The Baltic Course



[The Most Expensive We Had .]

[Acronyms of Baltic Capitalism] Summary

Just Before the Whistle

Ten years of reforming the economy of the three Batlic States allows for a summing up of the process of privatizaton which has incremently approached its conclusion. The Baltic Course has addressed three General Directors of national privatisation agencies. These are men that championed and protected the principle of the need to privatise in the face of often unsupportive attitudes from the general public and the political Elite. Janis Naglis, General Director of the Latvian Privatization Agency, and Stasis Vaitkevicus, Head of the State Property Fund of Lithuania are still at their posts. Vaino Sarnet, former Head of the Estonian Privatization Agency has left.

Ingus Berzins, Vudas Virgaudas (Respublika), Elizaveta Gavrilova (Investinfo)

- To what extent do the results achieved in privatization correspond to the ones planned at the beginning of the process?

Janis Naglis: During the first stage, the idea and the government's position was very simple. To privatize 75% of the state-owned enterprises. The next step to be taken involves selling the controlling block of shares to strategic partners, to real owners. I think that we have fulfilled the task and even overdid it a bit.

Stasis Vaitkevicus: Results of privatization in Lithuania are generally positive, although some principles of the privatization process were misrepresented. At the beginning of the privatization process, there was a free competition prevailing in Lithuania, but in several cases political, regional, and strategic considerations were on the top of our minds.

Vaino Sarnet: For me the answer is definitely affirmative. It will be easy to support the claim with the old newspapers of 1993. There was a big dispute about strategy of privatization then. My ideas expressed then (and still unchanged) are the following:
n Rapid privatization is a remedy to the value-subtracted command economy;
n Foreign investors are better owners than ones which are «home made» or «Soviet made»;
n As much cash and as few vouchers as possible; privatization through auctions and tenders.
I am happy to have the important role in making those ideas real.

- How much were competition, political or regional and strategic considerations prevailing in the privatization process?

Janis Naglis: Regional and strategic thoughts appeared in the privatization of companies which offer services, in particular - Latvian Gas (Latvijas Gaze) where it is stated that this and that must be attracted. As to other enterprises, there was a competition present as far as the law permitted. In 1994 and 1995, there was a restriction for foreign investors in control over the wood processing enterprises and real estate situated in the area of a port. In other respects, there was an absolutely free competition and anyone interested was able to privatize any enterprise. We did not play any special game.

Vaino Sarnet: The possibility of free competition is one of the main principles of the privatization process. The idea of free competition was strongly supported by foreign experts at the privatization agency. Estonia was lucky to have German experts with Treuhand experience. Their experience has allowed us to avoid some mistakes made during the privatization in East Germany.

- What was the result of work with the potential investors? Was the interest shown by the business community less or more than expected?

Janis Naglis: The privatization process started 1.5-2 years later in Latvia than in Estonia. That explains what was then «in fashion» and why Baltic investment was diverted more towards Estonia. There was a rule in use: first come, first served. That is why we have received less from foreigners: we have an average of one foreign investor for every ten local investors.

Vaino Sarnet: There was a common view in Estonia that foreigners are only waiting to buy out all the Estonian assets. This view was also intentionally spread around and trumpeted by the so-called Estonian capitalists (usually with little or no capital and little know-how to invest). To a large extent, the EPA has managed to neutralize that pressure by a speedy privatization process and commitment to go ahead regardless of the criticism.

- Why did Russian investors have such small influence in privatizing the Baltic enterprises? Does that mean that the Baltic States are beyond their scope of economic interest?

Janis Naglis: Definitely we are within their economic interests. But free competition does not allow Russian investors to get in at the beginning of privatization in the Baltic, in particularly in Latvia. This was caused by the fact, that it is extremely difficult for them to receive permission for floating currency abroad. The local bureaucracy has failed them.
We really were interested in having Russia involved, for example, in privatizing the gas company, the Latvian Privatisation Agency took part in the process as an accomplice. We even prepared a presentation of a business plan to Russian State institutions, for example, to the Central Bank of the Russian Federation and the State Property Fund.

Vaino Sarnet: One not widely published view of the Estonian Privatisation Agency was to create a «good mix» of foreign investors from different countries. Another idea was to attract investors with western know-how. As Russia was, and remains a powerful neighbour in terms of economy and politics, it makes sense, for the sake of this «good mix» approach, not to stimulate investments from Russia in the early stage of economic transition.

- Is it possible for the «godfathers» of privatization not to be involved in politics? What are the main questions where you have tried to be neutral despite the pressure? What are the topics that forced you to meet halfway with the ruling clique?

Janis Naglis: In principle, people in charge of the privatization process in Estonia and Latvia were independent from politics. Sometimes we were not able to make wise decisions that we wanted to make.
Furthermore, the Government adopted laws, which we were not allowed to discuss, but which we were tasked with implementing. Suddenly, unexpected delays and failures occurred: for example, with the Latvian Shipping Company, Latvenergo, etc. I think that Sarnet's departure was also connected with an incapacity to prove his case; he lost it and gave up his job.

Stasis Vaitkevicus: Exactly those political forces that are in the ruling elite made decisions on legal norms that were necessary to be adopted, on what, when and how to be privatized. The political leadership has not made it obligatory to implement the planned governmental programme - SPF is only an executor of their tasks.

Vaino Sarnet: You must have a sixth sense to realize your limits and you must have courage to say «No», if necessary and to act independently. If possible, use tactics to play one group against another. You must be accessible to the press and be ready to answer any question since only the media can be your true friend in hard times.

- Did the use of vouchers yield the expected results you expected? Did you consider social equity in the privatization process when using vouchers?

Janis Naglis: It is impossible to achieve absolute justice despite the tools used. But, in my opinion, the voucher programme was positive, firstly from the standpoint of enlightening the residents of Latvia. Secondly, the voucher programme, especially in Latvia, has allowed the capital market to develop properly.

Stasis Vaitkevicus: The voucher privatization stage, in my opinion, can be judged as a positive one. By the way, world renowned experts have confirmed that it has been the only appropriate decision in Lithuania, and also in the other Baltic states.

Vaino Sarnet: One of the important achievements of the EPA, was a limitation of possible damage to the economy by the politically convenient voucher privatization. This was one of the toughest disputes in the Estonian privatization history. A compromise has allowed selling more than half of the state property (more than 51%) for cash to strategic investors and the rest for the freely tradeable vouchers. Some enterprises were sold out through public offer to voucher holders. EPA has not considered social equity as a principal aim of the privatization. Equally well these problems can be addressed by the policy on taxation.

- Didn't you think that privatization by foreign corporations would result in a conflict with national interests?

Janis Naglis: Perhaps, at the beginning of the privatization process we did not pay much attention to the problems of globalization of the economy. That resulted from selling the enterprises off to large corporations, that was absolutely natural and difficult to countervail. But the important fact is that competition was won also by small companies with their local funds that led to the possibility of company restructuring and only afterwards re-selling for a different price. Consequently, the so-called local capitalists have arisen.

Stasis Vaitkevicus: It is not a secret that large-scale foreign companies are gaining national enterprises with a purpose to close them down in order to minimize the world's and European market competition. But I am not aware of similar examples of privatization in Lithuania, even in the cases of privatization following the Law «On initial privatization.» As a whole, the interest of businessmen worldwide in the state- owned property in Lithuania was less than expected at the first stage privatization.

- What rule do you follow when deciding on which strategic enterprises do or do not need to be privatized

Janis Naglis: The problem is solved in a better way in Latvia. There are no non-privatized enterprises. Anything could be privatized with the exception of say arms production companies, which is not, thank the Lord, something we have to deal with in Latvia. So, there is only the political choice - when to start privatizing. I think, the time will come when the politicians will come to an agreement and privatize those enterprises which are not yet meant for privatization, for example, the railway, the postal service, and the airport.

Stasis Vaitkevicus: It is up to the Lithuanian government to decide what can be privatized. The relevant laws must be adopted in order to guarantee consumer rights protection; very often it is the case that a state monopoly considers particular categories of products and services. Only then, a project can be worked out on how to reconstruct and re-organize those categories of property and then they are ready to be privatized.

Vaino Sarnet: As it was said before, the energy sector is not fully privatized. There are plans for privatizing the postal system, road maintenance and other public services. As for Tallinn Airport - the option of privatization is not politically correct due to the excessive investments made recently through the state-backed loans. Most probably, it would be difficult to receive those investments out of privatization income.



The Most Expensive We Had .

Even though the Baltic States followed different methodologies in the privatisation process, the financial means acquired by the State Treasury in the course of privatisation and invested in the development of companies in Latvia, Lithuania and Estonia were balanced in a surprisingly similar manner.
The above conclusion was made after the analysis of state-owned companies which were most expensive in the privatisation process and the new owners of which are determined to make the biggest investment in them

Ingus Berzins, Elizaveta Gavrilova (Investinfo)

The Baltic Course has analysed the ten biggest privatisation deals of each Baltic State by summing up the sales price and the compulsory investment requirement provided by the privatisation terms. Thus, we have attempted to show for what companies of what industries in each Baltic State the investors were ready to pay the highest price.

At the same time, these lists do not fully reflect the situation with the private capital attracted. The companies that were the elevenths or twelfths on our lists were not much cheaper companies. There were also companies outside the list, one of the indicators, either the sales price or the compulsory investment, of which was high enough but the other indicator was too low for them to get into the top.

Another reason for failing to get objective statistics is the difference in legislation in the Baltic States, which determined attraction of private capital. For instance, in Latvia and Estonia, the big modernisation processes of the telecommunications monopolies were not included in the general privatisation statistics.

As the dollar rate against the national currencies has changed, The Baltic Course assumed that in the course of privatization, the average rate of one dollar was as follows: USD 1 = LVL 0.58 = Litas 4 = Kronas 14.

Most expensive privatisation projects in the Baltic States, million USD
Company Buyer Industry Price Investments

In Latvia
Ventspils Nafta Latvijas naftas tranzits Stevedore services 124.1  
Latvijas Gaze Gazprom/Ruhrgas/Preussen Elektra Gas industry 56  
Rigas transport fleet Lavinia Corporation Shipping 14.3 10.3
Valmieras stikla skiedra Glasseiden Oschatz Glass fibre production 9.7 22.4
Rinuzi Naval Invest Stevedore services 9.0 11.2
Ventspils tirdzniecibas osta New Venta/Uniparks Stevedore services 8.6 3.4
Rigas kugu buvetava Remars Riga Shipbuilding 7.6 1.7
Liepajas metalurgs Agrosin PTE Metal processing 3.8 5.2
Kemeri Ominasis Italia Sanatorium 1.6 17.2
Rigas kugu remonta Eksperimentala rupnica Talinvest Real estate   17.2

In Lithuania
Lietuvos Telekomas Amber Teleholding (Telia&Sonera) Telecommunications 260 221
KLASCO Viachema Stevedore services 50 23.9
Lietuvos draudimas Forsilringsselstabet Insurance 26.3 25
Vakaru Laivu remontas Western Invest Shipbuilding 20.8 20
Klaipedos transporto laivynas SBA/Jo Tankers Shipping 20.8 12.5
Klaipedas tobacco factory Philip Morris Tobacco production 12.5 30
Klaipedos smelte Western Lithuanian -Corporation of Industry and Finance Stevedore services 11.3 18.8
Drobe ScanEast Fund/Finnventure Rahastro Textile production 4.8 11.4
Kaunas confectionery Kraft General Foods factory International Confectionery production 3 12.9
Textile factory Audejas Private owners from Germany and Lithuania Textile production 2 35

In Estonia
Eesti Merelaevandus ESCO Holding Shipping 71 57.1
Metallieksport Nelimet Metal export 14.3 9.3
Viru Hotell Harmaron Hotels 10.3  
Esoil E.O.S. Stevedore services 8.6 20.1
Kiviter Erioli Chemical industry 8.6 10.7
Liviko Neokapital Alcohol production 7.3 6.4
Laanemaa Elektrivork IVO Energia AS Electricity distribution 5 7.1
Leibur Offero Bread production 5 2.8
AS Narva Elektrivork Startekor Investeeringute Electricity distribution 4.1 5.6
Kalev Talinvest Confectionery production 4 3.9


Acronyms of Baltic Capitalism

Ingus Berzins, Zydrunas Damauskas (Lietuvos Rytas), Elizaveta Gavrilova (Investinfo)

Minority Shareholders Left Out

In November 1992 in Latvia, a law on «Certificates for privatization» was adopted. The law stated that PSs are to be apportioned to inhabitants of Latvia depending on the time of residence; to former owners of nationalized property or their heirs and in cases where the property has not been given back; and to «politically repressed» persons (punished for political reasons under the Soviet regime). A total of 3 billion LVL have been assigned for PSs to persons for the time of residence in Latvia, and only 168 million LVL for certificates of compensation.

The market price for one PS during the whole stage of privatization was approximately 2 lats; this was based on the total amount of PSs held by the population without being guaranteed with a constant offer of state property. Most of the population did not see much sense in gaining state property and so sold their certificates. The buyers, in turn, have turned around and sold the certificates at a profit to entrepreneurs (mostly, foreigners) who took part in privatization of state property.

Purchase of shares offered to the public has become the most popular way for PSs to be utilised. The Latvian Privatization Agency has sold shares of 85 enterprises for PSs at public offerings that resulted in an absolute majority of listed companies and more than 110 thousand shareholders participating in the new stock market. Shares to the amount of 928 million certificates were sold in the process of public offerings. On average, 25% of shares of the 85 enterprises have been sold in public offerings.

Through this process, in theory, the masses should derive some benefit out of privatization of state property; but in practice the public has suffered due to the crises of 1997 and 1998. The owners of the PSs who have bought enterprise shares during the rise of the stock market showed a return of more then the nominal value of 28 LVL for their PSs. Shares of co-owners, who privatized enterprises in a later stage, were of such little value that it would have been better to sell all their PSs, despite the ridiculous prices offered at that time.

And They Made  the Genie Appear

Following the Law on «Initial Privatization of State Property», privatization with cheques started in Lithuania in 1991 and was finished in 1997. All the inhabitants of the country were issued cheques.

For this purpose more than 2.6 million investment accounts have been opened. Almost whole branches of industry have been privatized by the means of cheques. For example, Invita Company has controlled the enterprises dealing with veneer and wood filing plates; Industas - companies of construction supplies; Invalda - furniture manufacture and metal-working entreprises; Medienos investicija - saw-mills; EBSW - the electric industry; Lietverslas - enterprises for processing agricultural and fishery products.

Out of 406 stock companies registered in Lithuania, currently there are only 17, which are called «investment-controlling stock companies». Investment stock companies were supposed to revive the privatization process due to the incapacity of private persons and groups to privatize state property quickly and in a trouble-free manner.

According to data of the Association of the Investment Stock Companies (which has now ceased to exist), more than half a million inhabitants of Lithuania have trusted their cheques to that kind of company. But dividends were paid out only by 10% of the companies that received cheques. Most of those companies were then liquidated; so the Lithuanian inhabitants failed to become owners of the state property.

Arturas Keleras, President of the Central Depository of Securities, has announced in the press 2 years ago that cheque companies intended for money-laundering were appearing in a geometric progression. They made the Genie appear and it was impossible to stop him once he was out of the bottle. One leading company was able to set up a dozen branches of investment stock companies.

Still Waiting for Its Time to Come

On January 1, 1991, the Law on Privatization came into force in Estonia. Nevertheless, the lodging problem was not solved. It was decided that tenants would be able to take possession of apartment property practically free of charge; but the government was looking for a method to create a level playing field for both owners of the cooperative flats and private houses.

The decision was made to divide the national capital into shares: an option similar to the Czech one, but the length of time spent in this country was considered within the period from 1 January 1945 to 1 January 1992. Each year of residency was equal to 1 m2 of living space, its monetary equivalent was introduced later on - 300 Estonian kroons.

First of all, national capital bonds (the so-called «yellow cards») had to be registered in a register specially created for that purpose, and a definite quantity of EVPs was added. EVPs were of purely virtual character, and initially only pensioners were able to relinquish them.

A compensatory voucher (voucher for expropriated or nationalised property), apart from above mentioned bonds has become an alternative of EVP. Owners of illegally expropriated property could then become possessors of the voucher.

Apart from obtaining property (apartments, enterprises, land, timber), one could buy shares of the investment or pension funds. Huvitusfond, a state compensatory fund, was established in the summer of 1993; its bonds are quoted at the Tallinn Securities Stock Exchange.

As a method of privatization, its papers were dominant in the purchase of houses (apartments) and land. The EVP's period of validity was prolonged twice. In February this year, the government has authorized the Ministry of Finance to draft and implement a law which would allow for an extension of the EVPs period of validity till July 2002. This step was stipulated due to the large quantity of EVPs at the disposal of Estonian residents and the slow privatization process. Altogether, there are EVPs emitted in the amount of 13,786 billion kroons.