US embassy cable - 05ZAGREB190

UNCLAS  ZAGREB 000190 
 
SIPDIS 
 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EAID, HR, Econ/Privatization 
SUBJECT: CROATIAN PRIVATIZATION: 14 STEPS FORWARD, UNKNOWN 
NUMBER BACK 
 
 
Summary and Comment 
------------------- 
 
1.  (SBU) The Croatian Privatization Fund -- under energetic 
leadership and with the help of U.S.-funded advisors -- has 
fought an uphill battle the past seven months, and can take 
some pride in the privatization of 14 majority 
government-owned firms over that period.  Privatization of 
subsidy-sucking large agricultural conglomerates has almost 
been completed.  On the other hand, the government has 
effectively "re-nationalized" several private companies 
rather than accept layoffs, and one privatization is in 
danger because the workers refuse to allow the new owner to 
take possession.  The government has largely failed to move 
on privatization of industrial properties, and in some cases 
is moving in the wrong direction, with ill-conceived schemes 
to merge industrial dinosaurs.  The international community 
is working together with new urgency to help the government 
make the tough decision to move forward on the more difficult 
privatizations.  So far, we do not see much evidence that the 
government will quicken the pace of reform before the May 
local elections.  If the IMF and World Bank hold the line, it 
will help the government stiffen its resolve.  The USG is 
prepared to extend its assistance to the privatization 
process if the government decides to move forward with 
industrial privatizations. 
 
Success, Especially in Agricultural Companies 
--------------------------------------------- 
 
2.  (U) Over the past year, the Fund has been able to sell 14 
majority state-owned enterprises.  They consisted of five 
agricultural companies, eight hotels, and one medium-sized 
metal working company.  These were mainly small-to-medium 
sized firms, with the exception of Belje and PIK Vrbovec. 
These two together employ 3600 permanent employees, and have 
over a billion kuna (USD 175 million) in known debt.  The 
sale of these companies represents a major victory, both in 
terms of the number of employees and debts cleared from the 
government ledger.  However, the path to the sales was far 
from smooth, and similar successes will be hard to duplicate. 
 Both were sold to Agrokor, one of the largest companies in 
Croatia.  Agrokor was able to agree to conditions not easily 
met by other (especially foreign) bidders -- such as buying 
the sprawling companies in their entireties, and promising to 
retain all the employees for three years.  If these "social 
clauses" come to be considered the norm, future sales will be 
more difficult. 
 
Hotels "Flying Out" the Portfolio 
--------------------------------- 
 
3.  (SBU) Hotel sales are brisk -- as they should be.  The 
Fund even managed to easily sell a hotel with a lovely view 
of the Rijeka oil refinery.  Even the Suncani Hvar saga 
appears to be entering its final chapters.  After the sale of 
this diverse resort almost caused a rupture in the former 
coalition government and was halted, the hotel sank deeper 
into debt.  The Quaestus Fund, a local group headed by a 
former HDZ (Croatian Democratic Union) finance minister, 
offered to "help out" the government by entering into a 
public-private partnership for the resort, with no tender. 
Quaestus would have made minimal investment, held onto the 
property for five years, and then sold its share.  The 
government would have retained a majority.  The Privatization 
Fund pushed for doing it right, and worked feverishly to 
craft a credible public-private partnership model (something 
new for Croatia).  The model developed provides for eventual 
sale of the government share.  Now there are a number of 
international and national bidders interested in the 
property, and the bids are higher than the original Quaestus 
offer. 
 
4.  (U) The government has also been able to sell off 
minority shares in over 250 companies via the stock 
exchanges.  Tenders have been prepared for 10 additional 
majority state-owned companies. 
 
Who's in Charge Here? 
--------------------- 
 
5.  (U) Another near-success was the tender of sugar company, 
Sladorana.  The Fund staff identified the best bid as that of 
another Croatian sugar company with good marketing channels 
in Western Europe.  However, the workers -- whose ESOP bid 
came in third -- have refused to let the winner take over the 
 
 
company, and the completion of the sale is in jeopardy. 
 
6.  (U) The workers at Sladorana publicly invoked the example 
of the agricultural company Valpovo.  Valpovo was privatized 
in the early '90s.  When a minority shareholder launched a 
successful takeover bid in 2003, the workers refused to let 
the new management enter the plant.  Rather than risk 
violence by upholding the court order to turn over the plant 
to the owner, in early 2004 the government bought the owner's 
shares at a good price, and put them on the stock exchange, 
where they have sat untouched since.  A call by the workers 
for new subsidies is reportedly being given favorable 
consideration by the government. 
 
7.  (SBU) Sladorana and Valpovo are part of a larger pattern 
of the government finding it politically impossible to accept 
job losses or social strife, even in already privatized 
firms.  As reported earlier, the government took over Sisak 
Steel and its 1600 workers.  Sisak had been sold in a 
bankruptcy in the late '90s.  Most experts agree that Sisak 
is a "dead company."  Two successive companies have been 
unable to make a go of it.  (As part of a vicious cycle, the 
last two owners have made unrealistic investment and 
employment promises in order to get access to Croatia's 
export quota for steel to Europe.  After the quota is 
exhausted, they walked away from the plant, which is 
uncompetitive under normal market conditions.  The reputation 
of the privatization and bankruptcy procedures has been 
blackened in the process). 
 
8.  (U) The press is now reporting that the government has 
stepped in to buy Goricanka, a textile firm that had been 
sold to a successful Croatian bakery chain, Pan Pek, in a 
bankruptcy procedure.  Pan Pek was accused of planning to lay 
off workers and convert the plant to its main line of 
business.  If the sale to the government is finalized, the 
Privatization Fund will add another 250 workers to its 
portfolio.  And the fact that the government stepped in after 
workers had threatened to blockade the company (ala Valpovo, 
and possibly Sladorana) will not be much of a selling point 
if the firm is finally put up for sale. 
 
Industrial Firms Proving Difficult 
---------------------------------- 
 
9.  (SBU) Earlier, the government had committed to working 
quickly on two industrial firms -- Split Steel and TLM (an 
aluminum plant in Sibenik).  Split Steel had a number of 
interested bidders, but the government would not commit to 
write off the debt necessary to make any sale feasible. 
Meanwhile, the director of Sisak Steel, desperate to keep his 
company afloat, has promoted the idea of merging Sisak Steel 
and Split Steel to create CroSteel.  Most experts believe the 
plan ill-conceived (the two plants are geographically far 
apart and produce completely different products) but the 
press reports rumors that the German consultant hired by the 
government to consider its scheme will give the plan a 
positive evaluation. 
 
10.  (SBU) The government has not shown the will to move 
forward on TLM, which is rumored to be mired in over a 
billion kuna (USD 175 million) of debt.  For 2005, the 
management has asked the government for over an over 400 
million kuna (USD 70 million) subsidy, and still projects a 
loss of over 60 million kuna (USD 10.5 million).  The subsidy 
package would include an odd mixture of reduced price energy 
from the state electric company, HEP, and reduced or free 
aluminum from an aluminum plant in Mostar -- of which TLM 
owns a 15 percent share. 
 
Shipyard Privatization Stuck in Port 
------------------------------------ 
 
11.  (SBU) Another bad idea promoted by the Minister of 
Economy and his deputy (a former shipyard head) is to combine 
the six large state-owned shipyards into one mega-company. 
The ministry has declared a need for a "restructuring plan" 
that would effectively pull the shipyards out of the 
privatization process until well into the next decade. 
Meanwhile, the management of best of the lot, the Uljanik 
yard in Pula, is urging that its shipyard be privatized. 
 
International Community Standing Shoulder to Shoulder 
--------------------------------------------- -------- 
 
12.  (SBU) In December, representatives of USAID, the EU 
 
Commission, the World Bank and the IMF met in Zagreb to 
discuss how to support the government's efforts to clear out 
the privatization portfolio.  The Ambassador co-signed a 
letter with the IMF Resident Representative and the World 
Bank Regional Director urging the restarting of the 
privatization process of Split Steel and TLM, and the 
inclusion of Uljanik Shipyard into the list of companies to 
be privatized this year.  The IMF and World Bank are making 
privatization of these three companies hard conditions of 
their programs.  USAID has offered to extend its assistance 
(due to end later this year) to the Fund to assist with these 
privatizations. 
FRANK 
 
 
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