Croatia's economic plight on display as freight operator goes off the rails

By bne IntelliNews March 4, 2014

Guy Norton in Zagreb -

In his 1852 political essay entitled, "The Eighteenth Brumaire of Louis Napoleon", Karl Marx penned the immortal thesis that history repeats itself, "first as tragedy, then as farce". Since 1991 the study of Marxist theory may no longer be required reading in Croatia, but Marx's observation could easily be applied to the historical conduct of economic policy by successive governments in the country, which has resulted in the wholesale destruction of much of Croatia's communist-era industrial base and transport infrastructure. The net result is that Croatia finds itself poorly placed to reap the economic benefits of accession to the EU, which it joined on July 1 last year.

For a clear example of the tragi-comic fate of many of the relics of Croatia's Yugoslav-era past one need look no further than HZ Cargo, the country's state-owned company which manages - many critics would argue mismanages - Croatia's freight train operations. Despite enjoying a monopoly on the provision of rail freight services within Croatia for almost two and a half decades, the financial results of HZ Cargo has been little short of disastrous. Last year it recorded a HRK248m (€32.6m) loss, it has run up over HRK1bn worth of debt and as a result it is now teetering on the brink of bankruptcy.

What's more, from July 1 this year under EU competition rules Croatia must open up its rail freight market to foreign operators - a requirement that many observers fear will effectively sound the death knell for HZ Cargo given its lacklustre competitiveness. Just to take one damning statistic, HZ Cargo generates annual revenues of around €23,000 per employee, while a worker at its Austrian counterpart, Rail Cargo Austria - which is also state-owned - racks up €256,000 per year.

HZ Cargo's demise would create a real financial headache for the Croatian government and for the country's hard-pressed taxpayers, who would have to pay a heavy price for the company's failure given the fact that roughly 80% of its debts are government-guaranteed and many of its roughly 3,000-strong workers - around a third of which are military veterans from Croatia's 1991-1995 Homeland War - are effectively legally protected from being laid off.

Arguably, the most farcical element of the entire HZ Cargo saga is that its short-term survival is only being ensured by the sale of part of its rolling stock in a desperate attempt to come up with sufficient funds to cover its workforce's wages and meet other short-term operating costs. To add to insult to injury, such is the parlous state of repair of much of HZ Cargo's fleet of wagons and tankers that many are being sold off at bargain basement-type prices to Croatian businessman Petar Pripuz, dubbed the "King of Scrap" by the local media.

Dashed hopes

Whether the terminal demise of HZ Cargo is a foregone conclusion remains a hotly debated issue within Croatia, which has been mired in recession since the beginning of 2009 and seen GDP shrink by around 12%.

It's widely acknowledged, however, that HZ Cargo's predicament, brought about by the seemingly complete absence of credible planning, budgetary and financial management, has come to symbolise the very worst aspects of state intervention in the Croatian economy. Critics say it has helped give credence to former UK prime minister Margaret Thatcher's famous remark that, "the problem with socialism is that eventually you run out of other people's money [to spend]."

When two years ago the ruling centre-left coalition government opted for a free market-based solution for the problems faced by the country's rail industry and broke up the monolithic Croatian rail operator Hrvatske Zeljeznice into three constituent parts - passenger transport, freight transport and infrastructure management - there were hopes the now-independent HZ Cargo could be first restructured and then privatised, in sufficient time to enable it to survive the forthcoming onslaught of competition from foreign operators.

Indeed, up until recently it seemed as if HZ Cargo had succeeded in attracting a strategic investor that would supposedly ensure it had a viable future. However, events have since conspired to frustrate those hopes and the appalling state of its finances means that HZ Cargo effectively qualifies for compulsory liquidation through the bankruptcy courts.

After six months of talks between the Croatian transport ministry and Romanian company Grampet over the sale of a 75% stake in HZ Cargo for a total of around HRK1.3bn, negotiations broke down irrevocably at the end of January amid mutual accusations that each party had negotiated in bad faith.

The initial reaction to the news saw calls in the Croatian parliament from the political opposition for the resignation of Transport Minister Sinisa Hajdas Doncic, whom politicians accused of incompetence over the conduct of the planned sale. Those calls quickly died down, however, when Gruia Stoica, owner of Grampet, was arrested by the anti-graft office in Romania on charges that he had bribed a lawyer to gain access to confidential data that enabled his firm to secure a coal transportation contract for Romanian energy company Complexul Energetic Oltenia.

The failure to sell HZ Cargo to Grampet thus came to be seen as something of a blessing in disguise, although opposition MPs nevertheless changed the angle of their attack on Hajdas Doncic, questioning why the transport ministry had entered into exclusive negotiations with such an allegedly shady business partner when there had been expressions of interest in HZ Cargo from more respectable operators such as Rail Cargo Austria and AWT from the Czech Republic.

However, HZ Cargo's arguably lucky escape from the clutches of a potentially unscrupulous new owner has done nothing to improve the state of its balance sheet. Indeed, one of Grampet's principal complaints when the time came for it to sign a definitive purchase agreement in January was that HZ Cargo's finances had deteriorated alarmingly since it had submitted a binding offer for HZ Cargo to the Croatian government in July last year. Another gripe raised by the Romanian company was that the authorities in Zagreb had failed to revise employment contracts at HZ Cargo, which Grampet claimed effectively made much of the existing workforce unsackable.

In the wake of the privatisation debacle, the authorities have to their credit moved quickly to ensure the short-term survival of HZ Cargo, putting forward a range of measures including redundancies, salary cuts and the disposal of non-core assets in an effort to restore at least a modicum of order to its chaotic finances.

While arguing that HZ Cargo's survival is key to the future of the liberalised rail transport market in Croatia, Hajdas Doncic has proposed cutting the company's workforce by roughly 800 by the end of September, slashing wages by 25% and has called for revisions to be made to the existing collective bargaining agreements governing pay and severance. Furthermore, a number of assets, including almost a third of HZ Cargo's 6,000 rail wagons, will be sold off. In return the government has agreed to grant HZ Cargo an HRK230m loan to cover the cost of servicing pension payments and current liabilities, but not salaries as that would contravene EU regulations governing state aid. The company will have to repay the loan within 15 months. Hajdas Doncic has emphasised that the measures proposed are completely non-negotiable and that it will send HZ Cargo into bankruptcy if they are not accepted. "The times of pampered social partnerships are over," he told state news agency Hina. "HZ Cargo definitely has the chance and potential to survive in the market, but only if significantly redefined, with a smaller number of employees and the privatisation of everything that is not part of its core business."

Not surprisingly, the unions at HZ Cargo are furious with the government's threat of declaring HZ Cargo bankrupt if they fail to agree to the conditions laid down by Hajdas Doncic.

On February 27, some 500 members of the SHZ and SZH railway trade unions gathered on St Mark's square outside the Sabor, Croatia's parliament, to protest against the proposed job cuts and new collective bargaining agreements, which they have so far refused to sign up to because they breach existing labour market regulations.

Waving banners featuring slogans such as "Mi znamo raditi - vi ne znate upravljati" (We know how to work - you don't know how to manage), and "Ne damo 3000 radnih mjesta" (We won't surrender 3000 jobs), the trade unionists called on Hajdas Doncic to agree to meet with them to discuss alternative measures to help save HZ Cargo from bankruptcy. "If within a week we don't get answers to our request, we will organise a strike," said SZH president Zoran Marsic, adding that the collapse of HZ Cargo would ultimately cost Croatian taxpayers at least HRK2bn and lead to short-term chaos in the transportation market.

Whether the trade unions carry through on their threats of industrial action remains to be seen, but whatever happens HZ Cargo is set to remain a financial train wreck for the foreseeable future at least.

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