Mixed reaction as Croatia restarts privatization drive

By bne IntelliNews March 29, 2012

Guy Norton in Zagreb -

After a near five-year hiatus, Croatia is set to reinvigorate its privatisation drive. Seeking to leverage increased investor attention on the back of its accession to the EU in 2013, Zagreb is hunting in the cash rich east. However, questions remain at home.

The centre-left government, which came to power at the start of the year, has adopted a much more active attitude to seeking privatization revenues and foreign direct investment than its right-wing predecessor. The country's economic supremo, deputy prime minister and economy minister Radimir Cacic, recently returned from a visit to Moscow on March 25-26, where he was trying to drum up Russian interest in both potential state sales and investment projects.

Among the assets that Croatia is looking to offload in the coming months is fertilizer company Petrokemija, insurer Croatia Osiguranje, and commercial lender Hrvatska Postanka Banka (HPB). Investment partners are being sought for a number of energy and infrastructure development projects.

On his return from Moscow, where he met with Energy Minister Sergei Shmatko and Emergency Situations Minister Sergei Shoigu, Cacic told Croatia's state news agency Hina that the Russians exhibited concrete interest. Reportedly, petrochemical giant Sibur - a subsidiary of Gazprom - is interested in taking a stake in Petrokemija, while banking titan VTB is viewed as a potential buyer of HPB.

Croatia is also interested in securing Russian funds to help build new power stations in Plomin, Sisak and Osijek, construct oil pipelines between Bosanski Brod in Bosnia and Slavonski Brod, and power new oil storage facilities in Omisalj and Slavonski Brod. The government has been at pains to point out that it will insist that the Croatian state retains ownership of these facilities. Meanwhile, Zagreb is also keen to become a partner in the South Stream pipeline project, designed to deliver Russian gas to southeastern Europe from 2015 onwards.

Mixed reaction

Reaction to the government's potential sale of assets such as Petrokemija has been mixed. On the Zagreb Stock Exchange, the company's shares surged almost 20% in two days to reach HRK272 per share - the highest level since January 2008 - on the news of Sibur's interest. However, workers' representatives at Petrokemija were less enthusiastic. According to trade union leader Zeljko Klaus, a government agreement signed in 1998 guarantees that the state will remain the majority shareholder in perpetuity, as the company is one of 62 firms declared to be of strategic national interest.

The Croatian government has plenty of other assets to punt out however. According to a recent research report from Barclays Capital, the authorities in Zagreb have stakes in more than 500 companies, which could be disposed of in the coming years. Privatisation sales this year are budgeted to bring in just HRK2bn (€267m), but the government currently holds stakes worth over HRK40bn in a whole host of sectors.

Among those stakes that could go under the hammer in the near future is a 21% holding in leading food producer Podravka, worth around HRK270m at current valuations, and a 25% slice of engineering company Koncar, worth around HRK333m.

Commenting on the prospects for the privatization drive, Michael Glazer, chairman of Zagreb-based investment bank Aucris also displays ambivalence. On one hand, he says that the Croatian authorities are looking to make the right moves, but it remains questionable how successful they will be. "The new government seems to at least want to try to change things on the economic front. It's very encouraging that they're talking seriously about privatization, and in particular about sales of stakes in companies where the government holds less than 25%, which is long overdue."

He adds that larger scale sales, at companies where the government has a majority, are also long overdue, but points to the situation at Petrokemija as an example of the danger that political controversy could bog them down. He also adds that in the short term, it's more important for the government to implement reforms to increase efficiency at state-owned enterprises and the establishment of new private sector firms. "The government needs to create a much more business-friendly environment in Croatia," he insists, "and right now that's not on the cards."

Like many local businessmen, Glazer points at the thorny issue of Croatia's inflexible labour market laws as a major issue; one which has posed an obstacle to private sector firms hiring new workers. The legislation goes some way to explaining the fact that Croatia currently has almost 350,000 unemployed, the highest level in almost a decade. However, he believes that would require some skillful negotiation by the government to avoid the threat of widespread industrial action. "The Croatian trade unions seem pretty determined to hold onto all their traditional privileges," he notes.

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