Can Eastern Europe “sweat” it?

December 20, 2011

Interesting to see that Poland wants to squeeze out more income from its state-owned enterprise (SOE) sector in the face of slowing economic growth and financing pressures.

Warsaw wants to double next year’s dividends from stakes in firms ranging from copper mines to utility providers to banks.

Fellow euro zone aspirant Lithuania has also embarked on reforms aimed at increasing dividends sixfold from what UBS has dubbed “the forgotten side of the government balance sheet”. It wants to emulate countries such as Sweden and Singapore where such companies are managed at arm’s length from the state and run along strict corporate standards to consistently grow profits.

The impetus isn’t entirely ideological. Poland and Lithuania are desperately trying to balance their books and under European Commission rules, privatisation proceeds cannot be taken into account when calculating the budget deficit but SOE dividends can.

But “sweating” government assets to yield higher profits doesn’t always come easy for central and eastern Europe. After all, this is a region where state ownership has been synonymous with inefficiency and stagnation.

Even so, the track record of emerging European governments on privatisation is mixed.

The haste at which state resources were sold off following the collapse of the Soviet Union had disastrous repercussions for economies such as Russia and Croatia. Recent efforts at state divestment from Poland to the Czech Republic to Romania have run aground on unrealistic price expectations, corruption or regulatory obstruction.

Add to the mix the euro zone turmoil and you can expect privatisation efforts to remain fraught.

Governments in the region will continue to try. Poland, defiantly sticking to its $3 billion privatisation target for 2012, plans a third attempt at selling its stake in utility Enea next year after two failed tries. The Czech prime minister said this week he would recommend the sale of the national carrier to a strategic investor next year, after a privatisation attempt two years ago failed.

Still, the region appears to be finally moving on long overdue reforms of the SOE sector. At the prodding of foreign lenders led by the International Monetary Fund, Romania is planning to overhaul the management of the most important of its 700-plus state firms by replacing political appointees with tender-selected executives.

There’s no time like the present. An overhaul of emerging Europe’s moribund SOE sector could lay the foundation for successful state asset sales when the market picks up.

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