VZCZCXRO0071
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBW #0051/01 0111607
ZNR UUUUU ZZH
R 111607Z JAN 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 2046
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0034
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000051 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN KPRV SR
SUBJECT: SERBIA: CORPORATE SHARE GIVE AWAY - GOOD ECONOMICS? GOOD 
POLITICS? OR BOTH? 
 
REF: 07 BELGRADE 1144 
 
SUMMARY 
------- 
 
¶1.  On December 26, the Serbian Parliament approved a law on the 
free distribution of shares of privatized and soon to be privatized 
companies to Serbian citizens.  The law was approved less than two 
months after Economy and Regional Development Minister Dinkic first 
proposed it.  The law started an acrimonious public debate as trade 
unions from the state-owned companies initially rejected the law's 
provisions.  This law gives the government a popular program that 
promises corporate shares (money) in people's pockets just as the 
January 2008 Presidential election campaign heats up.  End Summary. 
 
GOVERNMENT PROMISES FREE SHARES FOR 4 MILLION PEOPLE 
--------------------------------------------- ------- 
 
¶2.  The current privatization law states that there will be a 
distribution of shares from the privatization process of 
socially-owned companies (small and medium sized firms technically 
owned by their workers, unlike the large state-owned firms) to 
citizens that have not already received shares during the 
privatization process.  Privatization of socially-owned companies 
has been on-going since 2001 and must be completed by December 2008 
(reftel).  In the privatization process 15% of the company's shares 
are set aside for company employees and 15% are set aside with the 
Privatization Registry for distribution to citizens who are not 
employees of socially-owned companies.  However, the current 
privatization law does not specify exactly how shares should be 
distributed.  Some four million citizens who do not work for 
socially-owned firms have the right to receive free shares in 
socially-owned companies.  These beneficiaries include employees in 
the police, army, education sector, judiciary, health sector, 
government officials, state-owned companies, pensioners, farmers, 
unemployed, etc. 
 
¶3.  On November 5, Economy and Regional Development Minister Mladjan 
Dinkic, presented his concept for privatization of large state-owned 
companies between 2008 and 2010 and a draft law on free distribution 
of shares to citizens.  Dinkic said his plan would begin the 
distribution of the free shares before the privatization of the 
socially-owned companies was finished.  Dinkic added that beginning 
the privatization of state-owned companies should enable free 
distribution of shares in state-owned companies, as well as 
increasing the value of shares distributed to citizens. 
 
BUT, THE SHARE FUND PROVIDED LESS THAN $100 PER PERSON 
--------------------------------------------- --------- 
 
¶4.  Currently, shares from 68 former socially-owned companies sold 
by public tender have been deposited in the Privatization Registry. 
According to some estimates, the value of all shares in the Registry 
is approximately $345 million.  Dividing this amount to 4 million 
citizens, would have meant that every citizen would receive roughly 
$86.  In order to increase the value of shares to more than $1,400 
per citizen, Dinkic used the planned privatization of large 
state-owned companies to distribute shares for free from these 
companies, as well. 
 
¶5.  The large state-owned companies differ from the socially-owned 
firms as these large companies are owned by the state, not the 
firms' workers.  These companies fall into two categories.  In the 
first group, including the oil firm NIS and national airline JAT, 
Dinkic proposed that a majority share would be sold to a strategic 
partner and a 15% share of each company would be distributed to 
citizens.  The second group of companies consisted of electricity 
firm EPS, Telecom Serbia, the Belgrade airport and pharmaceutical 
company Galenika, where a 15% share would be sold through an initial 
public offering (IPO) on the stock market and an additional 15% 
would be distributed for free to citizens.  Companies would not be 
offered at the same time, but one by one.  Each of the state-owned 
firms would have a separate privatization strategy and law.  Money 
from the IPO's would go both to the budget and for necessary 
investments in the companies. 
 
TRADE UNIONS OPPOSED 
-------------------- 
 
¶6.  Dinkic's plan met resistance from state-owned employee unions. 
As noted, current and former employees of privatized socially-owned 
companies receive up to a 15% share in firms as part of the 
privatization process.  Employees of state-owned firms wanted to 
receive the same benefits.  Dinkic originally offered state-owned 
firm employees privileged status to buy up to 4% of the shares in 
the company at a 50% discount.  On November 22, the unions organized 
a one-hour warning strike in all state-owned companies proposed for 
privatization. 
 
¶7.  The law was adopted in Parliament on December 26 gives 
 
BELGRADE 00000051  002.2 OF 002 
 
 
state-owned company employees shares of their companies according to 
their years of service and the estimated market value of the company 
before privatization.  Typical employees are expected to receive 
between $5,700 and $7,100.  Milorad Panovic, President of the 
Nezavisnost branch trade union of the chemistry, non-metal energy 
and mining industry, told Econ FSN on December 28, that both trade 
unions were satisfied with the adopted solution and that all strike 
threats had been withdrawn. 
 
POSITIVE OPINIONS FROM EXPERTS 
-------------------------------- 
 
¶8.  The opinions of experts and former government officials 
regarding the free shares law are generally positive.  Aleksandar 
Vlahovic, Minister of Privatization during the Djindjic Government 
and DS member, said on December 5 to Econ FSN, that the plan was 
fully in accordance with the World Bank's suggestions and the 
current law on privatization.  Rade Rakocevic, broker and former 
owner of the successful brokerage firm Senzal, told Econ FSN on 
November 21 that IPOs of the big state-owned companies would 
contribute to the "deepening and widening" of the Belgrade Stock 
Exchange (BSE).  He noted that Serbian brokers were investing in the 
Croatian stock exchange since appearance of the Croatian Petroleum 
Industry INA and Croatian Telekom increased investment 
opportunities.  Luka Andric, State Secretary at the Economy and 
Regional Development Ministry, confirmed on December 5 to Econ FSN 
that the Ministry used the technical expertise of the World Bank in 
drafting the law on free shares. 
 
Comment 
------- 
 
¶9.  The Government was in a rush to approve Dinkic's draft law 
before the January 20, 2008, presidential elections, so that the 
government (and President Tadic) could take credit for putting money 
(shares) four million voters' pockets.  Dinkic pushed through a 
proposal that was initially dismissed, even by other parties in the 
government coalition.  Even more important may be the effect that 
public share ownership could have in pushing forward privatization 
and weakening the hold that political parties have over state-owned 
companies.  There are risks to the shares distribution strategy, and 
protection mechanisms within the law to ensure market pricing will 
be critical to avoid problems that have plagued similar share 
giveaways.  Ultimately, this plan may unleash the economic potential 
within these "dinosaur" companies and help to turn them into engines 
for the Serbian economy.  End Comment. 
 
MUNTER