EU reveals a penchant for encouraging privatisation

Date: 17/04/1997

By Tim Jones

BY AN accident of nature, the European Union has launched itself on a privatisation crusade.

It was certainly not meant to be. At its inception, the EU's founding fathers inserted a guarantee into the Treaty of Rome that the European Commission would always take a completely neutral and dispassionate view of who owned a particular company.

Officially at least, this is how the Commission and other institutions behave.

But the reality is different. The drive towards single markets in services as well as goods is turning public service companies into more commercially-minded enterprises which many governments have come to believe might as well be privately owned.

Now, with the single currency probably only 20 months away, many are also under an imperative to raise cash if they are to qualify for it.

Selling public assets to the market can be politically difficult, but it is considerably easier than raising taxes or cutting expenditure on middle-class welfare.

Recent estimates suggest that assets worth as much as 40 billion ecu will be privatised in the EU this year alone.

This wave of sell-offs is posing new problems for the Union's competition police as governments move to fatten up their assets before sale.

Member states' wishes to prepare their national champions for liberalisation in the fields of aviation, telecommunications, postal services and energy are frequently inextricably linked to the need to raise enough cash to make the sale worthwhile.

Deutsche Telekom, for example, was earmarked for privatisation long ago. At the beginning of 1995, the company was transformed from a public corporation into a joint stock firm in order to give it greater freedom in a market-place in which DT faced the risk of being overtaken by events.

The German government called in Ron Sommer, a 46-year-old Wunderkind from Sony, to revolutionise the firm in time for the onset of EU telecommunications liberalisation in January 1998.

As many as 60,000 jobs needed to be lost and enough profits generated to pay for the firm's 60 billion ecu of debts.

At the same time, the company was looking for sufficient inducements to offer to lucrative business customers to prevent them from shopping around once liberalisation begins.

Even more immediately, Sommer had to make the company a worthwhile investment by the end of 1996, when the government wanted to sell 8 billion ecu in shares to the market - Europe's biggest-ever stock offering.

The government had an interest in making sure this sell-off resulted in as much money as possible going into its coffers.

This meant that DT's position in key markets had to be protected: the fundamental reason for its 'Global One' alliance with France Télécom and American telecoms company Sprint.

The three companies were offering a 'one-stop shop' to business customers; multinational corporations whose internal phone, fax and electronic mail needs are so massive that their bills dwarf those of domestic telephone clients.

Competition Commissioner Karel van Miert had to walk a fine line when he came to vet the deal. After all, he is identified by many in the business world as the force behind the commercialisation of public companies; his actions could not be seen as undermining a genuine attempt by a state-owned corporation to win business.

On the other hand, he could not allow the emerging market for business communications, known as 'closed user groups', to be stitched up by two of Europe's biggest existing operators.

When the link-up was cleared in midsummer 1996, the two companies and the German and French governments agreed to allow some telecoms services on alternative networks, such as those run by utilities and railways, to be established from July this year. They also agreed to keep their data transmission service companies, Transpac and

Datex-P, outside the alliance until liberalisation begins in 1998.

Across the Rhine, the French government is faced with the biggest dilemma of all.

It has to decide whether to sink another 3 billion ecu into Crédit Lyonnais, the state-owned bank which was only saved from collapse two years ago with a massive 7-billion-ecu subsidy, in order to prepare it for privatisation.

The bank seems to be a 'money pit', simply eating the state's hard-earned subsidies which are desperately needed not only so that France can qualify for economic and monetary union but also so it can avoid fines for overshooting budgetary ceilings in the first few years of the single currency bloc.

Yet the government equally wants to wash its hands of Crédit Lyonnais and privatisation is the obvious method.

The only problem is that the bank would be singularly unattractive both to external buyers and to private share-owners if the government opted for a public offering of stock.

It is suffering not only from the terms of the rescue plan approved by Van Miert in 1995, but also from the reluctance of its management to countenance the kind of 'fire sale' that is essential if the bank is to restore itself to financial viability.

At the time of the bail-out, the government injected 7 billion ecu while bad assets worth 20 billion ecu had to be taken off the bank's books and moved into a new entity - itself financed by a 19-billion-ecu loan from Crédit Lyonnais for which the bank only receives 85&percent; of the normal interest rate.

This was Van Miert's way of making it pay for past mistakes, ensuring that other private-sector banks were compensated for the advantages Crédit Lyonnais gained from being bailed out and putting pressure on Lyonnais to shed non-core assets seen as peripheral to its main activities.

Unfortunately, the Commission's 'non-core' differs from that of Lyonnais. The bank's management still believes it can re-emerge as an international player and is clinging on to networks in Asia and the Americas.

While having to deal with Crédit Lyonnais, Paris is facing similar conundra with Crédit Foncier and the country's fifth largest insurance company, Groupe des Assurances Nationales (GAN).

Having already been granted a 430-million-ecu capital injection last year, the latter has come back, cap in hand, for another payment worth billions as a preparation for privatisation.

The Commission is having to take a close look at all these fattening-up aids.

“Promising privatisation to the Commission once a subsidy is paid can often be used by member states who think it is what we want to hear,” said an official. “We do not take these promises at face value and, what is more, we are treaty-bound to remain neutral in the exact form of property ownership.”

They would say that. But the fact remains that the Commission uses its leverage when it can to bring state-owned companies into the private sector.

It did this with Spanish airline Iberia, when a main condition of its approval for a 545-million-ecu capital injection by state holding firm Teneo was the sale of Iberia's Latin American carriers. The company will only be allowed to buy them back with the help of an outside and established 'private' airline.

In the railways sector, Transport Commissioner Neil Kinnock is throwing his weight behind plans to open trans-European freight freeways, which remove administrative obstacles and open public networks to private-sector operators with a valid licence.

Similarly, moves by the Commission to encourage member states to bring firms experienced in engineering, construction and even marketing into the building of Trans-European Networks betrays its penchant for private initiative.