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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   

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