VZCZCXRO8413
RR RUEHAST
DE RUEHPS #0545/01 1740955
ZNR UUUUU ZZH
R 230955Z JUN 06
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC 6246
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RHFMIUU/AFSOUTH NAPLES IT
RHMFIUU/CDR TF FALCON
RHEFDIA/DIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEPGEA/CDR650THMIGP SHAPE BE
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 PRISTINA 000545 
 
SIPDIS 
 
SENSITIVE SIPDIS 
 
DEPT FOR EUR/SCE, EB/IFD/OIA, EB/CBA 
DEPT PLEASE PASS TO OPIC 
AID FOR EE/ECA, EE/DGSR 
NSC FOR BRAUN 
USDOC FOR CEEBIC, 4232/ITA/MAC/EUR/OEERIS/CEED/SSAVICH 
TREASURY FOR EUROPE & EURASIA 
FRANKFURT FOR TREASURY E. MEYER 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EFIN EINV PREL YI
SUBJECT: KOSOVO: PISG AND WORLD BANK AGREE ON A WAY FORWARD 
FOR ENERGY SECTOR DEVELOPMENT 
 
REFS: (A) PRISTINA 321  (B) PRISTINA 141 
 
PRISTINA 00000545  001.2 OF 003 
 
 
¶1. (U) Sensitive but unclassified; protect accordingly. 
 
¶2. (SBU) Summary.  The Provisional Institutions of Self- 
Government (PISG) and the international community, led by 
the World Bank, have reached agreement on a way forward for 
development of Kosovo's energy sector.  The parties have 
resolved contentious timeline differences and adopted spring 
2007 (coincidently just after the likely determination of 
Kosovo's final political status) as the target for launching 
a tender for selection of the builders of a massive mining 
and power generation complex.  End Summary 
 
MEM AND WORLD BANK REACH AGREEMENT ON A WAY FORWARD 
--------------------------------------------- ------ 
 
¶3. (SBU) In a June 16 meeting with USG officials, Peter 
Thomson, World Bank (WB) Director for Infrastructure in 
Europe and Central Asia, said he and Minister of Energy and 
Mining Ethem Ceku had reached an agreement earlier that day 
on a way forward for Kosovo's energy sector development. 
Thomson described the centerpiece of the agreement as an 
integrated tender package for the development of the Sibovc 
lignite mine and a new independent power plant to be known 
as Kosovo C.  WB Strategy and Operations Officer Neil Bush 
privately told Econoff on June 16 that the meeting between 
Ceku and Thomson was pleasant and jovial, noting that once 
they agreed on the way forward for Kosovo's energy sector 
development, the Minister brought out champagne to celebrate 
the deal. (Note: USOP and USAID officials and USG-contracted 
advisors worked diligently with MEM and WB for several weeks 
before this meeting to ensure this agreement.  End Note) 
 
NEXT STEPS CRITICAL IN MOVING FORWARD 
------------------------------------- 
 
¶4. (SBU) Thomson outlined next steps for both sides to 
ensure that the agreement moves forward expeditiously: the 
PISG should issue a WB-endorsed solicitation of expressions 
of interest (EOI) in July, 2006; in accord with the WB's 
Lignite Protection Technical Assistance Project (LPTAP), a 
Project Steering Committee (PSC) should be established to 
review expressions of interested received and to create a 
shortlist of applicants judged qualified to eventually bid 
for the mining and generating licenses to be tendered (ref 
A); and the WB should start a process in July to select a 
transaction advisor to offer technical and legal support to 
the PISG in preparing and implementing the tender.  Thomson 
added that the PISG had agreed after several weeks of 
deliberation to sign the WB's energy sector development 
strategy policy letter, a prerequisite to the WB sending the 
LPTAP to its board of directors for final approval, and to 
ask that the Kosovo Trust Agency return the mining license 
for Bauxite E. Kosoves mine, a socially-owned enterprise 
(SOE) that is near the Sibovc field that will be privatized. 
Thomson explained that the WB requested that the KTA return 
the mining license for the bauxite mine to avoid any legal 
complications that could arise and allow the Bank and Kosovo 
government to have a clear path to tender the development of 
the Sibovc mine. 
 
TIMETABLE FOR LPTAP IMPLEMENTATION 
----------------------------------- 
 
¶5. (SBU) USOP asked what would be an ideal timetable for 
implementing the LPTAP if signed in late June.  Thomson said 
if the PISG agrees to proceed with the aforementioned next 
steps, the EOI could be released at the same time the WB 
completes, approves and releases the terms of reference for 
the transaction advisor by late July, and the European 
Agency for Reconstruction (EAR) also starts with the options 
 
PRISTINA 00000545  002.2 OF 003 
 
 
analysis study next month which will serve as a market 
sounding report to assess private industry's interest 
developing new lignite coal mines.  Thomson opined that by 
October the LPTAP PSC completes its initial review of EOIs, 
the EAR's options study is also completed by 
October/November, and the transaction advisor arrives in 
Pristina by December 2006. 
 
¶6. (SBU) Thomson added that the transactions advisor would 
decide if rehabilitation of some Kosovo Energy Corporation's 
(KEK) power units should be added to the tender package. 
Thomson said by late January the transaction advisor 
prepares tendering documents which are released by March 
¶2007.  Thomson concluded that energy firms or their 
consortia should have about six months to submit their bids, 
the PSC and transactions advisor evaluate the tender 
proposals and a provisional winner is chosen by December 
¶2007.  USG-funded technical advisors believe that it will 
likely take two years to negotiate a final deal to begin 
work.  However, the World Bank has left open the possibility 
of conducting two separate negotiations, one for Kosovo C 
and the other for mine development to allow lignite mining 
activities to begin sooner. 
 
IMPORTANT TO KEEP FOCUS ON SHORT-TERM ENERGY NEEDS 
--------------------------------------------- ----- 
 
¶7. (SBU) Thomson told USG officials that it was important 
that Kosovo focus on immediate needs such as developing new 
coal mines for short-term and long-term needs, improving 
energy bill collections and signing contract extensions for 
electricity imports until March/April 2007 to prepare for 
this year's winter (ref B).  Thomson said that a proposed 
credit enhancement facility to support energy imports was 
not feasible at this time, opining that Serbia continues to 
auction off and sell transmission rights for Kosovo; Kosovo 
does not control the power grid to buy or sell energy to 
third parties; and, energy traders affiliated with Serbia's 
Electric Power Industry (EPS) have set up a pricing monopoly 
with EPS that adversely affects Kosovo's energy imports. 
 
¶8. (SBU) On June 20 COM met with MEM Minister Ceku to 
congratulate the PISG for agreeing to a deal with the World 
Bank, but also pressed him to work harder to improve 
electricity bill collections, help KEK prepare for the 
upcoming winter and embark on a public awareness campaign 
that clearly explains the progress and timelines for the 
energy sector's development. 
 
KEK PREPARES FOR WINTER BUT MORE SUPPORT NEEDED 
--------------------------------------------- -- 
 
¶9. (SBU) KEK has made some progress in preparing for the 
upcoming winter.  In May UNMIK finally took action to remove 
the remaining squatters near Hade village in Obilic 
municipality, the site of an accessible, massive lignite 
coal seam.  The residents had interfered with mining 
operations for six weeks to demand employment with KEK 
despite the PISG already relocating and compensating them 
for the expropriation of their land.  KEK Information 
Officer Nezir Sinani told Econ FSN on June 15 that 
refurbishment of some KEK A and B units are on track and the 
energy utility is removing overburden and extracting lignite 
to build up coal stocks and supplies for the winter.  Sinani 
estimated that KEK still needs about 5.5 million euros to 
buy equipment, increase mining operations and prepare for 
emergency mining operations in time for next winter.  Sinani 
noted that EAR is supposed to provide 15 million euros for 
mining activities and KFW (Kredistal fur Wiederaufbau), the 
German Government's aid body, would provide another 8 
million euros for equipment.  He added that KEK has not 
received additional funding from the PISG to support its 
 
PRISTINA 00000545  003.2 OF 003 
 
 
activities to prepare for the winter.  Under the best of 
circumstances, KEK will be able to provide consistent power 
with the existing load shedding plan, known as the ABC 
Program, to Kosovars during the winter. 
 
¶10. (SBU) Regarding acquisition of affordable energy 
imports, Nezir told Econ FSN that KEK has signed supply 
contracts until December and is seeking to extend contracts 
until March-April 2007.  Nezir said KEK would likely need 
additional funding from the PISG or international donor 
support to extend the contracts as well as for emergency 
situations.  He noted that energy usage increases by 70-80 
percent during the winter and damages existing power lines 
and burns out electricity feeders and other equipment. 
 
¶11. (SBU) Comment.  USOP and USAID have worked closely with 
the World Bank and PISG to forge consensus on a clear way to 
move forward in the energy sector.  The WB and the PISG each 
claims that this agreement was reached because the other 
capitulated completely.  We therefore believe that USG 
diligence will remain essential as the agreement in 
principle, particularly the timeline, is implemented on the 
ground.  Certainly investor interest will support aggressive 
implementation: American AES continues to show strong 
interest; CEZ of the Czech Republic opened a project office 
in Pristina on June 16; ENEL of Italy continues to engage. 
The USG will continue to provide technical assistance to the 
MEM until the transaction advisor is on board and will 
continue to work with UNMIK, the PISG and the rest of the 
international community to ensure that Kosovo is well- 
prepared for the short-term that could complicate public 
acceptance of the necessarily medium-to-long-term 
perspective of the PISG-WB agreement.  End Comment. 
 
GOLDBERG