KYRGYZ PM WELCOMES U.S. ENERGY FIRM AES

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 000730 SIPDIS DEPT FOR SCA/CEN E.O. 12958: DECL: 07/15/2018 TAGS: ENRG ECON PREL PGOV SOCI KG SUBJECT: KYRGYZ PM WELCOMES U.S. ENERGY FIRM AES REF: A. BISHKEK 721 ¶B. BISHKEK 712 ¶C. BISHKEK 699 ¶D. BISHKEK 501 BISHKEK 00000730 001.2 OF 002 Classified By: CDA Lee Litzenberger, Reasons 1.4 (b) and (d). ¶1. (C) Summary: Visiting AES representatives reported a positive July 8 meeting with PM Chudinov, who encouraged AES interest in three major Bishkek-based energy sector assets. Any AES proposal would envision significant investment in return for a minority stake in the enterprises, and a long-term management contract. However, the tender process for the three assets may be delayed until September. AES personnel also toured the Bishkek thermal plant and reported that, while there is no evidence of preparatory maintenance for the upcoming winter, the facility is in better shape than expected. However, the delayed tender process will likely mean no investment in or upgrades to the Bishkek-based assets until the end of the year at the earliest. End summary. Prime Minister Encourages AES -------------- ¶2. (C) Following their July 7 meeting with Energy Minister Balkibekov (reftel B),representatives of U.S. energy firm AES met Prime Minister Chudinov July 8 and presented an outline of AES objectives and issues related to any AES proposal for three energy sector assets: 1) the Bishkek thermal plant, 2) the Bishkek heating and hot water network, and 3) Severelectro electricity distribution company. AES representatives briefed Emboff after the Chudinov meeting, and reported that Chudinov appreciated the "transparent" outline, indicated that AES was "asking the right questions," and viewed the outline as heading in the "right direction." ¶3. (C) Chudinov reportedly confirmed that the government would have documentation prepared by August 10 for a tender process for the three assets which would begin on September ¶10. According to AES representatives, Chudinov said that AES would be competing against two other companies. (Note: One of the companies is expected to be Kazakh investor Alexander Maskeyevich's firm. End note.) Chudinov summed up the meeting by noting that the AES outline presented "exactly what we need." ¶4. (C) AES Vice President Michael Jonagan (Amcit, please protect) told Emboff he was very optimistic after the Chudinov meeting, and believed that given AES's very liquid capital position his management would endorse pursuing the Kyrgyz assets. The AES proposal envisions significant investment in return for a minority stake in the Kyrgyz enterprises, and a long-term management contract. (Comment: Recent statements from the Kyrgyz indicate that full privatization is not desired, so the AES approach seems to fit into current Kyrgyz thinking. End comment.) Jonagan said AES would likely have a proposed contract available in time for the opening of the tender, and planned to return one of its staff to Bishkek to work related issues. (Note: AES mothballed its Bishkek office in early 2008 when it appeared that Kyrgyz energy sector reforms had stalled. End note.) According to Jonagan, PM Chudinov designated Minister of Energy Balkibekov (who is currently in the U.S. on a USAID-organized trip) as the point person for answering any AES questions. Jonagan said there had been only minor disagreement during the Chudinov meeting on the issue of dispatching electricity, which Jonagan said could be easily resolved in any contract. Bishkek Plant in Better Shape Than Expected -------------- ¶5. (C) Prior to the Chudinov meeting, AES representatives toured the Bishkek thermal plant. Jonagan told Emboff the BISHKEK 00000730 002.2 OF 002 condition of the facility, which burns expensive fossil fuels when the country's hydroelectric facilities cannot cope with electricity demand, was better than he expected. He noted that the Bishkek plant was nicely painted, and that he did not find any leaks. However, Jonagan expressed concern that there was no maintenance activity in preparation for the upcoming winter season. He said that plant managers told him that of their annual requests for about $20 million for repairs, the plant had only been receiving $4-7 million. Given the delayed tender process, Jonagan reasoned that an outside investor could only have an impact in December or January. As a result, Kyrgyz authorities would need to rely on current arrangements until that date. Comment -------------- ¶6. (C) The AES outline seems to have received a positive reception from PM Chudinov, and based on President Bakiyev's Chief of Staff's remarks (reftel A) to the Ambassador AES's interest appears to have the encouragement of the presidential administration. While Kyrgyz authorities could conceivably be seeking to bid up a counter-offer from another investor by stoking AES interest, the Kyrgyz Republic faces severe energy challenges this winter (reftel D). The AES visit was initiated by Kyrgyz officials, and comes roughly two months after AES reportedly was advised not to consider these three assets. This change in Kyrgyz sentiment may reflect the need for reliable investment in the energy sector. Limited hydroelectric capabilities (due to low water reservoir levels) have amplified the reliance on, and weaknesses of, the Bishkek municipal energy system. Although USAID programming will assist the Kyrgyz with longer-term energy sector policy issues, we will also be monitoring Kyrgyz efforts to recruit a reliable, experienced company to aid with short-term challenges and longer-term solutions. LITZENBERGER