Ian Bancroft in Belgrade -

When protesting employees from Zastava Elektro, an electrical goods manufacturer from the the town of Raca in central Serbia, descended on Belgrade in September, the focus of their discontent was not the more traditional targets, such as banks or government ministries, but the headquarters of Serbia's increasingly-maligned Privatisation Agency.

Accusing the company owners of falsely reporting investments and of purchasing old equipment and machinery, the striking workers, who have not been paid for some six months, have demanded that the Privatisation Agency cancel the privatisation contract with the current proprietors.

The Zastava Elektro episode, combined with the growing imperative of the Serbian government to reduce its widening budget deficit in order to meet International Monetary Fund (IMF) requirements, has exposed the entire process, proceeds and productivity of privatisation to ever greater scrutiny.

The case of Zastava Elektro is, unfortunately, far from unique. Similar violations of contractual obligations - including a failure to pay workers, the illegitimate disposal of property, social programme transgressions and absent bank guarantees - recently forced the Privatisation Agency to terminate a deal for the purchase of a 40% stake in Ikarbus, a bus manufacturer, by a Russian auto-parts maker, Avtodetal Service.

According to Dragan Zarubica, vice president of the Independent Trade Unions of Serbia, one key institutional shortcoming stems from the fact that the Privatisation Agency is responsible for both the privatisations themselves and for overseeing the execution of post-sale contractual obligations - an arrangement that Zarubica believes leaves significant room for corruption.

The fact that Zastava Elektro was purchased by a consortium led by Ranko Dejanovic, the husband of the current parliamentary speaker Slavica Dukic-Dejanovic, only serves to further fuel such concerns about undue political influence and interference in the privatisation process. The level of scepticism is such that assets are often deemed to have been privatised at rates well below their real market value.

Zarubica also describes how a majority of privatised companies in Serbia are bought merely for the purpose of generating profit, as opposed to investing in order to restart or revitalise production. For Zarubica, "it is usually the case that the new owners already have 'mother firms', so they buy state-owned companies in order to utilise everything that has remained good from them, to transfer profit to their own companies, but to leave all debts to the privatised company, including bank loans and mortgages... that's how they bring companies to insolvency and workers to the streets." Similar criticisms also revolve around the purchase of once important Belgrade-based companies solely for real estate motivations.

Sharing the blame

Successive governments must also share the blame for failing to find suitable buyers for a number of other notable assets. Despite putting a stake in the country's national airline, JAT Airways, up for sale in 2008 at a revised and reduced price of €51m, no offers were ultimately received. Though the Serbian government has announced the restructuring and re-branding of JAT, including additional investment and the possible purchase of five aircraft from Boeing, it remains a loss-making concern in an increasingly crisis-ridden industry. The collapse in global copper prices has also forced the Serbian government to suspend plans to privatise the country's largest copper mining and smelting company RTB Bor, following the failure of four separate attempts to dispose of the heavily-indebted firm. The government has also abandoned plans to sell stakes in other major public companies, such as Elektroprivreda Srbije (EPS, the country's power monopoly) and Telekom Srbije, until the global economic environment improves.

According to Ian Mihajlovic, partner at Accenica, a regional advisory firm based in Belgrade, EPS and Telekom Srbija will probably generate strong interest because each has significant market share and both industry sectors offer above average profitability. On the other JAT has already had one failed privatisation, is loss making and in desperate need of restructuring, problems which are compounded because the industry is in recession, while RTB Bor has been through several privatisation attempts and global mining companies that would have been good for the country have chosen not to engage in recent privatisation attempts. "Overall, investors will be cautious about engaging in a process when past privatisations failed, although this is unlikely to put off suitors for Serbia's hottest remaining assets, EPS and Telekom Srbije," Mihajlovic says.

Despite the immense promise and potential of privatisation for Serbia, the plethora of flaws and failings of the country's privatisation process has severely undermined the performance of many privatised assets. With countless former state enterprises demonstrating signs of chronic under-investment, stalled or even abandoned production processes, and repeated failures to meet the wage and social obligations of their employees, striking workers throughout Serbia have begun to seek the renegotiation, and even re-nationalisation, of privatised assets. Though the Serbian government has moved to mitigate the impact on individual employees and pledged to probe all completed deals, its reliance on privatisation proceeds in order to cover escalating budget shortfalls means that the litany of mistakes of the past are likely to be repeated.

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