KOSOVO SEEKS TO MAINTAIN MOMENTUM IN DEVELOPING

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E.O. 12958: N/A
TAGS: ECON EMIN ENRG PGOV PREL YI
SUBJECT: KOSOVO SEEKS TO MAINTAIN MOMENTUM IN DEVELOPING
LIGNITE MINES AND ENERGY SECTOR TENDER

REF: 06 KOSOVO 545

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY


1. (SBU) Summary. The Kosovo/World Bank energy sector
development project, known as the Lignite Power Technical
Assistance Project (LPTAP),has made some progress, but
ensuring coordination between UNMIK/PISG and the
international community on the way to move forward remains a
challenge. The PISG has proposed the creation of a new
lignite mining company to be spun off from KEK's mining
department. According to the PISG, this would expedite the
development of new mines, obtain money to rehabilitate
excavators to remove overburden, and keep the energy sector
development tender moving forward. The creation of a new
lignite mining company is part of the options analysis
conducted by EAR for the energy sector's development.
However, the World Bank is hesitant for this project to move
forward without its transaction advisor, who should be in
place by April. In addition, the IMF, and some officials in
UNMIK Pillar IV, UNMIK's Office for Oversight of
Publicly-Owned Enterprises and the Kosovo Trust Agency (KTA),
have expressed concerns about how UNMIK and the PISG plan to
take money from PTK to fund the rehabilitation of the
excavators, as well as the possible short and medium term
impacts on KEK. USOP will take the lead to encourage
UNMIK/PISG and the international community to sit down at the
same table to improve their coordination to ensure that we
all do what is in the best interests for Kosovo's energy
sector and economic development in general. End Summary.

LPTAP PROJECT ACHIEVES SOME SUCCESSES...


2. (U) Since UNMIK/PISG and the World Bank reached an
agreement on the Lignite Power Technical Assistance Project
(LPTAP) in mid-June 2006 (reftel),the Ministry of Energy and
Mining (MEM) and the LPTAP Project Steering Committee (PSC)
have kept the energy sector development tender moving
forward. In August, the PSC launched a World Bank-approved
expression of interest (EOI) request for companies to submit
their pre-qualification criteria for the upcoming energy
sector development tender. In October 2006, MEM hosted a
successful investors conference to discuss Kosovo's energy
sector development strategy and the tender. In November, ten
companies submitted their EOIs for the energy sector
development tender, with quantity and quality of interested
bidders better than anticipated by the PSC. On December 28,
2006, Energy and Mining Minister Ethem Ceku informed USOP
that the PSC selected four companies to be shortlisted to
compete for the energy sector tender. The four
companies/consortia are EnBW/Washington Group (German/USA),
Enel/PPC/Contour Global (Italy/Greece/USA),CEZ/AES
(Czech/USA),and Germany company RWE Power AG.

...BUT CHALLENGES REMAIN


3. (SBU) The primary challenge confronting the LPTAP is to
ensure coordination between UNMIK/PISG and the international
community. UNMIK/MEM and some members of the international
community are concerned that the World Bank's timeline has
slipped by six months to April 2007 to have a transaction
advisor, legal advisor and environmental advisor in Kosovo to
prepare for and launch the energy sector development tender.
World Bank officials blame the delay on the Kosovars, saying
that the PSC/MEM are behind schedule in appointing a project
manager for the LPTAP, the Bank has not received revised
draft request for proposals (RFPs) from PSC/MEM for the legal
and safeguard advisors, and the Bank wants assurances from
the Kosovo Trust Agency (KTA),which is responsible for the
administration and maintenance of socially-owned enterprises
(SOEs) and publicly-owned enterprises (POEs),that no other
lignite mining licenses will be issued that could adversely
affect this project. For its part, MEM attributes some of
the reasons for delay to World Bank inefficiencies in
approving certain PSC actions, as well as the Bank insisting
on substantial non-material changes in documentation. In
addition, there is serious concern from UNMIK/PISG and the
international community that the LPTAP process is not
prepared to address the short and medium-term problems of the
rapid depletion of existing lignite mines to power KEK's
plants, which are scheduled to run out of coal by 2009-2010.


MEM PROPOSES A WAY FORWARD FOR LIGNITE COAL DEVELOPMENT WITH
UNMIK SUPPORT


4. (SBU) In November 2006, the PISG approved the MEM's
proposal to unbundle KEK's mining department to form a new
joint stock company called the Kosovo Lignite Mining Company.
MEM officials said forming this new company was necessary to
obtain loans from banks to rehabilitate two excavators to
remove overburden. MEM officials added that creating the new
lignite mining company is part of the European Agency for
Reconstruction-funded options analysis to explore ways to
develop Kosovo's energy sector, which also supports the
LPTAP. UNMIK, under the guidance of PDSRSG Steven Schook,
supports MEM's proposal because it is concerned about the
existing lignite coal resources and believes that the MEM's
plan helps the LPTAP project move forward while waiting for
the World Bank's transaction advisor to arrive in Kosovo.
UNMIK officials maintain that UNSCR 1244 allows UNMIK via the
KTA to form the Kosovo Lignite Mining Company, and they
propose to take 40-65 million euros from telecommunications
monopoly Post and Telecom of Kosovo (PTK) to pay for the
rehabilitation of the excavators.

WORLD BANK OFFICIALS HESITANT ABOUT SUPPORTING NEW LIGNITE
MINING COMPANY WITHOUT ITS TRANSACTION ADVISOR


5. (SBU) World Bank officials have reservations about this
plan, noting that the decision to form a new company was made
without the Bank's recommendation from its transaction and
legal advisors. World Bank officials believe that UNMIK and
PISG officials formally agreed in the Bank's Letter of Sector
Development Policy (LSDP) and LPTAP that its transaction and
legal advisors would make any recommendations to restructure
Kosovo's lignite-related activities. World Bank officials
claim they were not invited to participate in the UNMIK/PISG
meetings with other donors to discuss how to move the Kosovo
Lignite Mining Company forward. However, in December 2006,
World Bank officials agreed that UNMIK/PISG could take
preliminary steps to prepare the necessary legal framework
and paperwork in advance of the arrival of the transaction
advisor, such as forming the mining company as a
publicly-owned enterprise and purchasing parts to
rehabilitate the excavators.


IMF VOICES CONCERNS ABOUT THE NEW LIGNITE MINING COMPANY AND
FUNDING THE EXCAVATORS


6. (SBU) On December 20, 2006, the International Monetary
Fund's (IMF) Resident Representative to Kosovo, Edgardo
Ruggiero, expressed his concerns about UNMIK/PISG plans to
develop the new lignite mining company and fund the
rehabilitation of the excavators from PTK revenues. He said
the IMF is concerned that this plan is being rushed by UNMIK
and PISG, and in particular complained about the funding
proposal for the new lignite mining company and the
rehabilitation of the excavators. Ruggiero explained that
UNMIK and PISG have not revised the Medium Term Expenditure
Framework (MTEF) to take into account these ideas and their
short- and long-term impacts on the Kosovo Consolidated
Budget (KCB). He noted that the MTEF already has a proposal
to fund the development of new mines, but if this plan had to
be revised it should be done according to the appropriate
budgetary and macroeconomic policy procedures.


7. (SBU) Ruggiero was particularly critical of UNMIK/PISG's
proposal to take money from PTK to fund the rehabilitation of
the excavators, noting that this was not good budgetary
practice to address important needs, and that Kosovo should
avoid setting bad precedents to deal with emergencies. He
added that UNMIK and PISG should also give careful
consideration to KEK's operational sustainability because
Kosovo will need the energy utility for the short and medium
term. Ruggiero said the IMF understood the immediate needs
of the mining situation, but budgetary and procurement
practices should be respected.


PILLAR IV, KTA AND UNMIK POE OVERSIGHT OFFICE ALSO VOICE
CONCERNS ABOUT THE PROCESS FOR THE NEW LIGNITE MINING COMPANY


8. (SBU) There are also some officials in UNMIK Pillar IV,
which is responsible for Kosovo economic policy, KTA, and
UNMIK's Office of Oversight of Publicly-Owned Enterprises
(OPOEs) who have expressed concerns about the development of
this new lignite mining company. Pillar IV, KTA and OPOE
officials share the IMF's concerns that the lignite mining
company is moving too fast without proper analysis of its
impact on PTK, KEK and Kosovo's budgetary policies and
procedures. OPOE officials say they are concerned about
UNMIK setting bad budgetary, economic and legal precedents
that the PISG could follow if the Kosovo Lignite Mining
Company is not analyzed and vetted properly.


URGENT NEED TO GET ALL STAKEHOLDERS AT THE SAME TABLE TO
DISCUSS THE ENERGY SECTOR


9. (SBU) Comment: We recognize the urgent necessity to
develop new mines for the existing KEK plants and the new
energy sector development tender, as the current lignite
sources will run out by 2009-2010. UNMIK and MEM should be
given some credit for taking bold action to address this
issue. However, it is important to bring all stakeholders
together to improve communication and coordination. USOP
believes that an important step in developing the mines is to
ensure that UNMIK, PISG and the international community are
clearly in sync with each other; the World Bank should be
pressed to live up to its commitments and understand the
urgency of Kosovo's energy needs, while the Kosovars and
UNMIK should make every effort to keep the World Bank on
board with their plans. There is real urgency in moving this
project forward, since the long-term stability and economic
development in Kosovo are dependent on the resolution of the
energy problems here. End Comment.
KAIDANOW