US embassy cable - 05PRAGUE366

UNCLAS SECTION 01 OF 03 PRAGUE 000366 
 
SIPDIS 
 
STATE FOR EUR/NCE, PM/PPA AND EB/TPP/MTA 
COMMERCE FOR 4232/ITA/MAC/MROGERS 
 
E.O. 12958: N/A 
TAGS: PGOV, EINV, ETRD, MARR, EZ, IZ 
SUBJECT: AMBASSADOR'S VISIT TO MORAVIAN-SILESIAN REGION: 
REGIONAL POLITICS AGAINST THE CENTER, PLUS STEEL, TRUCKS, 
AND IRAQ PROCUREMENT 
 
1.  Summary.  During his February 7-8 visit to Ostrava, 
regional governor Evzen Tosenovsky told the Ambassador the 
influence of the regions is growing, and that an 
accommodation between Prague and the regions must be worked 
out within his ODS party.   The Ambassador visited Vitkovice 
Steel, which the GOCR is in the process of selling. 
Vitkovice has significantly downsized over the past few years 
and is enjoying a good year in favorable world market 
conditions, but suffers from a dependency on one source of 
raw steel controlled by a competitor.  The government hopes 
to realize around $200 million from its sale.  A visit to 
Terex Tatra trucks revealed another company that has shed 
employment, a move that has caused hard feelings against its 
American management.  Tatra directors were concerned about 
purchasing procedures used by the U.S. Army to supply troops 
in Iraq.  End Summary. 
 
EVZEN TOSENOVSKY, REGIONAL AND ODS LEADER 
----------------------------------------- 
 
2.  During his February 7-8 visit to Ostrava, the capital of 
the Moravian-Silesian region, the Ambassador met with its 
governor, Evzen Tosenovsky.  Tosenovsky is both a leader of 
the opposition ODS party and a leader among the regional 
governors, twelve out of thirteen of whom are ODS members. 
Tosenovsky governs in Ostrava with a center-right coalition 
of the ODS and the Christian Democrats (KDU-CSL).  The region 
is hard hit by the drastic downsizing of its traditional coal 
and steel industries, but is actively promoting new 
investment from abroad.  Tosenovsky was pleased that the 
region has already attracted some quality companies such as 
Siemens and Visteon.  He is eager to develop the Mosnov 
airport to give executives -- especially Americans -- direct 
links to international flights from Vienna.  Tosenovsky was 
optimistic about the Czech Republic's future success in trade 
with Vietnam.  He mentioned that "half of the Vietnamese 
government speaks good Czech", having studied in Czech 
schools.  His region has an agreement with the Vietnamese 
Chen Hua province for cooperation.  He views prospects for 
trade with China and India as promising. 
 
VITKOVICE STEEL PRIVATIZATION 
----------------------------- 
 
3.  The Ambassador inquired about the status of the 
privatization of Vitkovice Steel, the third-largest steel 
mill in the region after Nova Hut and Trinec Ironworks. 
Tosenovsky said that the success of Vitkovice is vital to the 
further development of Ostrava and the region.  He said that 
there is strong interest from Russia in Vitkovice and from 
Mittal Steel, the owner of Ostrava's Nova Hut and VPO, a pig 
iron producer that supplies not only Nova Hut but also 
Vitkovice.  Tosenovsky thought that coordination of the Czech 
mills with very similar mills in Poland is important, and he 
said both Mittal and the Russians work well with Polish 
mills.  Tosenovsky guessed that the government is not in a 
hurry to complete the privatization because the political 
situation is very complicated.  He said that a new owner is 
not likely to lay off more employees, as the company has been 
stabilized and world demand for steel has revived.  He 
considers the time right for the government to sell 
Vitkovice. 
 
4.  Since its privatization to Mittal, Tosenovsky said, Nova 
Hut has become something of a black box.  It has been clever 
in reducing excess employment, offering attractive severance 
packages to employees willing to leave.  Its economic results 
seem to be good, given the current strong market conditions. 
But because of uncertainties at Nova Hut, Tosenovsky is 
hopeful that a strong new owner for Vitkovice will be found. 
 
5.  Later in the day, the Ambassador met with management of 
Vitkovice steel and toured its production facilities. 
Vitkovice had one of its best years ever in 2004, benefiting 
from worldwide shortages of steel and concomitant higher 
prices.  It has undergone significant restructuring in the 
past five years, dropping from 12,000 to 1500 employees since 
2000.  The layoffs are one of the reasons the Ostrava area 
suffers from 20% unemployment. 
 
6.  Vladimir Baar, CEO of Vitkovice, said that he expects the 
sale of Vikovice to generate from 4.5 to 5 billion crowns 
($195-217 million) for the government.  However, he said that 
the American firm Nucor has dropped out of the running to 
purchase Vitkovice.  Other reports indicate that the Russian 
firm Severstal is no longer interested either.  Both firms 
were probably put off by Vitkovice's key vulnerability: it is 
dependent for all its supplies of raw steel on Vysoka pece 
Ostrava (VPO), which along with Nova Hut is owned by Mittal. 
Vitkovice is already litigating with Mittal over what 
Vitkovice views as unjustified price increases.  Mittal is 
still actively pursuing the purchase of Vitkovice, even 
though the Czech government has said that it must settle the 
lawsuit as a condition for putting in a bid.  Settlement 
discussions are well under way and the government has an 
interest in having Mittal in the game to bid up the price. 
Trinec Ironworks and the Czech investment firm Penta are also 
said to be interested in Vitkovice.  So are Arcelor of 
Luxembourg and Donetsk Steel of Ukraine, among several 
others.  According to Baar, offers are due in mid-March and 
the government would like to make a decision on the buyer in 
June. 
 
THE REGIONS AND PRAGUE IN POLITICS 
---------------------------------- 
 
7.  Tosenovsky was proud that the message of his ODS party on 
terrorism and in support of Czech participation in the 
mission in Iraq was strong.  The November regional and Senate 
elections were clear successes for the ODS, he said, helped 
along by CSSD mistakes.  Now, of the 13 regional governors, 
12 are ODS, and their attitudes toward the U.S. are friendly. 
 Tosenovsky said that the U.S. elections last year were 
important to the world and that they "turned out well". 
Because of the ODS's strong regional representation, it makes 
the situation complicated for the parties' national 
leadership, Tosenovsky said.  Regional-national cooperation 
is essential, but ODS does not have a clear formula for doing 
so.  The national leadership in the person of ODS Chairman 
Miroslav Topolanek (who stands to be Prime Minister after the 
2006 election) should use, and not fear, regional political 
power, which will only become more sigificant in the future. 
 
8.  Tosenovsky believes that with regional support, the ODS 
is sure to be a winner in the next parliamentary elections. 
More generally, he sees a need for decentralization, since 
Prague is a very different world from the rest of the 
country.  Lobbying occurs only in Prague, he observed, which 
is dangerous for the Czech Republic's political and economic 
future.  He sees tensions rising between the regions and the 
center.  There are separate rules for Prague and for the 
regions, which in his view is bad.  President Klaus, he 
remarked, does not like the regions as they are now 
constituted, and his views carry weight in the ODS.  The 
dramatic reforms of the post-1989 period may have required 
strong central control, but times are changing, he said. 
 
9.  Note: The regional governors have founded an association 
and held their first meeting the week following the 
Ambassador's visit to Ostrava.  Tosenovsky chairs the 
association and told us after the two-day meeting that the 
governors discussed organizational issues at first.  They 
then moved on to a discussion of how to stabilize the 
forested areas of the Czech Republic.  Large parts of these 
areas are owned by the state and are faced with pressure for 
privatization.  The governors' would consider transfer of 
such areas to the regions favorably.  Water management was 
another issue.  The governors fear that strict EU regulations 
for water management cannot be met because compliance is too 
expensive.  One outcome of this discussion was a proposal for 
a joint meeting of all thirteen regional governors with the 
Ambassador in Prague. 
 
TATRA TRUCKS RESTRUCTURES, FINDS 
SELLING TO THE U.S. ARMY DIFFICULT 
---------------------------------- 
 
10.  On February 8, the Ambassador toured the 2200-employee 
Terex Tatra truck manufacturing plant in Koprivnice.  Tatra 
trucks have a long history and have a deserved reputation for 
ruggedness.  Since 2003 Tatra has been under the control of 
the United States firm Terex.  Tatra has a traditional 
customer base in Russia, China and the Middle East.  It has 
won contracts to supply trucks to the Israeli army, and is in 
line to supply the Czech Army and the Iraqi government. 
While in Koprivnice, the Ambassador saw a prototype truck 
that Tatra is preparing to compete for a U.S. Marine Corps 
tender.  The company is strongly vertically integrated, but 
is trying to move more of its parts production to independent 
suppliers.  Efforts to streamline the company have caused 
some hard feelings in Koprivnice, where Tatra is the dominant 
employer.  These complaints have attracted the attention of 
President Klaus, who recently visited Tatra to get a feel for 
what is going on there.  However, the company is operating in 
the black, and it is hopeful that some management changes may 
help to sooth local sensitivities and boost morale among 
employees. 
 
11.  In his discussions with Tatra management, the Ambassador 
heard serious concerns about how the U.S. Army's purchasing 
process for Iraq service is working.  In particular, the 
management took issue with the Army's practice of lumping 
together totally unrelated items in a single tender.  This 
results in bids from middlemen who gather together 
sub-contracts from numerous suppliers.  The management 
contends that narrower tenders, even if somewhat more 
expensive to administer, would result in lower-cost, more 
professional bids direct from manufacturers.  The management 
was also critical of the way specifications for truck 
purchases are developed, saying that they clearly are not 
developed by people who understand how trucks are made.  The 
result, they say, has been bids that are low, but do not 
result in quality products on the ground. 
 
12.  The Ambassador and Mrs. Cabaniss addressed two separate 
classrooms of secondary school students at the Koprivnice 
Secondary Technical School and College about various aspects 
of American life and their impressions of the Czech Republic. 
 They met with the rector of Ostrava University.  Mrs. 
Cabaniss visited a model community where Roma and non-Roma 
live together, and where Roma can obtain job-seeking and 
other social support. 
 
 
 
CABANISS