A POOR BRIDE-TO-BE WITH A DOWRY ON CREDIT
NIS is the only company in the global oil sector which has not been restructured anytime in the last fourteen years, with a surplus of workers and a low level of productivity causing it to fall behind in relation to other competitive oil companies.
According to Serbian Government announcements, there will be a swift restructuring of Naftna Industrija Srbije this year, and early in 2006 privatisation of the refineries. What is more, the privatisation of the refineries is presented in public as a result of “successful” negotiations with the IMF with unhidden delight straight from the Minister of Finance, Mladjan Dinkic. He probably saw it as a possibility to increase republic budget surplus and “solve” all the problems in the oil sector that have bothered him for so long, with its inflationary threats to the macroeconomic stability of the country. However, nobody previously made a serious analysis (or they did ?!) for the possibilities for privatisation of the refineries: The IMF did not do it, because it is not included in its job description, but neither did Minister Dinkic, that is the Serbian Government, although it is in their job description. Serious analysis of the possibilities for the privatisation of the NIS refineries implies considering the real conditions and performances of the refineries in order to estimate their attractiveness to foreign investors, the identification of potentially competitive privatization in the region, as well as analyses of past experiences concerning privatization in the oil sector.
All these analyses should be carried out in order to avoid mistakes in the privatisation of such a strategically important sector to the state, to earn as much as possible and to provide modernization and further development of Serbian refinery capacities.
Analysis of the condition of NIS-Petroleum Industry of Serbia
Realistic assessment of the conditions in NIS could encourage pessimism in potential buyers, but fortunately entrepreneur’s logic is based on the hypothesis that all visible problems actually offer potential opportunities for further development and company growth-if they are solved.
And there are plenty of problems, and their causes...
NIS was founded on June 21st 1991, as a public company (in public ownership) for the research, production, refining and sale of oil and natural gas, and until 2000 it made a loss. A year after foundation, it was hit by UN sanctions and the impossibility to import raw materials for production-crude oil. After seven years of business, under practically impossible conditions, UN bombing followed in 1999 and destroyed refinery capacities (estimated damage in Pancevo Refinery was $400 million, whereas in Novi Sad the damage is estimated at $280 million). In addition to these difficulties caused by factors out of NIS control, the company has carried an additional burden of organizational failures made during its set up: numerous double business functions at the NIS top level and on the level of its ten sub-sections, as well as the burden of putting a great number of non-core activities in its system.
These organizational problems have still not been solved today - NIS is the only company from the oil sector in the world that has not been reorganized for an entire fourteen years, with a high employee surplus (17,500 employed workers) and with low levels of productivity. All this has caused a notable falling behind in relation to the other oil companies in the region. Just to compare, Hungarian MOL has an income of around €310,000 per employee and NIS earns just about €180,000. In practice, this means that NIS, at its current level of productivity, should have at most 10,000 workers, instead of its current work force of 17,500.
Exhausted as it is, NIS enters the new century with out-of-date technology that is crying out for modernization and with product quality far below European standards. There is also a high percent of accumulated debts and losses, an urgent need for working and venture capital, and an almost completely written-off book value of technical-technological capacities.
Under relatively normalized conditions for business operations, and with state protection through regulation, since 2000 until now, NIS has started to record production growth: it recorded earnings of €105 million from business operations in 2002, €95 million in 2003, and finished 2004 with earnings of €30 million.
In spite of a notable improvement in the financial results of business operations, the rate of early planned investments is only 30%, which is insufficient to strengthen the company and to catch up with competition in the region.
Analysis of the current situation in the company would be incomplete without mentioning the influence of the state in company development, because since its founding, all the way to the announced privatisation, the state was and remained the main policy maker on NIS business operations. NIS business decisions are boxed in by numerous rules and regulations that “from the bottom to the top” regulate, bureaucratise and slow the decision making process - in today’s accelerated and dynamic economy, one of the greatest sins which is punished by falling behind.
According to the Act of its foundation, NIS is a public company with a public function. To the Government the term “public function” is more important than the term “company” for NIS is taxpayer number one (in 2004 it contributed to the budget approximately €675 million, which is 16 % of all budget income) and the main contributor for the realization of the energy balance in Serbia, with 75 % of all petroleum products that are necessary for the Serbian market.
The prices of NIS’ main products were an integral part of economic policy for every government since NIS came into being.
Such business decision making culminated late last year when the Government three times broke its own regulation on the costs of petroleum products and brought NIS to business operations at negative prices - prices which do not even cover basic production costs.
The price of such Government behaviour is €70 million less profit compared to the average of previous years, money which could have been used for urgent investment in modernization of the refineries and raising their value prior to privatisation.
The charges that NIS is a monopolist have to be explained in this analysis, because it remains a monopolist only in the sphere of “natural state monopolies” such as the exploitation of gas and oil, the refining of crude oil in refineries, and gas transport. In other fields, such as the trade of crude oil and petroleum derivates and gas distribution, private players have been aggressively present for several years.
Under this decision-making environment, the first restructuring of the company is taking place . There is “a shower” of proposals, ideas, well-meant suggestions, analyses, prognoses, plans, research, studies made by domestic experts, foreign experts, think tanks, politicians, economists, analysts, consultants, ministers, counsellors, teleprinter operators…
In the end, of course, the strongest wins.
According to Minister Dinkic’s announcement, NIS is going to be split into four parts - three public companies and a holding company. There will be a public company for oil transport, a public company for gas transport, a public company for gas distribution, and a NIS holding company with four independent companies within: NAP and Jugopetrol, the oil refineries (Pancevo and Novi Sad), Naftagas, and the supporting industries as the fourth part.
The Ministry of Mining and Energy has, of course, not been heard on this question, although they have been announcing a completely different concept for the restructuring in all their previous appearances. Whether they were uninformed again this time, or astonished or surprised, has no importance any more. Moreover, it seems that it never was important…
The "ping-pong" communication and making decisions in line Government - (authorized and unauthorized) ministries - politically suitable management of NIS, has brought about the state of “pessimistic indicators” from the beginning of the text. The solution for the recovery of NIS and the modernization of the refineries lies in privatization, and not just in any privatization, but in a successful one, which seems to be too heavy a task for its current protagonists. It is obvious that the present Government’s moves are based on short-term financial considerations. Whilst it works - tax it, if it continues to work - regulate it, and when it stops working - privatize it. This method of thinking causes numerous problems in the energy field; however, it seems that someone else will have to worry about that…as has been the case every other time until now. And the one to worry most in the following period, is the often-mentioned privatization consultant. The Government has announced that during July, through tenders it will choose a privatization consultant for Naftna Industrija Srbije.
Privatization consultants (aka matchmakers) are most often international investment banks, consulting and audit houses or solicitor’s offices that are recruited to prepare and carry out the procedure of selling a company. Recently representatives of the big investment banks have visited the Government frequently, from emissaries of JP Morgan & Chase Bank, PriceWaterhouseCoopers, and EBRD, to smaller consulting houses that are aiming at this attractive job. Whether EBRD will be selected as the privatization consultant, as was suggested in certain circles, remains to be seen, in August this year.
In the preparation phase, the privatization consultant, with his team of advisers, lawyers, auditors, financial and ecological experts, will analyze the company, and make an assessment of the company and of the market, and on these grounds he will prepare the documentation for sale. During the preparation phase, the Minister of Economy will form a five-member tender commission with three government representatives, one representative of local government, and a NIS representative as the fifth member. The tender commission has an obligation to supervise the tender and to approve the tender results. After the preparation phase, late in 2005, or early in 2006, the tender will be launched and then the consulting teams of interested buyers (who have purchased the tender documentation) audit and analyze the company (Due Diligence), and also visit the companies in order to get firsthand insights. On the basis of these analyses, interested buyers will submit their offers. An integral part of an offer is the amount of the bid made for the capital price (the money that goes to the Government), the investment part (wherein the buyer commits himself to investing a certain sum for modernization), and a social programme in which they propose particular benefits for the employed workers. Assessment and ranking of the bids follows after that, and under previously known criteria, they then choose the best bidder, then prepare the sale contract, and finally the tender is closed. The buyer becomes the owner of the company when he pays the agreed sale price in its entirety. If all of these activities are carried out within the allotted time-frame, the refineries in Serbia will have a new “boss” by September 2006.
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