Viewing cable 08PRISTINA561
Title: KOSOVO: KEK PRIVATIZATION REQUIRES RELIABLE

IdentifierCreatedReleasedClassificationOrigin
08PRISTINA5612008-11-06 09:13:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Pristina
VZCZCXRO4384
OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHPS #0561/01 3110913
ZNY CCCCC ZZH
O 060913Z NOV 08 ZDK
FM AMEMBASSY PRISTINA
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C O N F I D E N T I A L SECTION 01 OF 04 PRISTINA 000561 
 
SIPDIS 
 
DEPT FOR EUR, EUR/SCE, DRL, INL, AND S/WCI, NSC FOR 
HELGERSON, USUN FOR SGEE, USOSCE FOR AHYDE 
 
E.O. 12958: DECL: 10/20/2018 
TAGS: PREL ETRD ECON EAID EAIR ETTC PTER KTFN UNMIK
KV, YI 
SUBJECT: KOSOVO: KEK PRIVATIZATION REQUIRES RELIABLE 
COLLECTIONS SCHEME 
 
Classified By: AMBASSADOR TINA S. KAIDANOW FOR REASONS 1.4 (B) AND (D) 
 
¶1. (C) SUMMARY:  The Government of Kosovo (GOK) has publicly 
announced its commitment to move forward with privatization 
of the distribution functions of the country's public 
electric utility, the Kosovo Energy Corporation (KEK).  While 
the pledge to privatize is both significant and necessary, 
the factors challenging a successful privatization process 
are considerable.  In its current state, KEK is largely 
overstaffed and inefficient, with aging and sometimes faulty 
equipment struggling to provide electricity to the country. 
Collections are low and in some parts of Kosovo, 
non-existent.  Through a long history of non-payment, some 
households have accumulated thousands of euros of debt. 
Attempts to regularize customer payments throughout Kosovo 
and collect arrears have highlighted political and ethnic 
sensitivities, particularly in minority areas, where local 
residents are being pressured not to engage with KEK and GOK 
representatives. 
 
¶2. (C) SUMMARY (cont,d):  To make Kosovo's electricity 
sector attractive to a prospective investor, it is essential 
that KEK be able to collect payment at cost-recovery levels 
for power delivered throughout Kosovo.  To accomplish that, 
the GOK and KEK must commit to normalizing collections 
throughout the country in a manner that does not alienate 
minorities, and offers a debt relief and repayment plan that 
is applied equally to all households.  Attempts to bring 
Kosovo Serb enclaves into the regular KEK payment system may 
push parallel Serbian government representatives to dig in 
deep, and lead to a further strain on inter-ethnic relations. 
 However, not implementing a uniform and regular payment 
system throughout Kosovo will perpetuate significant 
financial losses for KEK, forcing the GOK to contribute more 
money from the central budget to keep KEK running, while 
running the very real risk of not attracting any investors 
for privatization.  This could leave Kosovo literally in the 
dark and broke.  A combined aggressive collection and debt 
repayment scheme applied uniformly across Kosovo could 
address these problems.  However, these actions could also 
result in increased inter-ethnic tensions, and possible 
confrontation between representatives of Kosovo and Serbian 
institutions.  END SUMMARY. 
 
KEK: DRAIN ON THE BUDGET 
 
¶3. (SBU) On October 2, the GOK publicly announced plans to 
move forward with the privatization of KEK's electricity 
sector, starting with privatization of the company,s 
distribution network by the end of 2009.  We expect the GOK 
to issue the tender for the multi-billion dollar "Kosovo C" 
power plant (now known as "New Kosovo") before the end of 
¶2008.  Selection of a developer should follow by the end of 
2009 or early 2010.  With the exception of the high-voltage 
transmission company KOSTT, the completion of these two 
actions will completely privatize Kosovo's electricity sector 
by the end of next year, and remove a large resource drain 
from the government's books.  Each year, KEK requires a 
disproportionately large amount of budget assistance to cover 
maintenance, equipment purchases and energy imports.  Over 
the past several years, the amount of GOK subsidies to the 
sector has typically exceeded 100 million euro, due to 
insufficient company revenues and mismanagement that has left 
critical equipment purchases and repairs unfunded by the 
company's own revenues.  KEK budget requirements for 2009 are 
well above the GOK budget projections, around 80.4 million 
euro for time-sensitive capital investments in maintaining 
continuous coal production, plus an estimated 70 million euro 
to cover the cost of imported power.  Without the attraction 
of private capital through the timely completion of the 
Kosovo C process and privatization of KEK,s distribution 
functions, KEK,s drain on the GOK state budget will begin to 
overwhelm all other budget lines. 
 
NON-PAYMENT, COMPOUNDED BY KOSOVO SERB ISSUE 
 
 
PRISTINA 00000561  002 OF 004 
 
 
¶4.  (SBU) As the GOK privatizes KEK's distribution and seeks 
to conclude a package for the development of Kosovo C, 
establishing a normalized and uniform payment system 
throughout Kosovo is critical.  KEK provides service to all 
areas of Kosovo but is unable to collect effectively from 
consumers, particularly in the Kosovo Serb enclaves. 
Throughout Kosovo, KEK estimates that only half of all 
customers pay their electricity bill regularly.  KEK is 
unable to provide uninterrupted electricity service 
throughout Kosovo at periods of peak demand due to real 
network and generation capacity constraints, exacerbated by 
over-consumption resulting from ineffective price-signals. 
As a consequence, a power rationing scheme distributes power 
based on the level of regular payments from a given community 
or neighborhood.  Called the "A-B-C" scheme, communities and 
neighborhoods with the lowest level of electricity payments 
are subject to the "C" category, receiving two hours of 
electricity for every six hours.  The most reliable customers 
fall into the "A" category, and are subjected to minimal 
load-shedding.  Yet during periods of acute shortages, 
rationing in the "C" category areas is most severe, with an 
on/off ratio as limited as one hour "on" and five hours 
"off".  During these times, even "A" category customers, 
service availability drops to four hours "on" and two hours 
"off". 
 
¶5. (SBU) Except for a handful of commercial businesses and 
residences, customers in Kosovo Serb enclaves are not 
registered as KEK customers.  KEK has no ability to enter 
enclave areas to establish service arrangements with 
residents or to install meters, due to security and political 
sensitivities.  For similar reasons, service to enclaves has 
not disconnected.  In 2007, KEK completed the installation of 
bulk-level meters at sub-stations serving enclaves. 
According to KEK, service to the enclaves comprises about 10 
percent of overall electricity consumption in Kosovo, a value 
of 20 million euro per year.  Of this 10 percent, the three 
northern provinces of Zubin Potok, Leposavic and Zvecan, plus 
Serb-majority north Mitrovica, are the largest consumers. 
With the exception of the these areas, Serb enclaves in the 
Albanian-majority south of the country automatically fall 
into the "C" category of power rationing due to non-payment. 
This would also happen in the north, but the A-B-C scheme 
cannot be applied there due to lack of technical capacity. 
 
¶6. (C) In the process of intensifying efforts to increase 
payment compliance, KEK is discovering many households have 
significant amounts outstanding to the utility, sometimes as 
much as several thousand euro per household.  Most Kosovo 
residents are not in a position to pay this amount.  Kosovo 
Serbs who live in enclave areas are technically "debt-free" 
because they are not registered as KEK customers and are not 
receiving bills for consumption.  Other Kosovo Serb 
households, however, and particularly those in ethnically 
mixed communities (for example in Viti/Vitina municipality) 
are technically registered as KEK customers where KEK has 
been able to install meters in that particular community, and 
have accumulated debt, sometimes to a much larger degree than 
their Albanian neighbors.  In many of these cases, pressure 
by Serbia's political leadership on Kosovo Serbs not to 
participate in Kosovo institutions has led these Serb 
households to avoid payment and thereby accumulate a 
significant amount of debt.  With the ethnic-Albanian Kosovo 
media picking up on these cases, there have been attempts by 
Kosovo officials, usually at lower levels, to disconnect 
Kosovo Serb households in mixed areas.  (Comment: Realizing 
the potential for serious conflict, we have urged officials 
at the highest levels here to leave the situation as is for 
the time being.  End Comment.)   KEK's total outstanding debt 
is close to 300 million euro, and KEK would undoubtedly 
benefit from the collection of all its outstanding debt, but 
it is even more crucial for the energy company to enhance its 
potential for sale through achieving reliable and regular 
payments from current electricity customers. 
 
POSSIBLE SOLUTIONS CARRY RISK OF TENSION 
 
PRISTINA 00000561  003 OF 004 
 
 
 
¶7. (SBU) Internal discussions with USAID advisors within KEK 
have identified two obvious but flawed ways KEK could 
approach this multi-pronged challenge: forgive all past debts 
and focus solely on current payment discipline, or require 
immediate repayment of all arrears.  Universal debt 
forgiveness may provoke a backlash from regularly paying 
customers and inadvertently increase the expectation from 
non-paying customers that debt forgiveness might be repeated 
at some point in the future.  On the other hand, aggressive 
collection of all debts regardless of amount or age would 
place many households in an untenable financial position, as 
well as leave them facing service disconnection.  Neither of 
these options is feasible. 
 
¶8. (SBU) A hybrid approach establishing a graduated debt 
repayment program, uniformly applied to all customers 
receiving electricity service, could be an acceptable and 
practical solution.  Large debts could be scheduled for 
repayment over 12 months, as is current practice for arrears 
up to 500 euro, and debts older than one year could be 
forgiven.  This would allow KEK to collect on a portion of 
arrears and encourage customers to become regular payers, 
with a minimal amount of debt forgiveness. 
 
¶9. (C) To implement a uniform and reliable collections scheme 
throughout Kosovo, KEK must be able to establish service 
agreements with all customers, including with Kosovo Serbs. 
But KEK's commercial relationship with the Serb community is 
weak.  Regardless of whether Kosovo Serb households are 
willing to pay for electricity service, KEK is not able to 
effectively engage this customer base, resulting in mixed and 
minority areas bearing the brunt of load-shedding as a result 
of non-payment.  For their part, Kosovo Serbs are frustrated 
at not receiving better service, but are pressured by 
parallel structure representatives to engage with Serbia,s 
public electric utility EPS, instead of formalizing 
arrangements with KEK.  Although EPS is not a registered 
business in Kosovo and does not provide electricity, EPS is 
active in Kosovo Serb areas, positioning itself as a direct 
competitor to KEK.  The company does have personnel on the 
ground connecting Kosovo Serb households to the KEK grid and 
providing equipment, as needed, to keep the lights on in 
minority areas.  Although the company does not currently do 
so, EPS does have the capacity to supply electricity directly 
to northern Kosovo. 
 
¶10. (C) Recent efforts by KEK to intensify collections in 
Kosovo Albanian areas have revealed that most Kosovo Serb 
residents in mixed areas have accumulated arrears often 
several times greater than the amounts owed by Kosovo 
Albanians in the same community.  Although it is important to 
note that a significant number of Kosovo Albanian households 
also have large unpaid debts to KEK, Kosovo Serbs tend to 
feel singled out for non-payment due to poor communications 
with KEK, and interference from parallel structure 
representatives reinforces this perception.  While KEK 
insists on engaging directly with Kosovo Serb community 
representatives, parallel Serbian government representatives 
tend to insert themselves in the dialogue, preventing any 
satisfactory agreement from emerging.  With any payment 
collection scheme that is put in place, maximizing the flow 
of accurate information about changes in KEK's policies 
toward Kosovo Serb households will be critical for success. 
 
¶11. (C) COMMENT:  A reliable and fully operational payment 
collection scheme is vital to attract investors to Kosovo's 
electricity sector.  No company will accept the obligation to 
provide service without assurances of being able to 
reasonably recover costs.  Likewise, to the extent that KEK 
distribution will be the largest single buyer of power 
generated within Kosovo by the Kosovo C power plant, the 
project developer will require assurances that KEK 
distribution will have sufficient revenues to pay for the 
wholesale power delivered.  In essence, the success of the 
Kosovo C project and KEK distribution privatization rests on 
 
PRISTINA 00000561  004 OF 004 
 
 
the ability of KEK to collect from its customers.  It is 
critical that payment discipline is achieved, and that KEK's 
ability to enforce such discipline is credible.  Continued 
poor payment by consumers will have negative effects on 
potential investors, perception of the Kosovo C project's 
potential for revenue generation.  Pilot projects to install 
more meters and initiate an aggressive collection policy in 
certain communities such as Ferizaj/Urosevac have yielded 60 
percent increases in collection over the same periods in 2007 
in the same areas.  KEK believes that intensified collection 
efforts over the coming six to nine months might allow KEK to 
collect an additional 70 million euro of past debt owed by 
households.  Such a success might substantially reduce the 
utility's 2009 request for GOK budget transfers from 150 
million euro to 80 million euro. 
 
¶12. (C) COMMENT (cont'd):  Once a policy approach to 
collection of past debts and regularization of service 
conditions for Kosovo Serb enclaves is adopted, KEK and the 
GOK's initiatives to implement uniform payment and collection 
procedures throughout Kosovo will require direct engagement 
from Kosovo Serbs with the Kosovo's national utility, 
including in all the enclaves.  This could lead to 
confrontation between representatives of Kosovo and Serbian 
institutions.  USAID advisors within KEK have suggested that 
while necessary for the sake of privatization, policies 
writing-off any significant past-due amounts in order to 
establish universal payment discipline for current and future 
power consumption might best be postponed until mid-2009.  In 
the interim, KEK would continue to aggressively collect 
past-due debts from households, but would avoid confrontation 
with ethnic Serb households. 
KAIDANOW