Privatization in Serbia

Successful Firms to be Sold First

The deadline for privatization is four years, and the sale of Serbian cement factories will be the best indicator of whether the right road has been chosen. Experts claim that the first big foreign investment will do more for privatization than anything so far.

AIM Belgrade, December 19, 2001

Only four months after the Privatization Act was passed, over 100 companies in Serbia began searching for strategic partners via auctions and tenders. This rather long list includes three cement factories, the Beopetrol oil company, eight hotels, six sugar factories, and several pharmaceutical, chemical, metal processing, construction material, and food processing factories.

In spring a total of 500 companies are expected to be undergoing privatization, 300 via auction, and 200 via tenders, because preparations for their sale are currently in the final stage. This is why Peter Senfi, a representative of the European Bank for Reconstruction and Development, taking into account past and present experience with other countries in transition, described Serbia's program of reforms as very good, stressing primarily its privatization process, which he gave a grade of 3 (4 plus being the highest).

Many at home, however, do not share his elation. Some, for instance, are disturbed by the fact that not a penny from privatization has reached Serbia's treasury. This, they claim, is the best proof that the program is unrealistic. Others do not trust the auction and tender models of privatization, particularly in the light of the ongoing struggle against corruption. Most, of course, are interested in privatization only so far as it provides them with a possibility to preserve their current jobs. Their understandable fear of what is going to happen to them once a foreign investor takes over their company is aptly used by all ideological opponents of changes in ownership structure. Furthermore, there are those who believe it is not good to sell the best companies first, as well as those who claim that the Serbian economy will be sold for peanuts, leaving hordes of workers without jobs.

The federal state, for example, recently offered some downtown business offices and two villas in the Dedinje district for sale. The former offer was extremely appealing and the final price was twice as high as the one initially set. The new owners paid DM10,000 per square meter. As opposed to this, the villas went unsold, although that was the third time they were put up for sale. And many used to claim that all economic problems could be solved by selling the mansions in this plush district of the capital, which could alone provide enough money to pay pension and social welfare checks.

The basic principle in passing privatization legislation was to offer for sale what was indeed valuable, because this is what foreign investors would be interested in, and then to invest the proceeds into restructuring companies investors are not likely to bid for. Only if the attempts to improve their image fail, in several years, will they be put up for sale for the symbolic sum of one dinar, in hopes that such a price would attract someone.

The Privatization Agency has so far registered 28 such big corporations and 150-200 big companies that have major debts. Their fate depends on how the problems between them and the four large banks currently under the jurisdiction of the Bank Restructuring Agency are resolved. If the agency opts to liquidate the banks, founded by the companies in question and their biggest debtors as well, then a deadline should be set in which they will have a chance to save themselves through privatization. "Stories that privatization will fail because of high internal debts are coming from the same sources that advocated debt to equity swaps. In that event all illiquid businesses, including the four banks in question, would become owners of companies. This is why we will not allow privatization through purchasing debts," explains Serbian Privatization Minister Aleksandar Vlahovic.

This instance clearly shows that the privatization process is not an autonomous reform-oriented move. It turned out, for example, that the unsolved problem of denationalization can endanger privatization. Plans to privatize three out of eight Belgrade hotels were abandoned because former owners appeared demanding that they be given back what is rightfully theirs. A similar danger arose in the case of the Beocin cement factory, whose privatization became very complicated when the question of whether the autonomous province of Vojvodina is the sole rightful owner of all communal property on its territory was also brought up. The dispute between the Serbian and Vojvodina governments was fortunately successfully resolved, and at a tender called for its sale six potential buyers appeared, all meeting the requirement that they produce over 7.5 million tons of cement annually. In other words, these are international producers intending to invest in cement production in Serbia. Which one of them will be selected as a strategic partner will be known by the end of the year.

The success of the privatization process mostly depends on Serbian and Yugoslav legislation, because all potential investors are complaining of excessive red tape and insufficient guarantees in regard to foreign investment. A package of new and amended laws -- including a bankruptcy bill, a bill on court registration, an amended bill on companies, a bill on foreign investment -- has been prepared in order to facilitate and speed up privatization. The political situation, however, does not give much hope that everything that needs to be done will indeed be done and done soon at that. And this could endanger plans to create about two million new jobs in Serbia in the next five years.

In addition to various "nuisances" that repel potential buyers, such as, for instance, small rooms in the Belgrade Metropol Hotel, which the greatest number of foreign investors was interested in, privatization should not be delayed because of unresolved internal relations within the big corporations. The example of the Kragujevac-based Zastava factory is encouraging in this regard. Officials claim that in two years at the latest the company will have a strategic partner. After its restructuring, a financial advisor will now be selected to search for a partner, says Sinisa Mali, director of a sector in the Privatization Agency. Similar programs have been prepared for IMT (manufactures engines and tractors), FAP of Priboj (makes vehicles), and the Zmaj farm machine factory.

There is also the problem of public companies that probably will not be privatized next year. First they have to make enough to cover their expenses, to prepare reorganization plans and then select parts they want to privatize. There are intimations, however, that some of them, such as the Belgrade utility company, will soon break the ice by finding a foreign partner.

It appears that Serbia has opted for intense privatization. The deadline for finishing this task is four years. The first year is almost over. It was mostly used to prepare the start of privatization. In the years to come good intentions will count for very little, with better effects coming from concrete results. Privatization of the cement factories will be the best indicator of whether the right road has been chosen. Experts claim, and not without reason, that the first big foreign investment will do more for privatization than anything so far.

Tatjana Stankovic

(AIM)