KOSOVO: PISG AND WORLD BANK AGREE ON A WAY FORWARD

UNCLAS SECTION 01 OF 03 PRISTINA 000545

SIPDIS

SENSITIVE SIPDIS

DEPT FOR EUR/SCE, EB/IFD/OIA, EB/CBA
DEPT PLEASE PASS TO OPIC
AID FOR EE/ECA, EE/DGSR
NSC FOR BRAUN
USDOC FOR CEEBIC, 4232/ITA/MAC/EUR/OEERIS/CEED/SSAVICH
TREASURY FOR EUROPE & EURASIA
FRANKFURT FOR TREASURY E. MEYER

E.O. 12958: N/A
TAGS: ENRG ECON EFIN EINV PREL YI
SUBJECT: KOSOVO: PISG AND WORLD BANK AGREE ON A WAY FORWARD
FOR ENERGY SECTOR DEVELOPMENT

REFS: (A) PRISTINA 321 (B) PRISTINA 141

PRISTINA 00000545 001.2 OF 003



1. (U) Sensitive but unclassified; protect accordingly.


2. (SBU) Summary. The Provisional Institutions of Self-
Government (PISG) and the international community, led by
the World Bank, have reached agreement on a way forward for
development of Kosovo's energy sector. The parties have
resolved contentious timeline differences and adopted spring
2007 (coincidently just after the likely determination of
Kosovo's final political status) as the target for launching
a tender for selection of the builders of a massive mining
and power generation complex. End Summary

MEM AND WORLD BANK REACH AGREEMENT ON A WAY FORWARD
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3. (SBU) In a June 16 meeting with USG officials, Peter
Thomson, World Bank (WB) Director for Infrastructure in
Europe and Central Asia, said he and Minister of Energy and
Mining Ethem Ceku had reached an agreement earlier that day
on a way forward for Kosovo's energy sector development.
Thomson described the centerpiece of the agreement as an
integrated tender package for the development of the Sibovc
lignite mine and a new independent power plant to be known
as Kosovo C. WB Strategy and Operations Officer Neil Bush
privately told Econoff on June 16 that the meeting between
Ceku and Thomson was pleasant and jovial, noting that once
they agreed on the way forward for Kosovo's energy sector
development, the Minister brought out champagne to celebrate
the deal. (Note: USOP and USAID officials and USG-contracted
advisors worked diligently with MEM and WB for several weeks
before this meeting to ensure this agreement. End Note)

NEXT STEPS CRITICAL IN MOVING FORWARD
--------------


4. (SBU) Thomson outlined next steps for both sides to
ensure that the agreement moves forward expeditiously: the
PISG should issue a WB-endorsed solicitation of expressions
of interest (EOI) in July, 2006; in accord with the WB's
Lignite Protection Technical Assistance Project (LPTAP),a
Project Steering Committee (PSC) should be established to
review expressions of interested received and to create a
shortlist of applicants judged qualified to eventually bid
for the mining and generating licenses to be tendered (ref
A); and the WB should start a process in July to select a
transaction advisor to offer technical and legal support to
the PISG in preparing and implementing the tender. Thomson
added that the PISG had agreed after several weeks of
deliberation to sign the WB's energy sector development
strategy policy letter, a prerequisite to the WB sending the
LPTAP to its board of directors for final approval, and to
ask that the Kosovo Trust Agency return the mining license
for Bauxite E. Kosoves mine, a socially-owned enterprise
(SOE) that is near the Sibovc field that will be privatized.
Thomson explained that the WB requested that the KTA return
the mining license for the bauxite mine to avoid any legal
complications that could arise and allow the Bank and Kosovo
government to have a clear path to tender the development of
the Sibovc mine.

TIMETABLE FOR LPTAP IMPLEMENTATION
--------------


5. (SBU) USOP asked what would be an ideal timetable for
implementing the LPTAP if signed in late June. Thomson said
if the PISG agrees to proceed with the aforementioned next
steps, the EOI could be released at the same time the WB
completes, approves and releases the terms of reference for
the transaction advisor by late July, and the European
Agency for Reconstruction (EAR) also starts with the options

PRISTINA 00000545 002.2 OF 003


analysis study next month which will serve as a market
sounding report to assess private industry's interest
developing new lignite coal mines. Thomson opined that by
October the LPTAP PSC completes its initial review of EOIs,
the EAR's options study is also completed by
October/November, and the transaction advisor arrives in
Pristina by December 2006.


6. (SBU) Thomson added that the transactions advisor would
decide if rehabilitation of some Kosovo Energy Corporation's
(KEK) power units should be added to the tender package.
Thomson said by late January the transaction advisor
prepares tendering documents which are released by March

2007. Thomson concluded that energy firms or their
consortia should have about six months to submit their bids,
the PSC and transactions advisor evaluate the tender
proposals and a provisional winner is chosen by December

2007. USG-funded technical advisors believe that it will
likely take two years to negotiate a final deal to begin
work. However, the World Bank has left open the possibility
of conducting two separate negotiations, one for Kosovo C
and the other for mine development to allow lignite mining
activities to begin sooner.

IMPORTANT TO KEEP FOCUS ON SHORT-TERM ENERGY NEEDS
-------------- --------------


7. (SBU) Thomson told USG officials that it was important
that Kosovo focus on immediate needs such as developing new
coal mines for short-term and long-term needs, improving
energy bill collections and signing contract extensions for
electricity imports until March/April 2007 to prepare for
this year's winter (ref B). Thomson said that a proposed
credit enhancement facility to support energy imports was
not feasible at this time, opining that Serbia continues to
auction off and sell transmission rights for Kosovo; Kosovo
does not control the power grid to buy or sell energy to
third parties; and, energy traders affiliated with Serbia's
Electric Power Industry (EPS) have set up a pricing monopoly
with EPS that adversely affects Kosovo's energy imports.


8. (SBU) On June 20 COM met with MEM Minister Ceku to
congratulate the PISG for agreeing to a deal with the World
Bank, but also pressed him to work harder to improve
electricity bill collections, help KEK prepare for the
upcoming winter and embark on a public awareness campaign
that clearly explains the progress and timelines for the
energy sector's development.

KEK PREPARES FOR WINTER BUT MORE SUPPORT NEEDED
-------------- --


9. (SBU) KEK has made some progress in preparing for the
upcoming winter. In May UNMIK finally took action to remove
the remaining squatters near Hade village in Obilic
municipality, the site of an accessible, massive lignite
coal seam. The residents had interfered with mining
operations for six weeks to demand employment with KEK
despite the PISG already relocating and compensating them
for the expropriation of their land. KEK Information
Officer Nezir Sinani told Econ FSN on June 15 that
refurbishment of some KEK A and B units are on track and the
energy utility is removing overburden and extracting lignite
to build up coal stocks and supplies for the winter. Sinani
estimated that KEK still needs about 5.5 million euros to
buy equipment, increase mining operations and prepare for
emergency mining operations in time for next winter. Sinani
noted that EAR is supposed to provide 15 million euros for
mining activities and KFW (Kredistal fur Wiederaufbau),the
German Government's aid body, would provide another 8
million euros for equipment. He added that KEK has not
received additional funding from the PISG to support its

PRISTINA 00000545 003.2 OF 003


activities to prepare for the winter. Under the best of
circumstances, KEK will be able to provide consistent power
with the existing load shedding plan, known as the ABC
Program, to Kosovars during the winter.


10. (SBU) Regarding acquisition of affordable energy
imports, Nezir told Econ FSN that KEK has signed supply
contracts until December and is seeking to extend contracts
until March-April 2007. Nezir said KEK would likely need
additional funding from the PISG or international donor
support to extend the contracts as well as for emergency
situations. He noted that energy usage increases by 70-80
percent during the winter and damages existing power lines
and burns out electricity feeders and other equipment.


11. (SBU) Comment. USOP and USAID have worked closely with
the World Bank and PISG to forge consensus on a clear way to
move forward in the energy sector. The WB and the PISG each
claims that this agreement was reached because the other
capitulated completely. We therefore believe that USG
diligence will remain essential as the agreement in
principle, particularly the timeline, is implemented on the
ground. Certainly investor interest will support aggressive
implementation: American AES continues to show strong
interest; CEZ of the Czech Republic opened a project office
in Pristina on June 16; ENEL of Italy continues to engage.
The USG will continue to provide technical assistance to the
MEM until the transaction advisor is on board and will
continue to work with UNMIK, the PISG and the rest of the
international community to ensure that Kosovo is well-
prepared for the short-term that could complicate public
acceptance of the necessarily medium-to-long-term
perspective of the PISG-WB agreement. End Comment.

GOLDBERG