Railway sell-off halted by lawsuit

  • 2001-01-25
  • Edvinas Butkus
An ambitious Estonian business group waited until the last possible moment before putting a temporary halt to the Estonian railway privatization last week, forcing the tender winner to prove to the Estonian authorities that it has a strategic investor from North America.

The sell-off agreement is now expected to be delayed by at least a fortnight provided there will be no further appeals. However, Eesti Raudtee CEO Parbo Juchnewitsch has already said that a delay in the privatization of the company may reduce transit flows through Estonia.

The Tallinn Administrative Court issued an order on Jan. 17 to suspend proceedings in the privatization of 66 percent of the shares in Estonian railway as it accepted a lawsuit by Railway Privatization People's Ltd. Co. (Raudtee Erastamise Rahva AS, RER), the bidder that placed third in the privatization tender, seeking to cancel the outcome of the tender.

The order halted the privatization proceedings until at least Mar. 14, when the court is scheduled to gather for a session.

RER manager Rain Tamm told the Baltic News Service that as the process was ordered to halt pending a final ruling, the privatization is likely to be in for a standstill "for months" as decisions may be appealed with higher level courts.

RER, a consortium of local business people and Sweden's national rail company SJ, holds that it has sufficient grounds to take court action on the basis of the privatization program and bidding conditions whereby Estonian railway was to be privatized to a strategic investor.

As RER sees it, the privatization agency should have viewed as a strategic investor a legal entity with wide experience of rail infrastructure and rail freight management, sufficient financial capacity to realize its bid, and direct links with the submitted bid.

Kingsley Group, the core investor in the winning bidder Rail Estonia, does not meet the above conditions, and representatives of the bidder itself admitted that the consortium is still looking for a strategic investor.

On Dec. 13, 2000, the Rail Estonia consortium was declared the winner of a tender to buy 66 percent of Eesti Raudtee at a price of 1.71 million kroons ($96 million).

At the moment, 90 percent of Rail Estonia belongs to the international consultancy Kingsley Group, with two U.S. railway firms, CSX Corporation and Rail America, represented by 5 percent each.

Under Estonia's restructuring of its railway sector, Estonian railway owns the track infrastructure, while cargo and passenger traffic operations have been given to other companies.

The head of the supervisory board of the national railway company, Ardo Ojasalu, said that Rail Estonia has delivered on all its promises, including the one to bring in a strategic partner.

"I know what Rail Estonia presented on Jan. 17, and that information satisfies us. They have fulfilled all their earlier promises," Ojasalu, who also serves as an adviser to the minister of transport and communications, told BNS.

He added that the information presented by Rail Estonia showed a strategic partner being involved, and that there are even several large North American companies in the offer.

"We were presented with the general structure of the deal and given the names of companies that have been brought in, and also the financing institutions and schemes were set out," Ojasalu said. "So all the promises have coverage from an economic point of view." But Ojasalu refused to give the name of the partner, explaining that Rail Estonia has not yet publicly named the partner.

Rail Estonia adviser Vallo Toomet confirmed to BNS that a strategic partner was involved, but declined to comment until the court case finds a solution.

The Estonian Privatization Agency and Rail Estonia originally had until the end of February to sign the privatization contract. The shareholders' agreement is almost ready and waiting to be signed, Rail Estonia said last week.

Rail Estonia said it was reaffirming again that it was ready to sign the privatization deal and the shareholders' agreements for 66 percent of the shares in Eesti Raudtee within the time frame set forth by EPA, by the end of February 2001.

The board of Baltic Rail Services, the second-best bidder, has decided against contesting the privatization decision in court. Edward Burkhardt, chairman of the board of the consortium, told BNS that the decision does not mean BRS is going to pull out of the privatization bid.

"Our lawyers find that Rail Estonia's bid does not, never did, and is unlikely to meet privatization conditions," Burkhardt said.

BRS decided against turning to court in order to avoid adding to the tension. BRS is a mixed U.S., British and Estonian consortium.

BRS was ready to pay 1 billion kroons for the majority holding in Estonian railway, while RER's bid was 865 million kroons.