AMBASSADOR'S CALL ON NEW MINISTER OF TRANSPORT

UNCLAS SECTION 01 OF 02 KABUL 000790 DEPT FOR SRAP, SCA/FO, SCA/RA, EEB/TRA/OTP AND SCA/A DEPT PASS AID/ANE DOT PASS FAA FOR RAY SMITH TREASURY PASS MHIRSON NSC FOR JWOOD SENSITIVE SIPDIS E.O. 12958 N/A TAGS: EAIR EFIN PREL EAID PGOV AF SUBJECT: AMBASSADOR'S CALL ON NEW MINISTER OF TRANSPORT REF: A) 08 KABUL 2977; B) 09 KABUL 267; C) 08 KABUL 3011; D) 09 KABUL 398 ¶1. (SBU) SUMMARY: On March 23, recently confirmed Minister of Transport and Civil Aviation Hamidullah Farooqi told the Ambassador that the Afghan government is poised to sign a deal with the UAE to provide airport security at Kabul and Kandahar airports and open the Japanese-funded new international terminal at Kabul airport. Minister Farooqi appeared sympathetic to Kam Air's claim that the Business Receipt Tax is unfair to Afghan airlines, but acknowledged that the airlines must pay their taxes. The Ambassador welcomed Minister Farooqi's efforts to establish a Civil Aviation Working Group and to shepherd the Civil Aviation Law through Parliament. The Ambassador assured Minister Farooqi of continued U.S. cooperation and support of the Afghan civil aviation sector. End Summary. ¶2. (SBU) In a cordial meeting with newly confirmed Minister of Transport and Civil Aviation Hamidullah Farooqi, the Ambassador congratulated Farooqi on his appointment and his strong confirmation by Parliament. He told Farooqi that the U.S. is delighted to have a close and cooperative relationship with the Ministry of Transport and Civil Aviation (MoTCA) and assured Farooqi of continued U.S. support and engagement as MoTCA works to develop the capacity to manage Afghan civil aviation operations. Farooqi warmly recounted his experiences as a student in Queens, New York and thanked the U.S. government for its strong support of Afghanistan's development and specifically for the USG's long history of collaboration with MoTCA. Farooqi said he was pleased to undertake such an important task, but acknowledged the difficulties that MoTCA has endured in its leadership. Farooqi noted that the Hajj will be among his biggest challenges as Transport Minister. He said that he is hopeful that he can learn from the past experiences and improve the government's handling of the Hajj (reftel A). ¶3. (SBU) Farooqi told the Ambassador that regional airport development is among his priorities. Farooqi said many of Afghanistan's airports were built in the 1960s and now require updating and rehabilitation to make them functional. The Ambassador noted the unfortunate circumstances that put the Jalalabad airport under military control, thereby inhibiting growth in civil aviation in eastern Afghanistan. Farooqi said MoTCA is hoping to exploit projects in Nangarhar and thanked the U.S. for promising to help in the construction of a new civilian airport in Jalalabad. Farooqi said that MoTCA looks forward to solving this and the Kabul airport problem. Farooqi noted that Kabul needs a new airport that is bigger and closer in quality to airports in neighboring countries. Farooqi solicited USG support for a feasibility study for a new Kabul airport. ¶4. (SBU) The Ambassador inquired about the status of the recently completed, Japanese-funded international terminal at Kabul International Airport. The terminal was officially completed in November 2008 but sits empty because of security and maintenance concerns. Farooqi said the new international terminal will be open in 1-2 months, as soon as he is able to secure a security contract with the Government of the United Arab Emirates (UAE). Farooqi said the Afghan government and UAE are ready to sign an agreement on airport security (reftel B). Farooqi said he plans to travel to Abu Dhabi soon to sign the agreement. Farooqi told the Ambassador that the UAE has agreed in principle to expand security contract services to include all flights departing from Kabul and Kandahar, not just those going to Dubai. Farooqi noted that MoTCA is also negotiating an airport maintenance contract. He said that once the maintenance contract is settled, MoTCA can open Kabul's new international terminal. ¶5. (SBU) The Ambassador urged Minister Farooqi to encourage tax compliance by air carriers, and expressed concern that Kam Air's campaign to eliminate the Business Receipts Tax (BRT) hurts the GIRoA's efforts to increase budget revenue (reftel C). The BRT, Afghanistan's equivalent of a value-added tax, is charged to airlines and other service industries at a rate of 20%. Kam Air has consistently refused to pay the tax - even though it adds the cost of the tax to its tickets - and has been lobbying the President and Cabinet to remove the BRT from airlines. The government's inability to collect taxes from Kam Air has become a flashpoint with the IMF, which has made the collection of taxes from all airlines a condition of its program with Afghanistan. Kam Air argues that the BRT effectively raises the price of tickets issued by Afghan carriers and hurts Afghan carriers because in order to cover the tax, airlines charge passengers more for the same route as the KABUL 00000790 002 OF 002 international carriers. Therefore, because of the BRT, Afghan carriers are supposedly less competitive vis-a-vis the international carriers. The IMF and others oppose this reading, as foreign airlines must of course pay different taxes levied by their own governments. To date, Kam Air is the only airline that is delinquent on its taxes. ¶6. (SBU) Farooqi said the GIRoA is trying to resolve this issue with the airlines, but indicated that he supports Kam Air's assertion that the BRT is a double standard because international carriers like Indian Airlines and Pakistan International Airways do not have to add this cost to their tickets. Farooqi noted that revenue collection is a priority of the government and that Minister of Finance Zakhilwal has promised Parliament to increase tax collection. Farooqi, a board member of the Afghanistan Chamber of Commerce and Industries (ACCI),said that the ACCI has discussed the BRT issue with President Karzai and he believes that Kam Air is willing to pay "fair" taxes. The Ambassador countered that Kam Air seems to be a successful, profitable airline, and emphasized that Kam Air must pay its taxes. ¶7. (SBU) The Ambassador said that the USG has invested a great deal in Afghan reconstruction and economic development. He noted that President Karzai often complains that the U.S. does not funnel enough assistance directly through the Afghan budget. The Ambassador said it is easier to channel more aid through the budget if the Afghan government is doing all it can to collect taxes and achieve fiscal independence. The Ambassador questioned the legitimacy of Kam Air's claim that international carriers should also be obligated to pay the Afghan BRT when they pay taxes in their own countries. For instance, if India decides to subsidize its airlines, the GIRoA should not use that policy as justification for not collecting taxes from Afghan airlines. ¶8. (SBU) Farooqi told the Ambassador that MoTCA is working on the draft Civil Aviation Law and he expects to have it passed by Parliament within the next couple of months. Noting the lengthy process it may take to secure Parliamentary approval of the law, Farooqi posited that perhaps a Presidential decree would be better. Ambassador encouraged the Minister to work with Parliament and develop a relationship of trust and confidence with the legislative body. He noted Finance Minister Zakhilwal's recent success in obtaining Parliamentary approval on the new budget. Farooqi noted that Parliament approved his nomination by a very high number and he believes he can continue to have a positive working relationship with Parliament. ¶9. (SBU) The Ambassador told Minister Farooqi that the U.S. is ready to support MoTCA in the establishment of a Civil Aviation Working Group (CAWG) (reftel D). Farooqi agreed that the CAWG is the best way to bring together civilian and military international actors with the MoTCA in support of Afghan civil aviation priorities. The Ambassador noted that involving the donors, particularly European countries, will provide opportunities to more effectively solicit donor funding for civil aviation projects. Farooqi promised to finish a charter for the CAWG and call the first meeting in the coming month. ¶10. (SBU) COMMENT: The Ambassador's meeting was cordial and friendly. Minister Farooqi appeared poised to take on the challenge of managing a tough portfolio of issues, including the Hajj, which has led to the downfall of several of Farooqi's predecessors. While Post applauds his movement towards establishing the CAWG and in signing the airport security agreement with UAE, the Minister's other priorities for MoTCA's capacity development were unclear. Post was disappointed, though not entirely surprised, by Farooqi's sympathy for Kamgar's anti-BRT campaign, given the Minister's private sector background. However, we hope that if Farooqi succeeds as the tenth Minister of Transport, he will understand the utmost importance that donors and the IMF place on revenue collection and tax compliance by wealthy airline moguls. End Comment. WOOD