Estonia rail sale agreed

Estonia's capital, Tallinn, is a showcase for the Baltic nation's reforms

In this story: Public 'tired' about the case Court ruling RELATED STORIES, SITES

By CNN's Douglas Herbert

LONDON, England (CNN) -- Estonia, long seen as a paragon of Baltic efficiency, has stumbled on the homestretch of its privatisation drive.

Controversy surrounding the sale of a two-thirds stake in the state's cargo railway to an international consortium is dogging a government whose reformist credentials are seen as second to none among ex-Soviet states.

The setback comes at a sensitive time for the Baltic nation of 1.4 million, as it enters the final phases of talks with European Union officials on a timetable for accession to the EU.

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Estonia is in a lead pack of six frontrunners -- along with Slovenia, Poland, Hungary, the Czech Republic and Cyprus - pushing for fast-track entry to the exclusive western fraternity, possibly by 2004.

Yet with some in the EU questioning the wisdom of early entry, the margin for error by aspiring members is narrowing as candidates race to harmonise their laws with those of the EU, a precondition of admission.

Estonian privatisation has been practically a closed chapter since 1996, according to a report by the World Bank issued early last year. Major power plants and telephone companies have all been privatised, along with scores of small and medium-sized enterprises.

The bank report praised Estonia for having the lowest unemployment rate and most stringent and effective bankruptcy laws in the Baltics.

It suggested that a favourable entrepreneurial climate had helped Estonia weather some of the worst effects of the Russian financial meltdown of 1998, when many Russians' savings were wiped out overnight.

Yet while only a few large industrial enterprises remained in state hands, the report concluded, the process of unwinding them "has again become more contested and time-consuming."

Public 'tired' about the case

The railway privatisation situation would appear to be a case in point.

The $57 million sale of a 66-percent stake in Eesti Raudtee, or Estonian Railways, to a consortium of American, British and Estonian investors has riled some Estonians who resent seeing a prized asset fall into foreign hands.

"It seems to me that the public is really tired about this case, and they see it as hopeless," said Kristjan Kuljand, a reporter and editor for Estonian National Television, in the Estonian capital, Tallinn.

As freight and transit rails go, Estonian Railways is relatively small fry: a rolling stock of a few dozen trains ferrying about 40 million tons of cargo annually over 600 kilometres of Soviet-era track.

Prime Minister Mart Laar's government has pursued an aggressive agenda of economic modernisation

But to Baltic Rail Services (BRS) -- the consortium to whom the Estonian Privatisation Agency agreed to sell the railway on April 30 after months of legal tussling that followed the withdrawal of the agency's first-choice bidder -- the asset is a strategic catch.

The railway is the main conduit for the trans-shipment of Russian oil products and other commodities via Estonia from Russia to Western European markets.

Last year, railway cargo traffic in the former Soviet Union and the Baltics rose by almost 10 percent from 1999 levels, while container cargo traffic increased by 26 percent, according to official statistics cited by RosBusiness Consulting.

Under terms of its deal, BRS, backed by a group of banks led by Hansapank and Swedbank, placed a deposit of 100 million kroons - 10 percent of the purchase price - and promised to plough an additional 5 billion kroons ($285 million) into modernisation projects over the next 10 years, according to the Associated Press.

Andrew Smith of Jarvis infrastructure services, part of Jarvis International plc, the British railway services company that owns 25.5 percent of BRS, said his company plans to replace Estonian Railways' rolling stock with 70 locomotives from the U.S.

Jarvis, which, in Britain, is Railtrack's largest contractor, will also plough investment into upgrading the Estonian Railways' technology, control and communications systems.

Additional investment will come from the consortium's other partners, a U.S. company, Rail World Inc., which also owns a 25.5 percent stake; U.S.-based Rail Development Corporation, with five percent; and an Estonian company, Ganiger, which owns 44 percent.

The Estonian government will retain the remaining 34 percent stake.

Court ruling

The deal has exposed vulnerabilities in the pro-market government of Prime Minister Mart Laar, whose handling of the sale, critics say, has been a study in the pitfalls of post-Soviet privatisation.

"The government has lost quite a bit of political capital on this thing," said Michael Tarm, editor of the City Paper -- The Baltic States -- and an AP correspondent, based in Tallinn.

The most embarrassing moment may have come last month, when an administrative court in Tallinn ruled that the Estonian Privatisation Agency had acted illegally in choosing an initial bidder unable to find cash backing for its offer.

A further hammer-blow was dealt when it emerged that one of the key officials in the bidding company, Rail Estonia, was wanted on money laundering charges in the United States.

Though Rail Estonia withdrew from contention well before the court's ruling, the whiff of scandal left in the wake of its selection spurred a third-rank bidder, RER, to file suit against the agency. RER now appears resigned to the fact that the April 30 agreement with BRS, in the absence of any obvious legal shortcomings, makes the sale all but final.

But those with grievances still have a window of opportunity to reconsider: last month's court ruling gave a 30-day grace period -- set to expire on May 16 -- in which to file objections.

"We are convinced that everything will be fine," Jaak Liivik, the head of the Estonian Privatisation Agency, told CNN last week.

Liivik said he had received assurances that the sale would not be contested. Katrin Kivi, an agency spokeswoman, told the Associated Press that the deal was final and did not require regulatory approval.

"Today's deal is the last big privatisation. After this, we can say Estonia's privatisation process is mostly finished," Kivi said.

The legal imbroglio surrounding the sale of the cargo rail comes at a time when another recent privatisation -- the sale of Estonia's passenger train Edalaraudtee to U.K.-based GB Railways -- is also running into speed bumps. GB Railways has been forced to reduce inter-city passenger services amid demands for more subsidies.

Attention has also been focused on the energy sector, with the recent sale to a U.S. company of an oil-shale burning power station at Narva, on Estonia's border with Russia. Despite this, Estonia's privatisation has seemed an exemplar when compared to its Baltic neighbours.

In Latvia, the privatisation process began in earnest in the mid-1990s -- after Estonia's was nearly finished -- but has since gained momentum via rising numbers of open tenders and direct sales to strategic investors. Both methods are favoured by western economists as fostering the greatest corporate viability and accountability.

In Lithuania, the early phases of large-scale privatisation, starting around 1991, were limited to voucher-based schemes that restricted the levels of private ownership.

Though the country has since adopted an open tender and direct-sale approach, hundreds of companies, according to the World Bank, remained in state hands as of last year.

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April 22, 2001

Estonian government
Estonian President's Office
Estonian Privatization Agency
Estonian Railways
Jarvis plc
Baltics Worldwide (CITY PAPER)

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