GOC PLANS NEW PRIVATIZATIONS AFTER LONG HIATUS

UNCLAS ZAGREB 000133

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: KPRV ECON EINV HR PRIVATIZATION
SUBJECT: GOC PLANS NEW PRIVATIZATIONS AFTER LONG HIATUS

REF 06 ZAGREB 1265


1. (SBU) Summary: After being stalled for the past two years, the
Croatian government is finally moving forward with the privatization
of some of the most problematic assets in the government's still
large portfolio. Privatization is unpopular with the Croatian
public, which equates the process with the corrupt, backroom deals
brokered in the early 1990s that made millions for a few and put
many out of work. However, with the EU pressuring Croatia to
eliminate subsidies to loss-making enterprises, the GOC has little
choice but to confront the issue, including writing off substantial
amounts of debt. End Summary.

The Privatization Fund
--------------

2. (SBU) The Croatian Privatization Fund (CPF),the government
office charged with managing the privatization of most of Croatia's
state-owned assets, is the majority shareholder in 36 companies (the
national telecom, oil, electricity and several other "strategic"
assets were not transferred to the privatization fund). Although
the nominal value of these concerns is 9 billion kunas ($1.6
billion),many are so heavily-indebted so as to be virtually
worthless, particularly three metals plants: Sisak Steel, Split
Steel and TLM Aluminum of Sibenik. Complicating matters further,
all three companies continue to employ large numbers of people. In
a country with double-digit unemployment, closing these plants would
require a degree of political mettle that is in short supply in
Zagreb in an election year.

Privatization Unpopular
--------------

3. (SBU) Privatization through the CPF has been at a virtual
standstill for the last two years as a result of disputes with local
governments and the national government's reluctance to confront an
issue that is largely unpopular with the public. The Croatian
public equates privatization with independent Croatia's first
privatizations, which were carried out in the early 1990s under the
regime of former president Franjo Tudjman. Public perception, which
is largely accurate, is that these were sweetheart deals designed to
reward political supporters at the expense of the country and,
particularly, workers. These privatizations also occurred at the
height of the war in the former Yugoslavia, guaranteeing that the
state received only pennies on the dollar in these transactions.


4. (SBU) Also fueling public enmity is a lingering collective
misperception of Croatia's manufacturing prowess before
independence. As many industries collapsed during the war or
shortly after their privatization, these are seen as the proximate
causes of the country's industrial decline, rather than the
unrelenting forces of globalization that few if any of these
industries could have withstood anyway.

Employee Ownership Model
--------------

5. (SBU) In an attempt to placate public sentiment and atone for
the sins of the past, the GOC has spent the last year drafting a new
privatization law with a view to facilitating employee purchase.
Although a popular principle, the challenge in this proposal has
been in finding ways to enable employee participation while, at the
same time, attracting sufficient capital to restructure ailing
enterprises. After an early model that would have extended loans to
fund employee purchase of up to 25% of shares was condemned by the
World Bank, the GOC plans to unveil a new law to the parliament in
the coming months. The current proposal, as explained by the CPF,
will replace credits with a 40% employee purchase discount. With
the exception of the metals industry, the CPF plans to tender its
other assets on the Zagreb Stock Exchange.

Time to Do Nothing Runs Out
--------------

6. (SBU) The opening of Croatia's EU accession negotiations in
October 2005 narrowed the GOC's room for maneuver on privatization,
particularly after the regulations of the Croatian Competition
Agency (the country's market watchdog) were harmonized with EU law.
In effect, Croatia outlawed state subsidies while it continued to
dole out subsidies to loss-making companies to avoid the hundreds of
layoffs that would result from a bankruptcy.

Who Wants to Buy 19th Century Industry?
--------------

7. (SBU) The privatization of the metals industry, which the CPF
hopes to complete in the second quarter of 2007, will remove a
burden from the state, but at a cost in debt write-offs:
TLM Aluminum Sibenik: 1,593 employees, $200 million debt; Sisak
Steel: 1,209 employees, $30 million debt; Split Steel: 488
employees; $30 million debt. According to the CPF, although each
company will be sold under specific terms, investors will be
required to maintain current levels of employment for a
predetermined period of time and to assume private debt. The GOC
will then write-off debts to the state in the form of unpaid taxes
and social charges. In the case of TLM, the value of this write-off
is likely to exceed $100 million.

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

8. (SBU) The CPF says that it aims to finish its work by the end of
2007, at which time its remaining assets, including minority
interests, will be transferred to the Office for the Management of
State Property. This is an optimistic timeline in light of
Croatia's lackluster track record in privatization. However, given
the GOC's imperative to keep EU negotiations moving forward, this
may finally break the logjam. Many economists here believe that
Croatia's latent potential for GDP growth is much higher than the
current 4.6% and reducing the state's footprint can help to
reallocate government spending. The caveat here is the shipyards,
which stand to reap billions of dollars in subsidies before their
still theoretical future privatization, but that is another story
(see reftel).


BRADTKE