SUPPORT FOR OPIC-BACKED FUNDS AND INTERGEN POWER PROJECT

UNCLAS SECTION 01 OF 02 ISLAMABAD 003400 SENSITIVE SIPDIS REFS: A) SECSTATE 103210 B) OPIC Press Release 9/19/08 E.O. 12958: N/A TAGS: ECON EAID EFIN EINV ENRG PREL PK SUBJECT: SUPPORT FOR OPIC-BACKED FUNDS AND INTERGEN POWER PROJECT ISLAMABAD 00003400 001.2 OF 002 ¶1. ( SBU) Summary. Post expresses its support to OPIC-backed funds investing in renewable energy in Pakistan. In addition, Post received updates from OPIC and Intergen regarding the proposed 158 MW power plant in Laachi. Post understands that OPIC has decided to hold off financing the deal until the Pakistani business climate for power projects improves or until the government of Pakistan's financial situation recovers. Intergen is looking for other methods of finance, including Chinese investors and alternatively is considering moving the project site to 40 km south of Islamabad. End Summary. - - - - - - - - - - - - - - PAKISTAN'S ENERGY SHORTAGE - - - - - - - - - - - - - - ¶2. (SBU) Pakistan is currently experiencing a significant power shortage. Government of Pakistan (GOP) officials have reported that the power supply shortfall in Pakistan has increased to an all time high of 6000 megawatts (MW) from previous highs of 4500 MW. The increase stems from a 34 percent domestic water shortage which has further reduced hydropower generation while maintenance activities in several major gas fields have resulted in a suspension of natural gas deliveries. This shortage has led to prolonged electricity blackouts, which are known locally as load shedding, and occur in every region of the country and effect every demographic. Some cities currently experience 18 to 20 hours per day on the extreme end of the domestic spectrum and others such as privileged Islamabad "only" suffer from 8 hours per day. Energy experts predict that power outages will further increase in the upcoming winter months as water levels drop. - - - - - - - - - - - - - - - - - - - - - - - - - - POST SUPPORTS PRIVATE EQUITY INVESTMENT IN PAKISTAN - - - - - - - - - - - - - - - - - - - - - - - - - - ¶3. (SBU) In response to Reftel A, Post welcomes OPIC's efforts to encourage investments in private equity in the renewable energy, resource efficiency and water sectors in emerging market countries. There is a definite need and desire for investment in these sectors in Pakistan due to domestic shortfalls. Post would welcome and support any investment in renewable energy such as hydro, wind, or solar power. ¶4. (SBU) Post will also support any investment in Pakistan by the recent OPIC-backed funds, which include Middle East & Asia Capital Partners Clean Energy Fund II, South Asia Clean Energy Fund, and FE Global Clean Energy Services Fund IV (Reftel B). OPIC is financing a combined USD 205 million in these funds to promote renewable energy. This will provide a significant pool of capital which Post would like to see invested in the Pakistani energy sector. - - - - - - - - - INTERGEN PROJECT - - - - - - - - - ¶5. (SBU) INTERGEN, a Pakistani company composed of investors from Interconstruct, a large Pakistani construction company, has been working to develop a 158 MW power plant in Laahi, in the Kohat district of the North-West Frontier Province (NWFP). US investors are providing 25 percent of the equity of the project, allowing them to qualify for OPIC financing. Total capital costs were estimated at USD 196 million and it was initially intended to be fueled by natural gas, but was later switched to heavy fuel oil because of insufficient natural gas supplies. The power plant would supply electricity to a particularly energy starved region of Pakistan. ¶6. (SBU) Post received a copy of the letter that OPIC will be sending to Intergen Private Ltd. OPIC has decided to delay moving forward with the power plant in Laachi due to "serious issues" facing the power sector in Pakistan. OPIC has said, however, that they would be willing to approve the project if either of the following two provisions are met: 1) the government credit enhances its payment obligations in the implementation agreement with hard currency off-shore deposits or 2) the government's financial situation improves significantly and the market conditions for Independent Power Producers (IPP) become more sustainable due to an improvement in the long-term prospects of the IPP contractual arrangements being met by the power offtakers. Post still feels ISLAMABAD 00003400 002 OF 002 strongly that this project is worth pursuing and will contribute to the overall USG efforts to stabilize this region. ¶7. (SBU) EconOff spoke with Ermeena Asad Malik from Intergen regarding the project. Malik has not received official notification from OPIC yet but says they have been pursuing alternative means of financing the project. Intergen has pursued several promising leads but Malik says that potential investors are waiting for international markets to settle and recover from recent downturns. They are also waiting to see how the security situation in Pakistan plays out. Malik expects to have the financing settled by March 2009, though they had originally anticipated end of calendar year ¶2008. Malik hopes to attract US investors for the project but has recently been aggressively courted by Chinese investors. She prefers US or Western investors because they are "easier to work with" and their processes are more "streamlined." In addition, the project site may be moved from Laachi to Chakri, 40 km south of Islamabad due to security concerns. ¶8. (SBU) Comment: Based on preliminary conversations with OPIC officials, Post believes that support for Intergen is exactly the type of project the USG should promote. It encourages economic development and supports US foreign policy in an emerging market. Post will continue to support any OPIC-backed private equity funds and projects, especially those investing in the renewable energy sector. Pakistan's energy deficit is so extreme that any investment in the energy sector, especially by US investors, is welcomed and actively courted by senior GOP leadership. End Comment. PATTERSON