BOSNIA: THE VIEW FROM THE RS PRIVATIZATION AGENCY

C O N F I D E N T I A L SARAJEVO 001066

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E.O. 12958: DECL: 04/27/2016
TAGS: ECON PGOV BK
SUBJECT: BOSNIA: THE VIEW FROM THE RS PRIVATIZATION AGENCY

REF: SARAJEVO

Classified By: AMBASSADOR DOUGLAS L. MCELHHANEY FOR REASON 1.4(B).


1. (C) Summary: New legislation to review past RS
privatizations (reftel) has shone the spotlight on the RS
Directorate for Privatization (DfP). However, the intense
focus on process misses the broader point: Many entity-owned
companies are little more than a pile of liabilities by time
they are transferred to the DfP -- the result of asset
stripping, embezzlement and incompetence by corrupt
government managers. A review of the data shows that the DfP
has done a respectable job of selling entity-owned companies,
many of which are technically insolvent, thereby unloading
significant liabilities that would otherwise be the
responsibility of the RS government. Without the DfP's
"creative packaging," most of these companies have no option
other than bankruptcy. The real lesson of an objective
privatization review is that the government should get out of
the business sector as fast as possible. End Summary.

The DfP's Response
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2. (C) RS Prime Minister Milorad Dodik, decrying
"sweetheart deals", has made a revision of past
privatizations a cornerstone of his pre-election economic
policy (reftel). DfP Director Vladimir Makcic, who has
headed the agency for less than two years, has responded to
these claims with a spirited defense of the agency's
performance during his tenure. Makcic has provided the
Embassy with detailed data on the DfP's activities to support
his claims. It should also be noted that, while the DfP does
the technical work, the RS government has ultimate
responsibility for privatization and must approve all deals
before they are finalized.


3. (C) According to data from Makcic, small-scale
privatization (defined as companies with entity-owned capital
of less than KM 300,000) has largely been completed. The
agency first attempted to sell these companies through
competitive public tender. If the tenders failed to attract
a minimum number of bidders, the DfP engaged in direct
negotiations with any interested buyer. The results of
Makcic's energetic work speak for themselves: After years
with very little activity, the DfP had successfully
privatized 54 small companies (out of a total of 182 in its
portfolio) by June 2005. There was no interest in the
remaining companies, most of which are insolvent. The DfP
does not have the authority to initiate bankruptcy
procedures, so many of these firms remain in limbo -- piling
up wage, pension, tax and other liabilities that will
eventually have to be unwound.


4. (C) There has been a similar acceleration in so-called
"strategic" privatizations (a term that is applied very
loosely in the RS). In the seven years before Mackic
arrived, the DfP sold a total of eight strategic enterprises.
Since his arrival, the DfP has successfully sold nine
companies.

The Numbers Speak for Themselves
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5. (C) Banjalucka Brewery (BLB) is the largest strategic
privatization to date. The company was sold for KM 23
million in December, 2005. This is less than the KM 25.6
million book value of RS government shares in the company.
However, it is significantly higher than the KM 18.1 million
appraisal of actual market value. The buyers pledged to
invest a minimum of KM 7.8 million in the firm and retain
current employment levels for three years. The new owners of
BLB, an Anglo-American private equity firm, also assumed KM
40 million in liabilities.


6. (C) This was the third attempt to privatize the brewery.
The first tender was canceled in the wake of a public uproar
after the government decided to sell BLB to a Slovenian firm
whose offer was significantly lower than other bidders.
Major international brewers such as Annheiser Busch and
Interbrew expressed initial interest in the second
privatization auction two years ago, which was conducted far
more professionally. However, it too failed after they
pulled out following the collapse of BLB's margins and
profits -- the result of brewery management's inability to
handle increased competition from cheap imported beer,
principally from Serbia. By the time the third tender was
conducted, BLB was hemorrhaging cash and operating at less
than 17% capacity.


7. (C) Other strategic privatizations tell a similar story.
The DfP sold UNIS, a cold rolled steel facility, for KM 2.1
million. Although the value of the company's assets was
estimated at KM 4.8 million, the firm had been out of
business since 1992 and had liabilities of more than KM
702,000. The DfP privatized a dairy for KM 500,000, against
assets valued at KM 1.7 million. However, the buyers assumed
KM 7.9 million in liabilities. Oslobodenje, a printer, was
sold for the symbolic price of KM 100. For this princely
sum, the buyers got state capital appraised at KM -2.6
million and liabilities of KM 8.5 million.

Comment
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8. (C) The current review of past privatizations diverts
attention from the real issue -- the RS government's poor
track record in managing what should be private business.
Entity-owned companies are milked for all they're worth and
slated for sale when there's nothing left on the books but
liabilities. Given the quality of its portfolio, the DfP has
done an admirable job of rapidly selling off companies that
are worth less with every passing day. If there is an
operative lesson to be learned from the ongoing review, it is
that the RS government should get out of the business sector
as quickly as possible. The DfP should be given additional
flexibility to entice bidders to buy RS-owned companies. The
longer the RS government maintains direct control over
business activity, the more it will end up having to pay for
wage and pension liabilities that continue to accrue each day
in insolvent entity-owned companies. End Comment.
KAIDANOW