BOSNIA - DODIK CHALLENGES PIC BY SEEKING TO

C O N F I D E N T I A L SECTION 01 OF 03 SARAJEVO 001459

SENSITIVE
SIPDIS

STATE FOR EUR DAS JONES, EUR/SCE HYLAND, FOOKS

E.O. 12958: DECL: 09/11/2023
TAGS: ECON ENRG PREL BK
SUBJECT: BOSNIA - DODIK CHALLENGES PIC BY SEEKING TO
UNILATERALLY REVERSE COMPETENCY TRANSFER

REF: SARAJEVO 1309

Classified By: Classified by Michael J. Murphy for reason 1.4 B,D


1. (C) Summary: On September 11, the RS Government began the
process of withdrawing from the state-managed electricity
transmission company, Electroprenos BiH (TRANSCO) and
establishing a RS transmission company. In February of this
year, Dodik proposed several reforms to TRANSCO that would
essentially create three sub-transcos -- to which Federation
PM Brankovic did not respond until several months later.
Despite Dodik's comments that the RS has "exhausted" all
attempts to fix the company, there has only been one meeting
by the Federation and RS Ministers of Energy to discuss the
issues each side has with TRANSCO. At the September 12 Peace
Implementation Council (PIC) Steering Board Ambassadors (SBA)
Meeting, there was consensus, including the Russians, that
the RS action was a direct challenge to the PIC, which made
clear in October 2007 that no entity may unilaterally reverse
previous reforms or competency transfers. The PIC SBA issued
a press statement on September 12 condemning the RS actions
and calling for immediate reversal. If Dodik is successful
in withdrawing from TRANSCO, essentially dissolving it, every
other state-level institution will be under threat. End
Summary.

RS CLAIMS FEDERATION INTRANSIGENCE FORCES ITS HAND
-------------- --------------


2. (C) On September 11, the RS Government passed a
"conclusion" that tasked the RS Minister of Economy, Energy
and Development "to prepare within the shortest possible
timeframe, and in 30 days at the latest" all the measures
necessary to establish an RS electricity transmission company
and to withdraw from the state-managed electricity
transmission company, Elektroprenos BiH (TRANSCO). The RS
Government conclusion and RS authorities justified the action
by claiming that they had exhausted all opportunities to
overcome problems with the operation of TRANSCO. They
suggested that they did not get the cooperation they needed
from the company or their Federation counterparts. According
to the Office of the High Representative (OHR),dissolution
of TRANSCO would be the first official withdrawal from a
previously transferred competency to the state (reftel).

REAL PROBLEMS, BUT NOT A REAL SOLUTION
--------------


3. (C) RS claims that there are problems with TRANSCO are
accurate, and the international community, including the U.S.
and the EU, have been engaged in an effort to improve its
operation. However, the RS has not made a good faith effort
to resolve these problems. Instead, RS PM Dodik proposed
"reforms" to Federation PM Brankovic (who, along with Dodik,
is one of the two "general shareholders" of TRANSCO) in
February that would, among other things, effectively create
three sub-transcos along ethnic lines. In effect, Dodik's
reform proposal amounted to a defacto break-up of TRANSCO.
Unsurprisingly, Brankovic delayed in sending a response to
Dodik's proposal and initially refused to negotiate on the
basis of them. This prompted a heated letter from Dodik to
Brankovic on July 18. Brankovic sent a response to his
letter on July 22 and the two entity Ministers of Energy met
for the first time on July 31 to begin negotiations, but made
no progress (reftel). On August 3, Dodik met with High
Representative Lajcak in Banja Luka and told the High Rep he
would take no unilateral action regarding TRANSCO.

OHR: RS ACTIONS A DIRECT CHALLENGE TO THE PIC
--------------


4. (C) In the PIC meeting on September 12, PDHR Raffi
Gregorian, who chaired the meeting in the absence of the High
Representative Lajcak, provided Ambassadors with a copy of
the RS Government conclusion, which had only been made
available to OHR two hours earlier. Noting that he had
spoken with High Rep Lajcak, who was in Berlin, and that he
was relaying Lajcak's views, PDHR stressed that if the RS
Government conclusion is implemented it would cross a red
line set by the PIC in October 2007, which made very clear,
very publicly that such actions would have consequences. OHR
lawyers stated that what the RS had done was outside any
procedure set forth in the law, and was in contravention of
numerous EU-related obligations, and quite possibly violated
the Dayton Constitution.

SARAJEVO 00001459 002 OF 003



CONCERN AMONG AMBASSADORS ABOUT SERIOUSNESS OF CHALLENGE
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5. (C) Ambassadors agreed that the RS action posed a serious
challenge to the PIC and required a strong response. Even
the Russian Ambassador conceded that the RS action was
"politically deplorable", but added ominously that Russia did
not share OHR's analysis that it was potentially
unconstitutional for an entity to unilaterally reverse a
competency transfer. The EC Ambassador and the French
Ambassador, speaking in her capacity as EU President, noted
that establishment of a single electricity transmission
company had been a precondition for signing the Stabilization
and Association Agreement (SAA). They noted that, if
implemented, the RS conclusion would reverse the major
progress achieved in the electricity sector required by the
EU and seriously set back Bosnia's European integration
progress. The Canadian argued that it was "inconceivable
that the PIC could pretend like this didn't happen".

PIC SBA DEMANDS RS REVOKE CONCLUSION
--------------


6. (U) After the initial SBA exchange, the Ambassadors agreed
to issue a statement calling on the RS Government to revoke
its conclusion. The text of the statement follows:

The Ambassadors of the Peace Implementation Council's
Steering Board treats as extremely serious, the conclusion
adopted yesterday by the RS Government to begin the process
of revoking approval for the Law on Electricity Transmission,
Regulator and System Operator in BiH, in the part pertaining
to establishment of Electricity Transmission Company in BiH
and canceling the Agreement on Transmission Company and
Independent System Operator between the entity prime
ministers in BiH.

The Ambassadors remind the RS Government of the clear
position the PIC Steering Board set out in its 31 October
2007 Declaration regarding possible unilateral action of this
nature by the entities, when it noted that "The PIC Steering
Board also re-emphasizes its concern regarding suggestions
that certain reforms could be reversed unilaterally by entity
decisions retrieving competencies previously transferred to
the state. An entity cannot withdraw unilaterally from a
previously agreed reform."

The PIC Steering Board Ambassadors expect the RS Government
to revoke its conclusion and continue to work within the
established institutions and laws of Bosnia and Herzegovina,
in this case the Electricity Transmission Company in BiH and
to continue to work in the spirit of compromise to improve
the functionality of these institutions.

Any move to implement this conclusion by the RS authorities
would be addressed as set out in the October 2007 PIC
Steering Board Declaration.

End Text

COMMENT
--------------


7. (C) The RS conclusion and instructions to the RS Minister
of Economy, Energy and Development to withdraw from TRANSCO
and to establish an RS transmission system are a clear
assault by Dodik on a state-level institution and a direct
challenge to the PIC and the international presence in
Bosnia. Dodik has picked his target well in that, on the
surface, TRANSCO may indeed be dysfunctional and all
knowledgeable observers agree that management and other
reforms are needed. Federation officials are not without
fault in this saga, however, the General Manager, who is at
the core of the management problem, is a Serb. Moreover, the
RS has made no real attempt at working with the Federation or
the International Community (which has invested hundreds of
millions of dollars in reconstructing and reforming the
energy sector in Bosnia) to craft and implement real
solutions. In light of the September 11 RS conclusion,
Dodik's February proposals for reform, such as dividing
TRANSCO into three ethnically based companies, appear to have
been merely preliminary steps toward the action taken this
week. The PIC SBA statement highlights the fact that the RS
action violates the PIC red-line that state-level reforms and

SARAJEVO 00001459 003 OF 003


institutions cannot be unilaterally undone. Dodik's RS is
now blatantly testing that resolve, even more blatantly than
he has in the past (e.g. frozen foreign currency, Missing
Persons Institute). If the RS succeeds in the effort to
violate a state-level law, and in effect, unilaterally
reverse a competency transfer, it would encourage similar
attacks on every state-level institution in BiH from the High
Judicial and Prosecutorial Council to the Central Bank to the
State Intelligence Service to the VAT system to the Ministry
of Defense.
ENGLISH