Mike Collier in Riga -

It should probably come as no surprise that in a topsy-turvy world in which global capitalism is rescued by means of wholesale nationalisations, one of Europe's more open economies is planning to show just how dynamic and business-oriented it is by deciding not to privatise its inefficient state-owned enterprises (SOEs).

Despite ranking 27th out of 183 countries in the World Bank's latest "Doing Business" report (and 9th in the EU having overtaken Belgium, France, Portugal, the Netherlands and Austria), Lithuania has scotched hopes of any imminent IPOs or strategic sales of state assets. Instead, the Lithuanian government of Andrius Kubilius has unveiled plans to streamline and modernise the SOEs in an effort to make them contribute greater revenues to state coffers and help bring the budget deficit down to 2.8% of GDP. If successful, the move could even prompt other post-Soviet states with key industries in state hands to keep their "for sale" signs firmly locked in the garage while they instead start polishing the family silver.

Economy Minister Rimantas Zylius tells bne that the SOE shake-up came from a July 2010 review of state-owned assets. Remarkably, it was the first such review of its kind: the first time a comprehensive list of assets had been drawn up since Lithuania regained its independence in 1991. Among the long list of SOEs is Lithuanian Railways, Vilnius airport, Lithuanian Shipping Company, Lithuanian Post, gas utility Lietuvos Dujos, Klaipedos Nafta oil terminal and the electricity grid. "It revealed that the national government owns around €5bn of commercial assets, which provided extremely low returns and income to the budget," Zylius says, adding that in 2010 these companies paid just LTL42m (€12.2m) to the budget.

"The government considered that better management of state-owned enterprises was possible as a third measure for fiscal balance - besides the already-implemented measures of austerity and tax rises. The potential of getting returns from SOEs seems very attractive, as SOE reform does not inhibit the economy in the way that both austerity and tax rises do. Also, it looked rather more efficient than trying to privatise these companies during an economic slowdown," he reasons.

Modest expectations

If Lithuania's move seems strangely familiar, it's not surprising as Zylius freely admits that it is based on Organisation for Economic Co-operation and Development corporate governance principles and "Norwegian, Swedish and Israeli models."

Following its economic crisis of the early 1990s, Sweden embarked on its own renovation programme to inject some dynamism into its SOEs and has reaped the benefits: in 2010, the 60 largest state-owned companies contributed more than €4bn in dividends to the economy, equivalent to around half the total budget surplus.

The expectations for Lithuania are more modest, but still ambitious and already showing results. "Lithuania's strategy is still under implementation, however the first results show that significant returns from state-owned enterprises are achievable within a 12-18 months' time frame," says Zylius.

From the LTL42m (€12m) in dividends in 2010, the government expects this amount to double to LTL86m this year and in 2012 to soar as high as LTL540m. "We have learned that the major element for success in securing considerable dividends for 2012 is the fact that the government has the capability and expertise to analyse SOEs," says Zylius. "Experts in the ministry of economy, with backgrounds in investment banking and private equity, have established professional relationships with the managers of SOEs. Now the managers know and understand that they cannot play with figures. Thus, they are more honest when talking about the potential contribution to the state budget."

That all makes it sound as if the major reform was telling managers they wouldn't be able to get away with cooking the books any more rather than universal application of idealistic principles involving improved transparency, "setting ambitious and unequivocal targets" and separating commercial and non-commerical activities.

There is also probably a political element to the government's strategy for the SOEs. Despite the success of companies that have been privatised (most notably telecommunications company TEO), with a general election due in 2012 the sight of state assets being sold off by Kubilius' centre-right government would make an easy target for opposition Social Democrats and the populist parties.

And Zylius insists that the SOE revamp is long-term rather than a holding strategy to increase asset value ahead of some future sale. "Reforms of SOEs take a long time to implement fully, so the initiative is targeted for the long run. The reform is not aimed at privatisation of SOEs, it is aimed to ensure that SOEs are governed professionally," he says.

Nerijus Maciulis, chief economist with Swedbank in Lithuania, warns that the potential problem of political patronage remains. "Currently the objectives, if any, are set by the ministries which they report to. Last year's initiative to find one holding company which could professionally manage all SOEs was met with a lot of scepticism and even opposition - clearly it is more beneficial for some ministries and politicians to have direct influence upon those companies and keep milking them further," he tells bne.

"Still, it is likely that reform will go on and SOEs will be given more ambitious objectives and eventually will operate more efficiently. If the government fails to impose these profitability objectives or if a company consistently fails to meet them, then there is a possible solution to privatize it and let the private sector show how it's done. But privatizing SOE's at this point does not make a lot of economic sense," Maciulis says.