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AFTER A YEAR OF LEGAL STUDY, STATE PRIVATISATION AGENCY HAS PREPARED A LIST OF 'DANGEROUS' COMPANIES TO INVEST IN

FNM takes slow road to 're-privatisation'

In the summer of 1998, the political parties then in opposition in Slovakia were a-buzz with an idea they dubbed 're-privatisation' - the return of companies sold in dubious privatisation deals to the state's account, and then their re-sale to other, presumably reputable buyers.
The idea was received with some skepticism by economic analysts, who feared that a wholesale revision of privatisation deals done under the government of Prime Minister Vladimír Mečiar might anger foreign investors who had bought shares in state companies in good faith, and scare away potential investment.
One year after parliamentary elections, however, 're-privatisation' is proceeding slowly and carefully, with far fewer sales overturned than expected. The FNM state privatisation agency which is responsible for disposing of state firms has taken shares back in only nine companies, and has now produced a list of "unsafe" firms that investors should buy into only with extreme caution.


Vladimír Ondruš, the hot candidate to become the FNM's next boss.
photo: TASR

In the summer of 1998, the political parties then in opposition in Slovakia were a-buzz with an idea they dubbed 're-privatisation' - the return of companies sold in dubious privatisation deals to the state's account, and then their re-sale to other, presumably reputable buyers.

The idea was received with some skepticism by economic analysts, who feared that a wholesale revision of privatisation deals done under the government of Prime Minister Vladimír Mečiar might anger foreign investors who had bought shares in state companies in good faith, and scare away potential investment.

One year after parliamentary elections, however, 're-privatisation' is proceeding slowly and carefully, with far fewer sales overturned than expected. The FNM state privatisation agency which is responsible for disposing of state firms has taken shares back in only nine companies, and has now produced a list of "unsafe" firms that investors should buy into only with extreme caution.

The FNM has investigated over 150 privatisation contracts signed by the previous management of the fund, and has drawn up a list of 16 firms where FNM lawyers have discovered serious contractual problems that remain to be solved.

Deputy Prime Minister for Economy Ivan Mikloš said that the FNM would probably end up renegotiating new privatisation contracts with companies on the 'danger' list. "Problems in these companies must be solved, through the courts if necessary ," he said, adding that the government had not yet decided if it would make the list public.

Equity analysts welcomed the idea of compiling such a list, saying it would shed more light on the complicated process of re-privatisation, and would give foreign investors much-needed guidance in deciding where to put their money.

"This [list of companies] is really a very good thing," said Ján Tóth, senior economist at Dutch investment bank ING Barings. Tóth explained that many investors are not sure which Slovak companies they can safely negotiate a capital entry with.

The FNM's investigations have also resulted in the 're-privatisation' of shares in eight firms this year - print media distributor PNS, chemical producer Istrochem, the gas storage firm Nafta Gbely, the Dudince, Piešťany and Sliač health spas, Klenoty and steel maker VSŽ. Peter Huňor, vice chairman of the FNM's Supervisory Board, said in an interview with The Slovak Spectator on November 10 that the total value of the shares the FNM had taken back had a market value of nine billion crowns ($220 million), less than 10% of the 109 billion crowns worth of shares that were privatised by the Mečiar government from 1995 to 1998.

Dangerous bonds

The FNM's performance in 1999 has drawn mixed reviews. Deputy PM Mikloš said he felt that the fund "has done a lot over the past year," adding that "the FNM's role in certain cases like Istrochem, the Sliač spa and even Nafta Gbely was very positive."

But Matthew Vogel, a senior economist for emerging markets with Merrill Lynch in London, said that the fund had made "mediocre progress" in 1999, and cited the bungled handling of the reacquisition of 45.9% of shares in Nafta Gbely as one of the FNM's less illustrious achievements.

The Nafta case, in which the government came close to losing the 45.9% stake to the American energy giant Cinergy, resulted in the October dismissal of the FNM's top two officials, president Ľudovít Kaník and vice president Ladislav Sklenár.

The FNM's Huňor said in the absence of the fund's top executives, the FNM cannot continue with its re-privatisation plans, as withdrawals from contracts must be approved by the FNM president.

However, looking towards the year 2000, FNM officials say that it is bond repayments rather than a lack of leadership which will present the greatest challenge to the fund.

Rather than give citizens a direct share in privatised companies, the FNM under Mečiar decided in 1996 to issue 'privatisation bonds' through the FNM that would be redeemable in 2001. The fund estimates that if it pays off the bonds in cash, as originally planned, it will have to find some 33 billion crowns - enough to bankrupt the FNM.

One of the solutions that has been advanced to the problem is to make the bonds publicly tradable, so that foreign firms or banks can buy them from citizens, thus relieving some of the burden on the FNM to pay up in 2001. An amendment to the privatisation law permitting this was approved by parliament in October.

However, the problem is that no overall conception of how to compensate the bonds exists. Huňor said that the fund had so far come up with three possibilities. "First, the FNM could exchange the bonds for shares in companies where the FNM has a stake. Secondly, the bonds could be used by the FNM's debtors to settle their claims with the fund. The third option is that the FNM will pay money for the bonds."

Huňor said that a government decision on which of these options it would select would be forthcoming "within two or three weeks." Huňor said that he personally favoured an exchange of binds for shares.

Ivan Chodák, an equity analyst with CA IB Securities, agreed that the bonds-for-shares option would be the most suitable. "Such a step would undoubtedly revitalise the capital market," Chodák said.

According to Chodák, many Slovak bondholders would be anxious to sell their bonds rather than exchange them for shares because of their distrust of privatisation in general. "On the other hand, there will be a lot of companies which will be willing to buy these bonds for relatively small amounts, maybe 5,000 Slovak crowns, a far cry from the 11,000 crowns promised by the Mečiar government," Chodák said. These new corporate bondholders, he said, would in turn exchange their bonds for FNM shares, and turn a profit selling them on the capital market.

ING's Tóth agreed that any notion of the FNM repaying the bonds was out of the question.

"The best thing the government and the FNM could do would be to simply cancel those bonds," Tóth said. The year 2001 was fast approaching, Tóth said, and bond holders were expecting to be paid off. "Someone really has to make a tough decision here," he said.

But Huňor said that the FNM could not simply cancel the bonds because the were held by cities and mnunicipal governments as well as citizens. "You simply can't say, 'Look, you won't get paid for bonds you bought,'" he said.

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