Swedes back off Kaunas Energy lease, French to take a crack at it

VILNIUS - After two years of planning and negotiations, Sweden's
state-owned Vattenfall energy company has, at the last minute, backed
out of a plan to invest in the renovation of Kaunas' debt-ridden
Kauno Energija heating grid.

There was much speculation that Vattenfall was waiting for the
results of recent Kaunas municipal elections prior to making a final
decision on a 340 million to 400 million litas ($85 million to$100
million) 15-year lease of the municipal energy grid and renovation
project. Newly elected mayor Vytautas Sustauskas, known for his
xenophobic and nationalist rhetoric while in opposition, reversed his
stand on the Vattenfall investment upon taking office. He
communicated his support for it to Vattenfall's project head Jari
Tielinen.

The major sticking point in the negotiations was the new
government's opposition to raising heating prices for residents and
businesses. Although Kaunas' small business sector is doing well,
many of the large-scale enterprises left over from Soviet times have
greatly downsized operations - many have gone bankrupt, others are on
the brink. An increase in heating costs would hurt already
beleaguered factories and employees.

"We did a professional job in negotiating this deal," said Kaunas
city's former energy head Arunas Keserauskas. "It's a simple question
of arithmetic. If heating prices are kept artificially low, the
investor loses money. The Swedes were simply wary of the risk
factor," he said. As it is, many Kaunas residents are behind in
paying their heating bills, a phenomenon that is not unknown in other
parts of Lithuania, and there is much speculation that inhabitants
would not be able to absorb another blow to their pocketbooks.

Vattenfall's Tielinen issued a vague public statement thanking Erikas
Tamasauskas, Kaunas' assistant mayor, for his constructive
co-operation and regretting that external factors had influenced his
decision to terminate the project.

Vattenfall has been actively investing in energy grids in other
European countries. It recently bought into several Polish
electricity suppliers and purchased a major energy plant in Hamburg.
It also holds a 10 percent interest in Lithuania's Lietuvos Energija.
In 1999, the company spent 7,92 billion kronas in foreign
acquisitions and investments.

With the withdrawal of Vattenfall, France's Dalkia, a subsidiary of
Vivendi, the largest utilities services supplier in the world, has
decided to take a crack at leasing Kaunas' grid. Dalkia's president
for East and Central Europe, Marc Boudier, arrived in Kaunas on June
14 for a three-day visit including a meeting with mayor Vytautas
Sustauskas. At a June 9 press conference in Vilnius, he announced
that the company would make a decision on beginning negotiations
regarding the project within two weeks. If Dalkia decides to take a
serious look at a deal, Boudier claimed that no more than two or
three months would be required to come to a final decision.

Dalkia is presently part of a joint venture in Litesko, along with
Lithuania's Rubikon and the European Bank for Reconstruction and
Development. Litesko has already leased the heating grids of several
small cities in Lithuania with a view to their modernization. The
company will invest 460 million litas into the country's energy
sector by the end of 2001. This number could reach as high as 800
million litas if more opportunities such as the Kauno Energija
project present themselves.