Serbia's growing problems with foreign investment

By bne IntelliNews January 31, 2012

Guy Norton in Zagreb -

Privatisation has long been a contentious issue in Serbia, with no clear consensus on the merits of transferring state property into the hands of private, often foreign investors. And with the recent privatisation of some major state companies not only stalling, but in some cases reversed, some are wondering what needs to change to make Serbia a more attractive place for investors.

The latest example is the Smederevo steel plant, which the Serbian government agreed on January 27 to buy back from US Steel for a token $1. The plant had been sold to US Steel for $33m in 2003 amid hopes that the Pittsburgh-based operator could turn around the plant's financial fortunes. However, given continued losses - $73m in the first nine months of last year alone - US Steel decided to throw in the towel, thus forcing the government to step in to try and save the plant and its 5,400 employees, which despite its financial problems was still the country's largest single exporter. In 2010, it recorded $35m of foreign sales, representing roughly 10% of Serbian exports that year.

Serbian Prime Minister Mirko Cvetkovic told state news agency Tanjug that the government ultimately hoped to find a new buyer for the mill. "We have no intention to remain the owners in a long run," Cvetkovic said. "We plan to start looking for a strategic partner."

Poor record

The re-nationalisation of the steel mill comes before parliamentary elections expected in May, when voters will go to polls and give their verdict on the current government's performance on the economic front. Part of the political debate will undoubtedly focus on the pros and cons of privatisation in Serbia, which has often yielded poor results. The buyback of US Steel's holding in the Smederevo steel plant follows on the heels of the recent repurchase of a 21% stake in Telekom Srbija from cash-strapped Greek telecom firm OTE, which resulted in the Serbian telecom firm once again being back in state hands. This was a total reversal of what had been planned. Last year, the government was hoping to sell a 51% stake in Telekom Srbija for a minimum consideration of €1.4bn. But after the only serious bidder Telekom Austria refused to cough up more than €1.1bn in cash an investment commitments, the sale was canned in May.

Similarly, the sale of JAT Airways, the country's flagship carrier, has also failed to spark any interest to date, with the latest sales attempt in 2011 coming to nought and leaving the loss-making airline facing an uncertain future in the face of growing competition from foreign low-cost carriers. Indeed, the only major privatisation in recent years has been the sale of a 51% stake on oil company NIS to Russia's Gazpromneft in 2009 for €400m - and this was heavily criticised at the time as being far too cheap a price.

While some state disposals have failed to materialise, other privatisations have become the subject of criminal investigations. Last June, the EU asked Belgrade to look into more that 20 state sales that are alleged to have been tainted by corrupt dealings. Surprisingly, the EU's intervention was well received in some quarters. Ivica Dacic, interior minister and leader of Socialist Party of Serbia, which is part of the ruling coalition government, told Tanjug that his party supports the testing of past privatisations. "We have nothing against privatisation... but we should see what should be in public and what in private hands, in a way that privatisation should not be reduced only to robbery and abuse of rights."

There's also been plenty of other criticism of privatisation from within Serbia. In December, a study conducted by the Social-Economic Council (SEC) on the effects of privatisation in Serbia concluded that the programme of state sales in the last decade had largely been a failure. According to the SEC report of over 3,000 firms privatised in the last 10 years, some 65% have collapsed or are about to collapse, destroying 83,000 jobs in the process. That represents two-thirds of pre-privatisation employment levels at the firms involved. "It is obvious that there is some systematic failure in the Serbian economy that is making it not an investor-friendly environment," says one high-placed Serbian executive, who declined to be named

The SEC, which comprises representatives from government, trade union and employers, concluded that future privatisations should take into account the social costs as well as the economic benefits of state sales, which have brought in revenues of roughly €2.6bn since 2001.

Serbia's State Privatisation Agency has been forced to annul roughly 650 privatisation contracts to date as a result of new owners variously failing to honour financial obligations, maintain production activity and comply with agreed social programmes.

Meanwhile, another report co-authored by professors Ivan Vujacic and Jelica Petrovic from Belgrade University concluded that the imperfections of the privatisation process in Serbia would continue to impact on future state asset sales. "Hopefully, some lessons have been learned. However, given the record of the past decade and against the background of the latest economic crisis, privatisation as a process that society will benefit from will be extremely difficult to sell to a disenchanted public."

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