AMBASSADOR DISCUSSES INVESTMENT BARRIERS AND

C O N F I D E N T I A L SECTION 01 OF 03 SKOPJE 000797

SIPDIS

SIPDIS

STATE FOR EUR/SCE (PFEUFFER),EB/CBA

E.O. 12958: DECL: 09/25/2017
TAGS: EINV ECON ENRG PGOV PREL MK
SUBJECT: AMBASSADOR DISCUSSES INVESTMENT BARRIERS AND
ADVOCATES FOR U.S. FIRMS WITH DEPUTY PM STAVRESKI


Classified By: P/E MLATHAM REASONS 1.4(B) & (D)

Summary
--------------

1. (SBU) During a September 25 meeting with Deputy PM for
Economic Affairs Zoran Stavreski, the Ambassador raised U.S.
concerns regarding three outstanding investment issues:
questions surrounding the GOM's decision on a recent power
plant privatization, steps the GOM should take to ensure the
personal safety of a U.S. citizen investor under attack by
his Macedonian business partner, and an inexplicable delay in
the GOM's decision on a mining exploration application by a
prominent U.S.-based mining firm. Stavreski maintained that
the only recourse open to the U.S.-Greek company that lost
the power plant tender is to file a lawsuit against the GOM.
He also said he would discuss with the Minister of Interior
the safety of the U.S. investor, and explained that the GOM
was waiting to pass a new mining law before awarding any new
mining exploration licenses. His less-than-satisfactory
answers demonstrate that the GOM still has much work ahead to
create a fully transparent and investor-friendly business
environment. End Summary.

Questions Raised on Power Plant Privatization
--------------

2. (SBU) The Ambassador requested a meeting with Deputy
Prime Minister Stavreski to discuss outstanding U.S.
investment issues, including a recent power plant
privatization in which a U.S. company's joint venture offered
the highest price but for less-than-clear reasons finished
second. The GOM announced on July 31 the result of an
international tender for the privatization of the "Negotino"
electrical power plant and the construction of new electrical
power generation. The winning bidder is a consortium of four
companies, Hatch Acres (Canadian),Mott McDonald (UK),Unit
Investment (Dutch),and Finance Engineering (Bulgarian). The
second-ranked bid is a joint venture, SENCAP, between the
Greek Public Power Corporation and a U.S. based investment
fund, ContourGlobal. SENCAP questioned the GOM's evaluation
of the bids and filed an appeal with the GOM.


3. (SBU) ContourGlobal executives met with the Ambassador on
August 7 to explain their concerns with the bid evaluation.
Specifically, ContourGlobal questioned how the GOM had
evaluated the business plans, worth ten points out of a total
of 100. The winning bid received a perfect ten, while SENCAP
received a 3.8 score. There was less than one point
difference between the two bids' total scores. ContourGlobal
also pointed out that in the official minutes of the opening
of the bids, part of the winning bidders' electrical
generation capacity was described as "optional," yet the GOM
included this "optional" capacity in calculating the winners'
total score.


4. (SBU) The Ambassador received assurances from the GOM on
August 8 that the GOM would not sign an agreement with the
winning bidder until after the completion of the appeal
process. Subsequently, Stavreski stated publicly that there
was no administrative appeal process, and that SENCAP's only
option was to file a law suit. Emboffs repeatedly requested
a meeting with GOM officials to discuss the evaluation of the
bids, resulting in the Ambassador's September 25 meeting
with Stavreski.


5. (C) Sources have told us that the Bulgarian company,
Finance Engineering, has close ties to an unspecified Russian
energy company, and may in fact be a front for a Russian
company. We do not know the original source or reliability
of this information. Finance Engineering's Executive
Director, Genady Tabakov, claims that his company is majority
owned by a U.S. company, Traders International. Embassy
Sofia's FBI legatt informed us recently that her office has
begun a money laundering investigation on suspicious
financial transactions involving Finance Engineering and
Traders International. We are not, however, authorized to
disclose this to the GOM.


6. (C) The Macedonian media has speculated over the past few
weeks on the true nature of the winning consortium, including
speculation on whether Hatch's role is to provide an
appealing "face" or front for other members of the
consortium. Minister of Economy Vera Rafajlovska had been
tapped by the GOM to sign the agreement with the winning
consortium, but the media reported she was hesitant to sign
it. The Ambassador recently mentioned to Rafajlovska that
the embassy still had several unanswered questions on the bid

SKOPJE 00000797 002 OF 003


decision. Subsequently, Rafajlovska told the media that she
would not sign an agreement with the winning consortium until
she received additional documentation from the companies in
the consortium. Those companies said they would provide the
GOM with the documentation requested by mid-October.

Privatization: No Specific Legal Requirements, No Appeal
-------------- --------------

7. (SBU) In the September 25 meeting, the Ambassador asked
Stavreski to explain the evaluation process used in the
Negotino privatization, and to respond to the questions
raised by SENCAP. Stavreski said that the GOM evaluated the
business plans on several criteria, and that the winning
consortium had provided a much more detailed and
comprehensive document than the one submitted by SENCAP,
hence the scores of 10 and 3.8 respectively. Regarding the
"optional" generation capacity, Stavreski said that it was
not really optional. The winning consortium's bid committed
to providing this additional capacity if the GOM would
provide the natural gas pipeline infrastructure. He added
that the GOM plans at some point to provide gas, therefore,
according to Stavreski, this additional capacity was not
actually optional.


8. (SBU) The Ambassador asked why there was no possibility
of an administrative appeal of the GOM's decision. Stavreski
said that he had agreed initially to the Ambassador's request
to postpone signing an agreement until after an appeal
process because he had believed an administrative appeal was
feasible. However, the GOM's legal experts subsequently told
him no such appeal was possible and there is no appeal, only
legal recourse, in the case of a privatization decision. He
explained that SENCAP had filed its appeal under GOM's
procurement law, but that since the process was a
privatization, the procurement appeal process did not apply.
Stavreski asserted further that because it was not a
procurement, but a privatization, there were no specific
legal rules the tender commission was required to follow in
evaluating the bids.


9. (SBU) Stavreski also stated that the government (i.e.,
the Prime Minister and his cabinet) had issued the tender
decision and that there was no administrative process to
appeal such government decisions. Stavreski concluded that
SENCAP's only option now was to file a legal suit against the
GOM. The Ambassador thanked Stavreski for the information,
but warned that a privatization with mandatory "optional"
elements, no specific legal requirements or possibility of
administrative appeal was likely to raise additional
questions internationally.


10. (SBU) Another GOM official had earlier confidentially
informed us that the tender falls under the 2004 law for the
privatization of the GOM's electrical system assets. That
law states that the privatization process should be "based on
the principles of transparency, nondiscrimination,
objectivity, and in accordance with market conditions," but
the law includes no administrative mechanism to enforce these
principles. SENCAP filed a lawsuit in Macedonian court on
September 25 requesting that the GOM's decision be overturned.


11. (SBU) We have discussed our concerns regarding the
Negotino power plant privatization process with local
representatives of EBRD and the EU Commission. In August,
EBRD sent a letter to Stavreski requesting more information
on the tender, but has still not received a response. EBRD
is continuing to press Stavreski and Prime Minister Gruevski
for a meeting to discuss the tender. EU Commission First
Counselor Joan Pearce told us that she had received the same
explanation of the tender process from Stavreski.

Protecting AmCit Investor's Safety
--------------

12. (SBU) The Ambassador also raised with Stavreski the case
of a U.S. citizen, Albert Hicks, who invested in a Macedonian
company and subsequently became embroiled in a legal case
against his former Macedonian business partner. Hicks had
informed emboffs that strangers, who he assumed were hired by
his former partner, had approached him and told him to drop
the case, "or else." The Ambassador sent a letter on July 30
to Stavreski and Minister of Interior Jankulovska requesting
that the GOM ensure Hicks' safety. On September 11 after he
left a court hearing, Hicks was attacked by two men wielding
metal chains causing scratches and bruises on his head and
shoulders. The Ambassador sent another letter to Stavreski
and Jankulovska requesting again that the GOM ensure Hicks

SKOPJE 00000797 003 OF 003


safety, and also requesting the GOM fully investigate the
attack. The RSO made the same points in a later meeting with
MOI officials.

13. (SBU) Stavreski told the Ambassador that he saw no
reason to be involved as this was not related to his
portfolio of economic and investment matters, but that he had
discussed the case with Jankulovska, and that he would talk
with her again to ensure that the MOI followed up. The
Ambassador noted that Hicks' individual safety was of primary
concern for the USG. Additionally, we saw a very direct
connection to investment in Macedonia as such an attack on a
U.S. investor could also undermine the government's attempt
to strengthen Macedonia's image as a desirable investment
location.

Phelps-Dodge's Long Wait For An Exploration License
-------------- --------------

14. (SBU) The Ambassador also asked Stavreski about a long
delay in the GOM's response to the U.S. mining company
Phelps-Dodge's request for an exploration license.
Phelps-Dodge submitted an application for a license to
conduct exploratory drilling in a specific geographical
location in March 2006, but has received no official response
from the GOM to date. Embassy econoff had met with
Stavreski's staff in June and requested that the GOM respond
to Phelps-Dodge's application, but action had not been
forthcoming.


15. (SBU) Stavreski said that the GOM was not satisfied
with the current process of granting such exploration
licenses, so in a draft law on mining the GOM has included a
new tender process for granting the licenses. Until
parliament passes that draft law, Stavreski said, the GOM
would not grant licenses to any mining company. Apparently,
it was not felt necessary to inform applicants and respond to
inquiries.

Comment - Answers, But Not Satisfactory
--------------

16. (C) Stavreski's attitudes and his answers to the issues
the Ambassador raised were very disappointing, particularly
given the GOM's desire to attract foreign direct investment.
The discussion demonstrated that the GOM still has far to go
in creating an efficient and transparent business
environment, despite the GOM's attempts to market Macedonia
as an investment "heaven." The Ambassador warned Stavreski
that our next update of the Investment Climate Statement for
Macedonia may have to reflect U.S. investors' multiple
negative experiences here over the past few months. How the
GOM treats existing investors, and potential investors such
as SENCAP, will have a significant impact on its ability to
lure new investors to Macedonia.
MILOVANOVIC