UNCLAS ZAGREB 000294

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR/SCE

E.O. 12958: N/A
TAGS: EIND EINV PGOV PREL EUC HR
SUBJECT: CROATIAN COMPETITION AGENCY: NO CHOICE BUT TO
CLOSE SHIPYARDS

REF: 2008 ZAGREB 735


1. (SBU) Summary: The GOC and EU continue to negotiate the
terms for privatizing Croatian shipyards - one of the key
remaining challenges in Croatia's EU accession process.
According to the head of the Croatian Competition Agency, the
GOC has now proposed selling a 50 percent stake in Uljanik,
the best performing of the enterprises (a previous plan to
offer up 25 percent was rejected by the EU as insufficient).
While Croatia remains reluctant to give up its belief that
its shipyards can be a successful "national champion"
industry, the EU remains skeptical any of the shipyards are
viable without subsidies. The EU has even begun
investigating the terms of some of the orders from Croatian
companies currently keeping the shipyards afloat. End summary.


2. (U) On May 18, Olgica Spevec, head of the Croatian
Competition Agency, gave Econoffs an update on shipyard
privatization. In late 2008, the GOC presented a proposal to
the EU by which the GOC would offer four of the shipyards for
a price of 1 HRK ($0.20) each in a public tender process and
ask potential buyers to specify how much of the yard's credit
liabilities they would assume (reftel). The GOC would also
impose certain conditions on the sales. For Uljanik in Pula,
the best performing of the shipyards, the GOC proposed a
phased process, first issuing a tender for a 25 percent
stake, then offering 25 percent plus one share to employees,
and then putting an additional 25 percent on the market for
investors.


3. (SBU) The EU rejected the proposal and pushed back on some
of the conditions the GOC would like to impose for all of the
shipyards, such as requiring buyers not to convert the
properties out of shipbuilding. Spevec said, however, the
main area still being negotiated is the plan for Uljanik.
Although Uljanik has been the best performing of the
shipyards, the EU now recognizes that even Uljanik would not
be a viable enterprise without significant state aid. Spevec
commented that the difference between Uljanik and the other
shipyards is that Uljanik has known how to use the subsidies
it has received. She said no Croatian wants to accept that
even Uljanik is not a strong, successful enterprise, as this
would leave Croatia without any shipbuilding industry at all.
EU officials insist, however, that any private owner must be
able to make key decisions about the future of the
enterprise, and they cannot do so with just a 25 percent
stake. Deputy Prime Minister Polancec has reportedly told the
EU that he would agree to issuing a tender for a 50 percent
stake and is awaiting their comment.


4. (SBU) While the negotiations continue, several of the
shipyards have received orders from Croatian ship lines that
will keep them operating for another couple years. Spevec
said, however, the EU is suspicious of the conditions under
which these deals were made and is now investigating. Spevec
said, as hard as it may be, Croatians will have to accept
that economic viability and leveling the playing field (i.e.,
removing state subsidies) are what matters to the EU in this
process; European Commissioner for Competition Neelie Kroes
does not want to hear about the importance of "national
champion" industries. Spevec said other European countries
have had to close non-competitive shipyards, and Croatia will
have to do the same. She added that given the current
climate, finding investors for any of the shipyards may prove
to be the biggest problem of the whole endeavor, especially
if restrictions remain on converting the yards to other
activities.


5. (SBU) COMMENT: With the prominence and immediacy of the
Slovenian border dispute taking up many headlines, the
continuing crisis in shipbuilding has not been widely
reported of late. What is clear, however, is that even if
the border issue is resolved and accession progress gets back
on track, tough negotiations and decisions remain over the
future of Croatian shipbuilding, and they will take place in
perhaps the worst possible economic circumstances. As long
as the EU negotiating process remains blocked by Slovenia, it
is unlikely that the Croatian government will be able to
muster the political will needed to take the other difficult
decisions that are part of EU accession. END COMMENT.
BRADTKE