The move was supported by the Latvian Parliament on May 17, while it rejected a proposal from the opposition Social Democrat's to suspend the privatization.
The government decided not to go on with the Latvian Shipping Company's sell-off under the current privatization regulations as the two companies approved as bidders for an auction scheduled for earlier this month failed to pay a $5 million security deposit by the deadline of April 27.
Economy Minister Aigars Kalvitis said that the government adopted the resolution unanimously and, despite serious debate, no Cabinet member questioned the need to continue the Latvian Shipping Company's privatization process.
He confirmed earlier unofficial reports that the minimum price of 70 million lats ($110 million) had been set up for 68 percent of the company's shares.
A significant delay in the shipping company's sale or considerable changes in its terms could jeopardize a second $40-million structural adjustment loan from the World Bank, Agence France-Presse reported.
If the Latvian Shipping Company's privatization were halted "it would be hard for the bank to continue working" on the loan, said Jos Verbeek, the World Bank's senior economist for Poland and the Baltic states.
The bank opposes opening the tender to non-strategic investors, he said in an interview from Warsaw. "It would be difficult for us to swallow. Opening it up to non-strategic investors would most likely not be swallowed," he told AFP.
The sale was widely seen as a test of the country's economic management as it prepares for membership in the European Union, AFP said.
The Latvian Privatization Agency believes that the new privatization terms should be more flexible than the previous ones which were created quite strictly and cautiously, the agency's representatives said.
Agency head Janis Naglis also suggested that the idea of a strategic investor be dropped, thus widening the circle of potential buyers. Naglis said that the most sensitive spot in developing the new privatization terms could be setting the minimum sales price, which would have to take into account previous experience in attempting to privatize the company.
However, while Naglis calls the privatization rules strict, international experts call them simply "stupid." Claude Hovnanian, an expert for the international anti-corruption watchdog Transparency International, said that two different systems of privatization - international auction and competitive bidding - have been mixed together in these terms. "I think it's the main reason why there is no auction today," he told journalists on May 11, the same day the privatization agency predicted the auction to take place.
However, Hovnanian denied possible corruption involved in the privatization process. "I haven't found any hint of corruption," he said. However, he noted that the atmosphere of suspicion might have scared away some potential investors. "I thought (earlier) that it was biased and written for a specific company. I think that my feeling was shared by potential candidates who didn't come. In fact, it was a mistake made in privatization regulations," he admitted.
The Italian company d'Amico, which was among the two remaining bidders, went public after the failure to pay the deposit.
Speaking on Latvian TV on May 9, d'Amico representatives said the company wanted to continue its participation in the privatization process and hoped that the government would not start everything anew, otherwise the Italians will withdraw from the game.
"If d'Amico quits, it may be the last large Western company displaying interest in the Latvian Shipping Company. If the process starts anew, only one bidder may be left, most likely from Russia," the Italians said.
Raita Karnite, the director of the Latvian Institute of Economy and another Transparency International expert, supported that view.
"It would be wise to continue the negotiations with the company which had expressed serious interest," she said. "D'Amico is a good company and the privatization outcome could be good."
Confirmations of interest in bidding for the Latvian Shipping Company were received from a total of six companies, including Russia's LUKoil Arctic Tankers, 60-percent owned by LUKoil, as well as Gazprom and Morskiye Perevozki, both from Russia, the Latvian Privatization Agency said last week.
Letters of interest were also submitted by a Singaporean consortium led by Keppel Shipyard Ltd., which is 100-percent owned by Keppel Hitachi Zosen Ltd., which in turn is 61-percent owned by Keppel Corporation Ltd.
Other companies expressing interest included Saudi Arabia's FAL Oil Company and Liberia's Talloco Holdings Inc., a subsidiary of Luxembourg's d'Amico International S.A. which is 99-percent owned by Italy's d'Amico Societa de Navigazione SpA.
The agency said that Gazprom and Morskiye Perevozki had only sent a simple letter, stating their interest in taking part in the privatization. These letters were received after the deadline set at midnight on Feb. 1, 2001.
The other four potential bidders submitted their documents before the deadline, but the papers were partly incomplete.
Three potential bidders for the shipping company paid the participation fee of $5,000 and signed the confidentiality agreement, but initial price offers were made by only two of them. Talloco Holdings Inc. bid $22.4 million and FAL Oil Company's bid was $70 million.
Hovnanian noted that there is not much time left for Latvia to tiptoe around the privatization. "If you look at the present financial statements of the Latvian Shipping Company, they made profits. If nothing is changed, in two years it will be shrinking into a very small shipping company," he said.