Estonian government threatens to terminate railway privatization

  • 2006-04-26
  • By TBT staff
TALLINN - The government has approved a proposal to terminate the privatization of Estonian Railway, claiming the invester has failed to meet its obligations. The decision amounts to a final warning for Baltic Rail Services, the private company that owns 66 percent of Estonian Railway and has been at loggerheads with the government for several months now. The company is likely to be given 60 days to meet its commitments, or else it will be stripped of ownership.

The Ministry of Economy and Communications came forward with the proposal on the basis of several grave breaches in the privatization agreement.
"BRS's behavior up to now shows that it does not take the state as a serious contract partner. They have followed the privatization contract only as much as they please," Anu Hallik-Jurgenstein of the Economy Ministry's public relations department told The Baltic Times.
"BRS said the privatization contract should be handled as a document that changes and develops over time, which should not be followed or completed in a random way. For this reason, it is inevitable that the state will be forced to get their contract partner in order," the spokesman added.

The ministry also stated that Baltic Rail Services violated the agreement by pledging 6 percent of Estonian Railway's stock as collateral against bank loans without the government's consent, and has taken the ministry to arbitration court over the so-called golden share that the state owns.
Officials from BRS, who are trying to sell their stake in the company, blasted the ultimatum, saying Estonia now has its own Yukos, referring to the Russian oil company that has been systematically dismantled by the Kremlin.

"Yesterday evening [April 20], Estonia got its own Yukos," said CEO Edward Burkhardt in a press release. "Certainly the Estonian government's actions are a direct parallel to Russia's treatment of Yukos shareholders, but this is happening in a nation that claims to have renounced its Soviet past."
He added, "Of course, we do not believe that in a European Union member state such actions will be successful, but the panic-driven and uncivilized intent of the government is clear 's to make a populist argument and to turn private investors into enemies in an effort to cover up its own mistakes."
Burkhardt defended BRS' performance as chief operative of Estonian Railway for the past five years. "This privatization has met every objective set forth by the government. Most importantly, they have cleaned up the pervasive internal corruption that existed during the period of state ownership," he said.
Burkhardt went so far as to claim that the government was carrying out the interests of the Russian transport company Severstaltrans.

The state owns 34 percent of Estonian Railway. Edgar Savisaar, the economy minister who has spearheaded the government's hard-nosed campaign against BRS, stressed that termination does not mean nationalization. "The owners of the company will be paid the full price of their holding, consisting of the sum paid to the state for the stake plus the investments made in the company. Payment to make up for price rises in the meantime in a justified amount will probably also be made."
If BRS contests the contract termination with the Stockholm Court of Arbitration, a legal battle lasting for two to three years, or even longer, can be expected, the Economy Ministry predicted. The majority stake would remain in BRS' possession for the duration of the court proceedings.
BRS stated that, according to agreements between itself, the state and Estonian Railway, the only way to settle differences is through the Stockholm Court of Arbitration. "BRS and Estonian Railway cannot accept a one-sided rescinding of agreements, and intend to force the state to accept responsibility damages to investment and other damage caused by its irresponsible and unlawful acts," the company said.

Burkhardt said he was confident the plan to terminate the privatization wouldn't succeed.
According to BRS board member Juri Kao, the Economy Ministry is in a panic due to a number of mistakes made in relation to the rail company. "The minister's [Savisaar's] proposal to nationalize the railway is colored by emotion and cannot be carried out in reality," he said.
He explained that the ministry has ended up in a highly embarrassing situation, characterized by vital mistakes and violations of EU law, international agreements and domestic legislation. "The minister is trying to come up with new topics in a rush, but unfortunately many of [his] statements contain false information," Kao said.
MP Meelis Atonen, a former economy minister and former member of council at Estonian Railway, questioned the judgment of BRS executives.

"Unfortunately the owner of Estonian Railway has not understood that Estonia is a European country and, since 2004, a member of the European Union. They expected a comparatively aggressive change in orientation from European railway regulation to an American one," he told The Baltic Times. "In this situation, the state can not do much besides terminate the privatization contract."
Meanwhile, a leading daily, Eesti Paevaleht, claimed that the real reason for the move lies in a report by the Security Police and Information Board, the agency in charge of foreign intelligence, claiming that Estonian Railway could fall under the control of Russian investors.
Among investors interested in acquiring BRS's majority holding in the rail company are Transgroup Invest, a company with a Russian background that owns the coal terminal at the port of Muuga, and the Russian investment company Prominvestors (Industrial Investors) owned by Sergei Generalov.

Defense Minister Jurgen Ligi hinted to Eesti Paevaleht that the security police report drew attention to various risks in the event that Eesti Raudtee passed under Russian control.
Regarding Sevelstaltrans, a Russian company that owns Starman, the rail freight operator that has locked horns with BRS, Burkhardt said the state's support was manifest in its refusal to allow BRS to revalue Estonian Railway's assets.
If, for example, Estonian Railway could raise the value of its assets to 6 billion kroons (383.4 million euros) as desired by private shareholders, this would raise fees that rail operators providing goods carriage services on Estonian Railways' tracks have to pay. This would cut Severstaltrans' operational profitability in Estonia, Burkhardt said.
The present infrastructure user fee is half of what is reasonable, he said, adding that Estonian Railway would survive for a few years under such conditions but eventually it will start telling on the quality of infrastructure.

According to Burkhardt, the close ties between the government and Severstaltrans are also evidenced by Severstaltrans chief Andrei Filatov's advice that Baltic Rail Services should sell its 66 percent holding back to the state of Estonia.
Private shareholders of Estonian Railway have reportedly filed a 5 billion kroon (319.5 million euro) claim in Washington against the state of Estonia, a suit that Savisaar calls artificial and preposterous.

Kairi Kurm contributed to this report.