BOSNIA: REPUBLIKA SRPSKA PRIME MINISTER RECEPTIVE

C O N F I D E N T I A L SARAJEVO 001096 SIPDIS SIPDIS DEPT FOR EUR/SCE (RIEHL, FOOKS),EUR/ACE (VISOCAN) AND EB/IFD/OMA (YOUTH/VOLK) TREASURY FOR OFAC (WERNER, LURIE) E.O. 12958: DECL: 05/16/2016 TAGS: ECON EFIN PGOV BK SUBJECT: BOSNIA: REPUBLIKA SRPSKA PRIME MINISTER RECEPTIVE TO ECONOMIC REFORM REF: SARAJEVO 417 Classified By: AMBASSADOR DOUGLAS L. MCELHANEY FOR REASON 1.5(B). ¶1. (C) Summary: In a wide-ranging discussion on May 15 (political issues reported septel),the Ambassador thanked Republika Srpska (RS) Premier Milorad Dodik for his quick action on several USG-sponsored economic priorities, including revenue allocation, corporate profit tax legislation, and regulatory reform. The Ambassador praised Dodik's aggressive campaign to clean up the RS forestry sector and offered U.S. technical assistance to address the problems that led Treasury's Office of Foreign Assets Control (OFAC) to "designate" RS forestry monopoly Srpske Sume in June 2004. The PM pledged the rapid and transparent sale of RS Telekom, by far the largest privatization in BiH's short history. Dodik also agreed to the transfer of banking supervision to the state level -- with one condition. While the Prime Minister continues to push some of his more populist reforms (reftel),his receptivity to sensible advice offers a window for further near-term economic progress. End Summary. Quick Off the Mark -------------- ¶2. (SBU) Although he has been in office less than three months, RS Prime Minister Milorad Dodik has already demonstrated his resolve to pursue economic reform, for which the Ambassador expressed U.S. support. At the Embassy's urging, Dodik pushed through a new law on revenue allocation that introduces transparent and objective criteria for distributing funds to local governments. The new PM has introduced legislation (drafted with USAID assistance) to radically streamline and simplify the tax system, the opening gambit in Post's strategy to improve the business climate for small and medium enterprises (SMEs) in BiH. Draft corporate profit tax legislation has already passed its first reading in the RS National Assembly (RSNA) and legislation to modernize personal income tax has been introduced. Dodik has also enthusiastically embraced a USAID-sponsored regulatory reform initiative by launching the "Guillotine Process", a commission he will personally chair to cut the red tape and bureaucracy that choke small businesses. Into the Woods -------------- �00A; ¶3. (C) In recognition of recent progress, the Ambassador praised Dodik's incipient campaign to tackle entrenched corruption and criminality in the RS forestry sector. The premier drew attention to his recent dismissal of the entire supervisory board of Srpske Sume (SS),the entity-owned forestry monopoly. The PM reported that he himself had met with the new board and that he had given the incoming team marching orders to use the reports written by the RS Supreme Auditor and others to root out corruption in the company. Dodik claimed the new board has explicit authority to remove staff, from the general manager on down, and that if they did not accomplish this task he would replace them. The PM posited that, in his view, "only a very small number of current Srpske Sume employees should stay there." ¶4. (C) The Ambassador noted that the U.S. had not engaged in the RS forestry sector since OFAC designated Srpske Sume (i.e., included Srpske Sume on the Western Balkans Executive Order list, making it illegal for U.S. entities and individuals to do business with the company) for its support of war criminals. However, in view of Dodik's show of resolve, the Embassy is prepared to offer the RS government technical assistance to reform the RS forestry sector through USAID. Dodik asked for specific suggestions. In response, the Ambassador passed him a one-page summary of recommendations, including legislative and regulatory changes that would improve governance of the sector and bring it closer to a market-based system. The Banja Luka Branch Office will follow up with Dodik and his staff to get the process moving on an operational level. (NOTE: USAID plans to work with the RS government, not directly with Srpske Sume. Post will consult with OFAC on the appropriate licenses prior to any financial engagement with Srpske Sume if there is sufficient progress to justify increased engagement. END NOTE.) Show Me the Money -------------- ¶5. (C) The Ambassador asked about progress on the RS Telekom privatization, expected to generate up to KM 600 million, stressing the importance of an open and competitive tender. Dodik informed the Ambassador that the technical report was a bit behind schedule but should be finished in the next few days. He alluded to difficulties with various interested parties, dividing them into two groups -- those that currently control the company and those that used to control it. However, he expressed his determination to maximize the sales value of RS Telekom. Specifically, the PM plans to follow an EBRD recommendation to keep investment requirements and other commitments to a minimum to ensure the largest possible cash offers. Additionally, Dodik wants to sell not just the RS government's 65% stake in Telekom, but also the RS pension fund's share (15%) to increase the attractiveness of the company for potential buyers. In line with another innovative EBRD practice that ensures top dollar in privatization sales, Dodik intends to hold a live televised auction among the top three bidders to finalize the deal. The PM also acknowledged the need to use the RS Telekom proceeds wisely, pointing out that such a windfall was unlikely to come along again in the near future. Banking Supervision -------------- ¶6. (C) In response to prompting by the Ambassador, Dodik expressed his willingness to transfer responsibility for banking supervision to the state level. However, he insisted that the headquarters of the new agency be in Banja Luka. When it was clarified that the current plan did not involve creation of a new agency but rather transferring of responsibility and staff to the Central Bank (a much cheaper and quicker solution than creating a new institution),Dodik agreed -- as long as the oversight for banking supervision was located in Banja Luka. He claimed that Principal Deputy High Representative Larry Butler had promised to secure agreement at the state and Federation levels for such a deal. Comment -------------- ¶7. (C) Dodik has made economic reform a priority for both his administration and his election campaign and has delivered a number of concrete reforms already in his short tenure. No economist, the PM continues to pursue some populist initiatives -- such as an ill-advised privatization review and a questionable development investment bank (reftel). However, he has proven receptive to sound advice as well. Post will continue to search for targeted interventions of mutual interest that Dodik can sell as pro-business and anti-corruption reforms in the run-up to the elections, especially in the forestry sector. End Comment. MCELHANEY