International Business : Croatia’s War-Torn Oil Industry Preparing Itself to Go Private

ISSUE: Croatia’s government insists that it has not abandoned plans to privatize the nation’s mammoth oil conglomerate, despite extensive damage during several months of civil war and the uncertainty of lasting peace in the former Yugoslav republic.

INA-Industrija Nafte, or INA, is Croatia’s largest business enterprise. With revenue of about $2 billion and assets of more than $3 billion in 1992, INA was estimated to represent between 22% and 30% of Croatia’s gross domestic product of about $9.9 billion last year. Because of its size and its participation in a wide variety of industries, any restructuring of INA would have an enormous impact on the Croatian economy.

BACKGROUND: INA was nationalized in October, 1990, by the then government of Yugoslavia as the first step toward a restructuring and eventual privatization. The civil war broke out in June, 1991, after Slovenia and Croatia declared independence from the disintegrating Yugoslav federation. Croatia, under attack from Yugoslav troops and the dominant republic of Serbia, lost a third of its territory and its economy was left in shambles.

INA estimated that while the war between Croatia and Serbia was in full swing, it suffered between $300 million and $350 million in direct losses from damage to its properties. The company also estimated millions of dollars in indirect losses due to its richest oil fields being occupied by the Serbian-dominated Yugoslav Army, the loss of important markets and the confiscation of its properties in Serbia.

OUTLOOK: Overshadowing INA’s future is the tenuous peace in Croatia under the cease-fire brokered by the United Nations. Unfortunately for INA, dealing with the prospect of further war is only one of the Herculean tasks it faces. Officials must also attempt to scale down an overstaffed and unwieldy operation inherited from years of Communist control. Among the company’s problems, said a government official who spoke on the condition of anonymity, is that the conglomerate’s value is difficult to define. The company still has vestiges of the communist system, he said, and the way it has been integrated makes it difficult to distinguish which divisions are making a profit.

“Normally, in big companies, you have Western-style profit units (showing) who is making money,” the official said. “That is not so clear over there. Generally speaking, on balance (INA) is doing all right. There might be certain profit units that are making money, and some that are not. “

STRATEGY: To face the post-Communist world in 1990, INA cut its employment to 27,000 people from 35,000 as part of an overall strategy for making the company more competitive. It became a joint stock operation, and though the state still owns all the shares, that move will make it simpler for the government to sell pieces of INA to investors, said Darko Tomic, INA’s liaison on privatization.

INA also centralized its operations, by combining more than a dozen loosely associated companies. Rather than divesting some units in preparation for privatization, INA got bigger. It has gobbled up enterprises ranging from the production of petrochemicals and fertilizers, tools and oil production equipment to tourist hotels.

Economists such as Drazen Kalogjera, a senior research fellow at the Economics Institute in Zagreb, finds the move ironic. He said the old system, which included worker-owned entities, was closer to a free-market economy than the one now in place.

Kalogjera estimated that fewer than 5% of the government-owned businesses eligible for privatization two and a half years ago have become private. And as long as there is the prospect of further conflict, progress is likely to be slow, he said.

“We are all hostages to the war,” he added.

Yet, INA executives described an ambitious future for the company. Some divisions, such as parts of the potentially lucrative tourism-related segments, are likely to be sold to foreign investors.

Private, local investment, however, seems to be closer at hand. Earlier this month, plans were announced for leasing 120 gas stations in January. Other proposals have included leasing other INA businesses to private operators. But while their hopes are immense, INA executives such as Tomic try to remain realistic. He said he hopes that public-sector businesses will be privatized in such a way that the government maintains significant interests in them.

Many Croatians believe the government will keep control of INA’s main oil production business and spin off majority ownership of most of the other segments not related to oil.

“We know we’ll never be one of the Seven Sisters,” Tomic said. “We don’t have such ideas, but we know we can do a lot and make INA a small or middle-sized oil company.”