Privatisation. The Lithuanian way

Date: 17/01/04

A botch-job in the Baltics

FOR a small country, Lithuania has had some big problems privatising state-owned industries left over from Soviet days. The sale of the biggest of them, the Mazeikiai oil refinery in 1999 - to an American firm which quietly moved it on to a Russian one - caused so much fuss that the then prime minister, Rolandas Paksas, resigned in protest and then exploited public anger at the deal to win an upset victory in a presidential election three years later.

Lithuania's recent sales of two state-owned alcohol firms have been similarly colourful, if on a smaller scale. One of the deals collapsed in October when the supposed buyer, an Italian, failed to turn up at the signing ceremony. The other provoked a flurry of protest when the top bidder, a firm from neighbouring Latvia, was rejected in favour of an underbidder from Lithuania. A parliamentary inquiry has since found that the local firm got leaks of confidential information about the deal from Mr Paksas's office. That charge forms part of the impeachment proceedings which the parliament launched against the president in December.

Now the Lithuanian government may be about to botch another deal. Last autumn, it put the country's electricity-distribution industry up for sale, in the form of two firms, one serving the west of the country, the other the east. The sale of the western firm was aimed at domestic investors, and went smoothly. Not so the sale of RST, serving the eastern half of the country, which was offered to foreign investors.

RST has attracted a serious bidder at a serious price - about €150m ($190m). The trouble is, the bidder comes from Estonia, Lithuania's even smaller near-neighbour in the Baltics. Regional rivalry runs deep, and selling out to uppity Estonians may be more than Lithuanian pride can bear.

Lithuania wanted a buyer from western Europe. But its best hope, a German company, E.ON, dropped out at the last minute, leaving Estonia's Eesti Energia as the only contender. Eesti Energia's offer is valid until March, but a Lithuanian parliamentary committee has already advised postponing the sale of RST for a year or two, and the embarrassed government seems sorely tempted to agree.

To explain its reluctance, Lithuania claims that Eesti Energia is too small and too indebted to inspire confidence as an owner. It is also a state monopoly that, says Lithuania, will have to be restructured and probably privatised in its turn, making the final ownership of RST uncertain.

These arguments ring hollow. Though a tiddler by world standards, Eesti Energia is five times the size of RST in profits and assets. Its credit rating is higher than Lithuania's own sovereign rating. It has been restructured already into separate accounting and operating units, meeting European Union rules in preparation for Estonia's EU entry in May. It may be privatised sooner or later, but probably through a public offering rather than a trade sale.

Besides, says Eesti Energia, the Baltic countries have similar strategic interests. They all fear dependence on Russia. If Lithuania is worried about an eventual Russian takeover of its power industry, then that is a worry which Estonia shares at least as strongly.

Eesti Energia is pushing for regional consolidation. Three years ago it sought a merger with Latvia's state power-monopoly, Latvenergo, but was blocked by political opposition. If it cannot get RST, it is likely to turn its attentions back towards Latvia. And it can hope to get its way in Lithuania after EU enlargement in May, when companies from all EU countries will have to be treated equally.