KABUL POWER SUPPLY - LATE BREAKING DEVELOPMENTS AND

UNCLAS SECTION 01 OF 03 KABUL 001033 SIPDIS STATE FOR SCA/A, SCA/FO (A/S BOUCHER, GASTRIGHT, DEUTSCH),F FOR MWONG STATE PASS USTDA FOR DSTEIN/SGREENIP STATE PASS OPIC OPIC FOR MOSBACHER/ZAHNISER/STEELE MANILA PLEASE PASS ADB/USED NSC FOR AHARRIMAN AND BCAMP USAID FOR JKUNDER, MWARD TREASURY FOR ABAUKOL OSD FOR SHINN, SHIVERS CENTCOM FOR CFC-A, CG CJTF-76, POLAD, JICENT OMB FOR ESHORTINO SENSITIVE SIPDIS E.O.12958: N/A TAGS: ENRG EAID ECON EPET ETRD KPWR PGOV AF SUBJECT: KABUL POWER SUPPLY - LATE BREAKING DEVELOPMENTS AND FINANCING PLAN Refs: A) Kabul 936/935; B) Kabul 692/317/274/162; C) 06 Kabul 5353/5194/4319 and previous (U) This message contains SENSITIVE BUT UNCLASSIFIED information. Please protect accordingly. Not for internet distribution. 1.(U) This is an action request message - see para 12. ¶2. (SBU) SUMMARY: Post met on March 26th with key GoA officials to reiterate and discuss the USG proposal to assist the procurement of 100MW of genset-produced electricity for Kabul prior to the winter of 2008-2009. Estimated cost is $130 million. GoA officials repeated their commitment to provide $20 million if the deal goes forward. Additional analysis of recurrent costs was requested by the Minister of Finance within the coming days to inform the final GoA decision. This is underway. Embassy sent a letter on March 27th reiterating the final proposal; GoA was given until April 9th to formally respond, including acceptance of the conditions which have been discussed for some weeks. None appear to be deal-breakers. Post proposes to Washington to finance the balance of the cost, estimated at $110 million, using reprogrammed power sector funds now with USAID in Kabul, and funds in the FY 2007 supplemental request already intended for addressing Kabul's power problem and to be redirected from provincial roads in the insecure south. Post requests State/SCA and AID/ANE to begin Congressional consultations, and if deemed necessary, formal notification. Please note to Congress that the actions are essential, that thre is no duplication or wastage of resources, and that we are leveraging major GOA policy changes and burden-sharing as a counterpart. END SUMMARY. -------------- BACKGROUND -------------- ¶3. (SBU) REFTELs document the discussions both within the Country Team and the GoA which began in late January 2007 concerning the need to provide Kabul with additional capacity to provide reliable electricity both before the anticipated delayed arrival of energy via NEPS from Central Asia, as well as afterwards due to supply constraints and system vulnerabilities. This consideration responded to a GoA initiative led by the Minister of Economy, who heads the Inter-ministerial Commission on Energy (ICE) established with USG support. The issue of Kabul power figured prominently both in the Strategic Partnership prosperity working group meeting in February, and the Partnership plenary session held in Kabul earlier this month. ¶4. (SBU) USAID power sector consultants, Black & Veatch (B&V),on March 11, 2007 submitted a technical assessment of adding 100 MW generating capacity to Kabul. The recommended technical solution is large reciprocating engines (diesel generators) in the nominal size unit of 7 MW to 12 MW. The estimated installed cost, done on a conservative basis including an allowance for contingencies, is $1,300/kw, or $130 million. This cost includes one year of O&M to be provided by the vendor. ¶5. (SBU) The GoA publicly stated in the Strategic Partnership meeting held earlier this month that if the gensets are procured that they would contribute $20 million towards the capital cost. COMMENT: USAID has suggested these funds be used for the initial downpayment upon ordering if at all possible. END COMMENT. The GoA is also providing $15 million to refurbish the NW Kabul diesel-fired generating plant to increase its reliability and lower its operating costs through conversion to heavy fuel oil (crude). ¶6. (SBU) The remaining capital expense to be covered by the USG is thus estimated to be $110 million. A portion of the total cost, notionally $20-$30 million, would be required at the point of ordering before the end of April, while the balance would be due in KABUL 00001033 002 OF 003 tranches upon delivery and when installation is complete. -------------- NEW DEVELOPMENTS -------------- ¶7. (SBU) On March 26th an Embassy delegation headed by the Ambassador met with the President's Senior Economic Advisor, Dr. Nadiri, Finance Minister Ahady, Economy Minister Shams, and other Afghan officials to discuss the B&V recommendations, the conditions precedent for USG assistance, an analysis of the recurrent costs of the extra 100MW, and the financing package discussed below. ¶8. (SBU) Minister Shams reiterated his strong belief that a single 100MW package of 7MW-12MW gensets delivered in late fall of 2008 is preferable to a split of 20 1MW gensets this coming winter followed by the remaining 80MW of 7MW-12MW gensets in 2008. He also contested the AID calculation of recurrent costs (O&M and fuel) for the addition of 100MWs, noting that another analysis he had reviewed indicated the cost to be lower. ¶9. (SBU) Minister Ahady responded that the MoF has budgeted $50 million for O&M (including fuel) in the next Afghan fiscal year, 1387, which is higher than even the B&V estimates. Although it appears that the recurrent cost concern may well be resolved, Dr. Nadiri asked that Minister Shams meet with AID and its consultants in the coming few days to resolve the differences and report back to the others. There was no disagreement on the GoA's part with the proposed conditions, although Minister Ahady questioned the cost of complying with them. AID's consultant replied that cost had been calculated and was factored into the recurrent cost figures provided to the GoA. ¶10. (SBU) The Ambassador stated the USG offer was on the table until April 9th, the day before his anticipated departure from Post, explaining he could not commit to arrangements after this date. He asked if the Embassy should send a letter to the GoA containing the final proposal and required GoA actions before this date, specifically a letter from the Minister of Finance reiterating the request for assistance to procure the gensets, accepting the conditions and the financing arrangements. Minister Ahady responded affirmatively, noting the issue would need to be discussed within the Economic Cabinet. Embassy will transmit this letter on March 27th. Although these steps are still necessary, Post feels confident that the deal will go through and thus requests the Washington actions described in para. -------------- FINANCING THE GENSET PURCHASE -------------- ¶11. (SBU) Post proposes to finance the $110 million using a combination of resources already appropriated for the reconstruction program in Afghanistan, and some contained in the FY 2007 supplemental request currently before Congress. The financing plan is as follows: -Resources at Post: We would reprogram $26,000,000 of the $76 million currently slated for the Kajaki transmission line. $50,000,000 would remain for design work and fabrication of the power line pylons beginning this summer. The $26,000,000 is intended for installation of the transmission lines and is not needed at this time due to the security environment in northern Helmand and parts of Kandahar province. These funds were originally part of the FY 2005 supplemental destined for Sheberghan and were reprogrammed to Kajaki last spring with Congressional approval. The $26 million would be back-filled with a portion of the FY 2008 $143 million base request. KABUL 00001033 003 OF 003 COMMENT: Post proposes these funds be used for the initial payment upon ordering in April 2007, should the process of USAID accepting the $20 million contribution from the GoA prove impracticable in the short time available. END COMMENT. -Supplemental Resources: $18,000,000 requested for "keeping the lights on" in Kabul. $66,000,000 requested for "strategic provincial roads," out the total planning level of $186,000,000 (district road funding is not affected). The $66 million can be redirected due to the extreme security conditions where three of the four roads are located in northern Kandahar, northern Helmand and eastern Farah provinces. When these particular roads were identified in collaboration with the Coalition last spring, conditions on the ground were quite different. Since then, the Taliban center of gravity has shifted to precisely the area where these three roads are located. NATO/ISAF will have a job on its hands providing the security environment needed to allow the Kajaki dam, road and transmission line work to proceed. Under these conditions work on the three roads therefore cannot be undertaken as rapidly as anticipated. The $66 million would be back-filled with FY 2008 base and GWOT funds, depending on the conditions on the ground and road sector priorities at the time. -------------- REQUESTED ACTIONS -------------- ¶12. (SBU) Congressional Consultations and Notification: Although the deal is not yet cinched, Post requests the following actions in the coming days. The ability to use the $26 million in resources already at Post should only require Congressional consultations since they were originally notified for the power sector. Having said this, the reprogramming of the entire $76 million from Sheberghan to Kajaki was contained in the broad May 2006 post-budget scrub re-notification involving FY 2005 supplemental and base funds. Post requests that State/SCA and AID/ANE confirm if consultation is sufficient in this case. If so, they should be undertaken in conjunction with discussions over the final use of the $66 million requested for provincial roads before the House-Senate FY 2007 supplemental bill conference. If not, Post requests that State and AID Desks work with F, H and AID/LPA to prepare a formal notification for the $26 million reprogrammed from Kajaki, while proceeding at once with the supplemental consultations. ¶13. (SBU) It is important to stress to Congress that: - We are meeting a critical economic and political need and need to do so before the 2009 election. - The capacity we propose to install will be needed in any event; there is no duplication or wastage of resources. - We are insisting on major cost sharing and policy from the GOA as a condition of our actions. The most basic of these changes are: a) commitment to provide $20 million for the purchase of the generators; b) agreement to pay for fuel and operations and maintenance of the equipment by an internationally reputed operating contractor; and c) commitment to corporatization of DABM and outsourcing or other mechanism for managing of the metering and collection of electrical bills. NEUMANN