Damir Polancec, Grga Ivezic and Hans ZollnerNacional has come into possession of documents that show that the Croatian Privatization Fund (CPF) will have to pay commercial banks in excess of 316 million kuna in 2009 to make payments on loans taken out over the past decade. These are debts that were not included in the Croatian Privatization Fund's financial plan, and likewise were not included in the national budget.

The documents Nacional has are also proof of the catastrophic business policies of the Croatian Privatization Fund. Over the past decade the Fund has, in a fashion entirely lacking transparency and without applying professional criteria, spent billions of kuna coming to the rescue of numerous state-owned companies. The Fund, at the behest of the political authorities, bought up their debts, issued short-term loans and granted them financial aid.

This was done to temporary put off the failure of some companies and the ensuing social unrest, even though it was clear that these companies would never be in a position to pay the state back the money they had received. This business policy has resulted in million-kuna debts at the Fund, and although they are nowhere evident on the institution's balance sheets, they are from year to year an ever-growing financial burden on Croatians. The result of this practice is the fact that Croatia will, in 2009, have to pay off the loans that the Fund has taken out for the account of some companies that have long ceased to exist or have been sold off to private owners.

And so the Croatian Privatization Fund, conceived as an institution that would, through the sale of state-owned property, make a significant profit to the benefit of the national budget, has become a major money loser and a significant burden on the national budget. What is more, given that these obligations are hidden and that there is no money earmarked for them either in the Fund's budget or in the national budget, it is easy to assume that paying them off will probably be financed from funds collected from the sale of the remainder of the assets under the Fund's control. And it can be taken for granted that the 2009 budget will gain practically nothing from the sale of state-owned assets, but that all of the funds collected in that fashion will be used to cover current debts. According to the official Fund documentation Nacional has come into possession of, most of the 43.5 million euro that has to be returned by the institution in 2009 is the result of loans that the CPF took out from commercial banks. To prevent the failure, namely, of some companies in state ownership, Government made direct decisions or gave orders through its representatives on the Fund's board of directors that the Fund take out loans from commercial banks. These funds were used for the most part for two purposes. The state would buy up the outstanding claims banks had towards state owned companies and prevented their bankruptcies, or issue them short-term loans enabling the companies to operate normally.

Nacional's source, well in the know when it comes to the situation in the Croatian Privatization Fund, feels that the current financial situation in the Fund is a result of years of poor management with national property. "There is in theory nothing bad in the state helping out companies it owns, but that help makes sense only if it results in the improved operations of these companies in the future. The problem is that decisions on financial aid were made without any financial analysis, only on the basis of political criteria. The state bought social peace, approved massive sums of financial assistance for companies, which in no way restructured their operations. Many remain to this day on the brink of failure. So it turns out that the state, by way of the Fund, spent billions of kuna to put off the inevitable." An example of this way of doing business is an 80 million kuna loan that the Fund took out in 2003 from Rijecka Bank, now the Erste Bank. The money was rerouted to the Dalmacija ferroalloy factory in Dugi Rat, as a short-term loan.

Production at the factory ground to a halt, the workers were laid off, and the attractive plot of land on which the factory was located was sold for 8.5 million euro to foreign investors. Nevertheless, more than five years after production ceased, the loan is due for repayment, and the Fund will this year have to pay Erste Bank 8.8 million euro. So, in the final tally Croatia is left without a large industrial firm and the land it was located on, the workers lost their jobs, and the entire Fund transaction ended up at a loss of 300 thousand euro. The Dalmacija case is only one in a series in which the Fund spend a significant amount of money helping out state-owned companies, even thought the justification for these moves, business-wise, was very questionable. What is more, the Fund assumed the debts of some companies in very peculiar arrangements. In 2002, for example, Government ordered the Fund to buy up Zagrebacka Bank's claims towards the PIK Vrbovec company. The claims amounted to somewhat over 88.5 million kuna, and Zagrebacka Bank sold the claims at a significant discount, at a price of 55.7 million kuna, and at the same time issued the Fund a loan to settle the claim.

This is an ethically very questionable arrangement, because a state institution returned the bank an assumed debt through a loan issued by that same bank. From that perspective it is very questionable what the real discount was that Zagrebacka Bank approved for the CPF, and what part it compensated by way of interest on the loan it issued. A similar deal was struck by the Croatian Privatization Fund in the case of the IPK agricultural firm out of Osijek. The company owed Slavonska Bank in excess of 20.6 million euro. The state bought the claims, and collected the money needed through a loan from the Hypo Alpe Adria Bank, the owner of Slavonska Bank. These kinds of deals were made during the coalition government of Ivica Racan, and since the HDZ took power the Croatian Privatization Fund's chief creditor has been Hrvatska postanska banka (Croatian Postal Bank, HPB), a bank owned by the state. Just in 2007 the CPF took out three short-term loans from that bank, worth in excess of 13.5 million euro.

Slavko LinicThe money was spent on short-term loans to some state owned companies like the Vjesnik daily, the Bizovac thermal springs, Borovo, Imota, KIM, Elcom, Adrichem and others. These loans are due for repayment this year and the Fund will have to, with interest, set aside 14.7 million euro to cover them. Just a little less, 14 million euro, will have to be put aside by the Fund to settle the loan the CPF took out at the Hypo Alpe Adria Bank in May of last year. All in all, the Fund will have to come up with 43.5 million euro to settle loan debts in 2009. The financing of a small part of that debt, interest payments of 4.1 million euro, has been foreseen in its financial plan for 2009. But the repayment of the principal of 39.2 million euro has not been foreseen anywhere in the expenditures side of the 2009 financial plan. That is why it is a logical assumption that the Fund will try to cover these obligations with funds gained from the sale of the state property in its portfolio. In business plans the Fund is otherwise classified in a special category, that of "inflow". The reason for that is the fact that the Fund should immediately send these funds to the national budget or put them at the disposal of the Croatian Bank for Reconstruction and Development. The funds should not be used by the Fund to finance its own operations. Nevertheless, a planned 100 million kuna from the sale of state owned property could in the end be used to pay off CPF loans. It is hard to expect then that the Croatian budget will profit in the coming year from the privatisation of state owned property, what is more, it is possible that the Ministry of Finance will, in the end, have to provide financial assistance to the Fund for it to be able to settle all of its obligations.

The data from the documents Nacional has in its possession are proof of the catastrophic business policy that the Fund has lead for years. The result of a lack of professionalism and the political influence exerted on the management of the institution have resulted in massive losses that will, in the end, be borne by Croatian taxpayers. The Croatian Privatization Fund has at this moment over a billion kuna in claims towards companies that are in part or majority state ownership. 28 companies now owe it money, along with a number of cumulative loans the Fund assumed from the Croatian Postal Bank (HPB). The biggest debtor is Hrvatske zeljeznice (Croatian Railways) with 319 million kuna of debt, followed by Borovo with 180 and the Vjesnik daily with 90 million kuna of unsettled obligations. Most of these companies continue to be in bad shape, on the brink of bankruptcy and it is quite certain that they will not be able to repay the money they have received from the CPF.

Even if the CPF succeeds, in the privatisation process, in finding investors interested in buying some of the debtor companies, it is quite certain that these companies will insist on having a part or the entire debt written off in the end. That is why it is quite certain that the Fund will continue to make losses over the coming years because it will have to pay off the debts of these companies. If one adds to that the fact that a further 1.4 billion kuna that the CPF spent covering the losses of state owned companies was, in the end, paid by the finance ministry on the basis of state guarantees, the magnitude of the losses to Croatia this way of running the Fund has caused becomes clear.