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