Estonian Air suspected of cartel agreements

The Baltic Times, TALLINN
By Kairi Kurm
Jul 26, 2001

The European Commission fined Swedish carrier Scandinavian Airlines System (SAS) and Maersk Air 53 million euros ($46.08 million) on July 17 for a cooperation agreement that led to price fixing on the Copenhagen-Stockholm route.

Some Estonians fear that Maersk Air, which owns 49 percent of Estonian Air, may have had similar agreements with SAS in Estonia.

SAS and Maersk Air, both of which belong to the international Star Alliance, signed a cooperation agreement on March 1999 under which Maersk ceased flying on the Copenhagen-Stockholm route, giving SAS a monopoly on that route. Maersk Air also promised not to start on the routes occupied by SAS.

Jorn Eriksen, president of Estonian Air, denied accusations of a cartel agreement in Estonia, saying that there was a normal program of cooperation between Estonian Air and SAS in Estonia, which is common among aviation companies worldwide.

“Estonian Air, like many other airlines, has agreements with a number of companies. The market size decides how many companies can fly on one route,” said Eriksen. “On some routes there is room for one carrier, on others, like Riga, Vilnius or Stockholm, there is room for two.”

He said that flights on different routes are also competing with each other, because people would change planes in Helsinki, Stockholm or Copenhagen for a flight that would take them to the destination country.

Estonian Air operates two 107-seat Boeing 737-500 aircraft and two 46-seat Fokker 50 aircraft, and it has flights to nine destinations: Stockholm, Copenhagen, London, Hamburg, Moscow, Kiev, Riga, Vilnius and Frankfurt.

Raimond Made, spokesman for Estonian Air, said that the company operates alone on such routes as Copenhagen, Hamburg, Frankfurt, London, Moscow and Kiev.

He said that on the Tallinn-Amsterdam route Estonian Air is in a “code share” program with SAS. Estonian Air takes people to Copenhagen or Stockholm, and SAS then transfers them to Amsterdam.

“In the past we flew to Amsterdam, but it was an unprofitable route, because the Boeing aircraft was too big for this and the Fokker would not fly so far. There is no monopoly. If we find that it is economically viable to fly to Amsterdam and we have the right plane, we’ll open the line again,” said Made.

According to the daily newspaper Postimees,Estonian Air doubled its prices recently on Stockholm flights from 3,900 kroons ($210) to 6,680 kroons.

“I am impressed with how many mistakes the papers make. They compare totally different prices. Our lowest price to Stockholm is 3,700 kroons,” Eriksen said.

Inge Koppel, product manager at Estonian Holidays, said that Estonian Air’s prices have not risen any more than those of other airlines.

According to Eriksen, the company is increasing the prices due to inflation.

“We cannot charge the same prices we did five years ago, because the dollar rating, airport charges and fuel prices have gone up. Of course it is expensive to fly, but airlines do not make big profits,” he said.

Eriksen said that Lithuanian Airlines, which is known for its cheap tickets, posts enormous losses. Estonian Air had 9.8 million kroon losses last year, but expects to end this year in the black. The company’s turnover reached 777 million kroons in 2000.

“We are a private enterprise and our shareholders cannot afford losses,” said Eriksen.

The Estonian Competition Board will start investigating the possible agreements between SAS, Estonian Air and the entire aviation market in the fall.

“The consolidations that take place on international aviation markets and their influence on the Estonian market, as well as investigations carried out by the European Commission, have given us a signal that this sector needs more attention,” said Peeter Tammistu, head of the Competition Board.

He said that infringing on the competition law might bring a fine that could reach up to 5 percent of the company’s sales last year.

Toomas Peterson, general director of the Estonian Aviation Administration, admitted that Estonian Air controls some of the routes. But there are not many companies willing to compete with them on the small Estonian market.

“They have a monopoly not because we do not enable anyone to come. It is because no one else wants to come,” he said. “We do not have the ability nor the wish to interfere in the tariff policies of aviation companies. The European market is already very liberal in this regard.”

Jukka Narakka, Vice President of Finnair, said that the cooperation between two airlines does not enable the Estonian Air to raise fares. “But if this kind of cooperation creates a monopoly in any particular market, the fares are likely to go up,” he added.

Narakka said that Finnair is very interested in the Estonian market because of its closeness to Helsinki and because Finnair already has services to all major markets in Europe.

“The competition in Estonia is increasing as the market matures. One has to understand that the market for air travel in Estonia is both very young and relatively small,” said Narakka. According to Narakka the market is basically divided between the Star-Alliance (SAS, Lufthansa, Estonian Air etc.) and Oneworld (Finnair, British Airways etc.).
Source: http://www.baltictimes.com/news/articles/5246/

Solid reputation of Pro Kapital shakes

The Baltic Times, TALLINN
By Kairi Kurm
Jul 26, 2001

Pro Kapital, the largest real estate development firm in the Baltics, has drawn a lot of media attention in the last week, ever since police carried out a search at the home of former CEO Ilona Saari.

Saari, 29, was accused of making an 18 million kroon ($1 million) purchase of real estate in May without the consent of the company’s management.

According to police, Saari purchased two properties on Logi Street in Tallinn for 68 million kroons from the company OU Hansameister, where she acted as a supervisory council member. She bought the property for 50 million kroons for OU Hansameister, then bought it from that company as the representative of Pro Kapital a couple of weeks later.

The business daily Aripaev wrote that the process of buying property by firms related to Ernesto Preatoni, the owner of Pro Kapital, and then reselling them to Pro Kapital for a considerably higher price was common practice at Pro Kapital.

The newspaper wrote that Preatoni had drained the company of hundreds of millions of kroons in recent years to the financial gain of Pro Kapital employees.

Preatoni said that the facts in the Aripaev report were false. He said he would consider stopping his investments in Estonia if the negative press continued.

“They say that we are using offshore companies. The shareholders might be using them, but we are not,” said Preatoni. “The companies we are dealing with are not related to my money. They might be related to people that I know.”

Pro Kapital’s management is also accused of attempting to issue new shares of the company to firms related to Preatoni for a considerably lower price and ignoring the interests of small shareholders. The shares will be issued for 30 kroons to current shareholders and FVT Financial VIP Tourism Ltd., starting August 15. The subscription period for the latter is two months, while shareholders have two weeks.

Aivar Pihlak, a member of the board at Pro Kapital, said that it is obvious that it takes more time to work with potential investors who do not know the company. He said that two weeks is enough for the subscription.

The Tallinn Stock Exchange suspended trading in shares and convertible bonds of Pro Kapital on July 20 and launched its own investigation.

Trading in Pro Kapital securities will be resumed after Pro Kapital Group refutes through the bourse’s information system the accusations made by press, the stock exchange announced. Preatoni told The Baltic Times that an announcement would be made this week.
Source: http://www.baltictimes.com/news/articles/5251/

IMF calls for balanced budget

The Baltic Times, TALLINN
By Kairi Kurm
Jul 19, 2001

The International Monetary Fund praised the Estonian economy in its annual report published July 9 and warned about the influence of the slowdown in the world economy.

Margus Uudam, deputy secretary general at the Ministry of Finance, said that Estonia’s economy is vulnerable to the influence of the world economy due to very open trade.

The IMF noted that Estonia’s medium-term economic prospects remain favorable, but that the short-term outlook could become clouded if the slowdown in the world economy proves sharper than currently expected. The slowdown abroad may cause a decline in exports. This may halt economic growth in Estonia and increase the current account deficit.

According to the IMF forecast the economy would grow by 5 percent in 2001. Last year it grew by 6.9 percent thanks to rapid export growth and the declining unemployment rate.

“Cautious macroeconomic policies and a vigorous structural reform effort have resulted in the almost complete transition to a market economy and have supported a solid growth performance,” the IMF reported.

The IMF noted that, despite its recent decline, unemployment remains high in Estonia. It reached 13.7 percent in 2000.

It welcomed Estonia’s further steps to reduce unemployment through active labor market policies and a reorientation of the education system.

It also welcomed Estonia’s recent pension reforms and the intention to strengthen further the social safety net. IMF analysts were, however, concerned that increased pension contribution and the proposed new unemployment insurance scheme will raise non-wage costs, which are already relatively high.

The IMF also emphasized the need to create a balanced budget. They urged the early passage of the new budget law, which would further enhance fiscal transparency.

“We hoped that the Riigikogu (Estonia’s parliament) would endorse the new law by summer, but it was postponed until autumn,” said Uudam. “Many additional costs, like loans and aid for example, would according to the new law be included in the budget. It would make the budget more transparent. It would also help to collect and compare international statistics.”

He said the government is planning to end the year 2001 with a balanced budget. “Active lending causes deficit. The half-year results show that we would do without the deficit this year. It is our firm task,” said Uudam.
Source: http://www.baltictimes.com/news/articles/5220/

Estonian railway privatization threatened

The Baltic Times, TALLINN
By Kairi Kurm
Jul 19, 2001

The Riigikontroll, the Estonian state audit office, announced on July 16 that the Estonian Privatization Agency had brought unlawful financial obligations on the state with the sale of the Estonian railway Eesti Raudtee to Baltic Rail Services.

The privatization contract may generate over 1 billion kroons ($55 million) of additional costs to the state, the office announced. The privatization agency does not have the authority to sign such contracts, said Sven Soiver, spokesman for the audit office.

“The most likely sum the state may have to pay additionally is around 200 million-300 million kroons,” said Soiver. “We don’t know how big the environmental claims will be for the possible damages the company may have caused when it was state-owned.”

The privatization agency had promised to compensate Baltic Rail Services most of the losses that had been caused by the company’s activities until Aug. 31, 2001. It includes claims by employees and former management as well as guarantees contained in the contract on the sale of shares in the railway Eesti Raudtee.

Besides the above-mentioned claims that the state is to compensate the buyer with, the losses the Estonian railway has sustained on giving up purchased locomotives have to be compensated, too.

“The clause on locomotives, where the state has to keep 50 million kroons in a bank account, is the most curious one. The privatization law foresees that the money has to be transferred from the account within 10 days,” said Soiver.

Soiver said that the state audit office would forward its opinion to the prosecutor’s office. “It’s a complicated issue. We want to have a penal law interpretation on it,” said Soiver.

“The agency could not explain why the privatization was carried out under such conditions. Their only aim was to ?privatize, privatize and privatize.’ Where did they get these terms? Neither the privatization agency, the government nor the Parliament has approved them. It was the personal decision of the management, which held the negotiations.”

According to Soiver, Parliament has to approve the deals that are related to the state budget.

Soiver said that they were surprised to see the reaction of the official from the privatization agency, who claimed that the audit office had exceeded the authority given to it by law.

“Katrin Kivi told us we could not inspect the privatization contract. We were amazed. How can an official interpret our rights this way? We asked the Ministry of Economy for his comments,” said Soiver.

Kivi said that the general director of the privatization agency signed the privatization contract with the authority given to him by law.

“The privatization agency finds that the contract is effective. The effect of the contract may be debated only by a court or a court of arbitration,” she added.

“Most of the obligations have already been dropped. The state office was exaggerating in its public letter. I can’t comment the privatization contract because it’s confidential. The probable additional costs are considerably smaller, I should say,” said Kivi.

The privatization agency signed a contract with Baltic Rail Services for the privatization of 66 percent of shares in Eesti Raudtee on April 30, after it was revealed that the representatives of Rail Estonia, the first bidder, had a questionable background. Baltic Rail Services offered 1 billion kroons for the railway and promised to invest 4.7 billion kroons in 10 years and pay 4.2 billion kroons in dividends to the state. For the rest of the railway, Baltic Rail Services was willing to pay 515 million kroons.

Kivi said that the privatization would be closed on Aug. 30 or earlier if Baltic Rail Services paid for the shares and fulfilled other obligations.
Source: http://www.baltictimes.com/news/articles/5223/

New power cable to unite Baltic and Scandinavian power supplies

The Baltic Times, TALLINN
By Aleksei Gunter, interviews by Kairi Kurm
Jul 12, 2001

With only six weeks left to Estonia’s next presidential elections all of the candidates are aggressively working on their own personal political promotions, launching official Web sites and hastily publishing books.

The candidates are Peeter Kreitzberg (Center Party), Toomas Savi (Reform Party), Peeter Tulviste (Pro Patria Union), Andres Tarand (Moderates) and Arnold Ruutel (People’s Union). Mati Pats, the popular grandson of Estonia’s legendary first president, Konstantin Pats, is an independent candidate, and Jevgeni Tomberg and Aarand Roos run as the candidates of the United People’s Party and Christian People’s Party, respectively.

The front runners, Savi and Tulviste, launched their Web sites almost simultaneously two weeks ago. Tulviste, a professor of psychology, is also a poet. He published a book of poems with the obscure, and obviously very learned, Latin medical title “Vademecum” on July 9. The book is especially valuable to Tuviste fans because of an interview with him never published before.

Half of Estonian citizens see both Tulviste and Savi as suitable for the office of president. But a vocal third supports the more socially oriented Ruutel. One out of every four citizens backs Kreitzberg and one out of five supports Tarand, or so it appears from a public opinion survey carried out by the market research firm ES Turu-uuringud in June.

Pats has the support of 22 percent of Estonian citizens. The other candidates can boast only 2 or 4 percent.

“The main issue of the elections to be held this fall is not who the respondents would most like to see as president, but how suitable for the president’s post any of the candidates is considered to be,” ES Turu-uuringud director Juhan Kivirahk wrote in the daily Eesti Paevaleht, commenting results of the survey.

Kivirahk added that it is quite senseless to continue observing throughout the summer how Tulviste leads over Savi one moment and how Savi leads over Tulviste the next.

In Estonia, the president is chosen not by the electorate but by the Parliament.

“It’s clear the public has accepted both men as suitable for the presidential post. It will a job for political jewelers to pick from them,” he wrote.

The Parliament makes its historic decision on August 27. The second term of President Lennart Meri ends on October 7. Only Tulviste and Savi have any real chance. The Baltic Times asked the people of Tallinn whom they would like to see perched in the presidential seat. Interviews and snaps made by Kairi Kurm.
Mari, interviewer at a research company
I like Savi. I like people who do sports. He is attractive. He was a doctor in the past.

Marge, mother
I am for Tulviste. He’s educated and sympathetic.

Rein, Tallinn Zoo manager
It’s difficult to say. I think it should be Toomas Savi. With his accomplished behavior and knowledge he has left me with the impression that he can fill this position.

Johannes, project manager
It should be Tulviste. He has a faultless past. There are a lot of rumors about Savi. I wouldn’t wonder if Ruutel won. He was a strong competitor to Meri during the last elections.

Hilja, pensioner
Tulviste from the Pro Patria Union. I like him. He’s a very respectable man.

Gerli and Janek, students
Gerli: I don’t know. “Lennu daddy” (Lennart Meri) should stay. If he can’t, then from the list given I would choose Savi.
Janek: Tulviste has left the most solid impression on me.
Source: http://www.baltictimes.com/news/articles/5189/

Analysts: EU will boost economy

The Baltic Times, TALLINN
By Kairi Kurm
Jul 12, 2001

Some leading Estonian analysts believe that joining the European Union will boost the country’s economy thanks to economic assistance programs and an increased inflow of foreign investments, according to a recent poll. Economic growth would also be accompanied by increases in wages and pensions and falling unemployment.

The poll was conducted by the European Union’s Information Secretariat in June and questioned nine economic analysts from banks and government institutions.

According to forecasts, the average annual real-growth rate of Estonia’s gross domestic product will be 5.8 percent and the yearly growth of foreign investments will reach 7.1 percent between 2005 and 2010 if Estonia joins the EU in 2004.

Unless the country joins the EU, annual GDP growth will average 4.1 percent for the same period and the inflow of foreign investments will grow by 4 percent.

But Maris Lauri, an analyst at Hansapank Markets, believes that accession to the EU will have relatively little effect on Estonia’s economic growth or wages this decade. She said growth would come later. Lauri predicted 5 percent growth for both scenarios.

She was also pessimistic about any strong inflow of foreign investments.

“Estonia isn’t the only country driving for EU membership. The more countries there are, the more difficult it is to attract investments,” said Lauri.

She believes that Poland, because of its size and proximity to larger EU countries, is more attractive.

She predicted that investments would grow by 6.1 percent annually until 2004 and by 5.5 percent afterward if Estonia joins the EU or by 4.5 percent if it doesn’t.

Other analysts predict faster price rises for Estonia when it joins the EU.

“When Estonia joins the EU, the rate of inflation could actually increase, because our price levels are much lower. In open market conditions the price convergence could take place faster than outside the EU where the price increases would be smaller,” said Sven Kunsing, head of market research at the Union Bank of Estonia.

Marje Josing, a researcher at the institute of economic research Eesti Konjuktuuriinstituut, says that Estonians should not fear rising prices because the price levels in Estonia are already similar to those of many EU members. The prices inside the EU vary by 50 percent to 60 percent, she added.

“There’s a common opinion that Estonian agricultural products are cheap, but they’re actually on the same price level as EU products,” she said. Josing said that Estonian farmers should not dream of increasing prices. The income of EU farmers is higher thanks to subsidies.

“Our research shows that the prices at Tallinna Kaubamaja are similar to those at a German supermarket,” said Josing. “Estonians already spend too much on food. They spend one-third of their income on food, which is way more than in the EU.”

Kunsing said that better growth prospects for Estonian companies would boost incomes, which would support the growth of private consumption. According to forecasts, the average monthly income should reach 11,600 kroons ($622) between 2005 to 2010 if Estonia joins the EU and 10,200 if it does not. The average income is currently 5,098 kroons. Long-term loan interest rates should also drop to 7.1 percent if Estonia gets into the EU and increase to 8.2 percent if it doesn’t.
Source: http://www.baltictimes.com/news/articles/5195/

Anger at power plants deal set to explode

The Baltic Times, TALLINN
By Kairi Kurm
Jul 12, 2001

Some Estonian academics are protesting against the sale of a 49 percent stake in Narva Elektrijaamad (Narva Power Plants Ltd.) and a 51 percent stake in the oil shale mining operations of Eesti Polevkivi (Estonian Oil Shale) to the U.S. energy firm NRG Energy. They have demanded an extraordinary session of Parliament to be held in August to discuss the power plants deal.Endel Lippmaa, a representative of the Estonian Academy of Sciences, said the deal is harmful to Estonia and is unconstitutional because it gives away the country’s mineral resources virtually for free.

In two public letters to the media, the scientists raised several points about the deal. They also demanded the publication of all the details surrounding the deal and called for a new public tender.

Eight Estonian environmental organizations have also expressed concerns about the sale of the country’s largest power plant to NRG, because it would give the environmentally disastrous oil shale-based energy a market advantage over other alternative sources of energy for the next 15 years.

“Power Plants should be privatized the way it is done in Europe,” said Lippmaa. “It should be a public tender and there should be no business secrets. Otherwise we would end up with something similar to the shady privatization of Lithuania’s Mazeikiai Oil.”

He said that Estonia’s Ministry of Economics was supposed to estimate the value of the power plants and the government should have given the privatization plan to the Parliament for approval before the deal was started.

Valuable thousandth

“The Parliament demanded on December 16, 1998 preparation of the privatization of the Estonian and Baltic power plants and the presentation of these decisions to Parliament for approval. The government did not do it,” said Lippmaa.

“The government gave Minister of Economy Mihkel Parnoja the task on June 8,1999 to estimate the value of 51 percent of the shares of Estonian Oil Shale before it was given over to Narva Power Plants,” he explained.

NRG will inherit this stake through Narva Power Plants and will pay an additional 500 million kroons for this, Eesti Energia reported on June 26. According to Gunnar Okk, chairman of the Management Board of Eesti Energia, it seemed an advantageous deal because NRG was getting virtually it free of charge.

Lippmaa said that NRG is paying for only 1/1000 of the value of Estonian Oil Shale. He said that the company’s production has reached 1.5 billion tons of oil shale per year.

“If we take 51 percent of the resources and multiply it by 130 kroons ($7), which is the price per ton, and add the value of mines and the value of the company, it would reach hundred billion kroons,” said Lippmaa.

Hillar Lauri, NRG’s representative in Estonia, said that Eesti Polevkivi does not own oil shale.

“It has a license to mine oil shale, which is state property,” said Lauri.

The price of the deal must, according to the terms approved by the government, be more than $54.5 million. The terms of purchase include a commitment by Narva Power to invest approximately $361 million in reconstructing and refurbishing the generation plants and making environmental improvements. NRG Energy will make an initial $65-70 million equity commitment.

Erki Peegel, a spokesman for Eesti Energia, said that the task of Eesti Energia’s management is to conclude the best deal for the company and not otherwise evaluate it.

He said that the value of Narva Power Plants has been estimated by various auditors and financial consultants of both parties.

“One of the world’s biggest investment banks, Shroeders SSB, consulted us,” Peegel said.

Some fear that NRG will sell its favorably acquired stake in Narva Power Plants as soon as it possibly can, because it holds important positions on the company’s board.

According to the deal, NRG may sell its stake two years after the reconstruction has been completed. Lauri said that the construction works will not be completed until 2004 and Eesti Energia would have the opportunity to make the first offer if NRG chooses to sell.

“Three out of five board members are from NRG, but the majority in the council are from Eesti Energia,” said Lauri. “Eesti Energia will hold its 51 percent stake in Narva Power Plants. Strategic questions will not be made without the council’s blessing.”

Off the shelf

Lippmaa said Estonia is signing a contract with a shelf company. Lauri confessed that NRG had registered the company NR Generating International B.V. in the Netherlands especially for this deal, in order to cut tax costs.

“NRG Energy is a big American energy company, the fifth largest independent energy company in the world. All the liabilities of the small company would be guaranteed by the parent company,” said Lauri.

The State Audit Office, which recently analyzed the deal, also found a number of flaws, most of which deal with environmental and social problems, the division of future liabilities between the two parties and the formation of prices. It also suggested that the government make a plan for opening the energy market as required by the European Union.

Currently, 98 percent of the Estonia’s energy is supplied by Narva Power Plants and the production capacities of Eesti Energia are guaranteed by its sales contract. Eesti Energia is interested in opening the market for exports, the State Audit Office reported.

According to Lippmaa, the state has guaranteed an annual 12 percent profit for NRG, which he believes is too high for an energy company. He said that the productivity of energy companies is less than 5 percent and the parent company receives 2 percent.

Lauri said that the two parties have abandoned the plan that guaranteed the 12 percent productivity rate.

“The rating is set for predictions only. If the company works inefficiently, we should put up with a loss,” said Lauri.

According to the deal, Narva Elektrijaamad will enter into a 15-year purchase agreement with Eesti Energia.

The producer price of electricity would range according to the amount purchased from 0.43 to 0.495 kroons per kilowatt-hour. Presently the producer price of electricity is about 0.37 kroons per kilowatt-hour. The price of oil shale sold by Eesti Polevkivi may not exceed 131 kroons per ton until the year 2010 and 101 kroons per ton in the following years.

It is against European Union requirements to sign long-term price and volume guarantees, Lippmaa said.

Tough task

NRG is negotiating with banks to find the best finance deal, which will likely be signed in September.

“It is not my business to predict what happens next. The task of scientists is to inform the public and we gave them information,” said Lippmaa.

Would Narva Power Plants survive without the privatization deal? Peegel said that the task of the management of Eesti Energia was to cope with all kinds of situations.

“Without NRG we would not be able to finish the reconstruction works by 2004 and the power plants would not be in accordance with environmental requirements by 2005,” said Peegel.

“Why should the state take such big loans and give guarantees if the private sector can do it,” asserted Lauri.

Source: http://www.baltictimes.com/news/articles/5199/

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