30 October 2006

Bullets need biting in Croatia's shipyards

By Eric Jansson
Published by Financial Times, 30 October 2006

The Hoegh Delhi, a massive windowless box of raw steel plate, floats quietly in the Uljanik shipyard. Uniformed workers swarm over the enormous vessel, adding finishing touches to the largest floating garage ever built, big enough and powerful enough to haul 7,000 cars across an ocean.

Uljanik's world record-breaking shipbuilding job for Norway's Viking Car Carriers, owner of the Hoegh Delhi, will continue into next month. Even before completion, the boat has become a symbol for Uljanik's workers of the shipyard's successful transition from socialist management to streamlined global competitiveness.

"We may be small, but by our measure we now hold 10-20 per cent of the car carrier market worldwide," says Hrvoje Markulincic, the hard-hat-wearing lawyer who heads Uljanik's public relations.

The shipyard's switch from general shipbuilding to its specialisation in car carriers took 12 years, starting in 1987. The workforce fell from 20,000 to the current 2,000, but added 1,000 subcontractors

But Uljanik still depends on state subsidies to survive, and even with such help it made a loss last year. Croatia's four other large state-owned shipyards performed worse.

However, officials say the time has now come for restructuring and privatisation. A proposal is expected next month.

Free market purists - an embattled minority in Croatia - call for cuts across the board. Natasha Srdoc-Samy, president of the Adriatic Institute for Public Policy, a free market think-tank in the shipbuilding city of Rijeka, says the industry should be privatised immediately, as it is, with no restructuring financed by taxpayers' money.

"Shipyards for which there are no buyers should be closed," she says, adding that compensation paid to laid-off employees would cost less than "sustaining dying companies".

Damir Polancec, deputy prime minister in charge of economic policy, is more cautious. He predicts a "transitional period" during which the shipyards will be brought into line with European Union standards on state aid.

Analysts say a dose of privatisation along the way will be required to bring in foreign capital and industry expertise. "Any regulation without privatisation will fail," says Zarko Miljenovic, chief economist at Zagrebacka Bank.

European Commission pressure being applied to state-owned shipyards in Poland, an EU member since 2004, suggests what may lie ahead for Croatia if the government shirks reform.

The size of the heavily subsidised yards, and their importance to Poland's economy, has proved little defence against EU competition rules.

Croatia's shipyards have traditionally counted ongovernment officials, who were able to resist pressure from the International Monetary Fund to refuse heavy subsidies. But as Croatia's IMF's loan arrangement phases out and EU negotiations roll forward, government officials have begun hinting at changes ahead.

Mr Polancec says the government is obliged to "take into consideration all possible scenarios" including permanent closure. Vladimir Drobnjak, chief negotiator on European Union accession, echoes the hope for a way out: "I won't be exact, but the shipyards are located on prime real estate, in the heart of the Mediterranean. These are not back yards in the middle of nowhere."

Shipyard managers would prefer privatisation to closure, though they cringe at the prospect of either.

Mr Markulincic says Uljanik has no interest in being sold to a foreign investor, but acknowledges that no Croatian company is qualified to run the technologically advanced yard.

He says the state must keep "at least" 25 per cent of Uljanik, with shares being sold to workers and other companies in the shipbuilding sector.

Foreign buyers would be less likely to use Croatian suppliers along the chain of production, he argues.

In this way, sale to a foreign buyer would erase the "multiplier effect" held precious by the defenders of subsidisating the industry, who claim that for everydollar earned by the shipyards, $2.90 of economic activity is generated elsewhere in Croatia.

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