GOS SEEKS REVISED BIDS IN ELECTRICITY TENDER AS

UNCLAS SECTION 01 OF 02 BRATISLAVA 000787

SIPDIS


USDOC FOR MROGERS AND STIMMINS

E.O. 12958: N/A
TAGS: ECON ENRG LO RU
SUBJECT: GOS SEEKS REVISED BIDS IN ELECTRICITY TENDER AS
RUSSIAN BIDDER BECOMES CONTROVERSIAL



1. Summary. The GOS asked the three contenders in the
privatization of a 66 percent share in the country's largest
electricity producer, Slovenske Elektrarne (SE),to improve
their bids. According to unofficial sources, Italian Enel
offered the highest bid, followed by the Czech CEZ and
Russian RAO UES. However, only RAO UES was willing to take
both conventional and nuclear assets of the utility. The
privatization of SE is Slovakia's last significant sale of
state property, and analysts believe it will have a
significant effect on the entire power supply market in
Eastern Europe. Summary end.


2. On August 12, the steering committee for the
privatization of a 66 percent stake in Slovakia's dominant
power producer, SE, asked three of four interested investors
to clarify and resubmit their bids by September 3. The
committee also confirmed it had excluded one bidder, but
refused to specify which one. According to sources, the
three finalists are the Russian RAO UES (a joint venture of
RosEnergoAtom and Unified Energy System in consortium with
German Ost-Elektra),Czech CEZ and Italian Enel. Austrian
Verbund, which bid only for SE's conventional assets, is
believed to be out of competition.


3. Analysts said the sale of SE is expected to change the
balance of power in Eastern Europe's electricity market and
the buyer could emerge as a low-price competitor for Western
European players because SE already exports electricity to
seven countries. The utility operates nuclear, hydro and
thermal power plants with a total capacity of 6,877
megawatts, securing it an 85 percent share of the domestic
market. Its output could decrease by 1,320 megawatts by
2008 following the phasing out of two of its nuclear
reactors (which could be replaced with two newer ones).
Sources close to the bidding said SE's value was estimated
at around USD 2.4 billion, but this included approximately
USD 1.6 billion in debt leaving a residual value of USD 800
million, making the value of the 66 percent stake offered in
the tender about USD 528 million.


4. According to the local newspaper Pravda, Italian Enel
offered the highest price, with a bid of SKK 40 billion (USD
1.2 billion). However, it also demanded the cancellation of
two long-term, economically disadvantageous contracts before
the sale. The French news agency AFP also reported that
Entel would decrease the amount of its bid by USD 25 million
unless it could delay the closure of the two aforementioned
nuclear reactors until 2015, in contravention of Slovakia's
treaty with the EU to close one in 2006 and the other in

2008. Czech CEZ is reportedly willing to pay SKK 31 billion
(USD 931 million),but would not take on the nuclear assets.
Russian RAO UES offered only SKK 19 billion (USD 570
million),but did not ask any special conditions. Pravda
cited Slovakia's opposition leader Robert Fico of the SMER
party as the source of its information.


5. The GOS's privatization advisor on the sale,
PricewaterhouseCoopers, said after the GOS had studied the
bids it asked the investors to reconsider some of their
assumptions. It did not provide further details, unlike the
Economy Minister Pavol Rusko, who surprisingly made
controversial statements indicating his preference for the
Russian bidder. In an interview with Pravda, Rusko said
that CEZ would only win the tender if it presents the
highest bid. Many observers favor CEZ due to the synergetic
effect that an eventual merger of the two former partners,
SE and CEZ, could generate. As a result of Rusko's
statement, SMER accused the GOS of manipulating the tender
and demanded its termination.


6. The reputation of RAO UES has been called into question
by the local newspaper SME, which recently revealed a
connection between the company and the former owners of the
now-bankrupt, Bratislava-based Devin Bank. According to
records in the Slovak Commercial Register, there are links
between RAO UES and Slovakia's Apis company, a former co-
owner of Devin Bank. Devin bank, which filed for bankruptcy
in 2001 after running into liquidity problems, was known for
its close relations with Russia. The bank held a lucrative
contract from the GOS to recoup Russia's Soviet era debt to
Slovakia, and the police are still investigating its
collapse.


7. Several domestic analysts have warned the GOS of risks
related to the selection of RAO UES. The Slovak Foreign
Policy Association warned that RAO UES chief Anatolij
Tchubays, as an ally of former President Boris Yeltsin,
could soon face the same scrutiny as the jailed owner of

BRATISLAVA 00000787 002 OF 002


Yukos. (Note: In 2001, Yukos won the tender to buy
Slovakia's oil-pipeline operator Transpetrol. End note.)
Others have warned that RAO, a strong state monopoly, will
likely undergo transformation, which could significantly
challenge its economic position. In the past three years,
Russian companies have purchased considerable interests in
Slovakia's energy infrastructure, including an option to buy
into its natural gas pipeline, and a controlling interest in
Transpetrol. Furthermore, Slovakia currently imports
virtually all of its oil and natural gas from Russia. The
addition of a 66 percent share in its major electrical
producer would give Russia even more influence in the
important energy sector - a fact which is just beginning to
enter the public debate over the SE privatization.

THAYER


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