VZCZCXRO2616
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHVB #0294 1461108
ZNR UUUUU ZZH
P 261108Z MAY 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 9245
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS ZAGREB 000294 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/SCE 
 
E.O. 12958: N/A 
TAGS: EIND EINV PGOV PREL EUC HR
SUBJECT: CROATIAN COMPETITION AGENCY: NO CHOICE BUT TO 
CLOSE SHIPYARDS 
 
REF: 2008 ZAGREB 735 
 
¶1. (SBU) Summary: The GOC and EU continue to negotiate the 
terms for privatizing Croatian shipyards - one of the key 
remaining challenges in Croatia's EU accession process. 
According to the head of the Croatian Competition Agency, the 
GOC has now proposed selling a 50 percent stake in Uljanik, 
the best performing of the enterprises (a previous plan to 
offer up 25 percent was rejected by the EU as insufficient). 
While Croatia remains reluctant to give up its belief that 
its shipyards can be a successful "national champion" 
industry, the EU remains skeptical any of the shipyards are 
viable without subsidies.  The EU has even begun 
investigating the terms of some of the orders from Croatian 
companies currently keeping the shipyards afloat. End summary. 
 
¶2. (U) On May 18, Olgica Spevec, head of the Croatian 
Competition Agency, gave Econoffs an update on shipyard 
privatization. In late 2008, the GOC presented a proposal to 
the EU by which the GOC would offer four of the shipyards for 
a price of 1 HRK ($0.20) each in a public tender process and 
ask potential buyers to specify how much of the yard's credit 
liabilities they would assume (reftel).  The GOC would also 
impose certain conditions on the sales.  For Uljanik in Pula, 
the best performing of the shipyards, the GOC proposed a 
phased process, first issuing a tender for a 25 percent 
stake, then offering 25 percent plus one share to employees, 
and then putting an additional 25 percent on the market for 
investors. 
 
¶3. (SBU) The EU rejected the proposal and pushed back on some 
of the conditions the GOC would like to impose for all of the 
shipyards, such as requiring buyers not to convert the 
properties out of shipbuilding. Spevec said, however, the 
main area still being negotiated is the plan for Uljanik. 
Although Uljanik has been the best performing of the 
shipyards, the EU now recognizes that even Uljanik would not 
be a viable enterprise without significant state aid. Spevec 
commented that the difference between Uljanik and the other 
shipyards is that Uljanik has known how to use the subsidies 
it has received. She said no Croatian wants to accept that 
even Uljanik is not a strong, successful enterprise, as this 
would leave Croatia without any shipbuilding industry at all. 
EU officials insist, however, that any private owner must be 
able to make key decisions about the future of the 
enterprise, and they cannot do so with just a 25 percent 
stake. Deputy Prime Minister Polancec has reportedly told the 
EU that he would agree to issuing a tender for a 50 percent 
stake and is awaiting their comment. 
 
¶4. (SBU) While the negotiations continue, several of the 
shipyards have received orders from Croatian ship lines that 
will keep them operating for another couple years. Spevec 
said, however, the EU is suspicious of the conditions under 
which these deals were made and is now investigating. Spevec 
said, as hard as it may be, Croatians will have to accept 
that economic viability and leveling the playing field (i.e., 
removing state subsidies) are what matters to the EU in this 
process; European Commissioner for Competition Neelie Kroes 
does not want to hear about the importance of "national 
champion" industries. Spevec said other European countries 
have had to close non-competitive shipyards, and Croatia will 
have to do the same. She added that given the current 
climate, finding investors for any of the shipyards may prove 
to be the biggest problem of the whole endeavor, especially 
if restrictions remain on converting the yards to other 
activities. 
 
¶5. (SBU) COMMENT:  With the prominence and immediacy of the 
Slovenian border dispute taking up many headlines, the 
continuing crisis in shipbuilding has not been widely 
reported of late.  What is clear, however, is that even if 
the border issue is resolved and accession progress gets back 
on track, tough negotiations and decisions remain over the 
future of Croatian shipbuilding, and they will take place in 
perhaps the worst possible economic circumstances.  As long 
as the EU negotiating process remains blocked by Slovenia, it 
is unlikely that the Croatian government will be able to 
muster the political will needed to take the other difficult 
decisions that are part of EU accession.  END COMMENT. 
BRADTKE