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C O N F I D E N T I A L SECTION 01 OF 06 SOFIA 001691 SIPDIS SIPDIS EUR/NCE FOR NORDBERG E.O. 12958: DECL: 12/20/2016 TAGS: ENRG, ETRD, KCOR, KCRM, PGOV, PREL, BU SUBJECT: DIRTY ENERGY: CORRUPTION AND LACK OF TRANSPARENCY PLAGUE BULGARIAN ENERGY SECTOR REF: A) SOFIA 1652 B) SOFIA 1481 Classified By: CDA Alex Karagiannis for reasons 1.4 (b) & (d) 1. (C) SUMMARY: Cleaning up pernicious corruption in Bulgaria's powerful (and often murky) energy sector, where cronyism is alive and well, should rank high on Bulgaria's to do list. A closer look at the sector reveals an ideal environment for graft and abuse. Accounting for a significant share of the country's wealth, Bulgaria's energy field is a closed-off, clubby branch of the economy, dominated by a handful of players who have a stranglehold over public procurement contracts and disproportionate influence over government decisionmakers and the country's energy policy. Energy and Economy Minister Rumen Ovcharov claims he wants to rid the sector of shadowy influences. Yet the government's newly-signed contract to build the Belene nuclear power plant (ref A) epitomizes all the ills plaguing the sector--a lack of transparency, little or no competition, weak public--and often parliamentary--scrutiny, and enormous waste and abuse of government resources. END SUMMARY 2. (SBU) XXXXXXXXXXXX OPPORTUNITIES FOR ABUSE 3. (SBU) Unsurprisingly, the energy sector is an attractive target for corruption and exploitive interests. Energy holds the second highest share of Bulgaria's GDP (after industry), accounting for 16-20% of GDP. Half of Bulgaria's top ten firms in 2005 (based on revenues) are in energy, while several others are related to fuel producers or traders. The sector also tends to be small and "clubby"--owing to the technical complexity and uniqueness of its work and the enormous economic and national security implications. Technical and economic debates on important energy decisions are often closed. This, along with the sector's strong dependency on external energy sources, creates conditions for the formation of political and economic rentseekers. According to a study by XXXXXXXXXXXX, there are one or more well-organized circles that control the sector regardless of who is in power politically. These energy consultants and traders have penetrated the top political circles (independent of party affiliations) and have close connections with the external--mainly Russian--suppliers of energy, who themselves enjoy close ties to high-level politicians at home. 4. (SBU) Abuse takes many forms. Many projects "require" the role of consultants, who assume a state-like function as the executor or manager of a project, despite their private character and frequent business ties to the venture itself. The consultants, whose actual work is hard to define and quantify monetarily, typically receive a percentage of the overall value of the project. Many corrupt payments are believed to pass through such consultants. Similar to consultants is the use of "middlemen or intermediaries" in the import and export of energy sources. These middlemen will either add an additional "tax" on the price of an import or make a handsome profit by exporting a resource (usually electricity) that the state could have profited from itself. As with consultants, intermediaries, who are closely associated with state institutions such as the National Electric Company (NEK), are allowed to dominate and control their respective sectors. 5. (SBU) The awarding of state tenders is another area of suspected abuse and corruption. A number of expensive energy-related projects have been issued without competitive tenders (some involving U.S. firms). Many of these projects, particularly in the nuclear field, have gone to the same firms. Other tenders have been awarded at clearly inflated prices--"cash cow" projects ideally created for corruption, according to critics. True competitive tenders have been cancelled on technicalities, only to be reissued later with a single candidate and at a higher price. For example, a U.S. firm, new to the sector, made the best offer (9 million Euro) in a 2004 tender to be a project engineer-consultant for the rehabilitation of the Maritsa East 2 thermal plant. Shortly after the bids were opened, the procedure was suddenly cancelled--reportedly for a lack of budget resources--only to be reopened a few months later for a slightly modified, but analogous, project. At that time, only one candidate, well known to the contracting authority, submitted a bid and won with a offer worth 18 million Euro. SOFIA 00001691 002 OF 006 6. (SBU) Other examples are more blatant and involve outright fraud and embezzlement, as was illustrated this summer when authorities discovered that the head of Sofia's District Heating company (or Toplofikatsia-Sofia), Valentin Dimitrov, stole and tried to launder at least 1.64 million Euro from the state-owned company. Dimitrov's abuse consisted of issuing contracts at inflated prices, making phony purchases and issuing billings in increments just below the minimum value required to report them. The scandal caused a public uproar and triggered a (still ongoing) parliamentary investigation into Toplofikatsia and other allegations of corruption in the sector, including the role of consultants, energy exports and the modernization of Kozloduy Units 5 and 6. BULGARIA'S ENERGY MAFIA: BOGOMIL MANCHEV 7. (C) Three names always mentioned as key players in Bulgaria's so-called "energy mafia" are Bogomil Manchev from Risk Engineering, Krassimir Georgiev from Frontier and Hristo Kovachki. Manchev and Georgiev have been omnipresent in the sector since the early 1990s, while Kovachki is considered a new player. 8. (C) Bogomil Manchev's presence in the energy field, particularly the nuclear sector, is pervasive. His engineering and consulting company, Risk Engineering, founded in 1992, got its start working as a subcontractor for Westinghouse for a EU Phare project related to Kozloduy's Units 1-4. From there, Manchev and Risk's influence grew as he won successive Phare projects for improving safety and security measures at Kozloduy Units 3 and 4, preparing documents for the development of Bulgaria's uranium mines in Simitli and Dospat, assessing a potential national storehouse for radioactive waste, etc. 9. (C) By the time of Prime Minister Simeon Saxe-Coburg Gotha's government (2001-2005), Manchev's power in the energy sector was rumored to be all-encompassing. XXXXXXXXXXXX, told us that Manchev controlled all public procurements in the sector, and others have echoed this. Manchev held himself out, and was regarded, as the "shadow Energy Minister," with significant influence over then Energy Minister Milko Kovachev (Kovachev graduated from Sofia's Technical University three years before Manchev and the two were colleagues at Kozloduy). Manchev controlled personnel decisions regarding state-related energy associations, according to XXXXXXXXXXXX, and advised Kovachev what actions to take related to government tenders. Manchev's influence, driven in part by Kovachev's lack of political support within the coalition, earned the Ministry the nickname--"Ministry of Risk Engineering." 10. (C) According to XXXXXXXXXXXX, Manchev receives most of the work in the energy sector. Manchev has an ownership stake in 10 different firms and is the sub-agent for hundreds of other firms. XXXXXXXXXXXX, told us that Manchev controls "everything" at Kozloduy. Manchev possesses the first license for trading electricity in Bulgaria, holds the sales quota for Kozloduy's (domestic) electricity, and is responsible for all of the plant's service and repair contracts. The common joke among many journalists is that he has "privatized" even the exit and entrance of Kozloduy. 11. (C) Manchev is believed to have strong influence over the directors of Kozloduy and NEK, whose previous deputy chairman was a former Risk employee. Likewise, NEK uses the Commercial Corporate Bank for much of its business, which according to XXXXXXXXXXXX has a secret partnership with Risk (Ref B). Further corroboration came when a respected U.S. energy company recently complained to us that Kozloduy's management is trying to force them to use Risk Engineering as a sub-contractor or partner in areas where Risk Engineering is not qualified. Company officials told us they fear that failure to do so will jeopardize this and other contracts, but they are concerned that working with Risk Engineering in this specific capacity could harm the product and the company's reputation. 12. (C) Moreover, Manchev and Risk have a close working relationship with the Australian-U.S. firm WorleyParsons. In 1998, Manchev and Risk formed a business partnership with SOFIA 00001691 003 OF 006 Parsons, specifically its regional director in Europe, Djurica Tankosic, an American citizen. The partnership, called GCR, was formed to modernize Kozloduy's Units 5 and 6, which has been conducted by Westinghouse. The relationship between Manchev and Tankosic is reportedly very close; the address for Parsons E & C Bulgaria is the same as Risk Engineering. It is this relationship that Manchev is likely referring to when, according to XXXXXXXXXXXX, he tells people that he is working for the United States--which, of course, has no basis in fact. MANCHEV'S REACH IN THE SECTOR 13. (C) In 2004 NEK issued two contracts related to the building of Belene--an environmental impact assessment report and a technical-economic study)) with the goal of preparing a document for the parliamentary energy committee. The contracts were valued at around 8 million dollars and were given)) without a public tender--to Parsons, with Risk Engineering doing much of the work, particularly on the environmental report. A similar technical-economic study for Belene was conducted in 2000 by Energoproekt, the former state institution for developing energy projects, for 150,000 USD, as was an environmental impact study for Kozoloduy in1999. According to energy experts who worked on the former studies, Parsons and Manchev's reports were not significantly different from the earlier reports and were largely just "cut and pasted" from the old studies. This should be no surprise since Manchev now owns the archives of Energoproekt, according to XXXXXXXXXXXX. Moreover, such reports in Europe and the U.S. cost no more than one million dollars, according to XXXXXXXXXXXX. As one critic of the deal said, "you don't have to be an economist to realize that NEK could have gotten a better price for the study." In 2004, Evdokia Maneva, former environment minister, tried to raise alarm bells about the deal and requested prosecutors investigate the matter. Minister Kovachev maintained that the contracts were legal and fell under Article 19 of the public procurement law, which states that research and development projects can be negotiated directly. 14. (C) Bulgaria is the leading exporter of electricity in the Balkans, supplying power to Kosovo, Albania, Serbia, Macedonia, Greece, and others. In 2005 NEK (which still maintains a monopoly over electricity exports) exported a then record 7.5 billion Kilowatts of power, making Bulgaria the fourth largest electricity exporter in Europe (after France, the Czech Republic and Poland). However, 90 percent of these exports are not sold by NEK but by Bulgarian and foreign intermediaries, who receive the electricity from NEK at a low price and then resell it for a huge profit. 15. (C) XXXXXXXXXXXX, argues that the use of intermediaries is clearly disadvantageous for the Bulgarian state. According to XXXXXXXXXXXX, NEK)) through this arrangement--loses 47 million USD of potential profit a year. Moreover, the firms to which NEK chooses to sell its electricity are the same questionable ones. In 2005, the main exporter of Bulgarian electricity was the Serb company EFT, which through its sister company, EFT Bulgaria, accounted for 70 percent of exports. Interestingly, EFT Bulgaria is owned by Manchev's firm, "Energy Finances Group." Tankosic is likewise active in electricity exports; firms linked to him have exported power to Albania. Similarly, Manchev is the main intermediary responsible for the coal imports Bulgaria depends on to fire its thermal plants in Ruse and Varna. KRASSIMIR GEORGIEV 16. (C) Another name that always emerges when people talk about problems in the energy sector is Krassimir Georgiev. According to the press, Georgiev is one of the richest men in Bulgaria and lives mostly in Switzerland. He and current Energy Minister Ovcharov both attended Moscow's Institute of Energy and were later reacquainted when Georgiev worked for a local Communist Party committee in Sofia and was directly responsible for Energoproekt, where Ovcharov was working. Georgiev's main company, Frontier, is present wherever there is money--energy, real estate, oil pipelines, highways, military offsets etc. 17. (C) XXXXXXXXXXXX, told us that Georgiev SOFIA 00001691 004.2 OF 006 usually develops the concept for a project and then outsources the actual work to various engineering or technical firms. As XXXXXXXXXXXX explains it, he is basically a rent-seeker who aims to make a large percentage off multi-million dollar deals. Georgiev was the primary legal consultant behind the notoriously corrupt Trakiya Highway deal. According to XXXXXXXXXXXX, at the height of the controversy surrounding Trakiya, Georgiev offered to pay XXXXXXXXXXXX 45,000 Euros to write a positive article on Frontier; when XXXXXXXXXXXX refused, Georgiev found XXXXXXXXXXXX to do it at a lower price. 18. (C) Georgiev has been the consultant or lobbyist behind three major projects--"Lower Arda Cascade," "Marista East 1" and "Maritsa East 3"--where investments topped 800 million USD. With Maritsa East 3, Georgiev acted as the principal lobbyist for the US firm Entergy, which won the project in a non-competitive process after being nominated by the then Energy Minister Ivan Shilyashki as a "strategic investor." Members of the Socialist party claim Shilyashki and most other top figures at the Energy Ministry during Ivan Kostov's government were under the personal wardship of Georgiev. Georgiev also was involved in the Tsankov Kamak hydropower plant and Yadenitsa dam projects, as well as the nuclear fuel contract for Kozloduy. Moreover, Frontier currently owns a 45 percent stake in the Universal Burgas Terminal, a key piece of the infrastructure connected to the future Burgas-Alexandropolis pipeline, which is currently being negotiated by Bulgaria, Russia and Greece. 19. (C) Most Bulgarians are familiar with Georgiev from the Toplofikatcia scandal, when it was revealed that he and Valentin Dimitrov's elderly mother--who also faces charges of money laundering--are partners in a real estate firm. Many people expect Georgiev's influence in the sector to grow now while Ovcharov is Energy Minister. XXXXXXXXXXXX told us Georgiev, who holds no official position at the Ministry, participates in Ovcharov's official meetings on a regular basis and has accompanied him on official visits abroad--often to the dismay of both local and foreign businessmen and officials. Russian energy officials are reported to have raised the issue of Georgiev's presence at inter-government talks while Citigroup officials walked out of a presentation because of his presence. 20. (C) Georgiev was involved in the Energy Ministry's recent decision to issue (without a tender) a 14-year contract to the Russian firm TVEL to supply nuclear fuel to Kozloduy. XXXXXXXXXXXX, told us the deal was clearly unfavorable)) with the fuel costing 40 percent more than in Russia and the markup allegedly being divided between the Bulgarian (25%) and Russian (15%) intermediaries. HRISTO KOVACHKI 21. (C) Hristo Kovachki is the newest player in the sector and, according to XXXXXXXXXXXX, lacks the professional expertise and savvy of Manchev and Georgiev. Kovachki's roots are more directly associated with organized crime. He was a close associate of Konstantin Dimitrov (a.k.a. Samokovetsa), who, before being murdered in Amsterdam in 2003, was one of Bulgaria's biggest smugglers. Some, like XXXXXXXXXXXX, believe that Dimitrov's illicit activities were the source of Kovachki's start-up capital, which he then used to buy into the energy sector. Others who are more acquainted with Dimitrov and Bulgaria's smuggling channels see Russia and Russian organized crime behind Kovachki's wealth. Regardless of the source of his initial wealth, Kovacki's current empire is vast. Along with being the owner of the only brick factory in the Balkans (Brikel), Kovachki and his primary company "Atomenergoremont" own at least 4 mines, 5 district heating facilities (in Burgas, Pleven, Veliko Turnovo, Gabrovo and Vratsa), several thermal power plants (TPP) including a 51% stake in Dimitrovgrad's mini-Martisa East 3, as well as controlling five coal companies and being a minority shareholder in Sofia's municipal bank. More recently, he was the only bidder for the Sliven heating utility in late November. OVCHAROV: THE PROBLEM OR THE SOLUTION? 22. (C) Energy Minister Ovcharov has said both publicly and privately that he would like to cleanse the sector of these "friendly circles" and have decisions based more strictly on competency. In an August 8 meeting with the Ambassador, SOFIA 00001691 005 OF 006 Ovcharov (whose ties to Georgiev and Dimitrov became front page news after the Toplofikatzia scandal) eagerly highlighted the GOB's efforts to limit the activities of "big economic bosses" to control the sector. 23. (C) Despite Ovcharov's claim to want to clean up the energy sector, the recently signed Belene contract (for 3.9 billion Euro) is yet another example of what critics are calling a "grand project for corruption." A number of observers have raised serious doubts about the project, saying the government has never presented clear evidence that Belene is beneficial or even necessary. Many suspect it is largely a gift to the nuclear lobby, which has strongly pressed for the project, to make up for the loss of Kozloduy's Units 3 and 4. The decision to build it was decided by the previous government--now part of the three-party coalition--with little or no public debate. 24. (C) Ovcharov and the present government have justified Belene by raising fears that Bulgaria will face domestic energy shortages once the units at Kozloduy are shut down. People like XXXXXXXXXXXX, however, have demonstrated that Bulgaria will have more than enough excess (at least 2500 megawatts) domestic energy capacity following the decommissioning and won't need additional power until at least 2020--instead of 2010 as Ovcharov contends. Though Bulgaria's role as the region's leading electricity exporter may suffer, the lion's share of these profits ends up in intermediaries' pockets anyway. More important, building a new nuclear reactor is not necessarily the most economically efficient or effective way to make up for the loss of capacity, say critics. There are a number of other significantly cheaper alternatives including building another 600 MGW block at Marista East 3 for 800,000 USD, renovating the thermal plant at Varna, or even building another reactor at Kozloduy itself. 25. (C) Kozloduy for a long time has been the "lifeblood" of the energy sector due to the countless activities related to its operation, servicing, safety enhancements, supply of fuel and decommissioning. The Belene project is similarly expected to be a serious windfall for the army of engineers and consultants that will help build it. NEK once again has picked its favorite consultants--Parsons and Risk--to oversee the project. Through their partnership GCR, Bogomil Manchev, along with Parsons, is slated to be the principle architect-engineer supervising the construction of Belene. For this, the company is expected to receive approximately 300 to 400 million Euro. 26. (C) The resources in Belene are so huge that all of the competing energy and political lobbies will be able to get a piece of the pie, which is something Manchev apparently has in mind, according to XXXXXXXXXXXX. Krassimir Georgiev and Frontier already have reserved a place for themselves in the structuring and possibly the financing of the project while Kovachki and Atomenergoremont are also likely to be involved, Manchev confirmed to XXXXXXXXXXXX. Firms close to the mainly ethnic-Turkish Movement for Rights and Freedoms and its leader Ahmed Dogan, which controls the Environmental Ministry responsible for issuing permits, also have the green light to participate. In a nutshell, Belene is the posterchild for all of the ills plaguing the sector--a lack of transparency, an apparent waste of public funds and the continuity of entrenched and monopolistic groups. 27. (C) COMMENT: Ovcharov is widely seen--even in his own party--as benefiting personally from his close ties to domestic and Russian energy interests. While there is no smoking gun, BSP MPs privately accuse him of putting personal business interests ahead of the party's, if not the country's. The EU's concern with the energy sector has been less about corruption and more about nuclear safety and improving competitiveness in time for Bulgaria's accession. Progress on the latter, which has been spotty, holds the greatest promise for eventually cleaning up the sector. Bulgaria is under pressure to break up NEK's de facto monopoly over power imports and exports when it accedes to the EU. Regardless, Bulgaria will have to untangle this nest of private and public interests and move towards more Western practices if it truly wants to ground this key economic sector and allow all taxpayers and consumers to benefit. Until then, American investors need to understand that the sector may be ripe for profits, but also is filled with players with hidden agendas and unseen barriers against success. END COMMENT SOFIA 00001691 006 OF 006 KARAGIANNIS
