Under the regulations approved by the Cabinet of Ministers on Dec. 12 an auction will be held for a controlling 68 percent stake in the company, rather than the 34 percent stake offered at the last attempt to privatize it. The initial auction price will only be determined by the Cabinet of Ministers after initial expressions of interest and offers have been received, says the privatization agency. A further 15 percent of shares will be offered to the public, who may use privatization vouchers (due to expire at the end of 2001) to buy them. A 6 percent stake will be given to company employees and pensioners, and 10 percent will be transferred to the state pension fund. The regulations have been drawn up in consultation with a consortium of financial advisors, and with the support of the World Bank, says the agency.
The agency's head, Janis Naglis, is confident the sale will be a success. "I'm totally sure there will be enough interest," he said. "The government will not retain a golden share in the company. There will be no complications." Basil Kavalsky, the World Bank's country director in the region supported Naglis' prognosis, albeit guardedly. "We will have to see about Latvian shipping. Our sense is there will be interest from investors," he said.
"But there is always a tension between governments' perception of what a country's assets are worth and what investors are prepared to pay. Governments have to be realistic." Maris Manchinskis, head of investment banking at Hansabanka's Latvia office found the plans less convincing. "This will be a very tough sale," he said. "Gaining investors' interest will be the biggest problem. Hopefully there will be some interest, but I haven't seen much. Prices in the shipping market have picked up since a year ago, but shipping is not the most attractive industry and it's difficult to achieve synergies in the Latvian commercial space. Economically it makes no sense to keep the company in Latvia because of the tax laws here. But relocating it would go against the government's goals."
The more open sell-off procedure was praised by Guntars Krasts MP in the right-wing For Fatherland and Freedom party, a partner in the governing coalition. But examination of the fine print of the plan reveals serious flaws, he says. The time scale proposed by Naglis, for an auction in late-March or early-April, is too short, says Krasts. Making the company's managers responsible for informing potential investors about the state of the company is also a mistake, he said, since the current inefficient management stand to lose their jobs if privatization succeeds.
Another problem, says Krasts, are restrictions lasting three years on the strategic investor selling shares, or using them to guarantee bank loans, restrictions Krasts believes will hinder restructuring and badly-needed modernization of the fleet. Having expressed an interest, potential investors will also be asked to put up a $5 million guarantee of participation in the auction, he says.
"Such terms are very difficult to understand," said Krasts.
"I'm not sure that privatization will go ahead. No one will be interested."
Meanwhile, uncertainty surrounds the future of the Latvian Privatization Agency, liquidation of which is due to begin on Jan. 1, 2001. Rather than creating a new, slimmed-down organization, the agency's responsibilities are more likely to be distributed among the relevant ministries, says Naglis. "This would not be the cleverest move," he said. "But unfortunately there is no clear decision. It's difficult to say who will own the Latvian shipping company before it is privatized."
For Krasts, liquidation of the Latvian Privatization Agency cannot come soon enough. "The agency couldn't have managed privatization worse," said Krasts. "The situation is tremendously different from Estonia. Privatization of the industrial sector has been carried out in such a way that we can't see any source of real economic development in the next three to five years. "
Kavalsky of the World Bank takes a different view. "The Latvian Privatization Agency has built up a very capable core team, who I hope will be retained," he said. "There is still a role for the agency."
The decline in Latvian manufacturing should not cause undue concern, says Kavalsky. "As far as the real economy is concerned last year was encouraging," he said. "Latvia has an interesting niche linking East and West. Light manufacturing will develop but Latvia's future lies in the development of financial mediation and services, linking the EU with Russia. Having a significant number of Russian speakers in the population will be a great asset. They should be appreciated, not seen as a cost."