Identifier
Created
Classification
Origin
06BELGRADE1257
2006-08-09 11:08:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Belgrade
Cable title:  

GOS ADOPTS PRIVATIZATION STRATEGY FOR NIS

Tags:  PREL ENRG ECON EINV SR 
pdf how-to read a cable
VZCZCXYZ0005
RR RUEHWEB

DE RUEHBW #1257/01 2211108
ZNR UUUUU ZZH
R 091108Z AUG 06
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 9118
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS BELGRADE 001257 

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL ENRG ECON EINV SR
SUBJECT: GOS ADOPTS PRIVATIZATION STRATEGY FOR NIS

Ref: Belgrade 1013

SUMMARY
-------
UNCLAS BELGRADE 001257

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL ENRG ECON EINV SR
SUBJECT: GOS ADOPTS PRIVATIZATION STRATEGY FOR NIS

Ref: Belgrade 1013

SUMMARY
--------------

1. (U) On July 20, the Government of Serbia (GOS) approved the
privatization strategy of state-owned oil company "Naftna Industrija
Srbije" (NIS). The approved strategy was not the preferred option
proposed by the privatization advisor consortium Merrill Lynch and
Raiffeisen Investment. The approved strategy calls for
privatization of the minority stake in NIS (up to 49 percent)
instead of the recommended option of 51 percent majority stake
(reftel). This decision sends a negative message to investors and
the international community, about GOS readiness to undertake
certain key structural reforms in the economy. The move also
undercuts previous obligations to the IMF about its intention to
sell a majority stake in the refineries. The various interests of
stakeholders in NIS and the political interest of preserving the
weak political coalition and majority in the Parliament are all
factors in the GOS decision to pursue the alternate strategy.

NIS PRIVATIZATION STRATEGY APPROVED
--------------

2. (U) On July 25, the Strategy for NIS privatization was publicly
presented at the press conference in the Ministry of Energy and
Mining by Radomir Naumov, Minister of Energy; Slobodan Sokolovic,
Assistant Minister; Rados Ilincic, Managing Director of Raiffeisen
Investment and Scott Lewis, Director of European Energy and Power
Investment Banking from Merrill Lynch.


3. (U) Minister Naumov repeated the goals of the GOS which are the
terms of reference (TOR) for the privatization advisor: to privatize
NIS in such a manner as to create a competitive and liberal oil
market; to attract strategic partners that will invest and develop
programs, introduce new technologies and management methods while
respecting environmental standards; and to implement the
privatization in reasonable time. Minister Naumov stressed that the
GOS approved the strategy proposed by the privatization advisor and
reviewed by the GOS steering committee that will oblige the GOS to
enable strategic partner to obtain up to 49 percent of NIS through
recapitalization without the influence of the GOS.

TWO PHASES PRIVATIZATION
--------------


4. (U) Rados Ilincic from Raiffeisen Investment presented the
strategy in detail starting with four cornerstones of the strategy:
the configuration of NIS, the program of capital investments, the
social program and changes to the regulatory framework. Ilincic
said that strategy envisaged preservation of the
vertically-integrated company and the process of privatization in
phases. The capital investments are expected to reach some USD 500
million in two phases with the focus on environmental protection,
fuel quality and working conditions. The social program will be
defined later but will not be different from any other. Redundant
workers will get approximately EUR 200 per year of employment, and
the shares will be at their disposal immediately with a guaranteed
minimum selling price. The regulatory framework will be gradually
changed during two to four years to give the company time to prepare
for competition. Sokolovic explained that changes to the Customs
Law will introduce custom taxes that will be phased-out to EU levels
by 2012.


5. (U) The first phase of privatization consists of two steps that
will flow continuously. In the first step, the GOS will sell 25
percent of shares to the strategic partner with the money going to
the budget, and in the second step the strategic partner will
increase the capital of NIS by 20 percent through recapitalization
of USD 250 to 300 million, which will enable it to obtain 37.5
percent of NIS. The GOS will have the same stake with around 6.7
percent belonging to NIS employees and around 18.3 percent belonging
to the Privatization Register for distribution to other citizens
after the entire privatization process in Serbia is finished. The
strategic partner most likely will acquire all the shares from NIS
employees between the two phases.


6. (U) The GOS hopes that through investments and good management
the value of the company will increase after three years. At that
time it will offer its shares through an initial public offer at the
Belgrade Stock Exchange or some foreign stock exchange to the
strategic partner. Through another recapitalization of some USD 300
million and possible buying of shares at the secondary market, the
strategic investor should obtain up to 49 percent of NIS. The state
will have 21 percent of shares, the Privatization Register some 15
percent and the remaining 15 percent will be freely traded on the
market. In the third phase, the GOS will have the discretionary
right to decide how and when it sells the rest of its shares.

MANAGEMENT CONTROL "GUARANTEED"
--------------

7. (U) The strategy emphasizes the importance of giving the
strategic partner, as a future minority owner, management control
from the beginning. The strategic partner will have the majority in
the Managing and Executive Board of Directors, but the GOS will have
certain negative or vto rights, in effect maintaining ultimate
manageent control. The specific rights and obligations f boh
sides will be defined later in the sales greement. In addition,
the strategic partner wil have the option of buying the
petrchemical complex "Petrohemija" Pancevo, which is an independent
company complementary to NIS. The tender for this company will be
issued at the same time as NIS.


8. (U) Rados Ilincic from Raiffeisen stated at the press conference
that the decision of whether to sell the minority or majority share
of NIS was difficult and the most time-consuming for the GOS.
However, he believes that the goals set forth in the TOR of the
privatization advisor justify the decision to sell a minority share.
Ilincic said that three years would be an optimal period for
acquaintance between the GOS and the strategic partner. The
minority strategy may bring a lower price for NIS, but he believes
that it will be justified in the middle term. Sokolovic explained
that the GOS would rather see NIS as a strong regional player that
spurs growth in other Serbian companies than to merely increase
revenues for the budget from the sale.


9. (SBU) Mladen Levanic from Merrill Lynch told Econoff that
although two options were presented to the GOS for consideration,
the advisor recommended privatization of the majority stake. The
Steering Committee agreed with this recommendation (see reftel) and
presented it to the GOS. However, after final consultations with
members of the GOS, the Steering Committee revised its
recommendation and the GOS adopted the minority stake option for the
strategic partner.

LEGAL AND POLITICAL REASONS FOR ADOPTING MINORITY STRATEGY
- - - - - - - - - - - - - - - - - - - - - - - - - - - - -

10. (SBU) There are different explanations as to why the GOS changed
its strategy to sell a minority stake to the strategic partner.
Sokolovic told Econ FSN that the official explanation for the change
in the strategy is that the GOS could not guarantee the majority in
NIS to the strategic partner in the second phase of privatization
since it is against the competitiveness principle in Article Two of
the Privatization Law. Dimitrije Boarov, a local journalist,
unofficially said that the GOS could not announce the tender for NIS
to sell firstly the minority stake in NIS because it is against the
Privatization Law. (Note: According to the current Privatization
Law, only 70 percent of the capital or property is subject to sale.
However, the current law refers only to socially-owned capital, and
does not apply to a state-owned company like NIS. The GOS announced
earlier that state-owned companies would be privatized under special
legislation).


11. (SBU) The better solution would have been to change the current
law, but the politically-weak ruling coalition did not have
sufficient votes in Parliament without the support of former
Milosevic's Socialist Party of Serbia (SPS),said Boarov. The
ruling coalition is heavily dependant on SPS which is against
privatization in the energy sector and of state-owned land.
Moreover, Boarov said that they are using these assets for private
interests (private pockets) and for financing the party. Therefore
the GOS adopted the Decree on privatization of state-owned companies
in the energy sector on the same day that the privatization strategy
was adopted. The Decree enables privatization of the minority share
in state-owned companies in the energy sector. Boarov thinks that
the GOS is just buying time to persuade SPS to accept changes in the
Privatization Law, because avoidance of the law through the Decree
is not constitutional. The Decree in general only serves to
implement the law but is not the law itself. Boarov believes that
there is a majority in the GOS for the privatization of NIS and
particularly for the model prescribed by IMF. However, the GOS
argues it was constrained in pursuing this strategy due to current
political realities.

UNCLEAR MODEL OF PRIVATIZATION BAD SIGNAL TO INVESTORS
- - - - - - - - - - - - - - - - - - - - - - - - - - -

12. (SBU) Zorana Mihajlovic Milanovic, former energy advisor to
former Deputy Prime Minister Miroljub Labus, told Econ FSN that the
proposed strategy actually means delaying and slowing down of the
privatization. She expressed doubts that an investor will invest
huge amounts of money for a little more than 30 percent of shares in
the first phase without any guarantee of the majority ownership
later. She believes that the GOS has privately already made a deal
with either Russian Lukoil or Hungarian MOL to become a majority
owner in the future. The deal would be to share the profit but the
question is where the money would go.


13. (SBU) Harold Hirschofer, International Monetary Fund (IMF)
resident in Serbia, told Econoff that the deviations from the
strategic advisor's recommendations will adversely impact the sale.
The GOS deviated in two important areas: selling a minority stake in
the company and not giving the strategic partner full management
control immediately by ceding negative or veto rights to the GOS.
Hirschofer believes that these deviations reduce the attractiveness
of the investment and will bring a lower price.


14. (SBU) Hirschofer said that GOS is breaching commitments made in
the last IMF agreement. The GOS agreed to include in the terms of
reference for the strategic advisor achieving the highest sales
price which it did not include in the TOR with Merrill Lynch. The
GOS agreed to sell majority stake in the two oil refineries which is
not included in the adopted strategy. Hirschofer said that Serbia
is also breaching its fiscal commitments with the recently-announced
National Investment Plan of EUR 1.1 billion. The Paris Club wrote
off debt based on these commitments, and Hirschoffer sees GOS
actions as a bad signal.


15. (U) Other experts also consider the proposed strategy as
unclear. Danijel Cvjeticanin, professor at the Belgrade School of
Economics, thinks that the strategy is complicated, unusual and
contradictory. He thinks that it is not clear why the GOS does not
want to sell the majority in NIS but is giving the management
control to the strategic partner and why it is doing in phases.

Privatization Timeline
--------------

16. (U) The privatization advisor will prepare the tender
documentation by August 2006 in order to issue a tender by October
2006 and finish the transaction at the beginning of 2007. Thus far,
all of the interested companies are regional players: Hellenic
Petroleum from Greece, OMV from Austria, MOL from Hungary, PKN
Orlean from Poland, Lukoil from Russia and Israeli Corporation.


Comment
--------------

17. (SBU) This move signals GOS unwillingness to undertake certain
politically key structural changes -- especially when state-owned
dinosaur companies are used as financial tools of political parties
and serve the private interests of the managing board members
themselves. It is clear that the strategy enabling the guaranteed
majority ownership in three phases was proposed as the first choice
of the privatization advisor (reftel),but the GOS lacked the
ability and potentially the will to pursue such a course.

POLT