Putting it mildly, Prime Minster Ivars Godmanis has made his first bad decision. (More ominously, he has shown that his government intends to preserve the "fubar zeitgeist" prevalent in Latvia.) On Jan. 17 he announced that the government would not accept a buyout deal for Lattelecom, the country's dominant fixed-line operator, a transaction that would have brought a tremendous sum of cash to state coffers and closure to the company's much-maligned privatization saga that began in 1993. The reasons for the rejection were opaque 's and therefore unconvincing 's and the prime minister left many observers wondering what his real motivation is.
Regardless, thanks to Godmanis' myopic decision, or simply the bad advice he received, Latvia stands to lose a phenomenal amount of money. The original transaction, designed by Lattelecom CEO Nils Melngailis and approved by the government last summer, was complex (see story on Page 6), but in contrast to past privatizations, it at least guaranteed the state an attractive price for its assets (Latvia's last major privatization, in October 2006, saw an oil terminal sold via an auction designed for selling fresh fish and flowers).
In a nutshell, the deal called for TeliaSonera, a Swedish-Finnish corporation, to take over LMT, a mobile operator and for years the most profitable firm in Latvia, while Lattelecom managers and employees, backed with foreign financing, would have controlled their company. In exchange, the government would have received some $600 million, or more than 3 percent of GDP.
Such a windfall comes all too rarely, and for Latvia represented a chance to establish a "rainy day" fund that could be utilized in direr times. Alternatively, the funds could be used to build the national library, a project the entire nation could benefit from. Instead, Godmanis balked, and for reasons that he proved woefully incapable of vocalizing.
As Melngailis confessed to journalists, he believes that the government did not consider the company's targets and financial needs when making the decision. Sadder still, the government didn't consider the country's own goals and needs. This was endemic of Aigars Kalvitis' government, and appears will be the modus operandi of Godmanis' Cabinet, which has 16 of the same 19 ministers.
No one knows what will happen next. Godmanis suggested half-heartedly that TeliaSonera sell its 49 percent stake in Lattelecom to a European investor, after which perhaps the government could offload its 51 percent interest. This, of course, is absurd. No strategic investor will pay for a 49 percent stake if it is unsure of the fate of the "other half."
He also mused that the state might auction off its 51 percent. This is equally senseless. First, it won't fetch as much money if the shares are sold in small units. Cash premiums are paid for controlling stakes. Certainly the prime minister knows this. Second, the current situation on international financial markets is not conducive to either public auctions or private tenders, and may not be so for some time to come.
Another possibility is that TeliaSonera will walk away with controlling stakes in both Lattelecom and LMT, which is precisely what the previous government went to great lengths to prevent. This doesn't have to be a bad outcome if two conditions are met: 1) the government maximizes revenue in the subsequent privatization, and 2) competition on the telecommunication market is guaranteed.
Another drawback is that Melngailis is likely to resign his post now that the deal has fallen through. He has been a good manager for the company, and it will be a shame if he goes. But understandably, one can tolerate working under incompetent governance for so long.