Fight continues over priceless national asset

The Baltic Times
By Kairi Kurm
Apr 05, 2006

Government officials are not disturbed by fresh arbitration court papers that could result in a fine of 1 billion kroons (64 million euros) to the government for violating a contract with Baltic Rail Services, the private owners of the Estonian Railway. “The U.S. firm NRG Energy threatened us the same way, but we won the case,” said Heido Vitsur, economic advisor to Edgar Savisaar, minister of economics and communications, who is embroiled in a conflict with Baltic Rail Services.

Edward Burkhardt, CEO of BRS, told The Baltic Times that he saw no similarity whatsoever with the NRG case.
“The state is entitled to their opinion as to the likelihood that they will win, but they are playing a dangerous game with voters’ money, simply to pander to the interests of the Russian transit oil people, while in the meantime the railway infrastructure is going downhill,” he said.

Burkhardt, who leads the group of individuals that bought 66 percent of BRS in 2001, has not minced his words when criticizing the current government, which has hit BRS with a fine for failing to meet privatization obligations.
“The minister [Savisaar – ed], with the evident support of the prime minister and the governing coalition, has placed at risk a priceless national asset, the railway infrastructure, in exchange for favors from his Russian friends,” Burkhardt said. “Additionally, he has exposed the state and the Estonian citizens who pay the taxes to a risk of huge claims being progressed by the BRS shareholders through international arbitrations.”

According to Burkhardt, there’s been no specific claim presented in any of the court or arbitration cases being progressed, but if there were, these would be confidential.
As he explained to The Baltic Times, “As a measure of damages being incurred each year, consider that Estonian Railway has calculated a proper track access charge to average 32 kroons per ton while the minister has established a charge of approximately 16 kroons. Multiply this difference by 45 million tons of freight each year, and you will come up with an approximation of the transfer of money from Estonian Railway to the Russian transit interests that will be ultimately claimed from the state.”

BRS offered to sell its 66 percent stake in the railway back to the state for 2.5 – 2.6 billion kroons at the end of December, but the state balked, saying it did not want to spend more than 2.1- 2.2 billion kroons for a stake that it sold for approximately 1 billion kroons five years ago.
Most of Estonia’s political parties agree today that Estonian Railway’s privatization was a mistake, and that the rail infrastructure should remain in state hands.

In Burkhardt’s words, the state never made a firm offer, so it was doubtful that money offered was anything more than talk. Talks between the two sides were terminated once it became clear that the state was not a serious buyer, he said.
According to Vitsur, the disagreement derives from a U.S. investor trying to adapt American railway policies and accounting to EU standards. “Our standards are in accordance with EU regulations, not American ones,” said Vitsur.
Burkhardt disagrees. He said that railways in both locations run on tracks, serve customers and are managed similarly. Railways in the United States use U.S. GAAP (Generally Accepted Accounting Principals), while in Estonia they use IFRS (International Financial Reporting Standards), he explained.

“The state, Estonian Railway and BRS agreed we would use IFRS, and that is what we do, and our independent auditor has certified the results,” he said.
Still, shareholders of Estonian Railway failed to approve the company’s annual report for both 2005 and 2004 after state officials refused to confirm the re-evaluation of fixed assets. Savisaar said he could not endorse last year’s report since it had been carried out in a manner and on a scale “not consistent with the principles of understandability and objectivity.”
The report, which was compiled by the railroad company’s private owners, reportedly increased the company’s assets from 2.5 billion to 6.1 billion kroons (160 million to 394 million euros).

Burkhardt lashed out at Savisaar’s reasoning. “It’s interesting to see Savisaar’s comments. The reports are made entirely consistent with International Financial Reporting Standards and have been certified by Deloitte, our auditor. I would say that Deloitte and Estonian Railway’s financial staff are considerably more competent in areas of accounting ‘understandability and objectivity’ than is the minister and his staff,” he said.
Furthermore, he said that two other audit firms, KPMG and BDO, reviewed the company’s accounting, and specifically the asset revaluation carried out in 2004, on the minister’s request, and found the methodology to be proper under IFRS.
The asset revaluation in 2004, according to Burkhardt, was 3.8 billion kroons, bringing the net value of Estonian Railway assets to 6.2 billion kroons.

“Heavy investment in the years since privatization would have also contributed to an increase in total value,” Burkhardt said. “I suspect that an equivalent investment in Tallinn real estate over the same period would have yielded a larger increase in value, and certainly our revaluation was small indeed when compared with the electric and telecom revaluations.”
He argues that all Estonian utilities, including telecom and electric companies, use revalued asset basis in calculating their charges. “If they didn’t, there would be no financially viable electric or telephone service in Estonia, just as there is now no financially viable rail infrastructure,” said Burkhardt.

Burkhardt believes the real problem was that the minister did not like the results, particularly because the auditors had all approved the revaluation. “Since the minister is pandering to Russian oil transit interests and has committed to them to keep access changes at low levels and increase profits, he doesn’t want the revaluation to take effect, and his weapon is to continue to vote the state’s shareholding against approval of the accounts. This matter will get settled in arbitration in Stockholm eventually,” said Burkhardt.
BRS and the state representatives will meet at an extraordinary shareholder meeting on April 5.

Source: http://www.baltictimes.com/news/articles/15053/

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