VZCZCXRO0574
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #0092/01 0330915
ZNR UUUUU ZZH
R 020915Z FEB 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0923
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000092 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON ENRG ETRD SR
SUBJECT: SERBIA: JOINT VENTURES FOR NEW POWER PLANTS 
 
REF: 08 Belgrade 382 
 
Summary 
------- 
 
¶1.  (SBU) On January 20, state-owned Electric Power Industry of 
Serbia (EPS) announced an international call for firms to submit an 
expression of interest in joint investments in the construction of 
two power plants.  The tenders are likely to be contested between 
Russian and Western firms with vigorous lobbying and Serbian party 
politics at the center of the process.  Industry analysts expressed 
concern about aggressive Russian tactics, but expected several 
strong Western consortiums to bid.  Ultimately, this tender could be 
an indicator of the balance of power between the coalition partners 
in Serbia and the commitment of the government to a transparent bid 
process.  End Summary. 
 
New Tenders for New Power Plants 
-------------------------------- 
 
¶2.  (U) On January 20, state-owned Electric Power Industry of Serbia 
(EPS) announced an international call for firms to submit an 
expression of interest in joint investments in two thermal power 
plant projects - Kolubara B (2x350 MW) and Nikola Tesla B (700 MW). 
The proposed facilities would provide additional generation capacity 
at existing power plant sites, maximizing the use of existing 
infrastructure.  EPS hopes to complete the qualification process for 
potential partners in the first half of 2009.  Qualified bidders 
would be asked to submit financial offers later in the year with EPS 
planning to make a selection by the end of 2009.  The total 
investment required for the two projects is approximately $2.7 
billion and the projects should require four to five years to 
complete.  Post forwarded information on the tenders to the Commerce 
Department for circulation to U.S. firms. 
 
Who is in Charge - DS or SPS or Both? 
------------------------------------- 
 
¶3.  (SBU) Aleksandar Cirilovic, Chairman of the Democratic Party 
(DS) Energy Committee, told us on January 23 that the Energy and 
Mining Ministry under Socialist Party of Serbia (SPS) Minister 
Skundric was pushing for these tenders, while DS did not have clear 
strategy.  According to Cirilovic, Skundric (an honorary professor 
at Technology University in St. Petersburg) Energy Ministry State 
Secretary Dusan Mrakic (SPS) supported by EPS management, especially 
Deputy Director Dragan Tomic, were in favor of partnership with the 
Russian electricity trading firm Inter RAO. 
 
¶4.  (SBU) According to the coalition agreement DS was to appoint the 
EPS managing director, but seven months after the government was 
formed DS has not agreed internally on appropriate candidate. 
Cirilovic said that DS needed to take charge of the tender process 
in EPS, but the internal struggle among different lobbies kept DS 
from acting.  The current EPS management, including the managing 
director, is from the opposition Democratic Party of Serbia (DSS) 
and SPS.  Cirilovic said that the lobbying process within DS for EPS 
potential partners had already started.  Cirilovic believed the 
final decision on the tenders would ultimately need the endorsement 
of President Tadic. 
 
Western Companies with DS 
------------------------- 
 
¶5.  (SBU) Cirilovic said that Tadic was fed up with proposals coming 
from the same people and the same players and that any new 
respectable player would be more than welcome.  According to 
Cirilovic, Economy Minister Mladjan Dinkic (G-17) and DS official 
and former Minister of Privatization Aleksandar Vlahovic would 
support German firm RWE.  Czech energy firm CEZ hoped to use support 
from Major of Belgrade Dragan Djilas (DS).  Local tycoon and 
president of the electricity trading company Energy Financing Team 
(EFT) Vuk Hamovic was looking for a partner to bid together in a 
consortium.  Cirilovic said that an EFT consortium could be very 
competitive.  He also admitted that he would personally lobby for 
German energy firm EnBW, which was considering participation in the 
tenders together with the investment fund Washington Capital Group. 
 
 
Russians stick to SPS 
--------------------- 
 
¶6.  (SBU) In April 2008, EPS and Inter RAO signed a protocol on 
cooperation for developing power generation facilities (reftel). 
The protocol was signed in the middle of the parliamentary election 
campaign in Serbia.  The agreement made no commitments, but called 
for exchanges of information on current and prospective projects and 
joint activities in third country markets.  The agreement was not 
binding and expires on July 1, 2009. 
 
BELGRADE 00000092  002 OF 002 
 
 
 
EPS Like NIS - History's Repeating? 
----------------------------------- 
 
¶7.  (SBU) Zorana Milanovic Mihajlovic, energy advisor to Republika 
Srpska PM Milorad Dodik, told us on January 21 that non-binding 
agreements with Russians as such did not exist.  Zorana said that 
working groups, created under the protocol, were preparing options 
for EPS divisions and equipment to be included into future joint 
Serbian-Russian companies.  Zorana expected that as in the case of 
oil firm NIS, tenders would fail and that Inter RAO would enter into 
direct negotiations with EPS.  Cirilovic confirmed that working 
groups did exist under the protocol, but denied that Inter RAO would 
be invited to negotiate with EPS outside the tender process.  He 
said that the tenders would be open, but only strong and respectable 
players would be considered. 
 
¶8.  (U) EPS has 8,355 MW of installed capacity and 35,000 employees. 
 The major concern for investors is that electricity prices in 
Serbia are the lowest in the region - on average 5.5 eurocents per 
kilowatt hour (kWh).  On January 16, announcing the tenders for the 
new powers plants, Energy Minister Skundric said that the 
electricity price would be adjusted to match prices in the region 
before the projects were finished. 
 
COMMENT 
------- 
 
¶9.  (SBU) The Energy Ministry has talked about releasing the EPS 
tenders for more than two years.  The January Russian gas cut off 
may have been the final straw to push these tenders to market. 
Serbian media focused blame for the gas crisis on Ukraine, but 
Russia's reputation took a significant hit in the public.  We expect 
that Russian interests will press on all fronts to secure the power 
plant projects.  However, political divisions in the government and 
public concern about Russia's reliability as an energy partner may 
hamper Russian efforts.  In the end, these tenders will be a 
bellwether of Serbia's commitment to free and transparent bids for 
large projects.  If the tenders are handled well, Serbia will not 
only secure desperately needed electricity supply, but will also 
advance its credibility with Europe.  End Comment. 
 
MUNTER