Cablegate: Ambassador's Visit to Moravian-Silesian Region:

Published: Mon 14 Mar 2005 06:42 AM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
1. Summary. During his February 7-8 visit to Ostrava,
regional governor Evzen Tosenovsky told the Ambassador the
influence of the regions is growing, and that an
accommodation between Prague and the regions must be worked
out within his ODS party. The Ambassador visited Vitkovice
Steel, which the GOCR is in the process of selling.
Vitkovice has significantly downsized over the past few years
and is enjoying a good year in favorable world market
conditions, but suffers from a dependency on one source of
raw steel controlled by a competitor. The government hopes
to realize around $200 million from its sale. A visit to
Terex Tatra trucks revealed another company that has shed
employment, a move that has caused hard feelings against its
American management. Tatra directors were concerned about
purchasing procedures used by the U.S. Army to supply troops
in Iraq. End Summary.
2. During his February 7-8 visit to Ostrava, the capital of
the Moravian-Silesian region, the Ambassador met with its
governor, Evzen Tosenovsky. Tosenovsky is both a leader of
the opposition ODS party and a leader among the regional
governors, twelve out of thirteen of whom are ODS members.
Tosenovsky governs in Ostrava with a center-right coalition
of the ODS and the Christian Democrats (KDU-CSL). The region
is hard hit by the drastic downsizing of its traditional coal
and steel industries, but is actively promoting new
investment from abroad. Tosenovsky was pleased that the
region has already attracted some quality companies such as
Siemens and Visteon. He is eager to develop the Mosnov
airport to give executives -- especially Americans -- direct
links to international flights from Vienna. Tosenovsky was
optimistic about the Czech Republic's future success in trade
with Vietnam. He mentioned that "half of the Vietnamese
government speaks good Czech", having studied in Czech
schools. His region has an agreement with the Vietnamese
Chen Hua province for cooperation. He views prospects for
trade with China and India as promising.
3. The Ambassador inquired about the status of the
privatization of Vitkovice Steel, the third-largest steel
mill in the region after Nova Hut and Trinec Ironworks.
Tosenovsky said that the success of Vitkovice is vital to the
further development of Ostrava and the region. He said that
there is strong interest from Russia in Vitkovice and from
Mittal Steel, the owner of Ostrava's Nova Hut and VPO, a pig
iron producer that supplies not only Nova Hut but also
Vitkovice. Tosenovsky thought that coordination of the Czech
mills with very similar mills in Poland is important, and he
said both Mittal and the Russians work well with Polish
mills. Tosenovsky guessed that the government is not in a
hurry to complete the privatization because the political
situation is very complicated. He said that a new owner is
not likely to lay off more employees, as the company has been
stabilized and world demand for steel has revived. He
considers the time right for the government to sell
4. Since its privatization to Mittal, Tosenovsky said, Nova
Hut has become something of a black box. It has been clever
in reducing excess employment, offering attractive severance
packages to employees willing to leave. Its economic results
seem to be good, given the current strong market conditions.
But because of uncertainties at Nova Hut, Tosenovsky is
hopeful that a strong new owner for Vitkovice will be found.
5. Later in the day, the Ambassador met with management of
Vitkovice steel and toured its production facilities.
Vitkovice had one of its best years ever in 2004, benefiting
from worldwide shortages of steel and concomitant higher
prices. It has undergone significant restructuring in the
past five years, dropping from 12,000 to 1500 employees since
2000. The layoffs are one of the reasons the Ostrava area
suffers from 20% unemployment.
6. Vladimir Baar, CEO of Vitkovice, said that he expects the
sale of Vikovice to generate from 4.5 to 5 billion crowns
($195-217 million) for the government. However, he said that
the American firm Nucor has dropped out of the running to
purchase Vitkovice. Other reports indicate that the Russian
firm Severstal is no longer interested either. Both firms
were probably put off by Vitkovice's key vulnerability: it is
dependent for all its supplies of raw steel on Vysoka pece
Ostrava (VPO), which along with Nova Hut is owned by Mittal.
Vitkovice is already litigating with Mittal over what
Vitkovice views as unjustified price increases. Mittal is
still actively pursuing the purchase of Vitkovice, even
though the Czech government has said that it must settle the
lawsuit as a condition for putting in a bid. Settlement
discussions are well under way and the government has an
interest in having Mittal in the game to bid up the price.
Trinec Ironworks and the Czech investment firm Penta are also
said to be interested in Vitkovice. So are Arcelor of
Luxembourg and Donetsk Steel of Ukraine, among several
others. According to Baar, offers are due in mid-March and
the government would like to make a decision on the buyer in
7. Tosenovsky was proud that the message of his ODS party on
terrorism and in support of Czech participation in the
mission in Iraq was strong. The November regional and Senate
elections were clear successes for the ODS, he said, helped
along by CSSD mistakes. Now, of the 13 regional governors,
12 are ODS, and their attitudes toward the U.S. are friendly.
Tosenovsky said that the U.S. elections last year were
important to the world and that they "turned out well".
Because of the ODS's strong regional representation, it makes
the situation complicated for the parties' national
leadership, Tosenovsky said. Regional-national cooperation
is essential, but ODS does not have a clear formula for doing
so. The national leadership in the person of ODS Chairman
Miroslav Topolanek (who stands to be Prime Minister after the
2006 election) should use, and not fear, regional political
power, which will only become more sigificant in the future.
8. Tosenovsky believes that with regional support, the ODS
is sure to be a winner in the next parliamentary elections.
More generally, he sees a need for decentralization, since
Prague is a very different world from the rest of the
country. Lobbying occurs only in Prague, he observed, which
is dangerous for the Czech Republic's political and economic
future. He sees tensions rising between the regions and the
center. There are separate rules for Prague and for the
regions, which in his view is bad. President Klaus, he
remarked, does not like the regions as they are now
constituted, and his views carry weight in the ODS. The
dramatic reforms of the post-1989 period may have required
strong central control, but times are changing, he said.
9. Note: The regional governors have founded an association
and held their first meeting the week following the
Ambassador's visit to Ostrava. Tosenovsky chairs the
association and told us after the two-day meeting that the
governors discussed organizational issues at first. They
then moved on to a discussion of how to stabilize the
forested areas of the Czech Republic. Large parts of these
areas are owned by the state and are faced with pressure for
privatization. The governors' would consider transfer of
such areas to the regions favorably. Water management was
another issue. The governors fear that strict EU regulations
for water management cannot be met because compliance is too
expensive. One outcome of this discussion was a proposal for
a joint meeting of all thirteen regional governors with the
Ambassador in Prague.
10. On February 8, the Ambassador toured the 2200-employee
Terex Tatra truck manufacturing plant in Koprivnice. Tatra
trucks have a long history and have a deserved reputation for
ruggedness. Since 2003 Tatra has been under the control of
the United States firm Terex. Tatra has a traditional
customer base in Russia, China and the Middle East. It has
won contracts to supply trucks to the Israeli army, and is in
line to supply the Czech Army and the Iraqi government.
While in Koprivnice, the Ambassador saw a prototype truck
that Tatra is preparing to compete for a U.S. Marine Corps
tender. The company is strongly vertically integrated, but
is trying to move more of its parts production to independent
suppliers. Efforts to streamline the company have caused
some hard feelings in Koprivnice, where Tatra is the dominant
employer. These complaints have attracted the attention of
President Klaus, who recently visited Tatra to get a feel for
what is going on there. However, the company is operating in
the black, and it is hopeful that some management changes may
help to sooth local sensitivities and boost morale among
11. In his discussions with Tatra management, the Ambassador
heard serious concerns about how the U.S. Army's purchasing
process for Iraq service is working. In particular, the
management took issue with the Army's practice of lumping
together totally unrelated items in a single tender. This
results in bids from middlemen who gather together
sub-contracts from numerous suppliers. The management
contends that narrower tenders, even if somewhat more
expensive to administer, would result in lower-cost, more
professional bids direct from manufacturers. The management
was also critical of the way specifications for truck
purchases are developed, saying that they clearly are not
developed by people who understand how trucks are made. The
result, they say, has been bids that are low, but do not
result in quality products on the ground.
12. The Ambassador and Mrs. Cabaniss addressed two separate
classrooms of secondary school students at the Koprivnice
Secondary Technical School and College about various aspects
of American life and their impressions of the Czech Republic.
They met with the rector of Ostrava University. Mrs.
Cabaniss visited a model community where Roma and non-Roma
live together, and where Roma can obtain job-seeking and
other social support.
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