Estonian prime minister links privatization with NATO

The Baltic Times, TALLINN
By Kairi Kurm
Aug 30, 2001

In the face of strong opposition, Estonia’s government decided on Aug. 23 to push ahead with privatization of Narva Elektrijaamad, which operates power plants and the oil shale company Eesti Polevkivi in the Narva region in the country’s north-east.

At an extraordinary parliamentary session Prime Minister Mart Laar said Estonia’s hopes of joining NATO were at stake in the sale to the U.S. power company NRG. “The NRG deal couldn’t lead us to NATO, but thwarting it could badly shatter U.S. support for our aspirations.”

The government earlier decided not to call an extra session of the ruling coalition council as requested by the Moderate Party, one of the three coalition partners. But it agreed to show MPs the sales contract between the Estonian energy company Eesti Energia and NRG, with the signatories’ agreement.

Laar said the privatization would bring much needed international expertise and capital to Narva and would help maintain employment levels. Not only would NRG be able to address the environmental problems with which the plants are associated, the deal would also enhance Estonia’s security, he said. “We must maintain our ability to provide our own electricity. It is no secret that investments like this bring soft security guarantees – we are dealing with a major company from a big country that is very friendly toward Estonia.”

Villu Reiljan, chairman of the opposition Estonian People’s Union faction, said the deal had nothing to do with security and was economically unsound. “It is a danger to the Estonian state and nation. There are no reasonable motives for it.”

Toomas Varek, chairman of the Estonian Center Party faction, also in opposition, echoed these comments. The plants should have been sold in an open tender and the price should have been higher, he said. “An insurance company has estimated the value of this oil shale at 16 billion kroons ($941 million), but we get 1.2 billion kroons for a 49 percent stake in the power plants and 500 million kroons for the Estonian Oil Shale.” He called for further debate in Parliament.

Elaborate arrangements have been made for MPs to see the contract. They have until Sept. 7 to visit the guarded room where it is held, having first signed a pledge that they will keep what they see secret. They may only discuss it with the contracting partners and other MPs. They can use dictionaries to help them scrutinize the 600-page English-language contract, but taking notes or using a translator are forbidden. Gunnar Okk, chairman of the board at Eesti Energia, told the daily newspaper Postimees these procedures would ensure the deal was as confidential as any other which needed to be kept out of sight of competitors.

But Reiljan and Varek were scathing. Neither had gone to see the contract in person. “You can see it but must not think about it,” said Reiljan.

Varek said he decided against visiting the room when he found translators were banned, and he would have to swear secrecy. “I refuse to waste my time. Our best linguists are working on it.”


Elcoteq cuts 400 jobs

The Baltic Times, TALLINN
By Kairi Kurm
Aug 30, 2001

Restructuring at Elcoteq Network Corporation, Europe’s largest electronics manufacturing company, means 400 people at the company’s Tallinn plant will lose their jobs.

Europe-wide, the company is laying off 1500 people, the same number as it shed in the first half of this year. Then, 600 lost jobs at the Tallinn-based cell-phone assembly facility after telecommunications giant Ericsson of Sweden decided to move production from Elcoteq to U.S.-based Flextronics International.

Osmo Kammonen, a senior executive at Elcoteq, said “We have to adjust our capacity to match current demand, which is very low. We are laying off employees because of the weakness of the market, especially the telecommunications sector. Networks have not grown as fast as we predicted.”

The 400 are expected to go by the end of the year. Most lay-offs will be implemented by not renewing fixed-term contracts.

Elcoteq is also closing a plant in Poland and reducing the number of employees at its Finnish plants by 25 percent and at its German plant by 40 percent. New employees are meanwhile being taken on in China due to rising demand there.

In the first half of 2001 the company made a 7.3 million euro ($6.64 million) loss on a 922.3 million euro turnover. For 2001 it predicts a smaller turnover compared to last year’s results and a loss. The company expects to save about 16 million euros annually as a result of the restructuring.

Hannu Bergholm, president of Elcoteq, said: “Our sector expects growth to pick up again next year and we have no reason to think otherwise.”


Swedbank outruns SEB in Baltics as merger beckons

The Baltic Times, TALLINN
By Kairi Kurm
Aug 30, 2001

Swedbank-owned Hansapank, the Baltic states’ biggest banking group, announced a record 914 million kroon ($54 million) profit for the first half of 2001, 74 percent up on last year.

Hansapank group’s profit is twice the total profit of the three Baltic banks owned by Scandinaviska Enskilda Banken, expected to be the dominant partner under a planned merger. Together SEB’s Baltic subsidiaries have earned 430.1 million kroons this year.

Net interest income of the Hansapank group grew 37.6 percent from last year to 1.21 billion kroons. SEB’s Baltic banks posted a 133 percent increase to 967 million kroons.

Indrek Neivelt, Hansapank’s chairman, said the good results were caused by several factors, including more successful management and recovery of bad debts at the leasing company Hansa Capital, increased revenues from interest payments and increased deposits in Latvia and Estonia.

Hansapank also completed the acquisition this June of Lithuania’s largest retail bank, Lietuvos Taupomasis Bankas, a deal which contributed much to a balance sheet which grew by 69 percent to 69.18 billion.

As a result of the acquisition the group’s loan portfolio grew by 55 percent to 34.77 billion kroons and deposits by 90 percent to 48.4 billion kroons. Neivelt said that the formerly state-owned bank’s relatively small lending experience meant employees would have to learn new skills.

He added that because of the potential for growth in Lithuania, the largest Baltic country, Hansa-pank is not planning to cut employee numbers there.

The bank received a 278.5 million kroon incentive payment for making the purchase, a sum which will be amortized over the next five years.

The group’s return on equity was 29 percent and return on assets was 3.6 percent at the end of June. Most of the group’s net profit came from Hansapank Estonia and the leasing company Hansa Capital. Latvia’s Hansabanka netted a 57.9 million kroon profit, while Lithuania’s Hansabankas together with Lietuvos Taupomasis Bankas brought in 3.1 million kroons.

Despite the risks, expansion into Lithuania is essential for the group, said analysts. “The bank’s growth opportunities will slow down in Estonia, but there is a lot of potential in Latvia and Lithuania,” said one.

Uhispank predicted Hansa-pank’s profit would be 1.8 billion kroons by year’s end.

But brokerage house Trigon Capital did not alter its prediction that Hansapank’s profits would total 1.53 billion kroons in 2001. Analyst Toomas Reisenbuk said profits from provisioning exaggerated perceptions of the bank’s success.

“It was a fantastic period, but one which is unlikely to be repeated,” he said. “We expect modest development in the next half of 2001.”

Hansapank’s share price increased by 3 percent to 158.75 kroons on Aug. 23, when the results were published. Trading in Hansapank shares that day was worth 29 million kroons – about 90 percent of the stock exchange’s total turnover for the day.

Results announced by Estonia’s second largest bank, Uhispank, were comparatively modest. With assets of 17 billion kroons, Uhispank made a 86,6 million kroon net profit in the first half of 2001 – twice more than last year.

Uhispank has slipped from the analysts’ spotlight since it left the Tallinn Stock Exchange after being acquired by SEB, which also owns Latvian Unibanka and Lithuanian Vilniaus banks. Since SEB is set to merge with Hansapank’s owner Swedbank in the near future several Baltic banks may come up for sale in order to avoid creating monopolies. But which will be sold has yet to be discussed, say the banks’ negotiators.

Hansapank’s Neivelt said the decision had been put on hold until the merger is approved by the European Union’s competition board in Brussels, which is expected on Nov. 14.

SEB is expected to make up 51.5 percent of the new Swedish bank and Swedbank 48.5 percent.

The third largest Estonian bank Sampo made a good profit in the first half of 2001 as well. Its assets grew by 21 percent to 5.2 billion kroons and it earned a net profit of 31 million kroons, which is three times up on the first half of 2000.


From monolith to future-park

The Baltic Times, TALLINN
By Kairi Kurm
Aug 30, 2001

The big, gray limestone concert hall Tallinna Linnahall, near Tallinn harbor and the Old Town, could become a modern conference center, ready to open up in about six years.Under current plans the complex would accommodate not only a conference center but also a hotel, office space, health center, exhibition grounds and a science institute.

A municipal working group has been drawing up the Tallinn Forum project for 18 months and some potential investors have already been found. This fall the municipality will decide whether to give the go-ahead.

Taave Vahermagi, director of the municipality said, “This will be the best conference hall in Estonia, the first to provide top-level conference facilities. It will bring a lot of foreign businessmen to Estonia.”

The project has so far been supported by the Osterled Foundation in Goteborg, Sweden, which supports complex or less profitable projects in the Baltic states with money from the Swedish state’s Baltic Billion Fund.

Estimates of the project’s cost vary, but according to plans ordered from its Swedish architects the whole center would cost over 700 million kroons ($41 million).

A precise figure will only be known when plans are finalized, but the conference center alone is expected to cost about 300 million kroons. The rest would depend on how much investors wanted to spend on the hotel and office buildings. But the project does offer the most attractive location in Tallinn.

The conference center would be run under the city’s budget until a new owner or a long-term operator was found. Tallinn’s Deputy Mayor, Liisa Pakosta said the building would be sold if enough investors were not found.

Tallinn’s city hall was built 21 years ago at the time of the Olympics in Moscow for which the city received lavish funding. Today the rooms are rented to about 30 companies and include an ice hall, the small harbor, a helicopter landing pad and entertainment facilities.

Last year the hall made a 2 million kroon loss on a turnover of about 10 million kroons. The badly planned 37,000-square-meter interior is thought to be to blame.

None the less, this year its stage has been graced by such world-famous acts as A-Ha, The Scorpions, Mel C and Duran Duran.

Removable walls will be installed in the hall which will make possible a reduction in seating capacity from about 4,300 to 3,500.

The center’s new rival, the Saku Suurhall, is considered ideal for sports and big music events but lacks the necessary meeting rooms for conferences.

Kalle Sepp, manager of the Sakala Keskus, said, “It is a pity that Estonia has so far not been capable of establishing a conference center.”

He added that the government should support the establishment of the center if private investors were not interested in it because profits might not be quick.

“Latvia has a highly developed conference center in Riga. It would be a suicide to wait any longer. How much longer can we just rely on our Old Town and the untouched nature to attract visitors?”


President criticizes power plant privatization

The Baltic Times, TALLINN
By Kairi Kurm
Aug 23, 2001

Estonian President Lennart Meri unleashed another of his critical outbursts regarding the privatization of two large power plants in the eastern city of Narva by the U.S. company NRG Energy, on Aug. 17.

The U.S. Embassy in Tallinn responded to the statement sharply the same evening declaring that the government’s task was to fulfill the obligations taken.

In his statement to the leaders of the parliamentary factions in the president’s office in Kadriorg in the capital, Meri blamed the government for making huge mistakes in the privatization of the power plants and called on the factions to discuss the matter further. He also suggested the politicians involved in the privatization process resign their posts.

“It is the constitutional duty of the head of state to maintain the constitution of the Republic of Estonia and the national defense of the Republic of Estonia, including the defense of strategically important sectors of the economy,” Meri said.

The president said that the privatization is in conflict with the Energy Act enforced by the Parliament. The sale of a company with such a strategic value also requires the consent of the Parliament, he noted.

On Dec. 16, 1998, the Parliament demanded that the privatization of the power plants be presented to legislators for approval. The government has not done this.

The U.S. power company NRG Energy and the state power company Eesti Energia signed an agreement on the principal conditions of establishing a joint venture on the basis of the two power plants on Aug. 25, 2000. NRG Energy is negotiating with banks to find the best financing deal, which is likely to be signed in September.

The terms give NRG Energy a 49 percent stake in the state-owned Narva Power Plants, while 51 percent of the shares would remain in the hands of Eesti Energia, which would be required to buy electricity from the plants for the next 15 years.

In his statement the president pointed to a number of shortages that had to be discussed. He suggested to analyze whether the agreement was in accordance with the Rome, Maastricht and European treaties on open markets and competition, and with the government’s decision on the evaluation of the shares of Eesti Polevkivi, an oil shale mining company 51 percent owned by the Narva plants.

After the privatization, this stake would go to NRG Energy, which still has to pay an extra 500 million kroons ($3 million) for it.

Meri suggested to find an answer as to whether the privatization agreement would separate the operating and transmission frequency of the Estonian power system from the control center in Moscow.

The president warned that a solution must be found for the utilization of the ashes from fluidized bed boilers, which – unlike the current flying ashes – may severely pollute the Narva River and the Gulf of Finland.

The government discussed President Meri’s demand to reconsider the privatization with representatives from the utility company Eesti Energia and the Academy of Sciences on Aug. 21. On Aug. 22 the government stated that the sale of 49 percent of Narva power stations is in line with the desired development course of Estonian power engineering.

An extraordinary parliamentary session to discuss the issue has been called for Aug. 23. The last session on this matter, called on the opposition’s demands in July 2001, failed because most of the ruling coalition’s members were not in attendance.

Andres Herkel, vice chairman of the Pro Patria Union, which leads the ruling coalition, said that his party was planning to participate in the extra session on Aug. 23, because the topic needed to be discussed openly. “We are of the opinion that the power plants have to be privatized,” said Herkel. “All of the questions raised have to be solved. We suggest the government set a date for further discussions.”

Heikki Talving, a spokesman for the Moderates, another coalition party, said that he was expecting a speech from Prime Minister Mart Laar next week on topics regarding the privatization, its risks, and what would happen if the power plants remained state-owned.

Edgar Savisaar, head of the opposition Center Party, said that his party and the People’s Union party, the second largest opposition group, had been against the privatization plan from the start. He invited academics who have protested against the power plants’ sell-off in the past to participate in the coming session.

The opposition wants to know why it is necessary to sell the power plants and how profitable it will be for the state. It is also demanding that the contracts with NRG Energy and the privatization adviser be made public.

According to the president, it is illegal to privatize in secret the branch of industry that has the greatest strategic value in Estonia. “I consider it self-evident that all the members of the Riigikogu (Parliament) will have the possibility, in a closed session if necessary, to be introduced to all the details of the agreements and, if necessary, to invite oil shale power experts to the session,” said Meri.

U.S. Ambassador Melissa Wells told The Baltic Times that the U.S. government was watching the privatization process carefully. “Washington called the U.S. Embassy in Estonia on Friday (Aug. 17) and declared that the United States was distressed about the statement,” said Wells. “It is our custom to support U.S. interests abroad. We are talking about a great investment here.”

How would the embassy react if the Parliament halted the privatization process? “I don’t know. We have a large delegation of U.S. congressmen coming to Estonia this weekend. We’ll see how they take it,” she said.


Transit businesses cut big profits

The Baltic Times, TALLINN
By Kairi Kurm
Aug 23, 2001

Sea transport is undoubtedly the most profitable business in Estonia. The operating profit levels of the strongest companies in this sector exceed 50 percent, which means they manage to earn 1 kroon ($0.05) per every 2 kroon sales in profit. The average profit margin in other industries in Estonia is just above 3 percent.The Port of Tallinn, or Tallinna Sadam, one of the few large state-owned companies left in Estonia, earned a profit of 255 million kroons on a turnover of 464.2 million kroons in the first half of 2001.

Erik Sakkov, marketing director for Tallinna Sadam, said that the good geographic position of the city provides excellent opportunities for cutting huge profits from sea transport. “Tallinn has historically been a good port. The port was here already before the city of Tallinn was founded,” he said.

According to Sakkov, rising volumes and good management are the secret behind the port’s success. “It is the skill of Estonians to make business. Our prices are two times cheaper than those in Finland and the services are of the same quality, if not better,” he said.

According to Sakkov, Tallinna Sadam has stayed at the same price level for the last seven years and will continue with the same prices in the coming seven years.

The ports of St. Petersburg, Ventspils and Klaipeda are the biggest competitors for Tallinna Sadam, if they are to be taken seriously at all. “We are strong at passenger and cargo transport. None of our competitors has these two services. Helsinki and Stockholm have a lot of passengers, but no cargo transport. St. Petersburg and Ventspils have cargo, but no passengers. Riga is far from the shipping routes and lacks both,” said Sakkov.

Tallinna Sadam, which handles about 30 million tons of cargo a year, controls the third busiest passenger traffic volume in the world. Sakkov said that the Tallinn-Helsinki route, with its 6 million passengers, is surpassed only by the traffic on routes between England or France and Denmark or Sweden.

According to Sakkov, it was the correct decision to privatize the harbor’s additional services, such as oil transit, in 1992. The only function left to the harbor is administering the port’s docks and land area.

The port has been able to increase its cargo business mainly by boosting the volume of shipments of oil and oil products in transit from Russian refineries, to be loaded onto westbound vessels. The oil transit companies benefit from the harbor’s good location as well.

Pakterminal, the leading oil transit firm, was probably the country’s most profitable company last year with a 65 percent operating profit margin. It posted a net profit of 755 million kroons on a turnover of 1.17 billion kroons for 2000.

It has been leading the business publications’ profitability lists for the past couple of years with an average 60 percent profit margin. In 1998 its 551 million kroon profit accounted for 17 percent of the total profit of Estonia’s 100 largest companies.

Pakterminal is an Estonian-Dutch joint venture, owned by the Estonian private enterprise Trans Kullo and the Dutch concern Royal Vopak. It is situated in a strategic, easily accessible location, in the ice-free Port of Muuga on the southern edge of the Gulf of Finland.

“The secret of our success lies in the productivity of the working terminals of our partner Royal Vopak. A lot of cargo comes through the terminal, the processing is fast and the sales are big. We transport 8.5 million tons of oil products a year. Our nomenclature includes 10 different kinds of oil products,” said Tommy Biene, spokesman for Pakterminal.

The second largest oil transit firm operating in Estonia is Eurodek. This company transported 6.2 million tons of oil in 2000 and predicts a 7.5 million ton volume for 2001. Its headquarters in Denmark refused to give any other data about the company.

The profit margin of the third major transit operator, EOS (Estonian Oil Service), has stayed at 36 percent for the last two years. It posted a profit of 305.9 million kroons on a turnover of 860.2 billion kroons for 2000. In 1999 it netted 222.4 million kroons with a turnover of 621.6 million kroons. The company became well-known in 1998 when it made a giant leap by increasing its profits by 118 million kroons.

Veikko Maripuu, an analyst from the investment bank Suprema, believes that the increase in profits in the transit sector will halt in the near future. He said that Russian companies are doing everything in their power to divert transit sales to Russian ports. “Several Russian companies are making a transition toward becoming Latvian and Lithuanian infrastructure companies,” said Maripuu. “Nobody knows what the future will bring.”

Private money saves railway deal

The Baltic Times, TALLINN
By Kairi Kurm
Aug 23, 2001

Baltic Rail Services, the privatizing agent for 66 percent of the freight arm of the Estonian railway Eesti Raudtee, which failed in its attempt to borrow the required 1 billion kroon ($57.11 million) purchase price from the banks, announced that it would pay the sum from its own reserves. According to the privatization agreement signed between BRS and the privatization agency, BRS has until Aug. 31, 2001 to come up with the cash. BRS initially planned to borrow the money from banks, but Hansapank and Swedbank decided to withdraw from the bank syndicate on July 24, and the European Bank for Reconstruction and Development announced it would postpone the approval of the loan in order to get more detailed information about it. Some observers believe BRS was influenced by the announcement from the state audit office, which has called the deal illegal. In addition to the 1 billion kroons, BRS must also present guarantees for investments it has to make in the future. BRS’s business plan foresees investing 2.5 billion kroons over the next five years.

According to BRS Board Deputy Chairman Guido Sammelselg, the company is negotiating with several international financial institutions and there is intense interest for the long-term financing of the Estonian railway. Sammelselg said that all current company shareholders are participating in the financing of the purchase price, proportionate to their share holdings, and new shareholders would not be involved. BRS shareholders include the U.S. rail operators Rail World Inc. (25.5 percent) and Railroad Development Corporation (5 percent), a subsidiary of the British infrastructure group Jarvis International (25.5 percent) and Ganiger Invest (44 percent), which is led by Estonian businessmen Juri Kao and Guido Sammelselg.

Rail World Inc. is a railway investment and management company, which belongs to the well known U.S. entrepreneur Edward Burkhardt, who’s BRS’s chairman of the board of. In 1999 he received the title of best U.S. railroad operator. Burkhardt is about to receive over 1 billion kroons from the sale of shares in the U.S. rail company Wisconsin Central Transportation Corporation to another North American operator. The privatization agency signed a contract on April 30, 2001 with BRS to manage the privatization of 66 percent of the shares in the Estonian railway Eesti Raudtee, after it surfaced that the representatives of Rail Estonia, the initial bidder, had a shady background.