A disagreement on the contract with Italy’s A2A for the management of power monopoly EPCG has destabilised Montenegro’s government and could lead to the resignation of ministers from the opposition, who joined the government under a recent power sharing deal.

According to broadcaster RTCG, one of the three opposition parties that have joined the government - United Reform Action (URA) – has threatened that will leave the government if the parliament approves the new contract with A2A. Another of the parties – the Social Democratic Party (SDP) – has also indicated it could cancel the agreement with the ruling Democratic Party of Socialists (DPS).

A July 27 statement on the government’s website said that two deputy prime ministers – Vujica Lazovic of the DPS and Milorad Vujovic from the opposition - have exchanged letters concerning the signing of the new contract, which is expected to be approved by the parliament by the end of the week.

Vujovic has informed Lazovic that the opposition ministers demand an amendment to the draft agreement, according to which A2A must sell its stake in EPCG to Montenegro if it decides to exit the company, for €250mn. Montenegro will be allowed to pay the sum over a period of seven years. If A2A declines to accept this change, the opposition ministers want the signing of the agreement to be left to the new government that will be appointed after the general elections this October.

A2A has managed EPCG since 2009 after the Italian company acquired 43.7% of EPCG following a major privatisation deal. The Italian company paid €435mn. In the meantime, A2A has lost 2pp of its equity capital in EPCG, while the electricity price has been reduced, which resulted in A2A failing to meet pledged targets on issues such as investment.

In April 2015, A2A’s five-year management contract expired and was temporarily extended so that the two owners could agree on the terms of a new management contract. In October, Economy Minister Vladimir Kavaric said that the government and A2A had agreed on new five-year management contract.

However, the agreement failed as the two parties could not reach an agreement on the construction of the second unit at TE Pljevlja.

The DPS and three opposition parties have signed an agreement aiming to secure fair and transparent general elections in October this year. As part of the deal, the DPS’s former coalition partner - the Social Democratic Party (SDP), URA and Demos entered the government, getting five ministerial seats. The move was seen as a step towards stabilisation of the political situation in Montenegro ahead of the elections.

In reply to Vujovic’s letter, Lazovic wrote that the opposition’s requirements are against the interests of the country.

In a second statement, the government said that A2A has turned down the opposition’s requests and that the Italian company does not want any further delays in the signing of the new agreement. According to this statement, Lazovic has informed Vujovic about A2A’s reply and has called on the opposition’s ministers to behave professionally.

Signing a new management agreement is a key condition for Montenegro to get a loan from the Czech Exports Bank and to finalise a deal with Czech Skoda Praha on the construction of a second unit at Pljevlja thermal power plant. A draft agreement with the company was approved by the government earlier in July.

The project aims to extend the capacity of TE Pljevlja, which now has only one unit of 210MW. The new unit must have a capacity of 220-300MW and a net electricity efficiency of no less than 38%. The project also envisages providing heating for the town of Pljevlja in cooperation with the local administration.

Initially, Skoda Praga offered to build the unit with electrical efficiency of 39.5% for €338.5mn. However, the government’s negotiating team reduced the price to €324.9mn.