Cablegate: Bosnia: Dispute Over Federation Telecom Firm

VZCZCXRO4128
RR RUEHIK
DE RUEHVJ #0061/01 0211420
ZNR UUUUU ZZH
R 211420Z JAN 10
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC 1265
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 SARAJEVO 000061

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE

E.O. 12958: N/A
TAGS: ECON ECPS PGOV BK
SUBJECT: BOSNIA: DISPUTE OVER FEDERATION TELECOM FIRM
DEEPENS CROAT-BOSNIAK RIFT

REF: 09 SARAJEVO 1300

SARAJEVO 00000061 001.2 OF 002

SUMMARY
-------

1. (SBU) Appointment of a general manager of the Federation
majority-owned telecommunications firm HT Mostar has become a
further point of conflict within the Federation. The Bosniak
Party of Democratic Action (SDA), along with most other
Bosniak and Croat parties, favors reappointment of the
current general manager, Stipe Prlic, a Croat. The Croatian
Democratic Union (HDZ-BiH), however, has tried to block the
reappointment, accusing Prlic of mismanagement. At the root
of the issue is a decade-long battle between Prlic andHDZ-BiH leader Dragan Covic for control of HT Mostr's mobile
phone subsidiary Eronet. The conflic has contributed to the
company's recent declinig fortunes and to a deepening rift
between SDA an HDZ-BiH. End summary.

ERONET AND HT MOSTAR: HZ-BIH'S TRADITIONAL CASH COW
--------------------------------------------- -------

2. (SBU) HDZ-BiH has in the past treated HT Mostar -- and in
particular its subsidiary Eronet -- as a cash cow. As
Federation Minister of Finance in 1999, Covic helped arrange
the transfer of Eronet to three private companies owned by
HDZ-BiH interests. Prlic, as HT Mostar's General Manager,
challenged the privatization in court and won, arguing that
the Federation government had not authorized it. Covic has
fought Prlic's reappointment ever since. (Note: Covic's
problems continued beyond losing the Eronet privatization
case. While serving as the Croat member of the BiH
tri-presidency, he was charged with tax evasion and bribery,
dismissed in 2005 by High Representative Paddy Ashdown, and
sentenced to five years in prison. End note.)

PRLIC REAPPOINTMENT STALLED
---------------------------

3. (SBU) On November 4, the Federation government voted to
reappoint Prlic. In response, Covic and his party increased
their public attacks on him, hoping to pressure Federation
Prime Minister Mustafa Mujezinovic -- an SDA member -- and
SDA party leader Sulejman Tihic to revoke the reappointment.
Backed by Covic's rival for the Croat vote, HDZ 1990 leader
Bozo Ljubic, and Bosniak Party for BiH (SBiH) leader Haris
Silajdzic, Mujezinovic resisted the pressure. (Comment:
Ljubic, playing schoolyard favorites, is likely only
supporting Prlic as a way to "stick it" to his natural enemy,
Covic, in advance of the general elections. End comment.)
However, at the December 9 session of HT Mostar's supervisory
board, the three members associated with Covic's party
blocked final board approval of Prlic's appointment. In
response, Federation Deputy PM Gavrilo Grahovac of SBiH has
threatened that the government will appoint a new board in
order to implement the decision. For now, the situation
remains at a stalemate.

HT MOSTAR LOSING GROUND
-----------------------

4. (U) The three telecom companies in BiH serve territories
largely defined along ethnic lines, with HT Mostar
effectively having a monopoly on land-line service in
majority Croat areas. In fact, the company has close ties to
Croatia, with Croatia-based provider HT Zagreb holding 39
percent of its shares.

5. (SBU) There is greater competition, however, in cellular
service, also divided among three ethnically-based companies.
After several years of impressive growth, Eronet saw
declining market share in 2009. Covic and others in his
party attribute this decrease to Prlic's mismanagement.
Prlic, however, argues that two factors are responsible for
the company's slowdown. First, he asserts, the 2006
privatization of Republika Srpska's provider RS Telekom (now
65%-owned by the Serbian national phone company), has created
an uneven playing field. Operating as a private company in
Bosnia, RS Telekom's mobile subsidiary M:Tel has been freed
of regulatory requirements that continue to restrict its two
competitors. (Note: The Communications Regulatory Authority
has refuted this assertion, claiming regulations have been
created to ensure a level playing field among cellular phone
providers. End note.) Whether Prlic is correct, or whether
its success is due to better marketing and customer service,
M:Tel has been making rapid inroads into the mobile market in
both RS and the Federation. Second, Prlic reasonably argues,
the stalemate over his own reappointment has prevented HT

SARAJEVO 00000061 002.2 OF 002

Mostar and Eronet from making capital investment decisions
that would have enabled them to compete more effectively.

COMMENT
-------

6. (SBU) We expect that Prlic will eventually overcome the
obstacles to his reappointment. Meanwhile, although HT
Mostar remains a potential candidate for privatization --
along with other planned privatizations in the Federation
that have failed to materialize in the last several years --
given the dispute between Federation politicians on this
issue, we don,t expect HT Mostar to be privatized any time
soon.
ENGLISH

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