5 September 2001

Business – Autor: Leah Bower – Strana: 01 Bailout blues Foreign firm ousted from revitalization process by state-run bank State-owned Konsolidacni banka (KoB) dismissed international banking consortium Odien from two of its four remaining revitalization projects, signaling a major change in the way the government plans to restructure the country’s most cash-strapped industries. According to KoB, which is responsible for absorbing bad loans to state-owned companies, Odien failed to fulfill its duties as an adviser to steel structure producer Hutni Montaze and the nation’s largest engineering group, Skoda Plzen. The proposals they made were not enough for us to make decisions on. So, we could not pass our decisions on to the Czech government,” said Jiri Pekarek, a spokesman for KoB. Odien had contracts to help four failing Czech companies restructure and attract foreign investment: Hutni Montaze, Skoda Plzen, truckmaker Tatra and tractor producer Zetor. Tatra and Zetor will remain under the supervision of Odien, Pekarek said, because their privatization is nearly complete. Pekarek would not disclose specific mistakes that Odien had allegedly made in its consulting efforts.He did say that as of Sept. 1, KoB will become the Czech Consolidation Agency, which will take over the revitalization process and will be controlled jointly by the Finance and Industry ministries. The agency will oversee the bailout of Hutni Montaze, a steel structure maker, and Skoda Plzen, which once had more than 40 subsidiaries producing everything from industrial trucks to nuclear reactors.But Odien – a combination of global investment banks Lazard and Latona Associates – wasn’t dismissed because of shoddy work, said Michael Saran, the group’s chief executive officer. To a large extent, [the problems] came from a change of management [at KoB],” Saran said. The new management is trying to prove the old management was bad. Perhaps it was making a problem so they look like they are finding a solution.”When current Finance Minister Jiri Rusnok succeeded Pavel Mertlik last April, he replaced the management at KoB, which is when the relationship between the bank and Odien became strained, Saran said.And Saran said Odien complied with its contracts, but wasn’t qualified to answer every question that came up in the restructuring and sale process. If you want legal advice, we’re not a law firm. We can’t give legal advice,” he said. We can only hire a law firm.”Saran describes the firm’s dealings with Zetor and Tatra as successes. Tatra has been stabilized and is no longer in the red, Saran claimed, and production at Zetor was restarted, with three foreign investors on the bidding shortlist. Political games Analysts say KoB’s dismissal of the banking consortium was a political move designed to make the ruling Social Democrats popular before the elections in June 2002 in regions where unemployment is high. Most of these companies included in the revitalization process are significant employers in particular regions,” said Jan Slaby, an analyst with the Prague office of Wood & Company, an international investment consulting firm. From a macroeconomic viewpoint, [the companies being revitalized] don’t have such a big influence. But ahead of the elections, politicians will try to show that they care about the economy in particular regions.” It can take several years to restructure a state-owned company before it is attractive to investors, Slaby added.Once the company is ready, the bidding process and subsequent government approval can drag on, which is why revitalization through privatization is not always popular with the general electorate.As jobs at state-run companies dwindle, Slaby said politicians are inclined to look for a quick fix. The Social Democrats, who had once supported a slow-paced restructuring of state-run companies that required minimal government support, are now enamored with Industry Minister Miroslav Gregr’s Big Bang” program, which pumps large amounts of state money directly into failing companies.The Big Bang provides a visible short-term solution, said Slaby.But in the long run, the companies will need repeated injections of capital to continue functioning, since their basic operating structure hasn’t changed.The process of trying to rescue failing Czech companies started in 1998 with Gregr’s proposed Big Bang program, which would have pumped 60 billion Kc ($1.6 billion) into 35 companies.Because of budget concerns, the program, managed by the now-defunct Revitalization Agency, was scaled back to 10 companies, only one of which – AliaChem – was privatized.The Revitalization Agency spent more than 200 million Kc on restructuring companies on the brink of collapse. Back in 1998, Gregr’s Big Bang received scathing reviews from many foreign industry analysts, who said it smacked of communist-style economics and would have a devastating effect on the nation’s growing debt.Slaby was concerned that KoB’s latest move might signal a return to Big-Bang style economics. It is unfortunate if politicians manage such as process,” said Slaby. This should not be a political issue; it should be a business issue.The best tack, he added, would be to hire an outside adviser to avoid the appearance of government favoritism, which may drive businesses to find other ways to invest in the Czech Republic.Ben Atkins, a press officer for the European Bank for Reconstruction and Development, was less dogmatic, and said the bank had no position regarding the latest shake-up in the revitalization process. The most important thing is to hang on to the forward momentum,” Atkins said. You bring in a strategic investor who can bring in new skills and access to new and wider markets,” he said. That is what helps build a strong market sector.” Leah Bower’s e-mail address is lbower@praguepost.cz FLASHPOINTS: ODIEN 1998 * Industry Minister Miroslav Gregr proposes Big Bang” program to pump 60 billion Kc into 35 failing state-run companies. 1999 * Big Bang sidelined because of lack of funds. November 1999 * The Revitalization Agency is created as an arm of state-owned Konsolidacni banka to manage the restructuring of AliaChem, CKD Praha Holding, Spolana, Skoda Plzen, Tatra Koprivnice, Vitkovice, Zetor, ZPS and Hutni montaze. The global investment banks Lazard and Latona Associates win the tender to administrate the Revitalization Agency. January 2001 * KoB announces that the Revitalization Agency will be dismantled by March because it only provided consulting services instead of also serving as a clearinghouse for company assets. February 2001 * Lazard and Latona merge to form Odien, which is set to take over as adviser in the restructuring of Skoda Plzen, Tatra Koprivnice, Zetor and Hutni montaze. A promised fifth contract never materializes. March 2001 * The Revitalization Agency is absorbed by KoB after racking up more than 200 million Kc in debt. April 2001 * Finance Minister Pavel Mertlik resigns after failing to convince other key government players that greater fiscal austerity and speedier privatization is the right course. Jiri Rusnok is appointed Mertlik’s successor. August 2001 * KoB dismisses Odien as adviser on the Skoda Plzen and Hutni montaze contracts, but keeps them on for Tatra and Zetor