BOSNIA: TRANSCO UPDATE - TALKS CONTINUE BUT NO

C O N F I D E N T I A L SECTION 01 OF 03 SARAJEVO 000147

NOFORN
SIPDIS

STATE FOR EUR (JONES); EUR/SCE (FOOKS, STINCHCOMB)

E.O. 12958: DECL: 02/01/2022
TAGS: ECON ENRG PREL BK
SUBJECT: BOSNIA: TRANSCO UPDATE - TALKS CONTINUE BUT NO
REAL PROGRESS

REF: A. A) 08 SARAJEVO 1835 AND PREVIOUS

B. B) 08 SARAJEVO 1613

Classified By: AMB CHARLES ENGLISH FOR REASONS 1.4B


1. (C) Summary. Little has happened since the entity Prime
Ministers agreed on December 3 (Ref A) to do everything
possible to jumpstart operations at the State-level
electricity transmission company (TRANSCO). The first
meeting between the entity Ministers of Energy finally took
place on January 27. Although both sides agreed to review the
counterparts, proposals and reconvene, no significant
agreements were made. Despite his December 3 commitment to
compromise, Republika Srpska Prime Minister Dodik told us on
January 28 that he is keeping his options open in terms of
pushing to dissolve TRANSCO. Dodik has also included TRANSCO
on a list of 56 competencies that he claims have been
transferred to the State from the RS and that he intends to
restore. Without clear direction from Prime Minister Dodik
to RS officials that they must cooperate in TRANSCO
proceedings, the company,s stalemate will continue. Judging
from RS Energy Minister Puhalac,s position in the January 27
meeting, the RS does not appear willing to compromise and has
not shifted significantly from its original February 2008
restructuring proposal, which effectively called for
dissolution of TRANSCO. In a more welcome development, the
Federation is now engaged on the issue of TRANSCO and came
well prepared to the January 27 meeting with proposals for
compromise where appropriate and ready to draw clear lines
opposing the most egregious RS demands. However, given the
track record of RS behavior on this issue, it is questionable
whether the Federation initiatives will be sufficient to put
this on a constructive track. End Summary.

ENERGY MINISTERS FINALLY DISCUSS TRANSCO
--------------


2. (SBU) Following the December 3 agreement between Prime
Ministers Dodik and Brankovic (reftel),Ministers of Energy
Puhalac (RS) and Heco (Federation) finally met on January 27
to discuss how to &jumpstart8 operations of the
state-managed electricity transmission company
Electroprijenos (TRANSCO). The two sides convened an
earlier, assistant-minister-level meeting in late December
which resulted in no progress and the January 27 meeting was
the first real effort to work out a resolution. Although the
Ministers agreed to review the counterparts, positions and
return to talk again on February 10, no agreements were made
on key problems, meaning a continued freeze on the daily and
long-term operations of the company. The biggest sticking
point continues to be the RS position, and the Federation
refusal, to restructure the company,s operational areas from
four to three, ethnically-based areas (similar to the
Mostar-, Sarajevo- and Banja Luka-based power generation and
distribution companies, the Elektroprivredas). Investment
planning was one area where the ministers did make progress.
Although they still disagree on the method for investment
planning, they did agree to allow the Management Board to
develop investment plans based on existing legislation with
the Prime Ministers given the ultimate approval, including
approval of the 2008 investment plan. On the transfer of 110
KV lines from TRANSCO back to the Elektroprivredas, the
Federation,s proposal to transfer only 110 KV lines used for
distribution was rejected by the RS which wants all lines,
including those used for transmission, returned to the EPs.
The two sides agreed to have the Management Board provide
them with a full list of 110 KV assets and personnel, with
which they can begin future discussions on the transfer
issue.

RS FUZZY ON TRANSCO FUTURE ) MAINTAINS PREVIOUS DEMANDS
-------------- --------------


3. (C) In a meeting with us on January 28, Prime Minister
Dodik claimed that he does not intend to dismantle TRANSCO
&right now8. However, he implied that he intends to keep
his options open, suggesting that if the RS side is not
satisfied with current talks to reform the company, he will
reconsider. He recently demonstrated what may be his true
intentions by including TRANSCO on a list of 56 competencies
that he claims were transferred to the State from the
Republika Srpska. Dodik and other senior RS officials,
including Serb member of the Tri-Presidency Radmanovic, have
frequently claimed that many of these alleged transfers were
illegal. In October 2008, Dodik secured an endorsement from
the RS National Assembly (RSNA) for this procedure and

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announced plans to reverse this allegedly illegal competency
transfer (Ref B). (Note: Dodik's claims about illegal
competency transfers are bogus. What he defines as a
competency transfer, such as border control, is actually the
state exercising powers guaranteed to it under the
constitution. End note)



4. (C) In a December 24 meeting with us, RS Minister of
Energy Puhalac claimed that the Federation, the RS and the
international community have &differing opinions8 on the
outcome of the December 3 agreement. The RS side continues
to demand Federation consent to its February 2008 proposal,
including provisions to renegotiate investments and
restructuring TRANSCO internal operations by turning four
operational areas into three, ethnically-based areas and
dissolving three of the five company directorates )
provisions that would ultimately lead to the dissolution of
the company. Prior to the January 27 meeting, the RS also
added to the agenda a discussion of the language in the State
Law addressing dissolution of the company.

FEDERATION FINALLY COMES TO THE TABLE WITH A PLAN
-------------- --------------


5. (SBU) After nearly one year of simply ignoring the RS
proposal to restructure TRANSCO, the Federation met with
emboffs on Monday, January 26 to review its negotiating
positions prior to the January 27 meeting. Much to our
surprise, Federation Minister of Energy officials had
dissected RS, proposal, drafted its own positions, some of
which included real compromise. Many of the Federation,s
points related to recommendations provided over the last year
by USAID consultants, though Federation energy officials have
come to embrace these proposals as their own. Federation
officials chose to negotiate with the RS on the transfer of
certain 110 KV lines from TRANSCO back to the entity-managed
power generation and distribution companies (Electroprivreda
) EP),reducing the number of company directorates from five
to three and how to develop annual investment plans ) all
areas of major concern to the RS. The Federation refuses to
negotiate on the RS plan to reduce the operational areas of
the company from four to three, ethnically-based area and the
plan to move all company operations to Banja Luka (presently,
the company has offices in Sarajevo, Mostar and Banja Luka).


INTERNATIONAL COMMUNITY CONTINUES PRESSURE
--------------


6. In the January 27 meeting, the Federation reissued the
proposal for international assistance for a management audit.
Preliminary indications are that the RS again rejected this
proposal. The Ministry of Foreign Trade and Economic
Relations (MOFTER) hosted an EU delegation from the Energy
Treaty Committee the week of January 19 who focused in
particular on the lack of progress on TRANSCO. According to
Federation contacts, RS officials were asked by the EU why
they chose to reject international community assistance to
save the company. RS officials answered that they had not
yet &completely8 rejected &all8 assistance. Following
their response, the EU has resubmitted its proposal for a
TRANSCO management audit.

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


7. Despite RS Prime Minister Dodik,s public commitment to
compromise, our concerns noted in Reftel about lack of
specificity on the December 3 agreement still exist. The
true RS intentions are suspect. At the Energy Minister and
below levels, the RS seems to be still pushing for the
demands it made last February that are clearly designed to
return assets and responsibilities to the RS that would leave
TRANSCO a shell at best. In an RS government so dominated by
Prime Minister Dodik, it is difficult to believe that Energy
Minister Puhalac is operating on his own contrary to the
wishes of his Prime Minister and SNSD party leader. There
are still grounds for optimism, albeit limited, provided the
talks continue and produce at least minor positive outcomes,
such as the January 27 agreement to approve the 2008
investment plan (to which the Prime Ministers must also
agree). A key sign of real intent to improve TRANSCO by the
RS would be a good faith acceptance of the management audit
and facilitator offered by the IC. A more pessimistic view
of the developments since December 3 is that Puhalac is

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simply stringing out discussions with orders from Dodik not
to agree to anything fundamental in preparation for an
eventual declaration that talks have failed leading to
another attempt at unilateral dissolution of the company by
the RS. This interpretation is more consistent with the
obstructionist, anti-state behavior and actions we have seen
from Dodik and the RS over the last two years.
ENGLISH