Privatisation

In mid-December 2010, the portfolio of the Croatian Privatisation Fund (CPF) comprised 769 companies of which 720 companies were available for privatisation and their equity capital stood at HRK 55.3 billion, of which HRK 13.1 billion were in state ownership. Although 54 companies were privatised in the period from September 2009 to mid-December (2 by sale through a public tender, 20 on the Zagreb Stock Exchange while 32 companies were deleted from the court register following completion of bankruptcy or liquidation procedure), the structure of the portfolio in terms of the number of companies and ownership shares remained almost unchanged in 2010 compared to the previous year. Thus, CPF is a minority owner with up to 25% share in equity capital in 80.75% of companies (621 companies). In 68 companies, it holds between 25% to 50% shares and in 80 companies, the government is still the majority owner, holding over 50% share.

The slowdown in the process of privatisation, with bankruptcy and liquidation, and to a lesser extent the sale of minority shares on the Zagreb Stock Exchange, as the main generators, is still due to the similar factors as in the previous years. On the one hand, highly indebted, mainly loss- generating companies in the portfolio which require significant restructuring are not attractive to potential investors at present conditions. On the other hand, a slowdown in the economic growth in the environment and a slowdown in international capital flows led to a fall in interest, particularly of foreign investors, for participation in the process of privatisation. Twenty-six public tenders

announced from September 2009 until end-November 2010 for the sale of majority shares in 21 companies resulted in privatisation of only two companies.

Although the time limit for the submission of bids under the second tender for the privatisation of five shipyards and one subsidiary in majority state ownership expired in May 2010, no final decision has as yet been made with regard to privatisation of three companies (Brodotrogir d.d, 3. Maj d.d. and Brodosplit d.d.) for which four bids were received. Pursuant to a Decision of the Government of the Republic of Croatia of 22 October 2010, the third tender for the privatisation of

the shipyard Kraljevica was announced and on 18 November 2010, three bids were received.12

Tenders for the sale of 6 companies in majority state ownership and 87 companies in minority state ownership are currently underway. The completion of privatisation of the largest share of the remaining CPF portfolio, as one of the preconditions for the creation of an efficient market economy and efficient and comprehensive organisation of the remaining state property management, remain the main economic policy objectives in the area of state property management. This objective is also defined in the Economic Recovery Programme adopted by the Government in April 2010 and the Economic Recovery Programme Implementing Activities Plan of 6 May 2010 which outlines specific measures and activities and the expected dynamics of their realisation.

In accordance with the set objectives and measures aimed at centralising state property, the Government of the RC submitted to the Parliament procedure in September 2010 a draft State Property Management Act which envisages the joining of the Croatian Privatisation Fund and the Central State Administrative Office for State Property Management into a single institution, the State Property Management Agency. The joining of these institutions is expected to yield positive synergetic effects such as more efficient state property management, balanced state property management, increased value of state property and reduction in operating expenses. State property management would be based on a four-year strategy adopted by the Croatian Parliament, and an annual operating plan adopted by the Government of the RC. The draft Act also envisages the establishment of a comprehensive register of state property.

As the Economic Recovery Programme also envisages “fast privatisation of the remaining shares

in companies, except those that supply goods and services which the private sector cannot, for good reasons, be expected to supply efficiently”, the draft Act envisages, in addition to the existing

sale models (through the stock exchange and public tenders) other privatisation models such as that which makes it is possible for the Agency to accept bids in take-over procedures, and other models such as IPO organisation for selected companies, public invitation for Agency portfolio company recapitalisation, etc.

The first steps towards centralised management of shares and stakes in state ownership have already been made with the enactment of a Decision on the transfer of all shares and stakes in state ownership to the Croatian Privatisation Fund in April 2010. Until the writing of this document,

12 _{Compared to the previous tenders, the text of this tender defines in more detail, in addition to the previously defined} amount of own contribution (40% of total restructuring costs), the terms of reference (increase in the initial capital, investment in material and immaterial assets, loss coverage, ensuring the necessary working capital during restructuring, assumption of existing liabilities, redundancies as an issue to be dealt with by the Tenderer, i.e. the Company, etc.) as well as the upper limit for production capacity alignment (maximum 21.15% in the context of compensation measures agreed with the European Commission) and leaves out additional conditions such as employee participation in the purchase of a part of the shares following recapitalisation and reaching an agreement with social

shares of 22 companies had been transferred to the CPF. Also, with a view to achieving faster and more efficient management of shares and stakes, annexes to the agreements with the owners of shares and stakes in CPF portfolio (mainly state budget users such as Croatian Institute for Health Insurance, Croatian Pension Insurance Institute, ministries, and central state administrative offices) are being signed currently which provide that it is no longer necessary to require prior permission of owners for sale, the practice which has until now slowed down the process of preparation of companies for privatisation.