VZCZCXYZ0000
RR RUEHWEB

DE RUEHPS #0032/01 0171144
ZNR UUUUU ZZH
R 171144Z JAN 07
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC 6927
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS PRISTINA 000032 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/SCE, EB/IFD/OIA, EB/CBA 
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AID FOR EE/ECA, EE/DGSR, EE/EG 
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USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEED/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EMIN ENRG PGOV PREL YI
SUBJECT: KOSOVO SEEKS TO MAINTAIN MOMENTUM IN DEVELOPING 
LIGNITE MINES AND ENERGY SECTOR TENDER 
 
REF: 06 KOSOVO 545 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
¶1. (SBU) Summary.  The Kosovo/World Bank energy sector 
development project, known as the Lignite Power Technical 
Assistance Project (LPTAP), has made some progress, but 
ensuring coordination between UNMIK/PISG and the 
international community on the way to move forward remains a 
challenge.  The PISG has proposed the creation of a new 
lignite mining company to be spun off from KEK's mining 
department.  According to the PISG, this would expedite the 
development of new mines, obtain money to rehabilitate 
excavators to remove overburden, and keep the energy sector 
development tender moving forward.  The creation of a new 
lignite mining company is part of the options analysis 
conducted by EAR for the energy sector's development. 
However, the World Bank is hesitant for this project to move 
forward without its transaction advisor, who should be in 
place by April.  In addition, the IMF, and some officials in 
UNMIK Pillar IV, UNMIK's Office for Oversight of 
Publicly-Owned Enterprises and the Kosovo Trust Agency (KTA), 
have expressed concerns about how UNMIK and the PISG plan to 
take money from PTK to fund the rehabilitation of the 
excavators, as well as the possible short and medium term 
impacts on KEK.  USOP will take the lead to encourage 
UNMIK/PISG and the international community to sit down at the 
same table to improve their coordination to ensure that we 
all do what is in the best interests for Kosovo's energy 
sector and economic development in general.  End Summary. 
 
LPTAP PROJECT ACHIEVES SOME SUCCESSES... 
 
¶2. (U) Since UNMIK/PISG and the World Bank reached an 
agreement on the Lignite Power Technical Assistance Project 
(LPTAP) in mid-June 2006 (reftel), the Ministry of Energy and 
Mining (MEM) and the LPTAP Project Steering Committee (PSC) 
have kept the energy sector development tender moving 
forward.  In August, the PSC launched a World Bank-approved 
expression of interest (EOI) request for companies to submit 
their pre-qualification criteria for the upcoming energy 
sector development tender.  In October 2006, MEM hosted a 
successful investors conference to discuss Kosovo's energy 
sector development strategy and the tender.  In November, ten 
companies submitted their EOIs for the energy sector 
development tender, with quantity and quality of interested 
bidders better than anticipated by the PSC.  On December 28, 
2006, Energy and Mining Minister Ethem Ceku informed USOP 
that the PSC selected four companies to be shortlisted to 
compete for the energy sector tender.  The four 
companies/consortia are EnBW/Washington Group (German/USA), 
Enel/PPC/Contour Global (Italy/Greece/USA), CEZ/AES 
(Czech/USA), and Germany company RWE Power AG. 
 
...BUT CHALLENGES REMAIN 
 
¶3. (SBU) The primary challenge confronting the LPTAP is to 
ensure coordination between UNMIK/PISG and the international 
community.  UNMIK/MEM and some members of the international 
community are concerned that the World Bank's timeline has 
slipped by six months to April 2007 to have a transaction 
advisor, legal advisor and environmental advisor in Kosovo to 
prepare for and launch the energy sector development tender. 
World Bank officials blame the delay on the Kosovars, saying 
that the PSC/MEM are behind schedule in appointing a project 
manager for the LPTAP, the Bank has not received revised 
draft request for proposals (RFPs) from PSC/MEM for the legal 
and safeguard advisors, and the Bank wants assurances from 
the Kosovo Trust Agency (KTA), which is responsible for the 
administration and maintenance of socially-owned enterprises 
(SOEs) and publicly-owned enterprises (POEs), that no other 
lignite mining licenses will be issued that could adversely 
affect this project.  For its part, MEM attributes some of 
the reasons for delay to World Bank inefficiencies in 
approving certain PSC actions, as well as the Bank insisting 
on substantial non-material changes in documentation.  In 
addition, there is serious concern from UNMIK/PISG and the 
international community that the LPTAP process is not 
prepared to address the short and medium-term problems of the 
rapid depletion of existing lignite mines to power KEK's 
plants, which are scheduled to run out of coal by 2009-2010. 
 
 
MEM PROPOSES A WAY FORWARD FOR LIGNITE COAL DEVELOPMENT WITH 
UNMIK SUPPORT 
 
¶4. (SBU) In November 2006, the PISG approved the MEM's 
proposal to unbundle KEK's mining department to form a new 
joint stock company called the Kosovo Lignite Mining Company. 
 MEM officials said forming this new company was necessary to 
obtain loans from banks to rehabilitate two excavators to 
remove overburden.  MEM officials added that creating the new 
lignite mining company is part of the European Agency for 
Reconstruction-funded options analysis to explore ways to 
develop Kosovo's energy sector, which also supports the 
LPTAP.  UNMIK, under the guidance of PDSRSG Steven Schook, 
supports MEM's proposal because it is concerned about the 
existing lignite coal resources and believes that the MEM's 
plan helps the LPTAP project move forward while waiting for 
the World Bank's transaction advisor to arrive in Kosovo. 
UNMIK officials maintain that UNSCR 1244 allows UNMIK via the 
KTA to form the Kosovo Lignite Mining Company, and they 
propose to take 40-65 million euros from telecommunications 
monopoly Post and Telecom of Kosovo (PTK) to pay for the 
rehabilitation of the excavators. 
 
WORLD BANK OFFICIALS HESITANT ABOUT SUPPORTING NEW LIGNITE 
MINING COMPANY WITHOUT ITS TRANSACTION ADVISOR 
 
¶5. (SBU) World Bank officials have reservations about this 
plan, noting that the decision to form a new company was made 
without the Bank's recommendation from its transaction and 
legal advisors.  World Bank officials believe that UNMIK and 
PISG officials formally agreed in the Bank's Letter of Sector 
Development Policy (LSDP) and LPTAP that its transaction and 
legal advisors would make any recommendations to restructure 
Kosovo's lignite-related activities.  World Bank officials 
claim they were not invited to participate in the UNMIK/PISG 
meetings with other donors to discuss how to move the Kosovo 
Lignite Mining Company forward.  However, in December 2006, 
World Bank officials agreed that UNMIK/PISG could take 
preliminary steps to prepare the necessary legal framework 
and paperwork in advance of the arrival of the transaction 
advisor, such as forming the mining company as a 
publicly-owned enterprise and purchasing parts to 
rehabilitate the excavators. 
 
 
IMF VOICES CONCERNS ABOUT THE NEW LIGNITE MINING COMPANY AND 
FUNDING THE EXCAVATORS 
 
¶6. (SBU) On December 20, 2006, the International Monetary 
Fund's (IMF) Resident Representative to Kosovo, Edgardo 
Ruggiero, expressed his concerns about UNMIK/PISG plans to 
develop the new lignite mining company and fund the 
rehabilitation of the excavators from PTK revenues.  He said 
the IMF is concerned that this plan is being rushed by UNMIK 
and PISG, and in particular complained about the funding 
proposal for the new lignite mining company and the 
rehabilitation of the excavators.  Ruggiero explained that 
UNMIK and PISG have not revised the Medium Term Expenditure 
Framework (MTEF) to take into account these ideas and their 
short- and long-term impacts on the Kosovo Consolidated 
Budget (KCB).  He noted that the MTEF already has a proposal 
to fund the development of new mines, but if this plan had to 
be revised it should be done according to the appropriate 
budgetary and macroeconomic policy procedures. 
 
¶7. (SBU) Ruggiero was particularly critical of UNMIK/PISG's 
proposal to take money from PTK to fund the rehabilitation of 
the excavators, noting that this was not good budgetary 
practice to address important needs, and that Kosovo should 
avoid setting bad precedents to deal with emergencies.  He 
added that UNMIK and PISG should also give careful 
consideration to KEK's operational sustainability because 
Kosovo will need the energy utility for the short and medium 
term.  Ruggiero said the IMF understood the immediate needs 
of the mining situation, but budgetary and procurement 
practices should be respected. 
 
 
PILLAR IV, KTA AND UNMIK POE OVERSIGHT OFFICE ALSO VOICE 
CONCERNS ABOUT THE PROCESS FOR THE NEW LIGNITE MINING COMPANY 
 
¶8. (SBU) There are also some officials in UNMIK Pillar IV, 
which is responsible for Kosovo economic policy, KTA, and 
UNMIK's Office of Oversight of Publicly-Owned Enterprises 
(OPOEs) who have expressed concerns about the development of 
this new lignite mining company.  Pillar IV, KTA and OPOE 
officials share the IMF's concerns that the lignite mining 
company is moving too fast without proper analysis of its 
impact on PTK, KEK and Kosovo's budgetary policies and 
procedures.  OPOE officials say they are concerned about 
UNMIK setting bad budgetary, economic and legal precedents 
that the PISG could follow if the Kosovo Lignite Mining 
Company is not analyzed and vetted properly. 
 
 
URGENT NEED TO GET ALL STAKEHOLDERS AT THE SAME TABLE TO 
DISCUSS THE ENERGY SECTOR 
 
¶9. (SBU) Comment: We recognize the urgent necessity to 
develop new mines for the existing KEK plants and the new 
energy sector development tender, as the current lignite 
sources will run out by 2009-2010.  UNMIK and MEM should be 
given some credit for taking bold action to address this 
issue.  However, it is important to bring all stakeholders 
together to improve communication and coordination.  USOP 
believes that an important step in developing the mines is to 
ensure that UNMIK, PISG and the international community are 
clearly in sync with each other; the World Bank should be 
pressed to live up to its commitments and understand the 
urgency of Kosovo's energy needs, while the Kosovars and 
UNMIK should make every effort to keep the World Bank on 
board with their plans.  There is real urgency in moving this 
project forward, since the long-term stability and economic 
development in Kosovo are dependent on the resolution of the 
energy problems here.  End Comment. 
KAIDANOW