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.

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BACKGROUND
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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.

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NEW DEVELOPMENTS
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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.

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FINANCING THE GENSET PURCHASE
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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.

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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.


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REQUESTED ACTIONS
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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