KOSOVO: TREPCA AND THE NEED FOR SOUND ECONOMIC AND

C O N F I D E N T I A L SECTION 01 OF 02 PRISTINA 000697

SIPDIS

SIPDIS

DEPT FOR DRL, INL, AND EUR/SCE, NSC FOR BRAUN, USUN FOR
DREW SCHUFLETOWSKI, USOSCE FOR STEVE STEGER

E.O. 12958: DECL: 09/18/2017
TAGS: PGOV EAID ECON KDEM UNMIK YI KV
SUBJECT: KOSOVO: TREPCA AND THE NEED FOR SOUND ECONOMIC AND
BUSINESS DECISION MAKING

Classified By: COM TINA KAIDANOW FOR REASONS 1.4 (B) AND (D).


1. (C) SUMMARY: In August, the Kosovo Assembly was poised to
pass an ill-advised resolution mandating that the debt-ridden
Trepca mining and minerals company be designated a
publicly-owned enterprise (POE) rather than a socially-owned
enterprise (SOE). The move would have been a disastrous one,
saddling the Kosovo government with up to a half billion euro
worth of debt and international claims against the mining
complex from the pre-war era. The resolution was not
adopted, following USOP intervention. However, we agree with
the Kosovars on one key point: they need a seat at the table
when Trepca's future will be determined. Our emerging view
is that, through USAID, we should play a role in ensuring
that Trepca is privatized in a way that yields the maximum
benefit to Kosovo and the Mitrovica region. END SUMMARY.

ONCE PROFITABLE, NOW DEBT-RIDDEN


2. (U) The Trepca conglomerate, an SOE, includes mines, an
industrial park in Mitrovica, and the Zvecan smelter complex.
It was a major employer in Yugoslavia, with over 20,000
workers at its peak. However, Kosovo Albanian management and
workers were expelled in 1988-89, and in the 1990s many
plants were closed. Between 1995 and 2000, Serbian General
Director Novak Bjelic engaged in a series of questionable
financial operations including borrowing against Trepca's
assets.


3. (U) Today, Trepca is a decrepit and debt-ridden shadow of
its former self. With 5,000 workers - most of them "phantom"
employees - it operates at a loss and has drained 70 million
euro from the Kosovo budget since 1999. In September 2006,
upon application by the Kosovo Trust Agency (KTA),the
Special Chamber of the Kosovo Supreme Court approved placing
Trepca under Chapter 11-style administration and imposed a
moratorium on creditor proceedings against it. The complex
is potentially liable for an estimated 205 million euro in
creditor claims and 120 million euro to remedy extensive
environmental damage. In addition, it will take an estimated
175 million euro of investment for Trepca to again become a
profitable concern.

KOSOVO'S PATRIMONY


4. (SBU) Trepca remains a highly emotional issue that looms
large in the popular imagination due to its past and the
widely held view that it was purposely driven into the ground
by Milosevic-era management. Its revitalization is seen by
many as the key to Kosovo's independent economic future.
Popular sentiment does not favor the KTA, or the UNMIK
administration that first conceived the Chapter 11-style
approach, and many Kosovar Albanians oppose giving an
independent administrator control over Trepca and its fate.
(NOTE: While there is every indication Kosovo could develop a
productive mining industry under the right circumstances,
industry sources tell us that Trepca itself would have been
closed years ago if it had been a private enterprise. END
NOTE.)


5. (SBU) On August 27, the Assembly was set to vote on a
resolution that would have called on the SRSG to stop action
to privatize Trepca and declare it a "strategic company of
special national interest" which should operate as a
publicly-owned enterprise (POE). The Assembly appeared ready
to take this action, apparently ignorant that making Trepca a
POE would end the moratorium and make the Kosovo government
liable for hundreds of millions of euro worth in claims.
Largely as a result of USOP and USAID efforts, the vote on
this ill-advised resolution was postponed. We have continued
meeting with the chairs of the Trade and Industry Committee,
caucus leaders, and the Assembly Speaker to keep it off the
agenda.


6. (C) Although the Assembly might have opposed the
privatization of Trepca merely to win pre-election political
points, we discovered that the immediate motivation behind

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the resolution was a desire among party leaders for Kosovars
to be better represented in the privatization process.
(NOTE: Under the regulation that governs KTA reorganizations,
UNMIK 2005/48, the Special Chamber, made up of three
international and two Kosovar judges, appoints an
administrator to oversee Trepca's Chapter 11-style
restructuring. END NOTE.) The administrator would then sort
out creditor claims and privatize the assets, leaving the
Kosovo government without a decision-making role. Many in
the Kosovo government strongly believe that some of the debts
are for money that was diverted to Belgrade's war chest and
Swiss bank accounts rather than being invested in Trepca, and
for that reason are loathe to repay them, at least without
further litigation. In addition to our intervention with the
Assembly, we met with UNMIK, which earlier did not fully
appreciate the emotional importance of Trepca to local
politicians. UNMIK has since agreed to negotiate amendments
to 2005/48 with the PISG and give them a larger role.


7. (C) COMMENT: If for no other reason than to stop it from
taking ill-considered steps that could potentially undermine
the entire privatization process for Trepca, the PISG needs a
seat at the table when decisions regarding the future of
Trepca are considered. This will be challenging, as some of
our local interlocutors will approach this issue from a
position of political demagoguery, ill-advised economic
nationalism, bad communist economics, and rent-seeking
agendas. Nevertheless, our experience through USAID with
Kosovo C and its project steering committee suggests that we
can empower the Kosovars -- in cooperation with other
stakeholders in the international community -- to be
responsible stewards of such an asset. END COMMENT.
KAIDANOW