SERBIA: PRIVATIZATION WELL ON ITS WAY

UNCLAS SECTION 01 OF 02 BELGRADE 000788 SENSITIVE SIPDIS USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH E.O. 12958: N/A TAGS: ECON ENRG EINV SR MW SUBJECT: SERBIA: PRIVATIZATION WELL ON ITS WAY Ref: a) Belgrade 0460 SUMMARY -------------- ¶1. On July 30, the Embassy met with State Secretary of Economy and Privatization Nebojsa Ciric of the Ministry of Economy and Regional Development. Fresh from negotiations with Fiat, Ciric was confident that the remaining 450 state-owned will soon be privatized while the 400 socially-owned companies would be privatized, or begin the process, by the end of 2008 as legally stipulated. A select few large companies will sale via a tender, while most others will be auctioned off. Those with no bidders, however, will be bankrupt. Although the NIS deal is expected to be ratified in September, the Ministry of Economy hopes to "improve" the deal with a higher purchase price and investment. End Summary. THE PROCESS, A WORK IN PROGRESS -------------- ¶2. Though all the technical details are not final, according to State Secretary of Economy and Privatization Nebojsa Ciric of the Ministry of Economy and Regional Development, select large socially and state-owned firms will be sold through a tender process while others will be auctioned off. Companies without buyers will enter bankruptcy. Tenders will call for strategic partnerships between the government and private investors which Ciric admits is not "really privatization, but something in between." Ciric quickly added, however, that the strategic partner would have full management control of the company, despite their initial minority share holding. ¶3. Ciric explained that over time and with accumulated paid-in-capital investment, strategic partners will move from being 20-30% shareholders to acquiring 70-80% ownership. Ciric did not offer a timeframe for this ownership reversal, however. The government was not looking to make money in the short term, but over time through dividend payments and a payout when the government exited the venture. Ciric cautioned that the GOS is still formulating its approach with the help of advisors Unicredit, Deloitte and Touche, and Harrison Solicitors. DESIRE FOR A BETTER NIS-GAZPROM DEAL -------------- ¶4. Ciric echoed previous statements made by Economy and Regional Development Minister Mladjan Dinkic that the deal between state-owned oil and gas company NIS and Gazprom should be revisited as the $640 million price tag and $800 million investment was too low. As a result, on July 31 the government announced it would hire an advisor to assess NIS' value. Merrill Lynch (with Raifeissen Bank) was the previous advisor, but according to Ciric, Merrill Lynch "did not perform well and did not act like an advisor to the State." Ciric added that the government was happy with the South Stream pipeline and gas storage portion of the NIS-Gazprom deal and said he did not think anyone other than the Russians could provide them. Ciric admitted that it was not clear what exactly was for sale in NIS which was something the new deal advisor would need to clarify. Ciric expected parliament to pass the deal in September and to begin negotiating a "better" contract. OTHER BIG DEALS WELL ON THEIR WAY -------------- ¶5. Ciric expects to sign the final agreement with Fiat (Reftel A) within a week. The Fiat deal, according to Ciric, has piqued the interest of an unnamed Western European automaker who was considering greenfield investment in Serbia as a way to export to Russia through the Serbia-Russian free trade agreement. JAT Airways is going on the market at a starting price of $81.6 million, down from the anticipated $120 million. Ciric wanted to sell it for "1 euro" given its heavy indebtedness and admitted that selling JAT now was bad timing because of slacking global financial market. He believes Russia's Aeroflot, Air India, Icelandair, Italy's Air One and German's Air Berlin are still interested in JAT. COMMENT -------------- ¶6. Despite a failure rate of 20-30% with privatizations, the government still acts committed to quickly concluding sale of socially and state-owned enterprises, averaging 50-60 transactions per month. The lessons learned from previous failures seem to have birthed the strategic partnership approach with a gradual shift to private investor ownership. Given a number of recent protests by workers against their new private employers, the strategy may be socially more palatable. Minister Dinkic - known for his decisiveness, high energy, and stubbornness - promises to be a BELGRADE 00000788 002 OF 002 formidable negotiator opposite the Russians in achieving a better NIS deal for Serbia. End Comment. BRUSH