfinance Commercial bank, to name a few. AKDN has decided
that a persistent, behind-the-scenes approach will ultimately
prove more successful in dealing with Ghulomov or other
problematic officials.


13. (C) During a lunch that preceded the Pamir Energy visit,
Ghulomov had responded at length to DAS Feigenbaum's suggestions
that Tajikistan needed to do more to assure a more attractive
investment climate for private firms. Given his convincing talk
over lunch and his impressive participation at the Istanbul
conference, Ghulomov's performance at Pamir Energy was all the
more disappointing. He may have been pandering to a
pre-election public, but his blame-the-victim approach to very
real problems at Pamir Energy suggest Tajikistan's leaders still
do not understand how to create a fair and attractive business
climate. Future private investors should be very careful.
Meanwhile, Pamir Energy should expect a long, uphill battle to
reach full recovery of their production and investment costs.


14. (U) DAS Feigenbaum cleared this cable.
HUSHEK