As Croatia heads towards privatisation, Gregor Famira and Thomas Hamerl specialists with law firm, CMS, weigh up the pros and cons of selling off national infrastructure

As soon as Croatia became independent twenty years ago, the country started the privatisation of its state-owned companies. Many of the companies owned by the Croatian Government have been privatised since then (among others, banks, tourist companies, and several other industries). However, until 2011, save for Croatian Telecom (which was 51 per cent sold to Deutsche Telekom in two steps in October 1999 and in October 2001), none of the infrastructure companies in Croatia have been privatised. The list of such companies is rather long and includes: Croatian electricity company (Hrvatska Elektroprivreda), Croatian waters (Hrvatske Vode), Croatian highways (Hrvatske Autoceste), Croatian post (Hrvatska Pošta), Zagreb airport (Zračna Luka Zagreb), Croatian woods (Hrvatske Šume) and Croatian railways (Hrvatske Željeznice) among others.

As Croatia is likely  to join the European Union (negotiations hope to be finished within the next couple of months), there is a healthy appetite from international investors to get into the country while the Croatian government might use the remaining time before EU accession to privatise certain infrastructure companies. Government advisors – among them Mr Borislav Škegro, the former minister of finance – are advising the Croatian Government to start with the privatisation of infrastructure companies.

Method of privatisation

Once the Croatian Government decides to start the privatisation of infrastructure companies, they must decide which model of privatisation should be used. Is it advisable to sell the companies or their assets? How can investment obligations and long-term quality standards in a privatisation be safeguarded? Should the state to this end continue to hold a minority participation? Or is a public private partnership (PPP) more suitable? Last but not least, who should be allowed to bid?

Quite obviously, there is the financial aspect: a sale of the company to be privatised would create positive cash-flow for the state’s pockets. ‘Cash is King’ goes the saying, and because of the financial crisis this has become even more so for countries like Croatia. Independent equity researchers, Standard & Poor, lowered the rating of the Republic of Croatia to BBB- in its last report, which will increase the cost on the international financial market for covering the deficit in 2011. So, from the perspective of the treasury, a sale would be the preferred option.

However, there is also a political angle to it: public opinion in Croatia seems to perceive a sale as finally giving away the last valuable assets owned by the state and ‘just’ to cover the next deficit. In addition, privatisations (via sale) in the past, have not been viewed by the public as hugely successful. As a result, public opinion favours a PPP solution as it appears to allow the state to keep the cake and eat it at the same time.

What can we learn from successful projects – be it a privatisation or a PPP – in the past? First of all, transparency, fair competition and reliability are crucial for attracting national and international private investors for financing and operating projects in the public interest. Croatia has a good legal framework for this and can – and should – rely on its modern Concession Act and its PPP Act which comply with international standards.

Comparable privatisations have shown that transparency and flexibility correlate indirectly: governments need flexibility in the selection process, however, this adds complexity, increases costs, and reduces transparency. This is interesting, because it demonstrates that the usual perception – to be able to reduce the cost and complexity of a selection process by being more flexible – is just not right.

In line with the reduction of ‘flexibility’ the tendering authority should offer the bidder a well-considered, but fairly rigid setup for his bid. However, being driven by ‘national’ expectations, the offered contract must comply with international standards. A number of international standards exist – for the development of projects and legislation (UNCITRAL, EBRD, EIB, UN) as well as for standard contracts (LMA, FIDIC, NEC). These international standards, among other things, are making the project bankable, which is a point that is often ignored by national authorities. An improved ‘bankability’ allows not only international financial institutions (IFIs), but also commercial and investment banks to be part of the financing structure, which usually attracts more bidders to the process.

Are domestic bidders preferable, as requested by some public voices? The answer is a clear ‘No’. National players should be given a chance to participate in both PPPs and privatisations via consortia and as subcontractors in order to pile up national expertise. However, Croatia should have learned its lesson from its privatisations in the early 1990’s that any exclusivity or significant preference for local bidders severely impairs the quality of the acquirer.

Timing of privatisation

The question remains whether there is now a trend to privatise infrastructure companies in the region. The Serbian and Bulgarian governments are currently amending their PPP legislation; others at least check whether their legal frameworks fit future requirements (Slovakia).

The Croatian government (together with the city of Zagreb) is currently preparing to privatise Zagreb airport. It would be a good sign to investors that the Croatian Government has taken the initiative. International examples for successfully privatising airports exist. But maybe there are even more examples for successful PPPs in this regard, like St Petersburg, Budapest and Athens. Outside Europe, many airport PPPs have been implemented or are going on, such as Hyderabad, Mumbai and Delhi Airports in India, along with Hong Kong and Manila.

After all, it remains a tricky and sensitive issue, especially because of the great public awareness of such projects, and because elections like the ones in autumn 2011 usually add emotional arguments to pragmatic ones.