VZCZCXYZ0001
RR RUEHWEB

DE RUEHVB #0133/01 0371416
ZNR UUUUU ZZH
R 061416Z FEB 07
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 7250
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS ZAGREB 000133 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: KPRV ECON EINV HR PRIVATIZATION
SUBJECT: GOC PLANS NEW PRIVATIZATIONS AFTER LONG HIATUS 
 
REF 06 ZAGREB 1265 
 
¶1. (SBU) Summary: After being stalled for the past two years, the 
Croatian government is finally moving forward with the privatization 
of some of the most problematic assets in the government's still 
large portfolio.  Privatization is unpopular with the Croatian 
public, which equates the process with the corrupt, backroom deals 
brokered in the early 1990s that made millions for a few and put 
many out of work.  However, with the EU pressuring Croatia to 
eliminate subsidies to loss-making enterprises, the GOC has little 
choice but to confront the issue, including writing off substantial 
amounts of debt. End Summary. 
 
The Privatization Fund 
---------------------- 
¶2.  (SBU) The Croatian Privatization Fund (CPF), the government 
office charged with managing the privatization of most of Croatia's 
state-owned assets, is the majority shareholder in 36 companies (the 
national telecom, oil, electricity and several other "strategic" 
assets were not transferred to the privatization fund).  Although 
the nominal value of these concerns is 9 billion kunas ($1.6 
billion), many are so heavily-indebted so as to be virtually 
worthless, particularly three metals plants: Sisak Steel, Split 
Steel and TLM Aluminum of Sibenik.  Complicating matters further, 
all three companies continue to employ large numbers of people.  In 
a country with double-digit unemployment, closing these plants would 
require a degree of political mettle that is in short supply in 
Zagreb in an election year. 
 
Privatization Unpopular 
----------------------- 
¶3.  (SBU) Privatization through the CPF has been at a virtual 
standstill for the last two years as a result of disputes with local 
governments and the national government's reluctance to confront an 
issue that is largely unpopular with the public.  The Croatian 
public equates privatization with independent Croatia's first 
privatizations, which were carried out in the early 1990s under the 
regime of former president Franjo Tudjman.  Public perception, which 
is largely accurate, is that these were sweetheart deals designed to 
reward political supporters at the expense of the country and, 
particularly, workers.  These privatizations also occurred at the 
height of the war in the former Yugoslavia, guaranteeing that the 
state received only pennies on the dollar in these transactions. 
 
¶4.  (SBU) Also fueling public enmity is a lingering collective 
misperception of Croatia's manufacturing prowess before 
independence.  As many industries collapsed during the war or 
shortly after their privatization, these are seen as the proximate 
causes of the country's industrial decline, rather than the 
unrelenting forces of globalization that few if any of these 
industries could have withstood anyway. 
 
Employee Ownership Model 
------------------------ 
¶5.  (SBU) In an attempt to placate public sentiment and atone for 
the sins of the past, the GOC has spent the last year drafting a new 
privatization law with a view to facilitating employee purchase. 
Although a popular principle, the challenge in this proposal has 
been in finding ways to enable employee participation while, at the 
same time, attracting sufficient capital to restructure ailing 
enterprises.  After an early model that would have extended loans to 
fund employee purchase of up to 25% of shares was condemned by the 
World Bank, the GOC plans to unveil a new law to the parliament in 
the coming months.  The current proposal, as explained by the CPF, 
will replace credits with a 40% employee purchase discount.  With 
the exception of the metals industry, the CPF plans to tender its 
other assets on the Zagreb Stock Exchange. 
 
Time to Do Nothing Runs Out 
--------------------------- 
¶6.  (SBU) The opening of Croatia's EU accession negotiations in 
October 2005 narrowed the GOC's room for maneuver on privatization, 
particularly after the regulations of the Croatian Competition 
Agency (the country's market watchdog) were harmonized with EU law. 
In effect, Croatia outlawed state subsidies while it continued to 
dole out subsidies to loss-making companies to avoid the hundreds of 
layoffs that would result from a bankruptcy. 
 
Who Wants to Buy 19th Century Industry? 
-------------------------------------- 
¶7.  (SBU) The privatization of the metals industry, which the CPF 
hopes to complete in the second quarter of 2007, will remove a 
burden from the state, but at a cost in debt write-offs: 
TLM Aluminum Sibenik: 1,593 employees, $200 million debt; Sisak 
Steel: 1,209 employees, $30 million debt; Split Steel: 488 
employees; $30 million debt.  According to the CPF, although each 
company will be sold under specific terms, investors will be 
required to maintain current levels of employment for a 
predetermined period of time and to assume private debt.  The GOC 
will then write-off debts to the state in the form of unpaid taxes 
and social charges.  In the case of TLM, the value of this write-off 
is likely to exceed $100 million. 
 
Comment 
------- 
¶8.  (SBU) The CPF says that it aims to finish its work by the end of 
2007, at which time its remaining assets, including minority 
interests, will be transferred to the Office for the Management of 
State Property.  This is an optimistic timeline in light of 
Croatia's lackluster track record in privatization.  However, given 
the GOC's imperative to keep EU negotiations moving forward, this 
may finally break the logjam.  Many economists here believe that 
Croatia's latent potential for GDP growth is much higher than the 
current 4.6% and reducing the state's footprint can help to 
reallocate government spending.  The caveat here is the shipyards, 
which stand to reap billions of dollars in subsidies before their 
still theoretical future privatization, but that is another story 
(see reftel). 
 
 
BRADTKE