Privatization of Serbian Petroleum Industry and „ gas arrangement “ with Russia

Procedure of privatization of one of the largest public enterprises would produce great attention of public and suspicions even when if it would be completely developed by an open tender procedure . This interest is even greater because of the fact that „ bond sales “ is practically agreed , and that in Government of Serbia which closes this arrangement exist very different opinions on its justification .

Key data which government should introduce citizens with , in order to insure them into whether announced way of sales is legal and suitable are following :

1. What is legal base for announced sales of 51 percent of capital of Serbia 's Petroleum Industry ?

By agreement on cooperation in the area of oil and gas industry between Government of Serbia and Government of Russian Federation , article 9 designates sales to Russian partner „51 percent of participation in Stockholder company „ Serbia's Petroleum Industry “.

It is very important to determine legal grounds because of validity and existence of deal , as well as for preventing of possible responsibility for overstepping of authorities . However , knowing of legal bases is very important even from an ordinary citizens' point of view . Namely , by the Law on Privatization from 2001 state posted competitiveness of procedures as a rule , and besides that , in past several years customized citizens that sale of state capital in large companies is made by tenders and created justified expectation that the most valuable companies would be sold in future in a similar way . Because of that, readiness of government to promise to sell major share of one of those companies without bidding of potential buyers could be very confusing to the citizens .

However, Government of Serbia not so long ago came to a conclusion that selling of majority of capital of SPI without bidding wouldn't be in accordance with domestic regulations . Year and a half ago , Government of Serbia considering more options for privatization of SPI , which was made by hired privatization councilor concluded among other things following :

„ Rest of prepositions of privatization councilor :

Special reason for choice of this Option was that other recommendation of privatization councilor was that Government obligates to sell enough number of stocks to strategic investor in second faze of privatization in order to make him establish majority ownership out of 51% of shares of SPI .

Why this preposition wasn't accepted ?

After consultations of members of Work group with ministries in charge , it is determined that that option is not acceptable by the Law on Privatization because by committing of the Government to sell capital in state property to entity determined earlier would brake principle of competition as well as principle of publicity from article 2. para 2. Law on Privatization as one of basic principles on which process of privatization is based on .“

( text is from „ Information on privatization of SPI Novi Sad “ , which was dated on July 25 th 2006 published with header of Ministry of Energy and Mining , and which could be downloaded from the website of Government of the Republic of Serbia , between information from sittings of Government where was decided on this matter . (Emphasized parts are of TS – originally whole section is written in bold letters )

Considering stated Government ' s standpoint from 2006 that stated provision of Law on Privatization hasn ' t been changed in the meantime , as well as the fact that many Ministers which now decide in Government on this matter did that also in previous calling , organization Transparency Serbia considers that it would be necessary to explain in which way something that was previously considered opposite to the Law , now became legally permitted .

2. Was the selling of SPI necessary part of international agreement ?

State officials presented to domestic public positive aspects of signing of agreement with Russia , stating firstly transit of main gas - pipeline through our country and welfare which can immerge from that . It seems that selling of SPI wasn ' t directly connected to building of gas pipeline with which natural gas could be transported from Russia to Serbia and third countries . Namely , By decision on establishing of stock holder company for research , production , processing , distribution and trading of oil and oil derivates and research and production of natural gas ( OG number 60 from 2005) SPI in its scope of work has only „ research and production of natural gas “, and not its transport .

Because of that organization Transparency Serbia considers that it would be necessary to explain to public whether possibility that „ gas arrangement “ could be closed without selling part of SPI ever existed and whether in that case agreement would be more unsuitable for Serbia . In the case that selling part of SPI was precondition for concluding „ gas arrangement “ out of which Russian partner didn ' t want to resign , it can be assumed that selling part of SPI is somehow unsuitable for Serbia, so it should be explained whether it was unsuitable and in what .

3. In which way goals of Agreement are accomplished by it's certain provisions ?

In preamble of the agreement is stated that it is closed for accomplishing of following goals :

In the text of Agreement , in regards to first goal set certain guarantees for securing continuous providing with natural gas are stated ( article 4 e . g . „ building of gas pipeline with throughput power of at least 10 billions of cubic meters a year “, but only as „ possibility of increasing scope of deliveries of natural gas from Russian Federation into Republic of Serbia “, which could be regulated by special contracts . Obviously for achieving of setup goal – continuous gas deliveries , it would be necessary to go one step forward and to agree minimum amount of natural gas which could be at disposal to consumers in Serbia . Nothing less important is the matter of price of that gas . Agreement leaves that question to companies which will be established ( and in which Russian partner will have 51 percent of ownership ). Clearly , it probably isn ' t possible to create exact prices in advance for longer time period , but it would be useful for achieving energetic stability that contractual clausal „ the most privileged prices “, „ average prices “ which same deliverer pays in other countries or some other parameter which would provide guarantee to Serbian consumers that delivering would be not only continuous but also by acceptable conditions .

Process of achieving goal „ continuous delivers of oil “ from Russia to Serbia and production of oil in Serbia isn't mentioned in agreement ( although this matter is probably circumstantially connected to buying of part of SPI and investments into this firm ).

4. Can Serbia count on the welfare out of transit taxes for distribution of gas into third countries on the basis of Agreement ?

As one of arguments in contribution to closure of „ gas arrangement “ often were mentioned possible incomes from transit of natural gas into third countries over our territory . It wasn ' t clear enough from published text of Agreement whether Serbia will have the possibility to have that kind of income nor how big that income could be . Agreement states obligations of Serbian side in this area , but there isn't a lot of mention on rights . Following provisions could serve as example : „ Serbian side guarantees full scope and free transit of gas through pipeline in accordance with contracts ( arrangements ) which are closed .“ ( article 6); „ Right to use all capacities of gas pipeline and underground warehouse of gas belongs to Russian participants “. ( article 8, para 3) It is possible that this matters have been resolved by some other acts , because of which we consider that Government should show to public data on this possible and future incomes of our country .

5. What procurement regulations would be implemented and what are the consequences for domestic suppliers ?

Article 10, para 2 of Agreement anticipates that „ With choice of work provider , as well as of suppliers of material - technical resources and organizations which provide services necessary for realization of this projects , deal Companies and Stockholder Company „ Serbia's Petroleum Industry “ on the basis of tender . Beside other equal conditions priority is given to corporate subjects of signatory States . “

Considering that from the moment of selling of major part of shares of SPI to Russian partner , that company will stop being procurement entity in the sense of domestic Public Procurement Law that it will be necessary to determine by which regulations procurements will be conducted . It is clearly good that it is determined that tender is rule for that procurements , but the guarantees would be even stronger if the provision of public tenders would be added, and if the procedure of protection of the companies rights who aren't satisfied with outcome of those tenders would be prescribed .

It would be good to introduce domestic public with consequences of that change of regime of procurements . Namely , by domestic Public Procurement Law domestic fabricators and goods of domestic genesis enjoy advantage out of 20% ( e . g . for the same product can be offered up to 20 percent higher price and to be chosen on tender if the competitors are foreign suppliers ). That kind of advantage wouldn't be enjoyed on the bases of this Agreement , but only in the case of equal offers advantage would be given to companies which are from Serbia or Russia .

6. How much would cost the state possible subvention through tax relive ?

Agreement anticipates following possibility : „ Serbian side will reconsider possibility that materials , services and works necessary for realization of projects stated in article 1 of this agreement , will be relieved of tax to added value till achieving of their payroll .“ ( article 12 para 2). Possibility of approving this tax relief was already subject of sever criticism of renowned economists . In any case , we consider that data on how big would estimated losses be for the budget due to possible tax relieve and what would state gain in return should be given to public , what would be considered as the moment of achieving of „ full payroll “, what could be legal bases for that kind of relieve and would state be ready to meet other potential investors in a same way should be given to public . All those answers should be given to public before bringing of possible decision on giving tax relieves , in order to give possibility to experts for taxes could determine thoroughness of answers and arguments .

7. How big are the indirect loses for state after selling part of property of SPI , with keeping current regulations which secure certain privileges to SPI Company ?

Provisions of the Agreement which were also subject of public criticism are also those with which „ protection of market for distribution of oil products produced by SPI in the period of at least 2 ( two ) years “ is guaranteed , possibility of exploitation of domestic oil wells by privileged conditions and concession rights in ownership of SPI in third countries . We consider that Government should clearly highlight its vision of economic consequences of their decision and benefits of Russian partner on the bases of this agreement , in order to give the opportunity to public to estimate suitability of this part of closed arrangement .

8. On the bases of which parameters is determined value of 51 percent of capital of SPI which should be subject of selling ?

By decision on establishing of SPI ( OG RS number 60 from 2005), in article 6, is determined that establisher's assets of that company , with status on May 31 2005 worth approximately billion euros ( financial assets 39.711.000 euros , property , property in stocks and other rights expressible in money of 954.075.000 euros ). Considering that in the meantime SPI run business positively , we can reliably assume that worth of enterprise is increased . Because of that Government should provide explanation why it committed to sell 51 percent of capital of the enterprise for the amount of (400 million euros ) which is far less that 51 percent of its bookkeeping value . Naturally , when enterprises are sold in competitive procedure , it can happen that no one should be ready to pay bookkeeping value . However , since there is no procedure here , organization Transparency – Serbia considers that Government should state arguments which could assure public in eventual justification of sales by considerably lower price .

It seems that finding of convincing arguments will be very difficult task , considering that previous estimations of value of SPI of state officials were far greater , as well as for publicly known data for which price were sold shares in enterprises in surrounding countries which deal with same type of business as SPI .

9. Which part of the profit that SPI realizes, state renounces by sales of major part of capital and how much profit it expects on the basis of future investment in that firm ?

According to SPI's statement that firm in 2007 realized benefit of 8,1 billion dinars ( approximately 100 million euros ), by which profit is greater for 17,5 percent than one year before . For this year SPI plans benefit of 9 billion dinars . Although benefit of one firm can depend on many aspects , could be assumed on the bases of this public data that with current quality of business of this enterprise and in current conditions of doing business which considers certain privileges on the market , already in following two years buyer of major part of shares could return more than quarter of money paid for that shares , even if it doesn't perform any additional investments . This is most certainly argument which additionally problematize price contracted with agreement and by Protocol on basic conditions of buying shares of SPI from January 23 rd 2008.

On the other hand , it is reasonably to expect that profit of the company could be in future higher , after investment of 5 00 million euros in the period from 2008 till 2012. Because of that , for greater persuasiveness of usefulness of achieved agreements for Serbia , Government should manage with projection of expected profit when such investments are done . Such arguments could maybe partially decrease current impression on extreme inopportune of agreed conditions of sales .

10. Which legal protection is anticipated for the case that Russian side doesn't perform its obligations from agreement ?

As it could be seen from previous clauses , it is pretty likely that sales of part of SPI shares will be done for the price lover then their assumed market value . Whether excuse for that behavior is expectation of significant rise of company ' s value ( and by that future profit of state of Serbia ) after additional investments , it would be logical to anticipate appropriate mechanisms of protection for the case that other signatory doesn't perform its obligations regarding investments or if profit of SPI in future should be lower than expected . Agreement doesn ' t mention such guarantee . Because of that , organization Transparency Serbia considers that Government should state to public in which way it has intention to secure legal protection of state interest , and to which extent could in that case provisions of the Law on privatization be implemented , and especially article 41?, para 1, clausal 1 by which „ Contract on sales of capital , that is property , is considered terminated because of non fulfilling if , neither in additionally left deadline for fulfilling , buyer doesn't invest into subject of privatization in a way , in form and deadline determined by contract .“

Clarification on possible measurements which could state of Serbia in that sense implement, is especially important to give, having in mind provision of article 2, para 4 of Agreement , by which Property of the Company can not be expropriated , nationalized or subject to measures equivalent by consequences expropriation or nationalization .

Transparency - Serbia

Belgrade , March 4 th 2008.