$ DONORS LINING UP IN KABUL
By Daniel Potash, Class of 2001, On Assignment in Kabul

The obstacles to building new power projects in Afghanistan are of course different than they are in the U.S. Surprisingly, financing is available, from international donors and individual countries who are striving to provide the physical infrastructure needed to support a stable political and economic infrastructure. My counting identifies nearly $1 billion of power sector projects for which $800 million of financing is already firmly committed.

Also surprising is that there are private investors who are not afraid of Afghanistan, though not yet in the power sector. Recently there was an auction for a third mobile telephone license. A robust 75 bidders participated in the competition, and the winner paid $40 million in cash up-front for the license. Building out the mobile phone network also requires up-front cash investment in towers and local processing capability, and, like power assets, the investment has characteristics of iron in the ground.

Note that these are the opinion of the author and not any kind of official statistics from the Government of Afghanistan, nor donors. The Government of Afghanistan would probably list upwards of $3 billion of projects, more of a wish-list than an expectation. Also recently the Government of Afghanistan has been lobbying to get more control of expenditures of donor-funded projects. This empowerment strategy has even had some traction with some of the major donors, such as the World Bank. However, given the lack of institutional capacity on the part of the government to effectively manage procurement and construction, it is doubtful that donors will loosen the reigns of control.

To put this power sector program in perspective, Afghanistan has a population of about 25 million people, and installed capacity of about 250 MW. Afghanistan is one of the least electrified countries in the world. Power is seen as a prerequisite to other social, political, and economic development goals.

Power Generation Sector

In the generation sub-sector, the largest planned project is a 100 MW gas-fired power generation plant, which has committed funding from U.S. Agency for International Development (USAID). The cost of this project is about $100 million for the power plant and $50 million for necessary gas treatment. The project will create local employment and it will enable local generation of power. Local generation is critically needed to counterbalance the market power of other countries selling power to Afghanistan.

In the long-term, there are some large hydro projects on the drawing board, and it is highly likely that they will stay on the drawing board. These projects would require significant flooding of agricultural land, and significant resettlement. Worldwide environmental opposition would simply bring these projects to a halt. By contrast, China can undertake a massive hydro project in spite of worldwide opposition, but Afghanistan lives at the pleasure of international donors, one of the biggest being the U.S.

Realistically anticipated power generation projects are in the table. It totals a respectable $341 million, which is split about 50/50 between new construction and rehabilitation of existing power plants.

Power Transmission Sector

In transmission, there are some large projects already underway and more planned, which conservatively may be expected to realize. Afghanistan and all donors have come to an agreement on a power supply strategy that relies heavily on importing power from neighboring countries: Turkmenistan, Uzbekistan, and Tajikistan. Two components are needed to accomplish this, first the high-voltage interlinking of Afghanistan with the neighboring countries, and second, a grid system within Afghanistan needs to be built.

At present, there are seven separate areas in the country that have a rudimentary power distribution network. An internal grid system project would tie up five of these areas into the “North East Power System,” or NEPS for short. There is also a SEPS, “South East Power System” for the Kandahar area. In the west, there is a distribution system in the city of Herat, which borders Iran. The NEPS would interlink with Turkmenistan, Uzbekistan, and Tajikistan at a 220 kV voltage level, with the potential to bring in about 900 MW of supply. There are difficulties and risks with arranging competitive and reliable power supplies from these three countries. None of the countries have a legal and commercial framework, and power sector operations have deteriorated significantly since Soviet times. But, business is business, and all three countries may have some surplus power that they would be keen to sell in Afghanistan in order to get hard currency in return.

All told, near-term realistically expected transmission projects in Afghanistan represent $450 million of procurement.

Electrical Power Distribution

A key problem in the power sector in Afghanistan, amongst many key problems, is servicing customers who are already connected to a grid system. Generally, there is not enough power supply.

Still, there are good reasons to strengthen existing distribution and build out new distribution capacity. The NEPS project calls for more than 400 km of new transmission lines, some of them going past some large towns that have currently have no electric power distribution. These towns along the NEPS need to be electrified in order to reduce the risk of sabotage from disaffected local citizens. It should be noted that President Karzai's administration is engaged in a fierce battle for the hearts and minds of citizenry, and this battle is most fierce in the regions further away from the capital Kabul. Providing electricity is viewed by citizens as one fundamental test of whether or not Karzai is making things better.

Planned distribution projects in Afghanistan total about $131 million in procurement. The cell phone example cited above suggests that if there were an adequate supply of power, then building the “last mile” of distribution may be an insertion point for private capital. Indeed the Iranian government has offered to give Afghanistan diesel generators and a CRM software system, and take over the billing and collection function. If the Iranians were also able to sell diesel fuel to the state-owned electric utility enterprise (now costing about $7 million per month), then they would collect cash at both the entry point and exit point of the power sector.

Power Sector Opportunities in Afghanistan Conclusion

Afghanistan represents $1 billion in power equipment procurement that is now happening or highly likely to happen. Even with financing secured, the obstacles to projects in Afghanistan are certainly formidable: supply chain, de-mining, commercial and legal framework, to name just a few. However, international donors are engaged and cooperating to ensure that Afghanistan does not again become a failed state. The power sector is unanimously considered to be a critical sector, fundamental to the adequate functioning of other key sectors: defense, health, education, and economic development. Albeit with stops and starts and problems, the program to rehabilitate and expand the power sector in Afghanistan will continue.

Daniel A. Potash is Senior Financial Analyst with Advanced Engineering Associates International. Under a USAID contract, Mr. Potash manages the Afghanistan Energy Information Center, which collects, analyzes, and shares information about electricity, oil & gas, coal, energy efficiency and renewable energy. He is also Managing Partner of Power Project Financing, a consulting firm located in Marin County, California. Mr. Potash is a member of the Class of 2001.