Cablegate: Goc Prepares to Privatize Shipyards

DE RUEHVB #0735/01 2961031
P 221031Z OCT 08



E.O. 12958: N/A

1. (U) SUMMARY: The GOC has begun the process to privatize
shipbuilding, the last major industry under state ownership
in Croatia. Subsidies to the loss-making industry have been a
burden on the state budget and are an obstacle to EU
accession. The Ministry of Economy and representatives of the
shipyards reached agreement on October 11 and 13 on the main
terms for privatization, and the GOC has submitted the
proposed tenders to the EU for review. Regardless of the
terms, it is uncertain whether the government will attract
any investors in the current less-than-favorable economic
climate. Aware of this possibility, the EU has asked for a
contingency plan, which the GOC will likely not complete this
year. These remaining challenges may complicate Croatia's
ability to stay on course for completing its EU accession
negotiations in 2009. End Summary.

2. (U) Over the past six months, the GOC has begun to move
toward privatizing Croatia's politically sensitive
shipbuilding industry. Although the government has been
reluctant to begin the process, it now has no choice since
state subsidies to shipyards is one of the two major problem
areas identified by the EU as obstacles to fully opening
accession negotiations. The loss-making shipyards burden the
state budget annually with about $80-100 million in subsidies
and about $450 million in loan guarantees. Olgica Spevec,
president of the Council of the Croatian Competition Agency,
told us that the reasons for the privatization moves go
beyond state budgetary concerns to a basic understanding that
the industry would be more successful under private
ownership, in the hands of investors who know the global
market well and can find the right niches for profitability.
She said the original restructuring plans submitted to the EU
in June were developed largely by the current management of
the shipyards and proposed restructuring while maintaining
state ownership. The GOC, however, had already begun planning
for privatization and, through consultations with the EU,
decided to scrap the submitted plans and prepare
privatization models for all the shipyards.

3. (U) Several factors have made privatization politically
difficult. Croatia has a long tradition of shipbuilding and
the fear of large-scale job losses has caused anger in
Croatia's port cities. The GOC has tried to address these
concerns in the proposed privatization plans and seems to
have gained at least tacit approval from the unions to move

4. (SBU) Work by the World Bank, however, suggests the real
effects of privatization on workers and local economies may
be different from the widely held expectations. The Bank's
findings indicate that workers are not as dependent on the
shipyards as presumed, since some 80 percent have secondary
jobs or experience in other fields. Further, shipyard
communities may not be as dependent on the industry as
presumed, since most workers commute more than half an hour
to the yards. The Bank also found workers more willing than
management to make whatever changes were needed to improve
enterprise viability. Noting that privatizing the shipyards
has thus far been "taboo to an unbelievable extent," Sanja
Madzarevic-Sujster, senior country economist at the Bank's
Croatia office, suggested the status quo may provide
significant graft opportunities to managers, who, she
observed, are "running loss-making enterprises but driving
the latest model BMWs."

5. (U) The Ministry of Economy and representatives of the
shipyards reached agreement on October 11 and 13 on the main
terms for privatization. Deputy PM and Minister of Economy
Damir Polancec then presented the tender proposals to the EU
in Brussels. Assuming EU approval, the ministry plans to post
the tenders in November. According to press reports, four of
the shipyards--3 May, Kraljevic, Brodotrogir, and
Brodosplit--will be offered for a starting price of 1 HRK
($0.20) in a public tender process. Potential buyers will be
asked to specify how much of the shipyard's credit
liabilities they will assume. They also will be required to
recapitalize the enterprise within one year, continue
shipbuilding activities, and respect existing collective work
agreements until expiry. Workers at each shipyard will be
offered 25 percent stock plus 1 share at discounted rates.
According to a separate agreement for Uljanik, the best
performing (though still not profitable) of the yards, the
GOC will issue a tender for a 25 percent stake in the
enterprise. Then, as with the other shipyards, workers will
be offered 25 percent stock plus 1 share at discounted rates.
In the final phase, 33 percent of the enterprise will be
offered to investors, with a cap of 2-3 percent of shares per
investor. Some press reports indicate the proposals include
continued state subsidies and plans for the state to assume
some of the shipyards' debt. A Ministry of Economy contact
who has worked on the proposals says the press information
has been mostly accurate, though he declined to confirm any

ZAGREB 00000735 002 OF 002

details for us while they are still in negotiation with the

6. (SBU) The privatization plan is meeting with skepticism.
The EU is still reviewing the proposed tenders, but local
papers are already reporting EU disapproval of some of the
terms, such as the continuation of state subsidies, the
state's assumption of part of the shipyards' debt, and the
prohibition of converting the enterprises to another
industry. Charlotte Ruhe, director of the European Bank for
Reconstruction and Development in Croatia, told us she doubts
the GOC will find many interested bidders under the proposed
terms and given the current global economic situation. Spevec
commented that the government may have missed its best chance
earlier this year, when ship orders were strong and several
investors were expressing interest. The shipyards reportedly
have already begun losing orders due to the global financial
crisis, and some analysts have called for the government to
delay posting the tenders, while others have suggested the
GOC would better spend its efforts preparing bankruptcy plans
than privatization plans for most of the shipyards. In
September, Josko Klisovic, secretary of the MFA's EU
Accession Negotiating Group, told us the EU has asked for a
contingency plan in case the sale of the shipyards does not
succeed. He seriously doubted the government could prepare a
backup plan in addition to the main privatization plan by the
end of this year.

7. (U) COMMENT: Although the GOC finally appears serious
about privatizing shipbuilding, the challenges are
formidable. The Ministry of Economy is hoping for some
leniency from the EU in acknowledgment of Croatia's
shipbuilding tradition, but this hope is likely in vain,
given the difficult decisions other shipbuilding countries,
such as Germany, the UK, and Poland, have had to make as part
of the EU. In any case, EU approval of the plans is only a
preliminary step to the real task of attracting investors.
Although PM Sanader remains publicly optimistic about opening
all negotiating chapters this year in order to complete
accession negotiations in 2009, the hurdles remaining for
shipyard privatization loom as the most likely reason that
this schedule could slip. END COMMENT.

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