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DE RUEHVJ #1066/01 1351414
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P 151414Z MAY 06
FM AMEMBASSY SARAJEVO
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C O N F I D E N T I A L SARAJEVO 001066 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/SCE (FOOKS/RIEHL), EUR/ACE (VISOCAN), AND 
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TREASURY FOR GAERTNER 
STATE PLEASE PASS TO USAID 
 
E.O. 12958: DECL: 04/27/2016 
TAGS: ECON PGOV BK
SUBJECT: BOSNIA:  THE VIEW FROM THE RS PRIVATIZATION AGENCY 
 
REF: SARAJEVO 
 
Classified By: AMBASSADOR DOUGLAS L. MCELHHANEY FOR REASON 1.4(B). 
 
¶1.  (C)  Summary:  New legislation to review past RS 
privatizations (reftel) has shone the spotlight on the RS 
Directorate for Privatization (DfP).  However, the intense 
focus on process misses the broader point:  Many entity-owned 
companies are little more than a pile of liabilities by time 
they are transferred to the DfP -- the result of asset 
stripping, embezzlement and incompetence by corrupt 
government managers.  A review of the data shows that the DfP 
has done a respectable job of selling entity-owned companies, 
many of which are technically insolvent, thereby unloading 
significant liabilities that would otherwise be the 
responsibility of the RS government.  Without the DfP's 
"creative packaging," most of these companies have no option 
other than bankruptcy.  The real lesson of an objective 
privatization review is that the government should get out of 
the business sector as fast as possible.  End Summary. 
 
The DfP's Response 
------------------ 
 
¶2.  (C)  RS Prime Minister Milorad Dodik, decrying 
"sweetheart deals", has made a revision of past 
privatizations a cornerstone of his pre-election economic 
policy (reftel).  DfP Director Vladimir Makcic, who has 
headed the agency for less than two years, has responded to 
these claims with a spirited defense of the agency's 
performance during his tenure.  Makcic has provided the 
Embassy with detailed data on the DfP's activities to support 
his claims.  It should also be noted that, while the DfP does 
the technical work, the RS government has ultimate 
responsibility for privatization and must approve all deals 
before they are finalized. 
 
¶3.  (C)  According to data from Makcic, small-scale 
privatization (defined as companies with entity-owned capital 
of less than KM 300,000) has largely been completed.  The 
agency first attempted to sell these companies through 
competitive public tender.  If the tenders failed to attract 
a minimum number of bidders, the DfP engaged in direct 
negotiations with any interested buyer.  The results of 
Makcic's energetic work speak for themselves:  After years 
with very little activity, the DfP had successfully 
privatized 54 small companies (out of a total of 182 in its 
portfolio) by June 2005.  There was no interest in the 
remaining companies, most of which are insolvent.  The DfP 
does not have the authority to initiate bankruptcy 
procedures, so many of these firms remain in limbo -- piling 
up wage, pension, tax and other liabilities that will 
eventually have to be unwound. 
 
¶4.  (C)  There has been a similar acceleration in so-called 
"strategic" privatizations (a term that is applied very 
loosely in the RS).  In the seven years before Mackic 
arrived, the DfP sold a total of eight strategic enterprises. 
 Since his arrival, the DfP has successfully sold nine 
companies. 
 
The Numbers Speak for Themselves 
-------------------------------- 
 
¶5.  (C)  Banjalucka Brewery (BLB) is the largest strategic 
privatization to date.  The company was sold for KM 23 
million in December, 2005.  This is less than the KM 25.6 
million book value of RS government shares in the company. 
However, it is significantly higher than the KM 18.1 million 
appraisal of actual market value.  The buyers pledged to 
invest a minimum of KM 7.8 million in the firm and retain 
current employment levels for three years.  The new owners of 
BLB, an Anglo-American private equity firm, also assumed KM 
40 million in liabilities. 
 
¶6.  (C)  This was the third attempt to privatize the brewery. 
 The first tender was canceled in the wake of a public uproar 
after the government decided to sell BLB to a Slovenian firm 
whose offer was significantly lower than other bidders. 
Major international brewers such as Annheiser Busch and 
Interbrew expressed initial interest in the second 
privatization auction two years ago, which was conducted far 
more professionally.  However, it too failed after they 
pulled out following the collapse of BLB's margins and 
profits -- the result of brewery management's inability to 
handle increased competition from cheap imported beer, 
principally from Serbia.  By the time the third tender was 
conducted, BLB was hemorrhaging cash and operating at less 
than 17% capacity. 
 
¶7.  (C)  Other strategic privatizations tell a similar story. 
 The DfP sold UNIS, a cold rolled steel facility, for KM 2.1 
million.  Although the value of the company's assets was 
estimated at KM 4.8 million, the firm had been out of 
business since 1992 and had liabilities of more than KM 
702,000.  The DfP privatized a dairy for KM 500,000, against 
assets valued at KM 1.7 million.  However, the buyers assumed 
KM 7.9 million in liabilities.  Oslobodenje, a printer, was 
sold for the symbolic price of KM 100.  For this princely 
sum, the buyers got state capital appraised at KM -2.6 
million and liabilities of KM 8.5 million. 
 
Comment 
------- 
 
¶8.  (C)  The current review of past privatizations diverts 
attention from the real issue -- the RS government's poor 
track record in managing what should be private business. 
Entity-owned companies are milked for all they're worth and 
slated for sale when there's nothing left on the books but 
liabilities.  Given the quality of its portfolio, the DfP has 
done an admirable job of rapidly selling off companies that 
are worth less with every passing day.  If there is an 
operative lesson to be learned from the ongoing review, it is 
that the RS government should get out of the business sector 
as quickly as possible.  The DfP should be given additional 
flexibility to entice bidders to buy RS-owned companies.  The 
longer the RS government maintains direct control over 
business activity, the more it will end up having to pay for 
wage and pension liabilities that continue to accrue each day 
in insolvent entity-owned companies.  End Comment. 
KAIDANOW