VZCZCXRO1352
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0735/01 2961031
ZNR UUUUU ZZH
P 221031Z OCT 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8709
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000735 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EIND EINV PGOV PREL HR
SUBJECT: GOC PREPARES TO PRIVATIZE SHIPYARDS 
 
¶1. (U) SUMMARY: The GOC has begun the process to privatize 
shipbuilding, the last major industry under state ownership 
in Croatia. Subsidies to the loss-making industry have been a 
burden on the state budget and are an obstacle to EU 
accession. The Ministry of Economy and representatives of the 
shipyards reached agreement on October 11 and 13 on the main 
terms for privatization, and the GOC has submitted the 
proposed tenders to the EU for review. Regardless of the 
terms, it is uncertain whether the government will attract 
any investors in the current less-than-favorable economic 
climate. Aware of this possibility, the EU has asked for a 
contingency plan, which the GOC will likely not complete this 
year. These remaining challenges may complicate Croatia's 
ability to stay on course for completing its EU accession 
negotiations in 2009. End Summary. 
 
¶2. (U) Over the past six months, the GOC has begun to move 
toward privatizing Croatia's politically sensitive 
shipbuilding industry. Although the government has been 
reluctant to begin the process, it now has no choice since 
state subsidies to shipyards is one of the two major problem 
areas identified by the EU as obstacles to fully opening 
accession negotiations. The loss-making shipyards burden the 
state budget annually with about $80-100 million in subsidies 
and about $450 million in loan guarantees. Olgica Spevec, 
president of the Council of the Croatian Competition Agency, 
told us that the reasons for the privatization moves go 
beyond state budgetary concerns to a basic understanding that 
the industry would be more successful under private 
ownership, in the hands of investors who know the global 
market well and can find the right niches for profitability. 
She said the original restructuring plans submitted to the EU 
in June were developed largely by the current management of 
the shipyards and proposed restructuring while maintaining 
state ownership. The GOC, however, had already begun planning 
for privatization and, through consultations with the EU, 
decided to scrap the submitted plans and prepare 
privatization models for all the shipyards. 
 
¶3. (U) Several factors have made privatization politically 
difficult. Croatia has a long tradition of shipbuilding and 
the fear of large-scale job losses has caused anger in 
Croatia's port cities. The GOC has tried to address these 
concerns in the proposed privatization plans and seems to 
have gained at least tacit approval from the unions to move 
forward. 
 
¶4. (SBU) Work by the World Bank, however, suggests the real 
effects of privatization on workers and local economies may 
be different from the widely held expectations. The Bank's 
findings indicate that workers are not as dependent on the 
shipyards as presumed, since some 80 percent have secondary 
jobs or experience in other fields. Further, shipyard 
communities may not be as dependent on the industry as 
presumed, since most workers commute more than half an hour 
to the yards. The Bank also found workers more willing than 
management to make whatever changes were needed to improve 
enterprise viability. Noting that privatizing the shipyards 
has thus far been "taboo to an unbelievable extent," Sanja 
Madzarevic-Sujster, senior country economist at the Bank's 
Croatia office, suggested the status quo may provide 
significant graft opportunities to managers, who, she 
observed, are "running loss-making enterprises but driving 
the latest model BMWs." 
 
¶5. (U) The Ministry of Economy and representatives of the 
shipyards reached agreement on October 11 and 13 on the main 
terms for privatization. Deputy PM and Minister of Economy 
Damir Polancec then presented the tender proposals to the EU 
in Brussels. Assuming EU approval, the ministry plans to post 
the tenders in November. According to press reports, four of 
the shipyards--3 May, Kraljevic, Brodotrogir, and 
Brodosplit--will be offered for a starting price of 1 HRK 
($0.20) in a public tender process. Potential buyers will be 
asked to specify how much of the shipyard's credit 
liabilities they will assume. They also will be required to 
recapitalize the enterprise within one year, continue 
shipbuilding activities, and respect existing collective work 
agreements until expiry. Workers at each shipyard will be 
offered 25 percent stock plus 1 share at discounted rates. 
According to a separate agreement for Uljanik, the best 
performing (though still not profitable) of the yards, the 
GOC will issue a tender for a 25 percent stake in the 
enterprise. Then, as with the other shipyards, workers will 
be offered 25 percent stock plus 1 share at discounted rates. 
In the final phase, 33 percent of the enterprise will be 
offered to investors, with a cap of 2-3 percent of shares per 
investor. Some press reports indicate the proposals include 
continued state subsidies and plans for the state to assume 
some of the shipyards' debt. A Ministry of Economy contact 
who has worked on the proposals says the press information 
has been mostly accurate, though he declined to confirm any 
 
ZAGREB 00000735  002 OF 002 
 
 
details for us while they are still in negotiation with the 
EU. 
 
¶6. (SBU) The privatization plan is meeting with skepticism. 
The EU is still reviewing the proposed tenders, but local 
papers are already reporting EU disapproval of some of the 
terms, such as the continuation of state subsidies, the 
state's assumption of part of the shipyards' debt, and the 
prohibition of converting the enterprises to another 
industry. Charlotte Ruhe, director of the European Bank for 
Reconstruction and Development in Croatia, told us she doubts 
the GOC will find many interested bidders under the proposed 
terms and given the current global economic situation. Spevec 
commented that the government may have missed its best chance 
earlier this year, when ship orders were strong and several 
investors were expressing interest. The shipyards reportedly 
have already begun losing orders due to the global financial 
crisis, and some analysts have called for the government to 
delay posting the tenders, while others have suggested the 
GOC would better spend its efforts preparing bankruptcy plans 
than privatization plans for most of the shipyards. In 
September, Josko Klisovic, secretary of the MFA's EU 
Accession Negotiating Group, told us the EU has asked for a 
contingency plan in case the sale of the shipyards does not 
succeed. He seriously doubted the government could prepare a 
backup plan in addition to the main privatization plan by the 
end of this year. 
 
¶7. (U) COMMENT: Although the GOC finally appears serious 
about privatizing shipbuilding, the challenges are 
formidable. The Ministry of Economy is hoping for some 
leniency from the EU in acknowledgment of Croatia's 
shipbuilding tradition, but this hope is likely in vain, 
given the difficult decisions other shipbuilding countries, 
such as Germany, the UK, and Poland, have had to make as part 
of the EU. In any case, EU approval of the plans is only a 
preliminary step to the real task of attracting investors. 
Although PM Sanader remains publicly optimistic about opening 
all negotiating chapters this year in order to complete 
accession negotiations in 2009, the hurdles remaining for 
shipyard privatization loom as the most likely reason that 
this schedule could slip.  END COMMENT. 
Bradtke