Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Privatisation comes of age in central and eastern Europe

The south-eastern European states formerly associated with the Soviet Union have been slow to privatise state-owned assets when compared with their western European neighbours, but political reforms and softening attitudes mean fresh momentum is spurring a wave of long-delayed sell-offs in the region, particularly in Serbia and Slovenia.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Privatisation comes of age in central and eastern Europe

With the elapse of more than 25 years since the end of the Cold War and the beginning of the shift from Soviet to market economies across central and eastern Europe (CEE), one topic keeps creeping up: the privatisation of state assets.

While it seems the process has largely come to a close in some countries – in EU member states such as the Czech Republic, Poland and Slovakia – for others, the process is far from over. In the ex-Yugoslav countries of Serbia and Slovenia, privatisation is very much on the agenda, with a large list of sales having been drawn up. The European Bank for Reconstruction and Development (EBRD) is supporting the privatisation programme and making efforts to encourage equity investments into the region – but challenges still remain to make the process worthwhile for countries and investors. 

A staggered start

The large wave of privatisations in the CEE region started in the 1990s as a means to optimise and modernise state-owned businesses, to sell off state-subsidised enterprises and to return some money to the fiscal budget. Yet while the more northerly CEE countries were able to proceed quickly with the privatisation programmes, the south-eastern European region was not in a position to follow suit.

At the centre of the former Yugoslav region, Serbia only became a standalone sovereign republic after neighbouring Montenegro voted for independence in 2006. Kosovo’s declaration of independence followed in 2008, although that is not recognised by Serbia. Such events delayed any large-scale privatisation. Meanwhile, Slovenia, having become independent in 1991, kept a state-dominated model, which meant support for privatisation was lacking.

In Serbia’s case, after some feeble earlier attempts, privatisation was made a priority by prime minister Ivica Dačić, who was in office from July 2012 until April 2014. However, it was the administration of his successor, Aleksandar Vučić, which gave momentum to the initiative. The country’s current finance minister, Dušan Vujović, acted as minister of the economy in the first four months of Mr Vučić’s government and saw the need to act.

“When I took office as minister of economy [in April 2014], there were 500-plus companies pending privatisation with a need to be resolved,” Mr Vujović said at the EBRD’s Western Balkans Forum in February. “There were companies in distress, which were kept on life support devices, which meant [they were reliant on] flows from the budget. A huge portion of the deficit was coming from these companies. Today, we are [making] the last [push] to complete privatisation.”

Serbia and Slovenia privatisation

Serbia's favourable environment

In 2014, the decision was made to bring Serbia’s finances in order and to devise a large-scale privatisation of state assets. With the country's economy on the right track – gross domestic product grew by 0.8% in 2015 as opposed to initial projections of a 0.5% contraction – and the budget deficit reduced from a projected 8.8% for year-end 2014 to today’s 3.7% general government deficit, the economic environment for investors has become more favourable. 

The Serbian government signed an agreement with the World Bank to reform the state’s socially owned enterprise sector for an €88.3m development loan in March 2015. Since then, 188 companies have been earmarked for liquidation and 206 for privatisation through equity and asset sales. The World Bank loan came just after a €1.2bn standby loan from the International Monetary Fund (IMF) with the condition of restructuring and, where possible, selling off socially owned enterprises. 

“From the end of 2015, the status of what have been called socially owned enterprises does not exist anymore. We are undertaking a full commitment to have a final status for the last 17 strategic companies by the beginning of June,” says Vladimir Krulj, an adviser to Serbia’s minister of finance and the minister in charge of EU integration. “Socially owned enterprises had cost the state roughly €700m to €750m per year, which is huge for the Serbian budget.”

The 17 strategic companies include Serbia’s steel mill Železara Smederevo, which the government has agreed to sell to China’s Hebei Iron and Steel Group for €46m, saving about 5000 jobs. Agricultural business PKB Belgrade is also on the list. The initial invitation for sale set a minimum price tag of €155m. This expired in late February, fuelling speculation over a potential new invitation, which might accept a minimum offer of €91m.

In early April, the government also launched a tender for a 25% stake in pharmaceutical company Galenika, seeking bids of at least €7m.

“This is the first time the state has set itself a deadline in the process of negotiations with the IMF,” says Mr Krulj. “Of course, our bargaining power would have been much better had a solution been found and implemented in 2006 or 2007, when Serbia was much stronger in terms of public finances, like the rest of the world, but [at that time] there was a lack of political will.”

Telecoms setback

Meanwhile, last year’s privatisation of Serbia’s telecoms provider, Telekom Srbija, was cancelled at the end of 2015 after six binding bids fell short of the government’s asking price of at least €1.3bn. According to CEE-focused law firm Wolf Theiss, the telecoms provider will now be restructured under the auspices of the state, and possibly sold at a later stage.

“The Telekom Srbija situation should not be regarded as a trend, but rather as an exception to the rule,” says Natasa Lalovic-Maric, a partner at Wolf Theiss. She notes that Serbia has many other companies that could be of interest to investors.

But the president of the EBRD, Sir Suma Chakrabarti (see separate interview on page 36) cautions: “Serbia has a very long list of public sector entities it wants to privatise, so we work quite closely with the Serbian government to try to sequence what the priorities are. We help draw up in what sequence you should do the privatisation.

“No market really has the appetite to do hundreds of privatisations at once... the whole country would grind to a halt if we were trying to do that.” 

The Slovenian model

The situation in Slovenia is slightly different. Despite its EU membership since 2004, the country has followed a “very state-dominated model for many years”, says Mr Chakrabarti. Some 25 years since the beginning of the transition, the government still controls about half of the economy.

“Slovenia is still under pressure to privatise,” says Gabor Hunya, a research economist at the Vienna Institute for International Economic Studies. “It has learnt the lesson that its overwhelming public sector really is a burden [on government finances] and in the course of fiscal consolidation it also has to privatise.” 

Mr Chakrabarti notes that the decision to privatise was “tricky” for Slovenia because civil society, the population and trade unions – which are very strong in Slovenia – all need to “accept this shift in the business model is required”.

“The process of building social acceptance that privatisation is the right route to pursue takes time. We are now very glad to be supporting Slovenia along that route,” adds Mr Chakrabarti.

SDH leads the way

Previously known as Slovenska odškodninska družba, Slovenia’s state asset management company was transformed into today’s Slovenian Sovereign Holding (SDH) in 2014, with the task of leading the state’s privatisation efforts as well as managing state assets.

“Given that we are a country with quite a significant ownership structure in the economy in comparison with other Organisation for Economic Co-operation and Development members, it was very important that the government adopted the strategy of managing state assets in July 2015,” says Marko Jazbec, chief executive of SDH. “In my opinion, this is the first consistent document to define our key strategies in terms of managing state-owned entities and in terms of privatisation that is happening in the next couple of years.”

The strategic document divides state-owned enterprises into three categories: portfolio, important and strategic.

Portfolio assets are companies in which the government does not deem it mandatory to keep a controlling stake. In July 2015’s strategy ordinance, 46 assets were entered into this category, which will ultimately be sold by SDH. Some 21 enterprises were classed as important assets, which will see the state keep a 25%-plus-one share stake in the businesses, while in the 24 strategic assets, the state seeks to obtain or maintain a 50%-plus-one share stake.

This year, the state wants to sell 35 portfolio companies, according to finance minister Dušan Mramor (see Viewpoint on page 14). This year’s first sale was agreed in January, when German turnaround specialist 4K Invest’s fund, 4K KNDNS, acquired 91.6% of Slovenia’s airline Adria Airways for €100,000. The fund agreed to inject a further €1m into the airline, while the Slovenian state will contribute €3.1m. 

Among the other assets up for sale in 2016 are car-part maker Cimos, tool and radiator maker MLM, and tissue maker Paloma. Ahead of an anticipated sale of Paloma to Polish mid-market private equity firm Abris Capital Partners, the EBRD supported the financial and operational restructuring of the company with a €4.5m loan.

Banking blitz

In Slovenia, large parts of the banking sector are also on the privatisation list – after the government had to intervene to save its financial sector from collapse in 2013. As a result, the country’s largest banks, Nova Ljubljanska banka (NLB), Nova KBM and Abanka were privatised. Owing to EU rules, the government's controlling stakes have to be sold off.

The first of the sales was agreed in June 2015, when alongside the EBRD, US private equity firm Apollo Global Management agreed to take an 80% stake in the sale of Nova KBM.

“The Nova KBM case is very important for us,” says SDH’s Mr Jazbec. “It is the second largest bank [in Slovenia] and a systemic bank. It is also being monitored by the European Central Bank. It will be the first time in Europe that private equity is investing in a systemic bank.”

The president of the Nova KBM management board, Robert Senica, says that the forthcoming ownership change of Nova KBM represents “a significant step forward and a great opportunity not only for the bank itself, but also for the region of Styria and Slovenia as a whole”.

Apollo is now seen as a consolidator in the Slovenian banking sector after it also bought Raiffeisen Bank’s subsidiary in the country. It is also thought to have been interested in acquiring Sberbank’s Slovenian operations. 

“Slovenia is slowly but surely being seen as more open to foreign direct investors than we used to be a few years ago,” says Mr Jazbec. “Apollo is a pioneer. To have its takeover of Nova KBM successfully closed is very important for the sales process of NLB.”

IPO route

As per July 2015’s strategy, an initial public offering is the proposed route for NLB. SDH announced on April 1 that it had appointed Deutsche Bank as financial adviser on the sale of Slovenia’s largest bank, which will see nearly 75% of it privatised. NLB is classified under official nomenclature as an important asset, meaning the state will keep a 25%-plus-one share controlling stake in the company.

In its March 2016 mission statement, the IMF noted that the privatisation model for NLB “is unlikely to attract strategic investors that would want to manage and develop the institution based on sound commercial principles”, urging the authorities to consider the benefits of a tender for a controlling stake in the bank to actively market it to strategic investors, and to reconsider plans to prevent any investor from acquiring more than the state’s designated share stake. 

In response to the statement, Mr Mramor said that the conditions for NLB’s privatisation will be reconsidered and could be changed when the strategy of managing state assets ordinance is up for review in June or July.

As with Serbia, though, Slovenia also has a track record of abandoned sales. Plans for a privatisation of the country’s telecoms operator, Telekom Slovenije, which was up for sale in 2015, would have seen the government’s 72.75% stake privatised. But in August 2015, private equity firm Cinven, the last remaining bidder, withdrew from the process because of regulatory challenges from the EU and domestic regulators. 

A political process

The two postponed sales of the state-owned telecoms businesses in Serbia and Slovenia show that even when the initial decision to sell government assets has been made, privatisations still undergo many more challenges than straight industry sales.

“Privatisation is where politics and economics become intertwined,” says Mr Chakrabarti. “Making the political case for privatisation is tough in some places once people have rejected some of the earlier attempts to do so.”

Political willingness is key for successful privatisations – if the seller’s support is missing, no sales can come to a conclusion. If the topic is a controversial one in the political landscape of a country, a change in government can quickly bring efforts to a halt. In addition to high expectations in relation to the price, a U-turn because of upcoming elections or improvements in the fiscal position of the country can also throw a spanner in the works. 

Serbia’s prime minister, for instance, has called early elections this year. The government, which only took office in 2014, was seeking re-election in late April. The outcome of the ballot was not yet clear when The Bankerwent to press. This poll, though, could have been a reason for delaying controversial decisions, such as the high-profile Telekom Srbija sale. 

“What the public and the politicians are usually afraid of is that privatisation is connected to lay-offs,” says Mr Hunya at the Vienna Institute. “But the fear of lay-offs may recede if the economy is doing better and the economic conditions for the central and south-east European countries have actually improved, because in many countries there is now quite stable economic growth and improving labour conditions.”

Equally, no amount of political willingness will suffice if investors are not ready to deploy money – and the signs are that demand is still not strong enough. 

Getting privatisation right

The sparser the interest, the more important it is to get the privatisation process right. Investors are particularly keen to receive reassurances that a privatisation is likely to go through. Therefore the degree of certainty of a sell-off is paramount. Investors give special focus to the policy environment, who the stakeholders are, and how political the process is, according to Horst Ebhardt, a partner at Wolf Theiss.

Investors – such as Cinven, when it considered whether to buy Telekom Slovenije – look at the regulatory environment they are faced with. Should it seem too restrictive or come with too many burdens as to how the company can function after privatisation, this can also cause an investor to reconsider an investment.

“Very clear privatisation legislation and the implementation of regulations that give you a good view on how certain it is that the process will be set up and implemented in the right way are an important factor for the success of a transaction,” says Mr Ebhardt. “Investors will want to see whether there is a clear authority for the relevant agencies to sign off on the transaction or whether there are risks that an overarching political influence could cancel the process later.”

The Serbian government has altered the country’s privatisation laws to make sell-offs easier. The law was passed in August 2014 and is a shift from “ideologically defined privatisation laws to pragmatic laws”, says Mr Vujović, the country's finance minister. “The old laws basically said you have to privatise capital. But many companies’ capital was zero or negative – you cannot privatise zero or negative.”

While the political and regulatory environment plays a significant role in a successful privatisation, a thorough preparation of the sale is equally important. This includes the need for a realistic timeframe and the hiring of experienced advisers. It also requires putting the asset itself up for sale.

“If all the work is done beforehand by, for example, bringing experienced management on board, who optimise a state-owned company, that means less risk for the buyer and likely a better purchase price for the government because the corporate governance has already been improved and the company has been made a better asset before it has been put on the market,” says Mr Ebhardt. “This process can take a few years – two or even three.” 

Komercijalna preparation

One such example is this of Serbia’s second largest bank by assets, Komercijalna Banka. To improve corporate governance and the performance potential of the asset, a new chief executive was hired in December 2015. Alexander Picker, who previously worked on the resolution and split of Austria’s troubled Hypo Alpe Adria Group into a ‘good’ and a ‘bad’ bank, will prepare the bank – which is still more than 40% state-owned – for a “good privatisation process”.

“Komercijalna Banka is like a sleeping beauty,” says Mr Picker. “There are some strategic approaches that have not yet been followed through. This is now my task: to push them through and unlock the value.”

His vision for the bank is that of a “regional champion”. This would see investments in the former Yugoslav region – where the bank already has operations – thereby strengthening Komercijalna Banka’s presence in Bosnia-Herzegovina, Montenegro and Kosovo. Mr Picker is also considering opening a branch in Vienna to cater for the city's Serbian community, who are sending about €2bn of remittances back to the country.

He sees further opportunities in cross-selling among the bank’s 900,000 retail and small and medium-sized enterprise customers. He is also looking at ways of dealing with the bank’s own and the wider banking sector’s large corporate non-performing loan (NPL) problem through a special workout vehicle, which holds the assets throughout the entire workout process.

“There is a strong interest  from international funds in purchasing NPLs in Serbia,” he says. “I think that banks, too, can see NPLs as a business. In particular, Komercijalna Banka can make some money on NPLs by becoming an active agent in the market.”

The privatisation process for Komercijalna Banka, which is already partly owned by the EBRD and the International Financial Corporation and has a small stake listed on the Belgrade Stock Exchange, is expected to be finalised in 2017. 

Opting out?

As much as there is a case for a free market economy, observers recognise that privatisation is not always the way to go. There are reasons why some privatisations were unsuccessful or why certain assets should remain under state ownership. For example, in situations where there is no competition in a sector before privatisation, the sale of an asset does not change the monopoly status.

“Regional monopolies were privatised with the aim of opening the market to competition later, but this tended not to happen,” says Mr Hunya. “Privatisation of monopolies, without competition afterwards, usually leads to private monopolies, as in the case of electricity distribution and energy companies in countries such as Bulgaria and Hungary.”

And, as Mr Jazbec stresses, there are cases across Europe where government-run companies are performing well and competing with private companies.

If a company is making losses, though, it is the duty of the owner to do something about it. This is particularly the case if the owner is a state because it is a “waste of taxpayers’ money if the government just keeps improving the conditions”, says Mr Hunya. “Restructuring and, in the final instance, privatisation is the better way because a government has too many political interests. It is better to have a politically uninterested party running a business.”

EBRD president Mr Chakrabarti notes that privatisation has its role to play but that it is important not to rush into state sell-offs. He impresses the need to do the groundwork, to plan the process and to improve the performance of the public sector entity that is going to be sold off before tackling the sell-off. 

“Nobody ever said privatisation is a must,” says Mr Vujović. “Privatisation is one generic solution to usually inefficient, mismanaged, non-competitive companies. It is a package deal. Through privatisation, you hope to get technology, management, know-how, everything. But markets tend to overprice risks.

“In companies that are at a dead end and that need to change technologies, and which have a lot of social costs attached to them, sometimes privatisation is not the best option. But that does not mean that you should [reject] it as one of the options.”

Was this article helpful?

Thank you for your feedback!