Economy pushes state asset restructuring

  • 2010-07-28
  • Staff and wire reports

YOU’RE FIRED: Managers of state-owned companies are turning in poor results overall.

VILNIUS - Dig into the political undergrowth anywhere in the region between the Baltic and the Black Seas and one soon finds curious connections between state-owned enterprises, officials and politicians. They mostly escape public scrutiny - not least because politicians of all stripes tend to benefit from the state firms’ largesse, claims an article in the British weekly The Economist. Lithuania’s government, faced with unpopular tax rises and spending cuts as it tries to reduce its deficit of nearly 9 percent of GDP, has just launched a rare attempt to run these firms properly.

A new analysis shows that state-owned assets in energy, transport and land at the end of 2009 were worth some 18 billion Lithuanian litas (5.2 billion euros) but provided only 45 million litas in dividends. This represents a return on equity of negative 6 percent. In other words, this is a gross destruction of value with Lithuania’s state-owned assets.

A glaring example of mismanagement comes from the forestry industry. Lithuania has 830,000 hectares of state-owned forests, run by 42 companies. The average yield in 2008 was only 4 litas per cubic meter of wood (a quarter of the Swedish figure), and even that trickles away into company costs: the state receives no dividend. The government now proposes to set up a single forestry company, charged with managing the industry on a commercial basis.
It has similar plans for state-owned property: in the future, ministries and other public bodies, many of which have notably spacious buildings and compounds, will have to pay market rents. When that was tried in Estonia, it led to sharp downsizing.

The plan to overhaul Lithuania’s 300 state-owned companies, presented in Vilnius on July 14, aims to increase the paltry level of dividends, and to later sell stakes in the companies, Finance Minister Ingrida Simonyte said in a telephone interview, reports Bloomberg. “The biggest benefit is the fiscal effects that this may bring,” she added. The revenue may amount to 1 percentage point of GDP and “this is especially important when we have a substantial consolidation to do and the economic upturn is still very fragile,” said Simonyte.

Prime Minister Andrius Kubilius’ government pushed through one of the EU’s toughest austerity packages last year, with budget cuts equal to 12 percent of GDP as the economy shrank 14.8 percent. The IMF expects GDP to grow 2 percent this year, it said on May 24. The government sees a 1.6 percent expansion.

Kubilius aims to narrow the deficit to 3 percent of GDP in two years, from 8.9 percent last year. That will require further spending cuts of about 5 percent of output, Kubilius said last month. The European Commission on May 5 forecast a shortfall of 8.4 percent of GDP this year. The 1 percentage-point goal may be “feasible” in 2012 through the efficiency program introduced on July 14, Simonyte said. The companies may become net contributors to the budget within a year, she notes.

The government would also offer shares in the companies, including state railway operator Lietuvos Gelezinkeliali, the energy holding company LEO LT, and postal service Lietuvos Pastas. Since joining the EU in 2004, Lithuania’s biggest asset disposal was the sale of oil refinery Mazeikiu Nafta to Poland’s PKN Orlen.
Investors are looking more favorably on Lithuania. The yield on Lithuania’s bond due 2020 fell to 6.55 percent on July 14. That compares with a 7.6 percent yield in February.

The Vilnius Nasdaq OMX stock index is up 18 percent this year. The cost of protecting Lithuanian debt with credit-default swaps fell 10 basis points (0.10 percent) to 257.57 on July 13, according to CMA DataVision.
The country has secured investment this year from Barclays PLC, Western Union Co., IBM Corp., Moog Medical Devices and Systemair. The government seeks to double the level of foreign direct investment in the next five years, Economy Minister Dainius Kreivys said in an interview on June 22, aiming at luring 20 billion euros, after attracting half that much in the 20 years of independence from the Soviet Union.

In the other Baltic states, Estonia and Latvia, asset sales have been piecemeal. Baltic Rail Services, a group of local and international investors, in 2001 paid 1 billion kroons (80 million dollars) for 66 percent of Eesti Raudtee and pledged to invest another 4.7 billion kroons by 2010. The stake was bought back by the Estonian state for 2.3 billion kroons in 2006. Stockholm-based Swedbank bought the 40 percent of Tallinn-based Hansapank, the largest Baltic bank that it didn’t already own, for 1.7 billion euros in 2005.

Latvia last sold an asset when it auctioned off its 38.6 percent stake in refinery Ventspils Nafta to the Vitol Group in October 2006 for 74.2 million lats (106 million euros). Prime Minister Valdis Dombrovskis (New Era) said on July 2 the government was carrying out an inventory of all state-owned enterprises and assets.

Lithuanian asset sales would attract private capital and increase accountability, though initially the state would hold on to a majority of the shares for a year or two, said Simonyte. “Nobody can preclude privatization when the time is right, or when it’s the best option, but we see that, at least in the beginning, there is a need to improve the return on the assets,” she said.
The government plans to introduce more professional management, set clearer goals, maximize the value of the enterprises and make their operations more transparent, according to the review. The book value of the assets is equivalent to about 25 percent of the economy, making the government the biggest owner of commercial assets in the country and the biggest single employer, according to the July 14 review.

The state companies had revenue of 8.4 billion litas last year, compared with 9.4 billion litas in 2008, the review shows. The negative 6.1 percent return on equity last year compares with 0.1 percent in 2008, according to the review document. If Lithuanian state assets were run as efficiently as in Sweden or Finland, the government could generate revenue equivalent to 1.5 percent to 2.5 percent of GDP, Kubilius wrote in the review.

But sorting out the mess will mean overcoming some of the most powerful lobbies in the country. For nearly 20 years they have stymied all attempts to introduce public scrutiny and competitive pressure on their cozy business arrangements. Lithuania’s president, Dalia Grybauskaite, a former European Union budget commissioner, has thrown her weight behind the plan. She said the new report revealed “powerlessness and lack of responsibility.” The black economy-smuggling and corruption represented a “mass of reserves,” she said, which would be a better source of revenues for the state than raising taxes.

That may be optimistic: though some of the money siphoned off from state enterprises goes into foreign bank accounts, much is spent at home. Higher revenues for the state will come at the cost of lower rents for its cronies, and less spending.
Despite the element of double-counting, the scheme has attracted interest from outsiders such as the European Bank for Reconstruction and Development. Bankers close to the scheme think a similar approach could also work in southern European countries like Greece. Better-run state industries would also be more attractive candidates for privatization, which, after vigorous efforts in the 1990s, has largely stalled in the ex-communist world.

But as it’s now popular for Lithuanian officials to promote the plan for a partial sell-off of at least some firms once they are better run, even the most rigorous politicians may ultimately find it hard to sacrifice the state-owned firms’ adhesive attractions some enjoy.