SERBIA: CORPORATE SHARE GIVE AWAY - GOOD ECONOMICS? GOOD

UNCLAS SECTION 01 OF 02 BELGRADE 000051

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN KPRV SR
SUBJECT: SERBIA: CORPORATE SHARE GIVE AWAY - GOOD ECONOMICS? GOOD
POLITICS? OR BOTH?

REF: 07 BELGRADE 1144

SUMMARY
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1. On December 26, the Serbian Parliament approved a law on the
free distribution of shares of privatized and soon to be privatized
companies to Serbian citizens. The law was approved less than two
months after Economy and Regional Development Minister Dinkic first
proposed it. The law started an acrimonious public debate as trade
unions from the state-owned companies initially rejected the law's
provisions. This law gives the government a popular program that
promises corporate shares (money) in people's pockets just as the
January 2008 Presidential election campaign heats up. End Summary.

GOVERNMENT PROMISES FREE SHARES FOR 4 MILLION PEOPLE
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2. The current privatization law states that there will be a
distribution of shares from the privatization process of
socially-owned companies (small and medium sized firms technically
owned by their workers, unlike the large state-owned firms) to
citizens that have not already received shares during the
privatization process. Privatization of socially-owned companies
has been on-going since 2001 and must be completed by December 2008
(reftel). In the privatization process 15% of the company's shares
are set aside for company employees and 15% are set aside with the
Privatization Registry for distribution to citizens who are not
employees of socially-owned companies. However, the current
privatization law does not specify exactly how shares should be
distributed. Some four million citizens who do not work for
socially-owned firms have the right to receive free shares in
socially-owned companies. These beneficiaries include employees in
the police, army, education sector, judiciary, health sector,
government officials, state-owned companies, pensioners, farmers,
unemployed, etc.


3. On November 5, Economy and Regional Development Minister Mladjan
Dinkic, presented his concept for privatization of large state-owned
companies between 2008 and 2010 and a draft law on free distribution
of shares to citizens. Dinkic said his plan would begin the
distribution of the free shares before the privatization of the
socially-owned companies was finished. Dinkic added that beginning
the privatization of state-owned companies should enable free
distribution of shares in state-owned companies, as well as
increasing the value of shares distributed to citizens.

BUT, THE SHARE FUND PROVIDED LESS THAN $100 PER PERSON
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4. Currently, shares from 68 former socially-owned companies sold
by public tender have been deposited in the Privatization Registry.
According to some estimates, the value of all shares in the Registry
is approximately $345 million. Dividing this amount to 4 million
citizens, would have meant that every citizen would receive roughly
$86. In order to increase the value of shares to more than $1,400
per citizen, Dinkic used the planned privatization of large
state-owned companies to distribute shares for free from these
companies, as well.


5. The large state-owned companies differ from the socially-owned
firms as these large companies are owned by the state, not the
firms' workers. These companies fall into two categories. In the
first group, including the oil firm NIS and national airline JAT,
Dinkic proposed that a majority share would be sold to a strategic
partner and a 15% share of each company would be distributed to
citizens. The second group of companies consisted of electricity
firm EPS, Telecom Serbia, the Belgrade airport and pharmaceutical
company Galenika, where a 15% share would be sold through an initial
public offering (IPO) on the stock market and an additional 15%
would be distributed for free to citizens. Companies would not be
offered at the same time, but one by one. Each of the state-owned
firms would have a separate privatization strategy and law. Money
from the IPO's would go both to the budget and for necessary
investments in the companies.

TRADE UNIONS OPPOSED
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6. Dinkic's plan met resistance from state-owned employee unions.
As noted, current and former employees of privatized socially-owned
companies receive up to a 15% share in firms as part of the
privatization process. Employees of state-owned firms wanted to
receive the same benefits. Dinkic originally offered state-owned
firm employees privileged status to buy up to 4% of the shares in
the company at a 50% discount. On November 22, the unions organized
a one-hour warning strike in all state-owned companies proposed for
privatization.


7. The law was adopted in Parliament on December 26 gives

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state-owned company employees shares of their companies according to
their years of service and the estimated market value of the company
before privatization. Typical employees are expected to receive
between $5,700 and $7,100. Milorad Panovic, President of the
Nezavisnost branch trade union of the chemistry, non-metal energy
and mining industry, told Econ FSN on December 28, that both trade
unions were satisfied with the adopted solution and that all strike
threats had been withdrawn.

POSITIVE OPINIONS FROM EXPERTS
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8. The opinions of experts and former government officials
regarding the free shares law are generally positive. Aleksandar
Vlahovic, Minister of Privatization during the Djindjic Government
and DS member, said on December 5 to Econ FSN, that the plan was
fully in accordance with the World Bank's suggestions and the
current law on privatization. Rade Rakocevic, broker and former
owner of the successful brokerage firm Senzal, told Econ FSN on
November 21 that IPOs of the big state-owned companies would
contribute to the "deepening and widening" of the Belgrade Stock
Exchange (BSE). He noted that Serbian brokers were investing in the
Croatian stock exchange since appearance of the Croatian Petroleum
Industry INA and Croatian Telekom increased investment
opportunities. Luka Andric, State Secretary at the Economy and
Regional Development Ministry, confirmed on December 5 to Econ FSN
that the Ministry used the technical expertise of the World Bank in
drafting the law on free shares.

Comment
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9. The Government was in a rush to approve Dinkic's draft law
before the January 20, 2008, presidential elections, so that the
government (and President Tadic) could take credit for putting money
(shares) four million voters' pockets. Dinkic pushed through a
proposal that was initially dismissed, even by other parties in the
government coalition. Even more important may be the effect that
public share ownership could have in pushing forward privatization
and weakening the hold that political parties have over state-owned
companies. There are risks to the shares distribution strategy, and
protection mechanisms within the law to ensure market pricing will
be critical to avoid problems that have plagued similar share
giveaways. Ultimately, this plan may unleash the economic potential
within these "dinosaur" companies and help to turn them into engines
for the Serbian economy. End Comment.

MUNTER