Financing pulled from under railway deal

TALLINN - Just as the company Baltic Rail Services reaches the final step in the prolonged privatization of the state-owned railway transport giant Eesti Raudtee, it has found that it might not get the share in the state-owned railway it has been waiting for.

On July 24 Hansapank and Swedbank decided to withdraw from the bank syndicate organized to oversee the deal, and the European Bank for Reconstruction and Development announced it would postpone the approval of a loan in order to get more detailed information about the deal.

BRS was supposed to borrow 360 million kroons ($23 million) from the syndicate, which includes the EBRD, in order to finance the privatization of 66 percent of ER by Aug. 31.

Katrin Kivi from the state's privatization agency told The Baltic Times two weeks ago that BRS was ready to conclude the deal before Aug. 31.

Neither Hansapank nor the EBRD explained its decision to the media, but some observers believe it was influenced by an announcement from the Riigikontroll, the state audit office.

The Estonian State Audit Office announced on July 16 that the Estonian Privatization Agency had incurred large, allegedly unlawful financial obligations to the state with the privatization and asked the state prosecutor's office to investigate whether criminal proceedings should be started.

Prosecutors concluded there was no evidence of a crime. The negotiators had the right to conclude the deals and the additional obligations seemed harmless to the state, they said.

According to Kivi, negotiations will fail if BRS does not find the necessary financing by the end of August. She said that a new tender would be held and the privatization agency would not continue with the third bidder, Raudtee Erastamise Rahva AS, although that company is interested in replacing BRS.

"It's not possible to start with the third bidder. The privatization process has gone too far," said Kivi.

The privatization agency signed a contract with BRS for the privatization of 66 percent of the shares in Eesti Raudtee on April 30, 2001, after it emerged that the representatives of Rail Estonia, the first bidder, had a shady background.

Guido Sammelselg, chairman of the board at BRS, said that the management of the consortium would gather on Aug. 10 either in London or Tallinn to discuss further action.

"There are, more or less, two ways of financing," he said. "BRS will either cooperate with a strong financial partner or it'll take the opportunity to pay the purchase price itself."

On July 24 Sammelselg announced that BRS is negotiating with the Emerging Markets Partnership, the adviser to AIG Emerging Europe Infrastructure Fund, on financing the privatization.

"We cannot deny that Hansapank's decision came totally out of the blue, but it is the kind of decision that cannot be repealed," he said. "The EBRD has confirmed its interest in financing the development of Eesti Raudtee and we have no reasons to doubt it."

Edgar Savisaar, head of the Center Party, leaped at the opportunity to criticize the controversial railway privatization process. In an open letter on July 24 he praised the EBRD's move to postpone the deal.

"It seems that the authoritative international banking organization has finally understood that the given privatization has been prepared by the Estonian government and carried out purely for political reasons, while economic reasons have been put aside," he wrote.

"The arbitrary action of the officials, the court rulings, the corruption, the lack of political consensus and the critical opinions of the state audit office and the legal chancellor do not increase its reliability," he added.

Evelyn Sepp, a spokesman for the Center Party, admitted that the party didn't have enough votes in Parliament to stop the privatization of the oil shale power plants in the northeast of the country and Eesti Raudtee. Eesti Raudtee should be controlled by the state, because, she said, it is a profitable business.

"If it is sold, it should be done profitably and transparently," said Sepp.

ER and BRS have had difficulties in agreeing on the purchase of locomotives. BRS is planning to replace the rail company's fleet of locomotives with American-made locomotives, while Eesti Raudtee prefers Ukrainian locomotives.

According to Sammelselg, BRS is optimistic and hopes that the "privatization saga" will end positively in the near future. "This is necessary for the state, for the privatizer and above all for Eesti Raudtee itself," he said.

BRS is a special purpose company registered in Estonia, which was established to participate in the privatization of Eesti Raudtee. Its shareholders include the U.S. rail operators Rail World Inc. (25.5 percent) and Railroad Development Corporation (5 percent), a subsidiary of the British infrastructure group Jarvis International (25.5 percent) and Ganiger Invest (44 percent), which is led by Estonian businessmen Juri Kao and Guido Sammelselg.