Serbia's sale of the century

By bne IntelliNews July 20, 2015

Andrew MacDowall in Belgrade -


With 526 companies listed by its privatisation agency, and one of the biggest assets just put up for sale, Serbia’s long-awaited sell-off of state-owned enterprises seems to be gearing up at last.

Companies from around the world are reportedly showing interest in what the government says is a wide-ranging opening up of an economy still groaning under the weight of Tito-era state ownership and post-communist clientelism. But many, perhaps most, of those up for sale have no commercial future, and political and social pressures threaten further delays.

On July 3, the privatisation agency invited potential investors to submit non-binding offers for the government’s 58.11% stake in Telekom Srbija, which operates fixed-line, mobile and internet services, as well as cable television channels. The process is limited to bidders with assets worth at least €2bn, or revenues of more than €500m, Reuters reported.

Telekom Srbija, which also has operations in Montenegro and Bosnia, is the most lucrative of the companies Serbia has listed to privatise. It posted earnings before interest and tax (EBIT) of RSD21.1bn and net profit of RSD15.7bn in 2014.

The company, like a number of counterparts in Serbia and across Southeast Europe, has had a mixed history of part-privatisation: the government bought back a 29% stake from Telecom Italia in 2002 and 20% from Greece’s OTE in 2012 – the latter the year after rejecting a €1.1bn bid for 51% from Telekom Austria.

Another sizeable asset on the agency’s list, Zelezara Smederevo, was sold to United Steel for $33m in 2003, only to be bought back by the state in 2012 for a single dollar. A reprivatisation to US-based Esmark fell through in February, highlighting the difficulties facing those engaging in privatisation in Serbia.

Telecoms are a world away from the troubled global steel industry, however, and Srbija Telekom itself is a success story, unlike aging Zelezara, which desperately needs to restructure and realign towards new markets.

“In my opinion the most attractive assets are Telekom Srbija and insurance company Dunav Osiguranje,” Tomislav Bajic, head of research at regional brokerage InterCapital Securities, told bne IntelliNews. “Basically, they are dominant players in their industries and that is very attractive for foreign companies which want to consolidate in regional markets.”

Last year, the Serbian press reported that a frontrunner for Telekom Srbija was Deutsche Telekom, which already has subsidiaries and stakes in counterparts around Central and Southeastern Europe.

Dunav is the market leader in insurance, but bne IntelliNews understands that CEO Mirko Petrovic, appointed to the post for the second time last year, is seeking three to five years to “consolidate” the company.

More time needed

Other companies that may interest investors include pharmaceutical manufacturer Galenika, Nikola Tesla Airport (currently benefitting from a surge in traffic thanks to the success of Air Serbia, part-owned by Etihad) and a smattering of other manufacturing and engineering companies. Prime Minister Aleksandar Vucic touted some of the latter in China last year. The government also has a 43% stake in Komercijalna Banka, Serbia’s second biggest lender by assets, and aims to sell it by 2017, which could attract a rival seeking consolidation.

By April, the privatisation agency announced 100 public invitations for the sale of capital, assets, or strategic partnerships, the organisation told bne IntelliNews in a statement. According to the Law on Privatisation adopted in August 2014, privatisation of state-owned capital should be concluded by the end of 2015. However, 17 “strategically important” companies with large workforces are excluded, with the government taking the view that more time will be needed to find strategic partners.

Progress as a whole has been not as rapid as the government expected and many hoped. A July report by Hypo Alpe Adria, a regional bank, highlighted slow restructuring of state-owned enterprises (SOEs) as one of the drags on Serbia’s economic outlook, saying that “developments remain a concern”. A well-placed source in Belgrade told bne IntelliNews that the telecom privatisation was the only major sell-off likely to go ahead in the near future.

The deadweight of SOEs has long been seen as a drain on Serbia’s limited resources, but privatisation remains something of a dirty word in the region, though restructuring has been opposed by vested interests as much as popular sentiment.

“The biggest opponents to privatisation process were directors of public enterprises, in which huge amounts of money from the state budget were poured in the last period,” the Ministry of Economy told bne IntelliNews in a statement. “They were holding tightly their positions.”

Of the companies up for sale, 70 – 13.3% - actually have no employees, while another 50 or so have fewer than five.

The landslide victory of the conservative Progressive Party (SNS) led by Vucic in elections in March last year gave renewed hope among investors that the Gordian knot would finally be cut.

“Incomplete privatisation is a great burden to the Serbian economy,” the Ministry of Economy said. “It must be completed in order to make space and funds for growth and development of healthy companies. The current government is the first one that is determined to solve this problem entirely.”

The government’s spine should have been stiffened by a new €1.2bn standby loan deal with the IMF in February, which came with the condition of restructuring and where possible selling off SOEs.

In a June 26 review of the agreement, the fund noted delays in this process “due to legal obstacles, implementation capacity, and concerns about the social impact of large layoffs”. But it acknowledged some progress and noted moves such as a number of debtors of state gas company Srbijagas operating without state aid, or at least further arrears, albeit aided by low energy prices. A SOE unit has been established in the Ministry of Finance, though largely to analyse companies’ financial performance.

Action plan

The fund also urged the government to hasten bankruptcy proceedings. The ministry bluntly admits that when a buyer cannot be found for a company, assets will be sold through bankruptcy.

In January, the government adopted an action plan for 188 companies to be put through bankruptcy proceedings by the agency. A further 43 had protection expire in May, some of which have now submitted proposals for bankruptcy.

Dejan Tufegdzic, a Serbian investment consultant, told bne IntelliNews that he expected big companies with dominant market positions to be sold off fairly smoothly – but said that the vast majority would enter bankruptcy, causing tens of thousands of job losses.

The ministry says that it meets unions and employees “on a daily basis” and that they are “key partners in the reforms we conduct… well aware of the unsustainability of the current state”. The 2015 budget sets aside RSD16bn to fund a social programme for those who lose their jobs through privatisation this year.

Nonetheless, there are concerns about resistance to privatisation and bankruptcies not just from unions but from powerful vested interests that have benefitted from networks of patronage and clientelism for years, or decades. The experience of other countries in the region, as well as Serbia’s own long-drawn-out will-it-won’t-it privatisations of major companies, does not suggest plain sailing.

The government is keen to portray the privatisation programme as part of a wide-ranging opening of Serbia’s economy as it looks to boost meagre growth, move towards the EU, and integrate with the global economy, leaving decades of communism and post-Yugoslav-war corruption and economic failure behind.

The Ministry of Economy trumpets a raft of recent measures including labour law liberalisation, a new law on planning and construction to enable “more efficient and faster obtaining of construction permits”, and a strategy for SME development intended to boost profitability and employment.

A new investment law is in the pipeline, along with changes that will allow investors to take leasehold on land for up to 99 years.

“For investors there are also incentives through income tax reductions and incentives for investment and employment of new workers,” the ministry told bne IntelliNews. “Local governments give investors rent-free land, while the existing 12 free zones in Serbia continue to have exceptional importance for foreign investors.”

Serbia certainly has other competitive advantages, including its location; favourable access to markets including the EU, Russia, and Turkey; low wage costs comparative to the skills base; and a history of manufacturing. As rising wages chip away at competitiveness of countries to the north, optimists feel that Serbia’s time is coming at last. In a May report “Investments in CEE: Switching into next gear of growth”, Erste Bank identified Serbia as one of the few countries in the region likely to see FDI rise in the medium term, thanks in part to privatisation.

But many within and outside Serbia remain sceptical. The pace of change is slower than promised, and structural hurdles are substantial. Indeed, the prevailing mood in Belgrade is pessimistic, with promised reform and revival seen by many as a mirage. The economy shrank by 1.8% year on year in the first quarter, and job losses could weigh further on the outlook.


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