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Vol 3, No 5
5 February 2001
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When the Sweet Turns to Sour
Mel Huang

Over the years, Estonia, Latvia and Lithuania have earned good reputations for their privatisation efforts. Scandals have been relatively few and far in between compared to many other countries in Central and East Europe, despite tremendous temptations for ambitious politicians and officials. There were no grand pyramid schemes utilizing privatisation vouchers, like the infamous MMM Invest in the Russian Federation, and the number of cases involving officials privatising things to themselves, or families and friends, has remained generally low.

Of course, this is not to imply that there have been no shaky privatisations in the Baltic states. In one country, a former prime minister ended up with control of a unique rare metals processing plant, and another former prime minister has yet to explain how he made his millions in the food processing business—one he oversaw years ago as a high-ranking official in the country's Agriculture Ministry. Yet another country had an entire party sign a deal that gave control of the Economics Ministry—one that oversaw privatisation—to a representative of local wannabe oligarchs. And there are, of course, the ever-present cases of bogus land and apartment privatisation in all three countries.

However, in the past few months, the privatisation records of the three countries have started to drastically deteriorate. Many of the useless or prized assets have already been taken care of, and the remaining items are seriously contentious, thus causing the problems facing all three countries. If the trend continues, 2001 will be remembered in Estonia, Latvia and Lithuania as the year privatisation problems reached chaotic proportions. Such a disastrous outcome would be quite negative for three countries that have told the world that privatisation has been successful and is nearly complete.

Estonia: Fighting over rails

The year 2000 was not a good one for Estonia in terms of privatisation. Only after a pullout by the primary bidder did the sale of the Tallinn Broadcast Centre go ahead with Télédiffusion de France. US company NRG Energy finally overcame the major hurdles in its multiyear bidding game to purchase a minority stake in the country's main power plants, despite high-profile opposition from the public, parliament, the executives of power utility Eesti Energia and even from President Lennart Meri (see Deal of the Decade, 30 July 2000). Furthermore, the 2000 national budget was in the red, thanks to the failure to privatise the TOP Olympic Yachting Centre in the Pirita suburb of Tallinn, the site of the yachting events of the 1980 Summer Olympics.

Even the sale of the small regional passenger railway Edelaraudtee (South-Eastern Railways) was contentious, as the investment package promised by Britain's GB Railways decreased considerably when the desired subsidy package came up short. The GB bid for Edelaraudtee almost collapsed several times due to political bickering and alleged tampering by losing bidders.

However, privatisation in the year 2000 will be best remembered for a closing move: the decision by the Estonian Privatisation Agency to sell national railway Eesti Raudtee to the RailEstonia consortium. The December decision triggered both intrigue and complaints from analysts and other bidders, as RailEstonia was mired in press. The Kingsley Group, a consulting company, controls most of the consortium, along with some capital from giant US rail companies CSX and RailAmerica.

Eesti Raudtee is seen as the last big gem to be privatised in Estonia. The railways play a significant role in the large oil transhipment business, as only oil cars on the railway system transport oil from Russia to the Port of Tallinn for re-export. That is why the companies fought so hard for the privatisation and why the grapes turned so sour after the controversial decision to sell it to RailEstonia.

In the end, losing bidder Raudtee Erastamise Rahva (Railway Privatisation Peoples, Ltd, RER) challenged the privatisation decision on the grounds RailEstonia did not have a valid bid and did not have a strategic investor. A Tallinn Administrative Court last week halted the process, awaiting a hearing scheduled for March. RER is comprised of local businessmen, Sweden's national railways SJ International and the London-based Serco Group.

However, this past week, press reports revealed that the largest rail company in the US, Union Pacific, is due to become the strategic investor in the RailEstonia bid. Immediately after the reports hit, Union Pacific announced it had nothing to do with the process, adding further confusion to the matter. Another losing bidder, Baltic Rail Services (BRS), is now also considering suing the Privatisation Agency. Embattled Transport Minister Toivo Jürgenson said that if RailEstonia does not establish who is its strategic investor by the end of February, talks on privatising Eesti Raudtee will shift to runner-up BRS.

The saga may go on for many months, and it will end up hurting Estonia's reputation if a sound resolution is not soon in place . The structure of the privatisation of Eesti Raudtee, ranging from the consulting contract for its advisor to the failure to project the process as fair to all competitors, has been problematic since the beginning, and it is certainly not a great way for the privatisation process in Estonia to end. The Privatisation Agency is due to be closed in a few months, but it will be a sad closing if the Eesti Raudtee case continues to spew out such a mess.

Latvia: Will shipping sink the government?

Of all three Baltic countries, Latvia is by far the most sensitive to privatisation issues. Problems with privatisation have caused several governments to fall and are once again threatening the nine-month old government of Andris Bērziņš. The scourge is, again, Latvijas Kuģniecība (Latvian Shipping Company), the country's shipping fleet affectionately known as LASCO.

The LASCO saga is seemingly never-ending, as the privatisation of the company collapsed three times in the past few years. More than once, the Latvian Privatisation Agency received no valid bids for the company, due to exceedingly high prices for the fleet. The government recently established another bid to privatise LASCO, hoping for a better outcome than the past three.

Unfortunately, the scourge of LASCO came back in the most dramatic of ways in the past few weeks, when LASCO state proxy Eižens Cepurnieks allegedly accused ex-Prime Minister Andris Šķēle of offering a USD one million bribe to Saeima Speaker Jānis Straume and Riga Mayor Andris Ārgalis on behalf of an unnamed LASCO bidder. The allegations were allegedly expressed during a conversation Cepurnieks had with Inese Voika, the representative of Transparency International (TI) in Latvia.

Cepurnieks, a member of junior coalition partner For Fatherland and Freedom (alongside four participants of the alleged meeting, the aforementioned Straume and Ārgalis, as well as party chairman Maris Grīnblats and businessman Normunds Lakučs), denied making the allegations and questioned the activities of the TI office.

With the deadline for yet another tender for LASCO's privatisation set for 1 February, many feel that such a scandal—whether true or not—would once again taint the LASCO sale and cause it to fail. This could put considerable pressure on the ruling coalition, causing it to fall. This time, President Vaira Vīķe-Freiberga will probably be forced to call early elections (see Latvian news reviews by Daria Kulagina from 22 January and 29 January for more on this case).

This is one example of the intense partisanship of the privatisation process, as each political party feels the need to have a presence in the Privatisation Agency and in the councils of the largest state-owned companies, such as LASCO and power utility Latvenergo. In the past, this column has dedicated much attention to how privatisation has affected the government's stability and survival (see, for example, Stability Sacrificed, 17 April 2000), and the trend appears to remain strong.

Several newspaper editorials made the unusual step of urging President Vīķe-Freiberga to interfere in the LASCO matter by using her right to initiate legislation, in order to bring regulation and order to the entire six-year fiasco. President Vīķe-Freiberga told CER last year in an interview that it will indeed be her prerogative to initiate legislation in 2001:

I think that on occasion—you might see this in the course of next year—I might come forward with some proposals of legislation as a way of introducing precisely this element of establishing equilibrium within various forces and creating some sort of recourse in the cases where there are direct conflicts between opposing interests.

If the situation deteriorates, President Vīķe-Freiberga may have little choice but to act in a decisive way here.

Lithuania: Who owns the boats and banks?

With the most state assets still to privatise, Lithuania continues to
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face some major problems. 2000 saw significant problems, though nothing as dramatic as in the previous year when the sale of a minority stake of oil industry Mažeikių Nafta (Mažeikiai Oil) left the state extremely exposed to financial calamities with no guarantee of the oil refinery even having the resources for successful operations. In 2000, the Supreme Court took a final pot shot at the deal, ruling that the state had no constitutional right to make some of the guarantees in the deal.

Very much like Latvia, the issue of the country's shipping fleet, the Lithuanian Shipping Company (LISCO), has plagued the political landscape of the country. In the latter part of 2000, the state chose Dutch consortium BB Bredo to hold a controlling stake in LISCO. However, BB Bredo's plans to break off parts of the fleet, moving them to offshore ownership, and flags-of-convenience registration angered some smaller shareholders, bolstered by the October general elections campaign.

As the politicians coming into power sounded off against the deal, the opposition to the restructuring of LISCO mounted. Eventually, the smaller shareholders went to court and put a wrench into BB Bredo's restructuring plans for LISCO. With mounting opposition from the public and harsh words from public officials, BB Bredo missed the payment for the majority stake—sending the privatisation into total limbo.

The government chose to continue talks with BB Bredo at first. However, one component of the consortium, Denmark's DFDS Tor Lines, moved ahead and is seeking to start talks with the government over LISCO. The government earlier set 15 February as a cut-off date for talks, though with the new direction of talks and the need to start over from the start, the LISCO mess may drag on further.

Lithuania is also facing another problem: the privatisation of its banking sector. In the European Commission's 2000 annual progress report, Lithuania was praised for nearing completion in the privatisation of its banks. Lithuania, a laggard among the three Baltic states in this matter, still had three state-owned banks by the end of 2000. The smallest bank, the tiny Vystymo Bankas (Development Bank), was sold to Finnish insurance companies Sampo and Leonia, which own the third largest Sampo Pank (formerly Optiva Pank) in Estonia.

However, the talks to privatise the second largest state-owned Lithuanian bank, Lietuvos Žemės Ūkio Bankas (Lithuanian Agriculture Bank, LŽŪB), with Poland's Pekao and Italy's UniCredito Italiano collapsed over price and obligation disputes, and a new tender has since been announced for the troubled bank.

The biggest prize of them all is the large Lietuvos Taupomasis Bankas (Lithuanian Savings Bank, LTB), the second largest bank in the country. A purchase of LTB would make any foreign bank a major player in Lithuania, but the political environment during and after the October general elections made many banks take a second look. There was a significant chance the privatisation process would be curtailed, or even stopped, thus only one bank—Estonia's Hansapank—made a bid for LTB.

The privatisation of LTB is still problematic, as the issue of price is keeping the deal from being consummated. Hansapank appears to want the bank at nearly any cost, largely due to its intense competition with the group of Baltic banks controlled by Sweden's Skandinaviska Enskilda Banken (SEB)—the Baltic rival of the Hansabank group, which is, in turn, controlled by Sweden's FöreningSparbanken (popularly known as "Swedbank").

The new Lithuanian government must clarify its views on the privatisation of the two large banks. During the rough campaign, various statements were made that scared many possible investors away from LTB. If the government is against the privatisation of the banks, as is the left-wing opposition, then it must say so soon; if not, the praise from the European Commission on the privatisation of banks will ring even more hollow. Vagueness is not a sign of commitment, and the government must soon choose.

An end in sight?

Privatisation, as a process, is nearing an end in each of the three countries. Some infrastructure companies and local enterprises remain, but the latter are going fast. Finnish, Swedish and even French companies are buying up small local heating utilities one-by-one. The two countries that set up German-style privatisation agencies, Estonia and Latvia, are due to wind up their operations this year.

However, it would be a shame if the privatisation agencies close down while the privatisation process is still unresolved. If the Eesti Raudtee mess in Estonia continues after the closing of the Estonian Privatisation Agency, an otherwise spectacular record will be tainted. Similarly, if the LASCO mess goes back to the Economics Ministry after the closure of the Latvian Privatisation Agency, the potential for disaster is great. Most government collapses in Latvia have involved problems with the economics minister.

Lithuania never had a "privatisation agency," per se, and it has never had a real coalition government that is sensitive to the whims of one party.Economics Minister Eugenijus Maldeikis How would the coalition government fare in Lithuania, especially seeing that scandal-laden Economics Minister Eugenijus Maldeikis (Liberal Union) is on the brink of resignation/dismissal? Coalition partner New Alliance (Social Liberals) has called on Maldeikis to resign over allegedly corrupt practices during a recent trip to Moscow. As the transport minister resigned over corruption last week, the country cannot afford a string of scandals and all the instability that would bring.

Nevertheless, the economies of the three countries are solidly in the hands of the private sector. For example, telecommunications are privately owned, with Estonia going furthest in deregulating even its fixed-line system starting this year. Overall, the processes have been successful in light of the removal of the state's presence in the economy. Selling off state assets is never easy, and the Balts, for the most part, have done it right up until now. Let's just hope things don't end on a sour note.

Mel Huang, 5 February 2001

Moving on:

Other resources:

The Estonian Privatisation Agency
The Latvian Privatisation Agency
The Lithuanian State Property Fund

The Estonian Economics Ministry
The Latvian Economics Ministry
The Lithuanian Economics Ministry

The Estonian Foreign Ministry
The Latvian Foreign Ministry
The Lithuanian Foreign Ministry

Äripäev (Estonian business daily)
Dienas Bizness (Latvian business daily)
Verslo inios (Lithuanian business daily)


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