The Baltic Course

From euphoria to censorship

By Uldis Dreiblats (Neatkariga Rita Avize),
Zidrunas Damauskas (Lietuvos Rytas),
Alexander Vene

Eleven years after the restoration of Baltic independence, only now is it just about possible to speak of a conclusion to the privatization process in general. Nevertheless, The toughest cookies in all three Baltic states related to the sale of big state-owned companies are yet to crumble. A shuffle in the very process of privatizing large objects has caused irritation amongst the public, followed by accusations of corruption on high levels

Latvia: society opposed

The Latvian government and governmental institutions have in the past promised to finish the privatization process many a time - both 1998 and 2000 were set as deadlines. The privatization of small and medium-size companies was fulfilled in the initial time set, but the privatization of large companies has bogged in for the last four years. Only now, in the spring of 2002, can we start speaking of light at the end of the tunnel.

«The main reason why the privatization process lost public support was the continuous political squabbles over models of privatization for the large state-owned companies.»

Unfortunately, over this period of time the privatization process has lost the fragile public support it earlier enjoyed back in 1996 and 1997 when all the state-owned companies were handed over for privatization and the privatization of small and medium-size companies was initiated.

A slice for all. At the time there was still hope that broad layers of society would be able to derive some type of income from privatization through the buying of shares in companies in exchange for privatization certificates or vouchers, then later selling them for a good price on the stock exchange. Privatization certificates were issued to all citizens of Latvia according to years of residence. This was done in a move enabling the broader public take part in the privatization process of housing, land, and also company stock. Privatization of stocks took place in form of public offerings, a process that still exists today, but was especially popular over 1996 - 1998. After a public offering, shares were placed on the stock exchange where rather active trade has been observed over these past years. A certain sense of euphoria was caused by the impetuous rise in stock prices on the Riga Stock Exchange in early 1997, giving rise to good profits for quite a portion of the general public. Euphoria was shattered by the crisis on the global stock exchange in early 1998, and was finally dispelled for good by the Russian financial crisis the same year.

The Riga Stock Exchange didn't give up even when the seeds of a local crisis started sprouting and it grew obvious that all this was taking place because the new owners of privatized companies (controlling stake holders) did not want to share their profit with minor shareholders. It was seldom that companies paid dividends and out of those enterprises quoted on the stock exchange, it seemed that only Unibanka cared for keeping its stock prices high. But Sweden's Scandinaviska Enskilda Banken bought-out shares in Unibanka from its small shareholders and unfortunately the company then left the stock market.

One of the reasons for panic on the Latvian securities market was the models of privatization that had been put to use - the Latvian Privatization Agency (LPA) sold the controlling stakes of almost all companies mostly to a single owner, while only about 15% of the shares fell into the public offering slot. The LPA backed this model by saying that the owner of a company who invests in development should be determined at once. Experts in the field of securities opposed the LPA by arguing that the more shares going to public offerings, the more active the transactions will follow on the stock exchange, which would mean a larger struggle for the controlling stake, prices would increase, and the small shareholders, the general public, would get a greater profit (the Riga Stock Exchange experienced such a struggle for the shares of two companies - Ventspils Nafta oil terminal and Latvijas Gaze gas utility). Conflicts between supporters of both methods still continue, while these conflicts are generally not of economic, but of political character.

The people against privatization.The main reason why the privatization process lost public support was the continuous political squabbles over models of privatization for the large state-owned companies. These models were generally still unclear and often under suspicion - the impression that these models had been developed especially for certain bidders was widespread. Moreover, those who had developed and those who had supported the models were often accused of corruption, with some major cases even discovered, but mostly still unsolved.

Public condemnation of the privatization process was best expressed in the spring of 2000, when enough signatures were collected for holding a referendum forbidding the privatization of the Latvian electricity monopoly Latvenergo. This company is probably the most valuable one in Latvia, while for now it has been put on the list of companies not to undergo privatization.

A 49% stake in Lattelekom - the fixed-line telecommunications monopoly - belong to Finland's Sonera, while 51% is held by the Latvian state, held at a rather heavy weight at the moment, as both owners are undergoing a complicated lawsuit filed against each other. Sonera wants compensation of 380 million US dollars for the Latvian state having shortened the Lattelekom monopoly period from 2013 to 2003 without consulting or compensation, while the Latvian state has placed a counterclaim over the company's modernization plan having not been carried out by schedule that was set in the privatization terms. Both the monopoly term and the modernization project were provided for in the agreement signed between both parties by rather short-sighted politicians in 1994, and seems to be slackening the company's privatization and also the development of Latvia's telecommunications.

At the moment it seems that a settlement is likely, which will probably be followed by privatization of the state- owned  share in Lattelekom. But according to unofficial information, Sonera wants only 20% of the Lattelekom shares to go on public offering, wanting first- hand rights to the rest of the shares. Thus a familiar course of privatization seems to be the most likely route also for Lat-telekom.

The state also owns 30% of the shares in Latvijas Krajbanka savings bank and approximately 40% in Ventspils Naftà oil terminal -privatization of these shares will require long and delicate negotiations, set to be of completely political character, as representatives of the ruling parties do not want to lose influence over these companies. Nevertheless, some promises have also been made also to the general public -privatization will actually take place, but only after privatization of the Latvian Shipping Company (LASCO) has drawn to an end.

Latvia's Rubicon.The six-year history in LASCO privatization has caused the wildest passions - several governments were overthrown for their previous failed attempts. These heated quarrels could mean that LASCO is safely considered as the country's key enterprise - if it is privatized, the Rubicon will have been crossed and privatization in Latvia would be counted as basically complete.

LASCO sale so far so good
The successful outcome of the public offering of 32 percent in the Latvian Shipping Company (LASCO) in exchange for privatization certificates could lead to the sell-out of the 51 percent stake set to be auctioned on the stock exchange for cash, said the Latvian Economy Minister Aigars Kalvitis to Latvian daily Diena. The Minister added that those who bought shares for certificates and intend to sell them later on the stock market will not turn out the losers. In Latvia's pre-election atmosphere this not only sounds great for the Latvian population, most of which, by the way, sold their certificates off for pennies years ago, but also for investors as the price quoted in the public auction is a good one, claim experts. Each share for 1.11 lats turned out to be good for both buyers and also the state, redeeming a large part of its privatization certificate securities, along with the recent sale of a 3 percent stake in Latvijas Gaze gas utility, also for privatization certificates. Yet the awaited sale of a 51 percent stake in one of the world's largest tanker fleet owning shipping companies is still doubted by some, as no one really knows what the shareholder line up will be like after the newly acquired shares start surfing the stock markets. LASCO is currently undergoing the fourth attempt at being privatized.

Four previous attempts at privatizing the company failed. All of these previous models were aimed at attracting a strategic investor, while at the same time the circles of applicants were always limited - at first only large shipping companies could apply. Naturally, such a model had serious drawbacks as such a large foreign company could buy LASCO only for improving its own competition and beating others, while development of the Latvian shipping industry itself would be left adrift. On the other hand, any quantitative limitations of applicants can cause suspicions of corruption. A substantial factor for the failures of these models was that Latvian companies could not participate in privatizing the shipping company owing to a number of restrictions. These flaws gave ground to continuous political feud over the shipping company which, of course, only deterred any real potential investors.

The present model for privatizing LASCO started on February 18th this year, when a public offering for 32% or 64 million shares in exchange for privatization certificates was launched. Later in May or June this year, 51% of the company shares will be auctioned on the international stock market, where any investor interested - without any exceptions - may participate.

The successful privatization of the Latvian Shipping Company can be harmed in only two ways - either by setting an initial bidding price too high, or by meddling with the company's financial means, scaring off investors at the last moment. It must be admitted that such methods have already been used in the privatization of other state-owned companies, while for now it seems that a fairly sturdy bridge is being built over this Latvian Rubikon.

Lithuania: 5 to go

Lithuania plans to finish its transfer of state property to private hands only in another five years. 11 years after the restoration of independence, the state still owns the national railway company Lietuvos Gelezinkeliai, all the power companies, the television and radio center, the national airline Lietuvos Avialinijos and the gas company Lietuvos Dujos.

All bar Ignalina nuke. "As there is no confidence in Lithuania that a state-owned enterprise will not be plundered, it is necessary to privatize everything, except for the Ignalina nuclear power plant, which is set to be closed down. I think, that the State Property Fund (SPF), which is carrying out the privatization process, will be at work for at least another 5 years - it not only has to sell the companies, but also observe how investors fulfil their obligations", - said Eduardas Vilkas - an academic and chairman of the Lithuanian Privatization Committee.

Only very recently the privatization of two state banks was completed. One of these - Zemes Ukio Bankas - was sold to Germany's Norddeutsche Landesbank (Nord/LB) only weeks ago, although this was the third attempt.

While the government pondered for years whether to sell the gas utility Lietuvos Dujos or not, its market share fell to 35%. A tender for strategic investors is now drawing to an end, with the likely bidders being Germany's Ruhrgas and E.ON Energy. A similar stake for gas suppliers will also be announced.

A decision is also set to be made soon over a tender for privatizing the Lietuvos Avialinijos airline. The seems unable to decide, as no western airlines are really showing much interest as of lately.

Failed equal shares.The privatization process in Lithuania, like all other post-Soviet countries, began with investment or privatization vouchers. According to Vilkas, the purpose of privatization for vouchers was to divide the privatized property on equal basis. Nevertheless, this idea failed to be fulfilled, as it was not exactly the end product top players wanted to share, but only the tickets for buying the product.

Vilkas emphasized that privatization for vouchers was strongly influenced by the criminal world. Gaps and constant changes in legislation were an advantage for criminals. The state dealt with this problem later, but at the time all the property had already fallen into the right hands.

«As there is no confidence in Lithuania that a state-owned enterprise will not be plundered, it is necessary to privatize everything, except for the Ignalina nuclear power plant.»

Vilkas says that the advantages of privatization through vouchers include the fact that the process was rather fast. After this, the greatest part of Lithuanian industry fell into private hands. The state still had banks, and large objects of infrastructure.

The Lithuanian academic thinks that after the period of vouchers, the process of privatization ran rather smooth, but only until last year's sale of the LISCO ferry shipper. The process was actually not so much as a scandal, in his opinion, as it was an attempt at making a scandal.

As it is well known, LISCO is now in the hands of Danish company DFDS. Privatization of LISCO was an ambition of the Lithuanian trucker association Linava. Experts claimed that the Lithuanians need LISCO to keep up the successful circuits of contraband. The parliament's left-wing sided with Linava. This was also behind one of the reasons for toppling the government of liberal Rolandas Paksas.

One goal - NATO membership.In 1999 (with the right-wing conservative party in power at the time) privatization of the oil group Mazeikiu Nafta was carried out through scandal. The operational rights and a 33% stake in the oil refinery, terminal and pipeline, were sold to US company Williams International. All politicians now seem to admit that this was merely a political investment made by the Lithuanian government with the one goal of becoming a member of NATO in mind. State institutions didn't even participate in the sale of this object, all was in the hands of the parliament and government.

Vilkas says he believes the goal of the state property privatization is reaching an efficient economy, but, as he puts it, the public in general demands only one thing - as much money as possible. The privatization of each large object has been accompanied by discontent, pressing politicians and the public. But as Vilkas claims, only those left with nothing after privatization are those who complain.

The academic is sure, that Lithuania has in general acted correctly, pushing the pedal of privatization at a mediocre pace: "The experience and competence of experts at the Privatization Committee and the State Property Fund now and in 1998, when the country's largest object - Lietuvos Telekomas - was privatized, differ as day and night. Without the necessary knowledge, one can only stir trouble".

Estonia: it could be worse

Officially, major privatization in Estonia was completed in November 2001, when the Estonian Privatization Agency was closed. In conclusion, one may say that the situation could be worse.

During the 10 years of major privatization in Estonia, practically all industrial and financial spheres passed into private hands. Only the power industry remained in possession of the state: the Narva Power Plants, Eesti Polevkivi oil-shale mines and a majority of the electricity networks, as well as the Port of Tallinn. Besides this, the state has still not sold a substantial part of its real estate, which basically belongs to the state ministries and their departments, as well as municipalities.

No Moscow support. The privatization of industrial objects turned into dead failure in north-east Estonia, where the majority of companies of high importance to the industry of the former Soviet Union were located. Neither the huge capacities, nor the products made by these companies located in Estonia were needed by anybody after the collapse of the Soviet Union. Many of the factories were closed, failing to even wait until privatization, another part went bankrupt already in private hands. There are little successful exceptions - the urea producer, Nitrofert, was bought by Russia's Gazprom and the rare metals manufacturer Silmet now belongs to the former prime minister of Estonia, Tiit Vjahi.

Consequences of ruin of regional industry in the early Nineties in north-east Estonia, still predominantly inhabited by ethnic Russians, are felt even now. Unemployment in the region is still the highest in the country, none of the regional or state programs for creating new jobs have been successful. Restoration of the already destroyed companies is pointless; therefore the north-east area of Estonia looks to be recovered only by alternative methods. What kind of methods may be used - nobody knows yet.

Unfortunate railing.The first of the large objects of Estonia's infrastructure to undergo privatization was the railway. Initially, it was split in two parts, one part of which went under the name of Edelaraudtee and dealt with passenger transportation, and the other - Eesti Raudtee - with transit. As domestic passenger transportation in Estonia is unprofitable, the first problem for Edelaraudtee was getting state subsidies, as the losses were no longer covered by the profit made from transit. Edelaraudtee has now changed hands twice, however, until now the main field of work done by the owners is begging the state for new grants, and closing down railway lines.

The process of Eesti Rraudtee privatization last year went on long and scandalous, however, eventually the company has got itself an Anglo-American consortium with the participation of several Estonian oligarchs. As the owners have only just come in, it is rather early to speak of fortune or misfortune of the company's privatization. Yet the first step taken by the new owners was the replacement of old Ukrainian-built locomotives with 15 or even 20 year old used American engines. It is now said that trains in Estonia will thus become longer, allowing to increase throughput and profitability.

Power industry - at a crossroads.For the past five years, all Estonian governments in succession have carried on negotiations with the US company NRG Energy over sale of the Narva Power Plants, which provide over 90% of the country's electrical power. Americans wanted guarantees of high profitability and market shares, and kept increasing demands. In result, late last year the negotiations were closed, and now authorities and experts are searching for new ways of developing the power complex, and some versions still include privatization.

«The state has still not sold a substantial part of its real estate, basically belonging to ministries and their departments, as well as municipalities.»

The management of the oil-shale mining company Eesti Polevkivi, suggests that the Narva Power Plants be privatized together with the mines, but not giving investors more than 49% of the shares in the future merged company. The present owner of the Narva Power Plants - Eesti Energia which also sells electric power and owns the grids, reports it has no opinion. The Estonian President Arnold Ruttel recently offered not to privatize the power industry, but to find means of modernizing the Narva Power Plants by national bills, meaning the issue of promissory notes.

Shipping co scare.Earlier this year, ESCO Holding - owner of the Estonian shipping company ESCO - offered an 80% stake in ESCO for sale. It turns out that over six years after privatization, the once successful company with a turnover in billions and profits in hundreds of millions of kroons, has sunk to debts, and its fleet down from 60 to 20 vessels. Norway's Tschudi&Eitzen, which controls ESCO Holding, has made it no secret that by selling ESCO shares, they want to get rid of bad assets and assume possession of the company again from scratch. Few believe in a recovery for ESCO.

Furthermore, the failure of the shipping company has frightened off even those who still recently supported privatizing the last state milking cow - the port of Tallinn, or Tallinna Sadam. The port privatized all operators, remaining as landlord, and now annually brings the state up to 300 million kroons in dividends - just as the shipping company once did. To tell the truth, many operators actually assert that the state monopoly port of Tallinn is leading wrong policies. Nevertheless, the company's profits speak for themselves, and nobody is venturing for complete privatization of the lucrative port.

Estonian privatization securities.Until last year, the destiny of Estonian privatization securities developed in not too much of a successful way. The state was reluctant to sell valuable objects in exchange for privatization securities, so the luckiest were the buyers of shares in Saku brewery and the supermarket Tallinn. Besides these, apartments in Estonia and the land under apartments or under private houses were privatized for privatization securities. It is no wonder that in result the exchange value for privatization securities until last year did not exceed 30% of their face value, and the value of those left unused was estimated in the billions. The situation changed when local governments decided to offer large patches of agricultural land, forests and also land under buildings for sale in exchange for the privatization securities. Shortly before the beginning of last year, the value of privatization securities doubled and since then has not fallen below half the face value. Moreover, mass sale of land belonging to municipalities has net yet started so the Estonian vouchers seem like they will still be in use for a while.

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