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.