MACEDONIA SCRAPS ELECTRICITY PRIVATIZATION AND

C O N F I D E N T I A L SECTION 01 OF 02 SKOPJE 000886

SIPDIS

SIPDIS

EUR/SCE FOR PPFEUFFER

E.O. 12958: DECL: 11/02/2017
TAGS: ECON EINV ENRG PREL PGOV MK
SUBJECT: MACEDONIA SCRAPS ELECTRICITY PRIVATIZATION AND
INVESTMENT PLAN

REF: SKOPJE 797

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

SUMMARY
--------------

1. (C) The GOM announced on October 31 that it had canceled
the "Negotino" power plant privatization, and would instead
keep the plant state owned. This decision ended any
possibility that the GOM would award the privatization and
investment contract to the U.S. - Greek joint venture,
SENCAP, the "runner-up" bidder on the project. The GOM
initially awarded the deal to a consortium of four companies,
including a suspicious Bulgarian company, and ranked SENCAP's
bid second. The Ambassador, in discussions with top GOM
economic officials, strongly questioned the GOM's lack of
transparency and clear procedures in ranking the bids
(reftel). The GOM announced on October 25 that it would not
sign with the consortium initially chosen because it had not
received all the information it had requested. We lobbied
the GOM to sign a deal with SENCAP as the second-ranked
bidder, but the GOM decided instead to cancel the tender
completely, without giving a justification for its decision.
This mismanaged tender process has damaged the GOM's investor
friendly image, a point we are underscoring with high-level
GOM contacts. End Summary.

A Questionable Process
--------------

2. (U) The attempt to privatize the Negotino power plant, a
210 megawatt petroleum fueled electricity power plant, has
been a drawn out, problematic process for the GOM. The
previous government attempted to privatize the plant during
its last few months in office in 2006, but ran out of time.
It left the incoming government with a list of ranked bids
that put the Austrian company EVN first, and a joint bid by a
Canadian company, Hatch Energy, and a Bulgarian company,
Finance Engineering, second. The current government canceled
the tender, claiming that the offered purchase price of 4
million euros for the plant was too low, and launched a new
tender.


3. (SBU) We were contacted in July 2007 by the U.S. company
ContourGlobal, which had bid on the second privatization
attempt through a joint venture company, SENCAP, that it had
formed with the Greek Public Power Corporation. The
Ambassador called Deputy Prime Minister for Economic Affairs
Zoran Stavreski, who was also the head of the tender
commission, to emphasize that the selection process should be
fair and transparent. Stavreski assured the Ambassador that
the GOM would give all bidders a fair evaluation. The GOM
announced on August 1 that the winner of this second round of
bidding was a consortium of four companies: Finance
Engineering, Hatch Energy, Mott McDonald (from the UK),and
Unit Investment (Netherlands). SENCAP was the only other
bidder to meet the tender requirements. The committee ranked
the two bids on a 100 point scale and the difference between
the two scores was less than one point.


4. (SBU) ContourGlobal officials complained to us that the
GOM's ranking of the two bids appeared suspect.
ContourGlobal had offered a higher purchase price for the
existing plant (68 million euros vs. 62 million euros). In
addition, ContourGlobal committed to generate 600 megawatts
of electricity, while the winning consortium committed to
only 500 megawatts. However, the GOM had also counted the
winning consortium's offer to convert the existing plant to
natural gas and generate an additional 140 megawatts, even
though this offer was conditional on the GOM installing a gas
pipeline to the plant. Finally, the tender committee gave
the winning consortium a perfect ten points for its business
plan, while SENCAP's plan received only 3.8 points. The GOM
provided ContourGlobal with no explanation of the criteria
used to evaluate the business plans.


5. (C) The Ambassador discussed her concerns regarding the
tender's lack of transparency and questionable scoring with
both Minister of Economy Vera Rafajlovska and Deputy PM
Stavreski in September (reftel). Stavreski told the
Ambassador that no specific legal criteria for the
privatization existed, and there was no possibility of an
administrative appeal of the GOM decision.

Who Was Really Bidding?
--------------

6. (SBU) The GOM had trouble inking the deal with the winning
consortium due to unanswered questions about the winning

SKOPJE 00000886 002 OF 002


bidders as well as internal government fissures.
Rafajlovska, a member of the minority coalition partner NSDP,
refused to sign a deal with the winning consortium until she
received additional information from each of the four
constituent companies on the nature of its involvement in the
consortium, despite apparent pressure to sign from Stavreski
and Prime Minister Gruevski. Reportedly, she did not want to
be the "fall guy" in case of a future corruption
investigation. After several weeks passed and the GOM had
still not received an adequate answer from the winning
consortium, Stavreski announced on October 25 that the GOM
would not sign a deal with the consortium. The media
reported that only Finance Engineering had submitted
additional information to the GOM, raising questions about
the other companies' true involvement in the deal.


7. (C) We had serious concerns about the consortium's
Bulgarian member company, Finance Engineering. The executive
director of Finance Engineering, Genadi Tabakov, contacted us
during the first failed attempt to privatize the power plant.
Tabakov claimed that his company was majority owned by a
U.S. incorporated company, Traders International. However,
our research found that Traders International appeared to
exist only on paper, while scant public information existed
on Finance Engineering. In September, the FBI Legatt in
Sofia told us that the two companies were under investigation
for financial transactions that had the appearance of money
laundering between Bulgaria and the U.S. (Note: this
information remains confidential as there is an on-going law
enforcement investigation.) Various sources told us they
believed Finance Engineering was tied to the Bulgarian mafia
and/or an unidentified Russian energy company, though we were
not able to evaluate the reliability of that information.

Privatization Canceled Again
--------------

8. (C) After Stavreski announced that the GOM would not sign
with the consortium it had initially chosen, the Ambassador
sent Stavreski and Rafajlovska letters detailing the
advantages of signing a deal with SENCAP. Econoff delivered
the letters and met with the ministers' staff to reiterate
the Ambassador's message. We also discussed the matter with
the Prime Minister's Chief of Staff and delivered a copy of
the Ambassador's letter to him.


9. (C) Despite our efforts, the GOM's spokesperson announced
on October 31 that the GOM had canceled the tender for the
second time and would maintain state ownership of the power
plant. GOM officials gave no explanation for their decision
to reject SENCAP's offer. The Ambassador sent Stavreski a
follow-up letter expressing her disappointment with the GOM
decision, and offering to provide technical assistance to
help the GOM conduct transparent, predictable privatizations
in the future.

Comment: We Want (Only Some) Foreign Investment
-------------- --

10. (C) The GOM's mishandling of this attempted privatization
starkly demonstrated that other considerations can trump GOM
officials' stated commitment to attracting foreign
investment. The GOM has two ministers whose sole job is to
attract foreign investment and has paid undisclosed amounts
to international media outlets to advertise the advantages of
investing in Macedonia. Despite such lip service to
attracting FDI, the GOM has illogically canceled an
investment deal worth hundreds of millions of dollars. A
deal with SENCAP would probably have been the largest single
investment since Macedonia's independence, and would have
generated badly needed electricity. We don't know why the
GOM refused to sign a deal with SENCAP, but it is likely that
hidden personal or political concerns outweighed the
investment's considerable potential benefits for Macedonia.
When Deputy PM Stavreski announced agreement with Russia to
embark on gasification projects in Macedonia to repay
Russia's outstanding debt, a gas pipeline to the Negotino
power plant was identified in the media as one of the
projects. The only good news is that the GOM, perhaps due in
part to our close examination of the process, avoided signing
a deal with the questionable Bulgarian company.
MILOVANOVIC