Select Committee on Foreign Affairs Appendices to the Minutes of Evidence - Sixth Report


Memorandum submitted by Independent Power Corporation PLC


  The Independent Power Corporation (IPC) is a British public company formed in late 1995. Its aim is to take advantage of the move to independent power projects in a number of emerging markets. IPC has a significant interest in developing, owning and operating power generation facilities in Central Asia. The company maintains an office in Almaty, Kazakhstan from where it runs its regional operation.

  In Kazakhstan, IPC has worked in partnership with Samsung Deutschland GmbH. In October 1996, IPC's subsidiary, Kazakh Power Partners Ltd, won the privatisation tender for Karaganda GRES 2, a 608 MW coal-fired plant. In July 1997, an IPC subsidiary, Kazakh Independent Power Ltd, lodged the highest bid in the privatisation tender for Ekibastus GRES 2, a 1,000 MW coal-fired plant in north-eastern Kazakhstan. This privatisation has yet to be completed.

  In Kyrgyzstan, IPC intends to be a participant in the privatisation by Kyrgyzenergo of various hydro-electric projects on the Naryn River and initial discussions have been held with the Government of Uzbekistan for IPC to take a position in their power sector. Furthermore, IPC maintains an active interest in power-generation projects in all countries in the region. This paper presented to the Foreign Affairs Committee draws on the experience and knowledge of our senior management team active in the area to provide our perspective of potential developments. In summary, we view the potential as being enormous, the obstacles formidable and the need for Britain to be in constructive political and economic engagement with the countries of the region as vital.


  Unlike other regions, Central Asia has moved from one extreme case of central planning to a market structure. In many cases unrealistic reform agendas have had far-reaching political and social consequences, with too much dependence on arm-twisting. Additionally many people who thrived under the old regime now suffer under the new. Thus while there has been substantial progress in some aspects of the economy, such as the energy sector, there has been limited progress in protecting the poor.

  In the immediate aftermath of the Soviet Union's demise there was a school of thought within Whitehall arguing that in order to demonstrate an effective presence in Central Asia, a single Embassy sited somewhere in the Region would be sufficient . Such a move, it was thought, for all purposes including support to Britain's commercial interests, would have considerable financial advantages.

  However, the influx of US diplomats into the Region spearheaded by the then Secretary of State James Baker, caused a major rethink in Government. As a result, the newly-independent Republics of Central Asia and the Caucasus eventually merited British diplomatic recognition, (although two of the Republics—Kyrgyzstan and Tajikistan—did not receive resident British Ambassadors). The Embassy in Kazakhstan became the first-ever shared diplomatic facility with British, German and French diplomats.

  Douglas Hurd's decision to recognise the independence of all 15 Republics of the Former Soviet Union may have stretched the FCO's budget at the time. However the wisdom of his move is indisputable now, when the CIS political structure is disintegrating and it is becoming more important than ever to be able to monitor political and commercial developments in these countries from the local Embassies.

  It is customary to talk about the Region's tremendous resource potential. The less well publicised fact is that, according to the Red Cross, at least half a million people across the Region are in desperate need of help and that over 15 million are living below the poverty line. Supporting the development of energy policies in the region therefore has significant social implications.

  Bearing in mind that Britain on its own can do relatively little to alleviate the plight of these people in the immediate future, this paper seeks to address how IPC views the long term role of the FCO in promoting British interests and relations with these countries.


  British interests are primarily promoted in the region through low to medium level exchanges of politicians, parliamentarians, military personnel, academics and students. The activities of the Know How Fund, the British Council and the BBC World Service are almost universally acknowledged and cited as the "best of British" and their reputation has certainly served to benefit British commercial interests.

  A milestone in relations between Britain and the Central Asian states was reached in November 1996, when HRH the Prince of Wales visited Kazakstan, Kyrgyzstan and Uzbekistan. Eyewitness accounts at the time suggest that the sheer presence of the Prince of Wales proved to the people of Central Asia that "Britain takes them seriously".

  In October 1998, Joyce Quin, MP, as Minister of State at the FCO, visited Central Asia and was received at the highest level.

  Anecdotal evidence reaching IPC suggests that some British diplomats in the Region are perhaps more renowned for their intellectual capacity than their linguistic skills or ability to promote British business interests. But at the same time, when it comes to questions of human rights, parliamentary democracy, civil service or English language training, British Embassies invariably become the first port of call and British diplomats are seen as uncontested authorities.

  To support this thesis we have noted that:

    —  Since the middle of January 1999 British Civil Service experts are training the Armenian Prime Minister's staff. The programme aims to help Armenia in streamlining the Government apparatus;

    —  A grant of £250,000 has been awarded by the FCO for a project on prison reform in Eastern Europe and Central Asia. It will be undertaken by the International Centre for Prison Studies, King's College, London (ICPS) and Penal Reform International (PRI). This work should complement a prison management project already run in Kazakhstan. The need for this work is indisputable. In February 1999, some 26 prisoners in the penal colony of the Kazakh city of Atyrau had cut their stomachs open in protest against the harsh and degrading conditions of the Kazakh prisons;

    —  In 1996, Britain and the Republic of Georgia signed a number of defence agreements. Since then, Georgian officers, along with officers from other CIS countries have been able to attend training courses in Britain;

    —  In 1998, at the request of President E Shevardnadze of Georgia, the FCO facilitated the delivery of a consignment of fresh and spent Highly Enriched Uranium fuel from a civil research reactor in Tbilisi, Georgia to Dounreay. In view of the political instability in Georgia the need for the fuel to be moved out of the country as soon as possible was compelling;

    —  The Chevening programme organised by the FCO facilitates higher education courses for three students from Kyrgyzstan. The British Embassy in Kyrgyzstan (operating from Almaty, Kazakhstan) is helping to set up a British faculty at the Bishkek University;

    —  In February 1999, British experts completed the long-term training programme aimed at providing assistance in agricultural reform, land management and tenure in Kyrgyzstan;

    —  British representatives are invariably invited as independent observers to witness the fairness of the elections in the Region. The British are renowned for their commitment both to impartiality and to open reporting of any irregularities in the electoral process, which are not uncommon;


  If some of the Embassies or their activities are not covered in this paper, it is not intended to imply that IPC management perceive them to have been less diligent or proactive. The progress achieved by the countries of Central Asia and the Caucasus on the road to democracy is very uneven and in some cases, notably in Uzbekistan and Turkmenistan, the very presence of British diplomats has been a major achievement for British influence.

  Those visiting Uzbekistan, and especially Turkmenistan, could be forgiven for believing little has changed in these countries since 1991. The authorities in these countries are at pains to paint a picture of stability and success. However, on 16 February 1999, Uzbekistan—until recently a country of visible political stability and almost total political control—was shaken to the core by six simultaneous bomb blasts in Tashkent. Even before an investigation could start in earnest the Government blamed "Muslim fundamentalists, who are directed and financed abroad."

  President Karimov's fear of foreign interference is not unfounded. In the south, Uzbekistan is facing the Taleban movement, controlling neighbouring Afghanistan. In the south-east, a war-torn Tajikistan has led to a serious and growing refugee problem in Uzbekistan; immediately to the north—a complex relationship with Kazakhstan, based on the "eternal regional rivalry", causes unease in Tashkent. Further north in Russia, the inability of some Russian politicians to reconcile themselves to the independence of the Central Asian states worries neighbouring countries.

  Inside Uzbekistan we have noted the growing religious assertiveness of Muslim activists who are opposed to the pro-western policies of the President Karimov's Government. In addition, a highly flammable ethnic mix populates Uzbekistan: Uzbeks, Tajiks, Kyrgyz, Kazakhs, Koreans and Slavs, as well as other minorities from often opposing cultural, religious and national identities. The economic reforms in this predominantly agricultural cotton-growing country have barely scratched the surface. So far there has been limited British commercial success with the principal exception in Uzbekistan being BAT.

  In gas-rich Turkmenistan, there are, as one observer put it, "no political parties, no unhappiness, no dissent and no inflation". All that is by Presidential Decree. A newly built tower in Ashgabat has been topped with the gold-plated statue of President Saparmurad Niyazov, which rotates so that it always faces the sun. A leading dissident, Mr Durdymurad Khoja-Mukhammedov, who tried to found an independent party was incarcerated for two years in a psychiatric hospital. After his release, Khoja-Mukhammedov went to the British Embassy; in his judgement that was the most natural thing to do. The authorities though begged to differ: as he was leaving the Embassy he was severely beaten-up by three "innocent bystanders".

  In both Uzbekistan and Turkmenistan British diplomats operate in exceptionally difficult conditions. Moreover, the Ambassador to Uzbekistan (Ms Barbara Hay) is "enjoying" an extra "privilege" of being additionally accredited as an Ambassador to Tajikistan. This particular posting to a country torn by civil war requires tremendous personal courage, which can only be applauded.


  Perhaps posing greater danger is the work undertaken by British drug-control experts in the area. Although less publicised, it is well appreciated. Bearing in mind that Central Asia has become one of the world's main transit points for drugs which are sold on the streets of Western Europe and Britain, the fight against the drug industry is as important for Central Asian states as it is for Britain. Britain is providing Uzbekistan with training and detection equipment as well as innovative drug-destroying technologies: in June 1998 the FCO through the UN Drug Control Programmes funded a project aimed at destroying heroin by releasing strains of fungi capable of killing off opium poppies. It is difficult to overestimate the dangers of Central Asian drug trafficking: some reports suggest that opium from Afghanistan moves through Tajikistan, Kyrgyzstan and Russia to Western Europe at an estimated rate of 100 kilograms per day.


  British diplomacy in the Region seems to be less successful when it comes to promoting British business. There are simply not enough diplomats with the necessary linguistic and business skills to be effective and competitive in promoting British trade.

  That is one of the reasons why Britain is lagging behind the United States and a number of our European partners in increasing trade, since our competitors are more proactive and aggressive in supporting private sector opportunities and identifying the best local partners. The notable exception is Azerbaijan, where BP is one of the largest investors in the Western oil consortium and where the British Embassy and the DTI are actively and effectively promoting British commercial interests.

  It is also notable that business ethics in Central Asia have less than solid foundations. An average British company representative can easily find himself totally out of his depth negotiating contracts in a part of the world where sharp practices are often more the norm than the exception.

  That applies not only to deals with private companies since a report by the National Audit Office published in July 1997 had qualified as "disastrous" a $6.5 million contract between the HMSO and the Government of Uzbekistan. Reportedly, only £210,000 was recovered from the proceeds of the deal, which seems to have been concluded more "on the basis of trust" rather than a solid and enforceable legal base.

  British diplomacy—together with diplomats from other Western countries—face yet another task of preventing the countries of Central Asia from becoming "professional beggars". Genuine economic hardships aside, all the countries of the Region have tremendous potential for growth and self-sustenance. Even Kyrgyzstan and Tajikistan—much less developed economically than their neighbours—have strategic economic potential. They are well endowed with the very precious commodity—water.

  Should they adopt the right fiscal, regulatory and legal policies, succeed in decreasing corruption levels (and in the case of Tajikistan—quell the civil war), even the poorest countries of the Region have every chance of becoming powerhouses for the entire Region. Realistically however, there is still a long way to go before that can happen.

  In the meantime, the main focus of Western diplomacy is more likely to concentrate on the oil and gas rich littoral states of the Caspian Sea—Azerbaijan, Kazakhstan, Turkmenistan, Iran and Russia.


  Throughout modern history Central Asia and the Caucasus were never far from the British foreign policy concerns. The Anglo-Afghan War of 1878-80 was, to a large degree, caused by the systematic Russian conquest of Turkistan, the region laying to the south of the Kazakh steppes. The process, which began in the 1860s, caused serious concern in London, fearful at the time of the Russian interference in Afghanistan and its potential implications to British rule in India.

  Since then the situation has changed remarkably little; it is as if the "Great Game" has never stopped being played with the United States, Russia and China being the principal players, and the significant difference being the growing assertiveness of the local national leaders, fed by their understanding of their countries' role as barriers on the way to Muslim fundamentalism and Russian expansionism, as well as the desirability of their mineral resources.

  In the foreseeable future it is difficult to see the countries of the area moving to become fully-fledged democracies. It would be over-optimistic to expect the current leaders to adopt the acceptable rules of power-transfer. In Azerbaijan, for instance, they already talk about a "specific genetic code of a leader" which makes the transfer of the Presidential power from the incumbent Heydar Aliev to his son "logical".

  In purely business terms, those of us working in the region know only too well the extent to which high level corruption as well as sheer incompetence hamper economic development and Western investments in the region. In Kazakhstan, for example, a Government Agency has been quite capable of privatising and selling the same entity twice at the same time: recently a coal mine in the north of the country seems to have been sold simultaneously to a Russian state company and the American "Access Industries Inc".

  The recent global economic crisis in South-East Asia followed by economic turmoil in Russia have demonstrated the extent to which Central Asia and the Caucasus are susceptible to the slightest change in the direction of the wind blowing either from Seoul or Moscow.

  Geographically this part of the world is deceptively remote from London but its political and economic importance to Britain is considerable and should not be underestimated.

April 1999

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Prepared 27 July 1999