US embassy cable - 04BRATISLAVA787

UNCLAS SECTION 01 OF 02 BRATISLAVA 000787 
 
SIPDIS 
 
 
USDOC FOR MROGERS AND STIMMINS 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, LO, RU 
SUBJECT: GOS SEEKS REVISED BIDS IN ELECTRICITY TENDER AS 
RUSSIAN BIDDER BECOMES CONTROVERSIAL 
 
 
1.  Summary.  The GOS asked the three contenders in the 
privatization of a 66 percent share in the country's largest 
electricity producer, Slovenske Elektrarne (SE), to improve 
their bids.  According to unofficial sources, Italian Enel 
offered the highest bid, followed by the Czech CEZ and 
Russian RAO UES.  However, only RAO UES was willing to take 
both conventional and nuclear assets of the utility.  The 
privatization of SE is Slovakia's last significant sale of 
state property, and analysts believe it will have a 
significant effect on the entire power supply market in 
Eastern Europe.  Summary end. 
 
2.  On August 12, the steering committee for the 
privatization of a 66 percent stake in Slovakia's dominant 
power producer, SE, asked three of four interested investors 
to clarify and resubmit their bids by September 3.  The 
committee also confirmed it had excluded one bidder, but 
refused to specify which one.  According to sources, the 
three finalists are the Russian RAO UES (a joint venture of 
RosEnergoAtom and Unified Energy System in consortium with 
German Ost-Elektra), Czech CEZ and Italian Enel.  Austrian 
Verbund, which bid only for SE's conventional assets, is 
believed to be out of competition. 
 
3.  Analysts said the sale of SE is expected to change the 
balance of power in Eastern Europe's electricity market and 
the buyer could emerge as a low-price competitor for Western 
European players because SE already exports electricity to 
seven countries.  The utility operates nuclear, hydro and 
thermal power plants with a total capacity of 6,877 
megawatts, securing it an 85 percent share of the domestic 
market.  Its output could decrease by 1,320 megawatts by 
2008 following the phasing out of two of its nuclear 
reactors (which could be replaced with two newer ones). 
Sources close to the bidding said SE's value was estimated 
at around USD 2.4 billion, but this included approximately 
USD 1.6 billion in debt leaving a residual value of USD 800 
million, making the value of the 66 percent stake offered in 
the tender about USD 528 million. 
 
4.  According to the local newspaper Pravda, Italian Enel 
offered the highest price, with a bid of SKK 40 billion (USD 
1.2 billion).  However, it also demanded the cancellation of 
two long-term, economically disadvantageous contracts before 
the sale.  The French news agency AFP also reported that 
Entel would decrease the amount of its bid by USD 25 million 
unless it could delay the closure of the two aforementioned 
nuclear reactors until 2015, in contravention of Slovakia's 
treaty with the EU to close one in 2006 and the other in 
2008.  Czech CEZ is reportedly willing to pay SKK 31 billion 
(USD 931 million), but would not take on the nuclear assets. 
Russian RAO UES offered only SKK 19 billion (USD 570 
million), but did not ask any special conditions.  Pravda 
cited Slovakia's opposition leader Robert Fico of the SMER 
party as the source of its information. 
 
5.  The GOS's privatization advisor on the sale, 
PricewaterhouseCoopers, said after the GOS had studied the 
bids it asked the investors to reconsider some of their 
assumptions.  It did not provide further details, unlike the 
Economy Minister Pavol Rusko, who surprisingly made 
controversial statements indicating his preference for the 
Russian bidder.  In an interview with Pravda, Rusko said 
that CEZ would only win the tender if it presents the 
highest bid.  Many observers favor CEZ due to the synergetic 
effect that an eventual merger of the two former partners, 
SE and CEZ, could generate.  As a result of Rusko's 
statement, SMER accused the GOS of manipulating the tender 
and demanded its termination. 
 
6.  The reputation of RAO UES has been called into question 
by the local newspaper SME, which recently revealed a 
connection between the company and the former owners of the 
now-bankrupt, Bratislava-based Devin Bank.  According to 
records in the Slovak Commercial Register, there are links 
between RAO UES and Slovakia's Apis company, a former co- 
owner of Devin Bank.  Devin bank, which filed for bankruptcy 
in 2001 after running into liquidity problems, was known for 
its close relations with Russia.  The bank held a lucrative 
contract from the GOS to recoup Russia's Soviet era debt to 
Slovakia, and the police are still investigating its 
collapse. 
 
7.  Several domestic analysts have warned the GOS of risks 
related to the selection of RAO UES.  The Slovak Foreign 
Policy Association warned that RAO UES chief Anatolij 
Tchubays, as an ally of former President Boris Yeltsin, 
could soon face the same scrutiny as the jailed owner of 
 
BRATISLAVA 00000787  002 OF 002 
 
 
Yukos.  (Note: In 2001, Yukos won the tender to buy 
Slovakia's oil-pipeline operator Transpetrol.  End note.) 
Others have warned that RAO, a strong state monopoly, will 
likely undergo transformation, which could significantly 
challenge its economic position.  In the past three years, 
Russian companies have purchased considerable interests in 
Slovakia's energy infrastructure, including an option to buy 
into its natural gas pipeline, and a controlling interest in 
Transpetrol.  Furthermore, Slovakia currently imports 
virtually all of its oil and natural gas from Russia.  The 
addition of a 66 percent share in its major electrical 
producer would give Russia even more influence in the 
important energy sector - a fact which is just beginning to 
enter the public debate over the SE privatization. 
 
THAYER 
 
 
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