Rail deal unveils shady investors

TALLINN - The privatization deal of Estonia's local railway passenger carrier Edelaraudtee was completed last week, more than eight months after its signature. But a change in investors was revealed as well, leaving Estonian officials astonished and surprised.

It became clear on Aug. 1 that the British firm GB Railways plc, highlighted as a potential investor during the privatization process, actually owned only 20 percent of the Estonian company. It was previously thought that GB Railways owned the entire company.

The remaining 80 percent, however, is owned by two notorious Estonian businessmen.

The revelations cast doubt on the level of transparency that exists in Estonia.

Estonian Transport and Communications Ministry spokesman Aap Tanav said the ministry was taken by surprise when it heard about it.

"We are disappointed that the share of GB Railways is so small," Tanav said.

Liina Tonisson, an opponent of Edelaraudtee's privatization from the Parliament's Center Party, said that it boils down to simple deception. "So far we have been hearing about an experienced Western investor, but instead the buyers appear to be two local businessmen of not the best reputation," she told the Baltic News Service.

The company GB Railway Eesti AS, thought to be owned by GB Railways plc, signed the Edelaraudtee privatization agreement on Nov. 29, 2000. When GB Railway Eesti AS increased Edelaraudtee's share capital by 100 million kroons ($5.6 million) last week, thus concluding the three-year long privatization process, it also revealed the change of ownership. The financing of the deal was organized by Sampo bank and the investment bank Suprema.

To privatize Edelaraudtee, foreign investors used a scheme common in privatization in the Baltic states: forming a local daughter company for a single deal in order to be able to pay part of the sum in so-called privatization vouchers given to all residents. The vouchers are then purchased on the open market for a considerably lower price than their original face value.

GB Railway Eesti AS, formed specifically for Edelaraudtee's privatization and for paying half of the contracted sum of 10 million kroons for the vouchers, was owned by an intermediary company, Railways Holding. This company had changed owners recently, 80 percent now belonging to Edelaraudee Board Chairman Henn Ruubel and Estonian lawyer Marcel Vichmann.

Vichmann, a former lawyer for the Estonian savings bank Hoiupank, is well-known in Estonia because of a lengthy litigation process with Hansabank over the allegedly illegal purchase of Hansapank shares currently worth about 185 million kroons.

Moreover, both have been accused of lacking the proper experience to run Edelaraudtee.

"The local investors have no knowledge of the railway operating business," Tonisson said. "What we needed were investors who could make Edelaraudtee more efficient."

She called the deal "a breach of faith and trust by GB Railways. The reason GB Railways decided to involve local businessmen is probably because of their insolvency," she stressed.

GB Railways plc representative and Edelaraudtee supervisory council member Jim Morgan commented that "it is very important to have as strategic shareholders local, motivated partners prepared to take responsibility for the development of Estonian passenger train traffic."

Katrin Kivi, a financial expert at the Estonian Privatization Agency, told The Baltic Times that the agency was not aware Edelaraudtee would go to the current owners, but that in general there are no restrictions on whether the investor should or must be a foreign or local company.

"It's very usual when a company changes its owner," she noted.

According to the agreement, the company had a right to change owners, and GB Railway Eesti AS did not break the law in this respect, said Kivi. "And there is no threat to the state, as the details of the agreement remain the same. The company still has the obligations it purchased along with the railways," she said.

"I can assure that acquiring an 80 percent interest in Edelaraudtee is a long term investment, not for resale in a few weeks," said Henn Ruubel, Edelaraudtee board chairman and majority owner. "We have to follow a privatization business plan during the next five years, which is backed by bank guarantee, and we have long term cooperation plans and a management agreement with GB Railways plc for their knowledge and know-how."

Vichmann said that at least in the near future he had no intention of interfering in Edelaraudtee's management. "I trust both the present management and the British partners," he stressed.

"GB Railways are experienced and hopefully they will share their expertise with us even though they own only 20 percent of the shares," Tanav said.

Edelaraudtee, the operator of local passenger train lines, was split from the freight arm of the Estonian railway system, Eesti Raudtee, last year. It owns the track and infrastructure on two major local routes, Tallinn-Viljandi and Tallinn-Parnu, and operates shorter lines as well. Edelaraudtee is in quite a bad shape as its losses for the last year were 17 million kroons, the worst ever financial result of the company, according to Ruubel. The privatization agreement provides for annual state subsidies of 60 million kroons.