Kosovo: August 2005 Briefing on Trepča

The memo on the Trepča issue that follows was prepared for me after my July 2005 arrival in Mitrovica as UNMIK Regional Representive.  (Trepča was under UNMIK management.)  During my time in Mitrovica, I paid special attention to the various economic issues, which in many cases were in contention between Serbia and K-Serbs on one side and the K-Albanians and the internationals supporting them on the other.  These included Trepča -- which had facilities and workers on both sides of the ethnic divide -- as well as electricity production and delivery (KEK and Obilić), water (Gazivoda), telecoms and ownership of Serbian owned entities such as JugoPetrol.  I believed that a final political settlement -- difficult in any case -- could be facilitated by reaching fair agreements on economic matters giving both sides an incentive to make the agreement work.  Thus I encouraged Special Status Envoy Ahtisaari to address these matters in his final status proposal but he decided against apparently under pressure from the pro-Albanian internationals and especially the US.  I believe Trepča status is still unsettled.  

Trepca Mining Complex

Briefing Notes for new Mitrovica Regional Representative

What was/is Trepca.

Trepca was a massive and diverse base metal mining conglomerate operating throughout the former Yugoslavia with its principle assets and activities based in Kosovo, managed from offices in Mitrovica, Zvecan. With operations commencing in the mid 1920’s by a British company, at its peak in the early 80’s, the now state owned business employed over 20,000 workers. With three primary lead and zinc mining centres in Kosovo situated in Leposavic in the north, Mitrovica and Kisnica in the south and metal refining operations in Mitrovica, its operations touched all of the Kosovo population.

Following the conflict years and NATO’s arrival, all operations ceased. However, some 2,000 workers come to work each day and a further 2,500 ex-workers receive a monthly stipend, all paid for from the Kosovo Consolidated Budget. The company is now overseen by a small team of international mining engineers and experts, employed by UNMIK through KTA.

The Trepca Vision Statement

The under explored Trepca Minerals Belt provides a very good potential for finding additional ore resources at and in the vicinity of the existing mines which offers excellent opportunities for a vital, active and viable base metal (lead and zinc) mining company which would provide an estimated 2000 real, direct jobs. Indirectly, according to the experience of the Worldbank, another 4000 jobs will be created in the supply and service sector.

Metallurgical activities, associated with and peripheral to the former primary lead and zinc metal production facilities, form the basis for an industrial company serving industrial and environmental businesses in the Balkans.

Strategy

“Develop and bring into operation promising business units with the limited funds available over the next two to three years. This will enable Trepca management to explore markets, test competitiveness and gradually establish viable businesses. This strategy will determine the viability of each project and lead to the creation of real jobs. Incompetent, uncompetitive companies will have to close. The development of businesses and successful companies will be attractive for investors. This will enhance privatisation opportunities.”

The several recent international expert reviews have confirmed the existence of promising business units within the Trepca complex. The Trepca strategy has therefore found wide support. Generally it is seen to be the only realistic and pragmatic option left which relates to the specifics of Trepca’s position in respect to its geographic location, the current political, social and economic environment, the restructuring and privatization objectives of KTA, the technical status of its plant, equipment and mines, the qualification of its workforce, the expectations of ex-workers and society and, last not least, the lack of funds.

A summary of the Trepca Strategy and current status

1. Core business-mining. Funded through the Kosovo Consolidated Budget and funds from the EAR.

The strategy is unchanged, four mines and concentrators at all 3 mining centres are now ready to start production. Explosives have just been delivered and blasting will commence shortly building up gradually towards target production levels towards the end of the year.

Yet again Trepca suffered severe delays in 2005, partly due to regulatory requirements with respect to the storage and use of explosives and partly due to funding constraints. A request was made for a budget of € 11.1 million only € 8.1 million was approved, in addition a requested carry forward of Capital from 2004 was not given even though verbal approval had been given this caused Trepca to change plans and refurbish existing equipment which will be less productive and less reliable than the new equipment that had been planned. Trepca still does not have sufficient funds to implement the approved plans and this has been aggravated by delays in start up which means a delay in receipt of revenue.

2. Other business. Funded by Trepca Own Funds.

Through funding realized from the sale of existing semi products, wastes and scrap, Trepca has some limited funds of its own. These it is directing into investment in the plant with Action Plans now approved for reactivation of several industrial production units, such as Aluminium Sulphate manufacture at MIP, S. Mitrovica; Battery Recycling at Zvecan ; production of Zinc and Zinc Oxide powder at MIP; Starter Battery manufacture at MIP; Trailer factory; Custom Terminal. The Trailer Factory is already operational as is the Customs Terminal. Limited Aluminium Sulphate production has already commenced against contracts for supply in Kosovo. Investment commenced in the Battery Recycling Plant at the end of 2004 and the plant is due to commence production 1^st September 2005. The sourcing of sufficient used batteries is as expected causing some problems. The rehabilitation of the Zinc Dust/Oxide Plant commenced in April 2005 and is ahead of schedule. However a funding shortfall may prevent completion this year.

3. Environmental Remediation. Funded by Donor Agencies.

Many programs have been completed over the past two years All these funded by individual mission donations including the Dutch Government, DANIDA and SIDA. Trepca is currently negotiating a further donation from the Dutch Government that will, if granted, fund the rehabilitation of Gornje Polje Tailings Dam, Leposavic Tailings Dam, MIP tailings dams and several other projects. The EAR are also examining how to best spend some €10 million during 2006-7 to assist job creation in Mitrovica/Zvecan, some of these funds may be made available to assist Trepca.

Significant Issues

1. Trepca is being pursued by Creditor Claimants

A number of very aggressive creditor claims are being pursued through the courts (Special Chamber of the Supreme Court). In total the creditor claims for Trepca are believed to amount to over € 200 million and there may be over two thousand claims. As Trepca’s assets are believed to be worth less than €85 million, Trepca is (like many SOEs) insolvent.

We are concerned that the claims against Trepca should be dealt with in accordance with international insolvency laws. There are three critical creditor claims which are near judgment stage in the Special Chamber. To address the concern that these will be executed soon against Trepca’s assets – by way of seizure of assets, the SRSG signed an Administrative Direction on 2nd June that stops the execution of all claims for three months whilst a new Bankruptcy and Administration Law is finalized and promulgated. This gives temporary protection to Trepca but the company must be placed in Administration immediately it becomes possible. A successful Administration process is not possible without the co-operation of the Serbs in Zvecan and this will not be gained without at least the tacit consent but ideally the full approval of the Serbian Government. Funding for the Administrator will be required at least in the short term until the sale of assets can generate sufficient funds to pay the Administrator

2. Trepca must obtain longer term budgeting commitment.

The short-term and piecemeal funding is unacceptable for a business that MUST plan ahead for several years. Yet again insufficient funds were provided and even these were late. This caused programme delays.

3. The redundancy of employees past and present has to be resolved.

For 5 years, Trepca has been forced to manage an unpaid workforce of almost 5,000 solely to assure the ongoing social peace and which continues to expect employment and salaries but which is totally unrelated to Trepca’s present or future needs. This is a social issue for Kosovo and has nothing to do with the new Trepca. This issue continues to be a problem.

4. Trepca must receive a business and VAT registration and move towards privatization.

Trepca is now registered as an SOE but has still not been able to register for VAT The lack of definition of the business position of Trepca continues to frustrate all efforts to establish a long-term, viable company, which can be successful in the international business world.

We cannot run a business unless we ARE a business.

Obstacles and Difficulties

• The overriding parameter for a successful new start of some of Trepca’s previous activities is the political will to do so. This will has been lacking or at best not focused and that affects all tasks that management is faced with.
• There is has been no policy on Trepca, therefore the management has had to coordinate on a daily basis, project by project, with UNMIK, KTA, MFE, Government, KFOR and Trade Unions. Coordination work takes time and as time goes by, decision makers change and the management starts all over again. Some progress has been made in unifying policy but there is still incomplete agreement between UNMIK and PISG on the way forward.
• There is no secured financing. The lack of an industrial policy requires the management to present its plans on numerous occasions as if a brand new story has to be told. The different sources of funds (KCB, Donors) appear to be uninterested of each other yet harmonization of these funds is a critical task. Offers of funding are made then withdrawn or delayed this makes planning of programmes impossible.
• The administrative procedures required by the procurement law are bureaucratic, inefficient and not suitable to running a company. This resulted in 6 months delay in expending capital in 2004 and then loss of funds and cancellation of contracts these lead to loss of credibility and a recirculating work.
• There exists a large number of unqualified, over aged and physically unfit workers, who in many cases lack experience, skills and competence whilst we have put most of these on early retirement, a permanent solution remains a problem.

Summary

1. Trepca management has plans to re-start production in the mines in the third quarter of 2005. The production will be limited, traditional operating practices will be applied and modern safety management systems shall be implemented. The timetable for the implementation of the program is subject to many factors outside the control of the management.
2. The pursuit of creditor claims in the courts will stop all activities unless the protection currently afforded by the AD signed by the SRSG on 2^nd June remains in force until there is a new law on Administration and Bankruptcy and the company has been placed into Administration. The Administrator once appointed will be responsible for selling all the Trepca assets.
3. Getting Trepca into the private sector is considered vital to the establishment of any long term viable business since all the businesses need investment in both their physical assets and their human resources. Sale/privatisation is more likely to be successful if the initial viability of selected business units can be demonstrated; thus the strategy of Trepca’s management.
4. Trepca management believes in the excellent mining potential of the “Trepca Minerals Belt”. All efforts in re-starting mine production are also geared at substantiating this perspective which will increase the attractiveness for international investors. A special fund for an exploration drilling program and regional geological investigations would very much support this concept. Funds for this were cancelled by the MFE at the end of 2004.
5. Rehabilitation work on environmental hazards must continue which requires the allocation of funds.
6. Certain metallurgical business units are identified as potentially viable and these will be brought into production as funds become available. These units, which appear to be competitive, will have to establish themselves in a market environment with a distinctive entrepreneurial drive.
7. Last and certainly not least, the operational and managerial capabilities in combination with safety attitudes and knowledge of everyone, be it operators, engineers and managers, Albanians or Serbs, have to be much enhanced. This requires several years of on the job training ideally through qualified contractors.