BOSNIA: U.S.-EU TABLE TRANSCO PROPOSAL; UNEVEN

C O N F I D E N T I A L SECTION 01 OF 03 SARAJEVO 001623

NOFORN
SIPDIS

STATE FOR EUR/SCE HYLAND, FOOKS

E.O. 12958: DECL: 10/16/2023
TAGS: ECON EINV ENRG PINR PREL BK
SUBJECT: BOSNIA: U.S.-EU TABLE TRANSCO PROPOSAL; UNEVEN
RESPONSE FROM PRIME MINISTERS

REF: SARAJEVO 1459

Classified By: Ambassador Charles English for reasons 1.4 (b) and (d)


1. (C) SUMMARY: The Ambassador met with Federation PM
Brankovic on October 14 and Republika Srpska (RS) PM Dodik on
October 16 to discuss a joint U.S.-EU proposal to resolve
problems with state managed electricity transmission company,
Electroprijenos (TRANSCO),which had prompted RS government
threats to unilaterally withdraw from it and establish its
own electricity transmission company. The U.S.-EU proposal
is designed to preserve the current company structure, an
EU-required reform, while at the same time addressing
legitimate RS concerns about its operations. The proposal
includes four elements: 1) suspension of the current General
Director; 2) conduct a management audit, the outcome of which
would provide the basis for management reform negotiations;
3) resolution of pending management decisions that are not
contingent on the outcome of the audit; and 4) hiring of an
international facilitator to ensure operational benchmarks
are hit and lead the reform negotiations. Brankovic told the
Ambassador that he was &open8 to the U.S.-EU proposal.
Dodik did not rule it out, but continued to insist on a
restructuring of TRANSCO along entity lines (i.e., a de facto
dismantling of TRANSCO). In a separate October 16 meeting
with the Ambassador, RS Energy Minister Puhalac took a much
tougher line than Dodik about TRANSCO,s future. Our first
meetings with the two PMs suggest that the U.S.-EU proposal
could provide a way forward, but TRANSCO will continue to
demand international attention. Along with the EU, we plan
to proceed with preparations for the management audit and the
hiring of an international facilitator, and at the same time,
we will provide both PMs with detailed explanation of the
proposal in writing and seek their firm, written commitment
to it. END SUMMARY

U.S.-EU Proposal to Resolve TRANSCO Problems
--------------


2. (SBU) RS PM Dodik has repeatedly voiced his displeasure
with the operations of the state managed electricity
transmission company, Electroprijenos (TRANSCO),but has not
made a good faith effort to resolve these problems. (Note:
The RS and Federation PMs are the two general shareholders of
TRANSCO. End Note) Instead, Dodik used the Federation,s
failure to respond to RS proposals to restructure TRANSCO,
proposals that if implemented would have amounted to a de
facto break-up of the company, to justify an attempt to
withdraw from TRANSCO and create a separate, RS-level company
(reftel). Outside experts agree that TRANSCO has management
problems, but many result from the failure of the company,s
Serb General Director Mijatovic to perform his duties.
Ethnic tensions between RS and Federation management
officials have also exacerbated the company,s internal
problems. With the aim of maintaining TRANSCO as a
state-level institution )- TRANSCO,s creation was a
Stabilization and Association Agreement (SAA) requirement )-
and addressing legitimate RS concerns about its management
problems, the U.S. and EU developed a proposal, which the
Ambassador presented in separate meetings to the Federation
and RS PMs and RS Energy Minister.

Four Key Points
--------------


3. (C) The main points of U.S.-EU proposal to improve TRANSCO
operations are as follows (Note: OHR also participated in the
preparation of the proposal and its experts will continue to
support its implementation, but for political reasons the
U.S.-EU role is being emphasized. End Note):

--Initiate Independent Management Audit: The EC has agreed to
finance an independent management audit of TRANSCO. We
expect the whole audit process to take as long as six months,
but will impress upon the PMs their obligations to accept the
findings of the audit once it is complete.

--Benchmarks for Success: Because the audit will take
considerable time, technical experts from the US and the EC
have agreed to establish a list of the currently-blocked
management decisions (on issues such as investment, personnel
and maintenance) that need to be decided on and resolved by
the management team as soon as possible before the
finalization of the audit.

--Suspension of the General Director (GD): As is the norm in
corporate America, the head of a company often steps aside

SARAJEVO 00001623 002 OF 003


during the management audit process. An interim GD can be
appointed or a technical expert from the international
community could be brought in.

--International Facilitator: The IC also strongly recommends
introducing an international facilitator to negotiate between
the Federation and RS management officers. Because the
management consistently votes according to ethnic
considerations, a facilitator can work with both sides to
promote decisions that will benefit the company from a
technical and financial standpoint.

BRANKOVIC OPEN TO PROPOSAL; SUPPORTS SUSPENSION OF GENERAL
DIRECTOR
-------------- --------------


4. (C) The Ambassador met with Federation Prime Minister
Brankovic on Tuesday, October 14 to discuss the joint U.S.-EU
proposal. Brankovic said that he was &open8 to the
proposal, and noted that he would speak with Dodik about
TRANSCO on October 17 at a previously scheduled meeting in
Banja Luka. He suggested that the two PMs should call a
general shareholders assembly in order to discuss the U.S.-EU
proposal in detail, and also push for finalizing this year,s
investment and business plan, which were critical for daily
operations. Brankovic reiterated his support for the
&TRANSCO model,8 which said Bosnia could use in organizing
state management of other infrastructure sectors, such as
highways and railroads. Brankovic supported the proposal to
suspend the General Director of TRANSCO, noting that the
General Director has allowed his personal politics to get in
the way of managing the company on a technical level.

DODIK &ACCEPTS8 TRANSCO PROVIDED IT IS ETHNICALLY-DIVDEDED
-------------- --------------


5. (C) In a meeting on October 16, Dodik claimed that he did
not reject the TRANSCO model of state-level management for
major infrastructure, but at the same time he insisted that
TRANSCO must be reorganized along ethnic lines. Dodik noted
that other energy institutions in Bosnia, such as the
Elektroprivredas, were already divided into separate
operating companies based in Mostar, Sarajevo and Banja Luka.
(Comment: In other words, Dodik repeated his earlier
unacceptable proposal that any unified TRANSCO must consist
of three sub-TRANSCOs responsible for day-to-day management
decisions, including investment decisions, with one of those
sub-companies operating exclusively in the RS. End Comment)
Dodik claimed that he never wanted to obstruct the work of
the company, but that its current organization had not
protected RS interests. In addition to reorganizing the
company, Dodik said that he wanted to rework the investment
strategy so that investment in the RS was guaranteed,
explaining that, in his opinion, too much investment had gone
to the Federation. (Comment: According to experts, the
majority of investment for 2006 and 2007 went to the RS; only
in 2008 has the majority investment been planned for the
Federation. This was largely why the Serb General Director
refused to approve the 2008 investment plan, and RS
management officials stopped attending TRANSCO meetings.
Dodik,s proposal for guaranteed &equal8 investment in both
entities makes no technical or financial sense; investment
should go where it is most needed. End Comment.) Dodik
welcomed the international community,s attention to TRANSCO,
since it underscored RS grievances against the company and
forced the Federation to respond.

PUHALAC STRONGLY PUSHES FOR DISSOLUTION OF TRANSCO
-------------- --------------


6. (C) In an October 15 meeting, RS Minister of Energy
Puhalac explained that he personally would prefer that
TRANSCO be divided into two companies, along entity lines.
Puhalac said that he was frustrated with the Federation,
which had ignored RS proposals for restructuring TRANSCO, and
that he believed no amount of tinkering would improve company
operations. The Ambassador detailed the U.S.-EU proposal for
addressing legitimate concerns about TRANSCO,s management.
Puhalac immediately dismissed the proposal to temporarily
suspend the General Director, claiming that changing
personalities would not improve operations. Despite his
objections, he noted that the PMs were the shareholders, and
noting that he has a &master to serve,8 intimating that
ultimately Dodik would make the decisions on TRANSCO.

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

SARAJEVO 00001623 003 OF 003




7. (C) Both Prime Ministers gave enough general support to
the U.S.-EU proposal for the EU to continue with preparations
for the management audit. However, we need more assurances
from the Federation and the RS that they will work with the
international facilitator before the person is brought on
board. We plan to follow up our discussions with the PMs,
who were supposed to discuss TRANSCO on October 17, with a
letter to both that provides great detail about the U.S.-EU
proposal and requests follow-up from their side. However, if
Puhalac,s position was any indication of Dodik,s true
position, we have a long way to go to get the RS side to
agree to maintain TRANSCO as it is currently organized.
Dodik,s proposal to reorganize the company into three
ethnically-based, but unified, sub-TRANSCOs amounts to a de
facto dismantlement of it, and there is currently consensus
within the international community that it must be opposed.
We are somewhat concerned, however, that our EU allies --
given their negotiating history with the RS -- may buckle, if
the RS continues to insist on such an outcome.
ENGLISH