RESTRICTEDWORLD TRADE
ORGANIZATIONWT/ACC/HRV/40
3 August 1998
(98-3020)
Working Party on the
Accession of CroatiaOriginal:  English
ACCESSION OF THE REPUBLIC OF CROATIA
Information on the Privatization Process in Croatia
The following communication concerning information on the privatization process in Croatia
as of July 1997 has been received from the Permanent Mission of the Republic of Croatia.
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Overview
Croatia commenced its privatization program in 1991.  The aim of the privatization
programme is to privatize approximately 3,000 "socially-owned" enterprises.  Privatization is beingimplemented in two phases:  the first under the Law on the Transformation of Socially Owned
Enterprises of 1991 (the "Law on Transformation" and the second under the Law on Privatization
which came into force on 22 March 1996.  The Croatian privatization fund (the "CPF"), created at the
request of the IMF and the World Bank by the merger of two former bodies, the Agency for
Reconstruction and Development and the Croatian Development Fund, is the governmental agencyresponsible for privatization.
The Law on Transformation, effective on 1 May 1991, and subsequently amended, provides
the regulatory framework under which companie s which were "socially-owned" in the former
Yugoslavia, were to be incorporated and brought into the private sector (See "Privatization Process"
below).  This law did not cover banks, insurance companies and utilities.
At the beginning of 1995, the Ministry for Privatization was established to handle from then
on the privatization process, namely the privatization of Croatia's utilities and the mass voucherprivatization programme.  Privatization of Croatia's banks is partially to be achieved indirectly
through privatization of the banks shareholders.  Insurance companies are expected to be privatized
through the CPF, although no specific plans for the privatization of insurance companies have been
drawn up to date.
The Process
As of 31 December 1997, 1,126 companies had been wholly privatized, 1,315 companies had
a majority of private shareholders and 108 companies had some private shareholders with the majority
of their stock held by the CPF and the state pension funds.
The method chose for privatization was, to a certain extent, dictated by the system of "social-
ownership" and socialist self-management in the former Yugoslavia.  "Socially-owned" enterprises
were relatively independent from the state and management was accustomed to making its own
decisions.  Accordingly, it was decided that there should be certain features of its privatization, i.e.
equity, debt structures, debt/equity swaps etc., which could be either accepted or rejected, but not
modified by the CPF.  All proposals had to be submitted to the CPF by the management board of theWT/ACC/HRV/40
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relevant enterprise prior to July 1992 (except for those enterprises whose headquarters were located in
occupied territories, which were granted an extension until the end of 1995).  Enterprises which failed
to meet this deadline had all their shares transferred to the CPF.
Under the law of Transformation, shares in the relevant enterprise, which are valued on the
basis of the estimated net book value of the enterprise, have to be offered first to employees andformer employees, then to state employees and employees at the public enterprises, and, finally, to
other citizens of Croatia.  All such subscribers were entitled to purchase shares at a basic discount of
20 per cent plus 1 per cent for each year of employment in Croatia ( up to a maximum discount of
60 per cent on acquisitions with a value up to and including DM20,000).  There was a further limit in
that not more than 50 per cent of the value of any company could be purchased by subscribers entitled
to such discounts.  Those acquiring shares were allowed to be paid in instalments over a five year
period  (subsequently increased to 20 years).  To the extent that shares above the DM20,000 thresholdwere purchased, no discount was available but the instalment option was available;  such shares as
well as the discounted shares could be purchased with frozen foreign exchange deposits "FFEDs")
(see "Debt-internal debt).  In January 1994, the government changed its policy to allow a partially
gratuitous distribution of shares in companies to be privatized.  Private subscribers have been entitled
to obtain outright that part of their full entitlement to shares which represents their discount merely bypaying either the first annual instalment or 5 per cent of the price of the non-discounted portion.
Subscribers who obtain their "discounted shares" in this way are under no liability, in practice, to pay
the remaining instalments under the contract to purchase the remaining "non-discounted" shares.
Certain enterprises also have shares reserved for people whose land was confiscated after the
Second World War and, in such cases, decide on the level of compensation themselves.  To date anaverage of 5 per cent of the equity of all enterprises privatized has been reserved for restitution in this
way.
The remaining shares, namely those which were not acquired by employees, former
employees, state employees and employees of public enterprises or other citizens of Croatia, were
transferred to three funds;  two-thirds to the C PF and one-third to the state pension fund. The CPF is
under obligation to dispose of the shares in its portfolio by way of public auction, tenders or private
sales.  Individuals affected by the hostilities such as war widows and their families, injured
servicemen, and families of interned or mission soldiers or civilians are entitled to apply for grants of
shares from the CPF (see "Mass Voucher Privatization").  The relevant individuals may choose the
company in which they want to receive shares.
The cash proceeds from the privatization of enterprise have accrued to the Government.  Up
to and including 1995, cash proceeds were transferred to the general budget, but from 1996, proceedsrealized by the CPF will be transferred to the Croatian Bank for Reconstruction and Development.
The Government initially saw the privatization programme as a significant source of revenue for the
budget, however, receipts from privatization have no been as large as expected due partly to the
option granted to investors to pay for their shares with FFED's.
As of 31 December 1996 the net proceeds of privatization (since 1 January 1991) were as
follows:WT/ACC/HRV/40
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Net Proceeds from Privatization
Year ended December 31
(in millions of DM) 1991 1992 1993 1994 1995 1996 Total
Cash 4.2 65.5 94.8 126.8 100.2 246.9 638.4
Swaps with Bonds for
Reconstruction- 48.3 28.1 41.9 1.4 3.3 123.0
Swaps with Frozen Foreign
Currency Deposits- 157.4 455.6 741.9 257.7 225.0 1.837.6
Total 4.2 271.2 578.5 910.6 359.3 475.2 2,599.0
Privatization of Utilities
The privatization of utilities will be carried out in accordance with the Law on Privatization.
The method of privatization of each utility is to be  approved by Parliament based on a proposal by the
Ministry for Privatization drawn up after consultation with the Ministry for the relevant utility.
According to the Law on Privatization, 30 per cent of shares in utilities will be transferred to the state
pension funds.  Any shares offered and not acquired will be passed to the CPF.  To date, no detailed
plans for the privatization of utilities have been developed.
Mass Voucher Privatization
The mass voucher privatization is, in effect, a distribution of the shares not sold in the first
phase of privatization.  The vouchers are given to individuals affected by the war hostilities.  The
shares that are represented by the vouchers are presently held in the portfolio of the CPF.  Shares held
by the state pension funds are not included in the process.  The Government started the first round ofvoucher issuance in June 1998 and hopes to conclude the process by the end of 1998. Following the
voucher issuance the CPF will offer and subsequently clear its portfolio.  By the end of the mass
voucher privatization more than 90 per cent of Croatia's companies will be privatized.
"Socially-Owned" Housing
Privatization of former "socially-owned" housing has almost been completed.  Of the 328,489
apartments eligible for privatization, approximately 90 per cent have been sold.  Of these,
37.8 per cent have been sold outright and the remainder have been sold on an instalment basis.
Revenues from these sales have accrued directly to the Government budget and have proved a
successful way of raising funds.  A total of DM3.8 billion of revenue has been raised by selling state
housing (which is significantly higher than the cas h sum raised from the sale of "socially-owned"
enterprises over the past five years).
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