ANNEX I
State-Owned Enterprise Restructuring
in Croatia
- BACKGROUND AND CONTEXT
In Croatia state-owned enterprises (“SOEs”)continueplaying a critical role in the economy. According to European Commission estimatesbased on ORBIS database, employment in SOEs represents 12% of the overall employment, and SOEs represent 18% of the total turnover and 30% of total assets in Croatia. The state is particularly heavily present in public utilities and transportation, where the share of employees working for the SOEs in 2012-2013 reached 79% and 45% respectively. Other sectors with significant state presence include information and communication (14%), construction (8%) and manufacturing (6%).[1]
The state portfolio of SOEs is managedby therecently established Ministry for State Assets (the “Ministry”), which together with the line ministries manages companies of strategic and special interest. In particular, 43 companies classified as being either of “special interest” or “strategic interest” are in the domain of the Ministry. All other companies (in total 470 of which 35 are in majority ownership of central government) are in the domain of the Restructuring and Sale Center (“CERP”).
Although the value of SOEs assets (30% of total assets) in Croatia is much higher than in Central and Eastern Europe (“CEE”) countries, Croatian SOEs’ revenues stand only at 15% of GDP and they are less profitable or more loss-making than CEE peers in the same sector. This relatively weak performance continues to weigh on public finances as subsidies to SOEs amount to 2% of GDP, significantly above the EU average. SOEs in Croatia have on average lower productivity, measured by revenue per worker, than in their CEE peers, while their leverage is higher.[2]Against this background, a great number of SOEs face financial difficulty[3]and are in need of restructuring.
Restructuring is a complex process requiring substantive expertise and active involvement of both the SOEs and the Government. Currently, there is no adequatelegal framework, which governs the process of restructuring.
In November 2016 a law was adopted to create the Ministrythrough thereorganisation of DUUDI. This law prescribes that the Ministry, in co-operation with other ministries and other state administration bodies and public entities, proposes to the Government a strategy for the management and disposal of state assets as well as analysis of procedures concerning restructuring of SOEs[4]. In this respect, the line ministries, the Ministry of Finance (MINFIN), and the Ministry share responsbilitites, with the latter being the the only hub concerning the State ownership policy and with the mandate of„ scrutinizing of the restructuring plans” (as per article 45 of the State Asset Management Act).The Ministry is currently preparing the new State Asset Management Act, which currently contains generic provisions on SOE restructuring.
The Croatian authoritieslack the skills and experience to provide the necessary guidance to thoseSOEs that face financial difficulty and require restructuring. Therefore, SOEs undertake restructuring on their own, but due to limited capacity, this either takes a long time to complete or does not lead to the desired results, or does not happen at all.
Against this background,the Government of Croatia, represented by the Ministry, is requesting support under the Structural Reform Support Programme (the “SRSP”)to strengthen the SOE restructuring framework in Croatia.
1.1.Objective
The objective of this project is to support the Ministryin its role to coordinate and manage state’s stakes in SOEs, including SOE restructuring. The state should act as an informed and active owner, ensuring that restructuring of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness.
The specific objective of the project is to support the development of a comprehensive framework for preparing andimplementing financial and operational restructuring of SOEs that are in financial difficulty. To this end, support will assist the authorities to review the current processes and provide on the one hand (i) guidelines for the Ministry/CERP/MINFINfor preparing and implementing SOE restructuring plans; and on the other hand (ii) guidelines for SOEs on preparing and implementing their restructuring plans.The project is complemented by activities to build capacity in the Ministry, CERP and MINFINin order to support, guide and supervise these companies during the restructuring process.
This project will primarily target approximately 8 companies[5]of strategic or special interest, which are currently in financial difficulty; however, the envisaged guidelines will be applicable to any SOEs that are facing financial difficulty at any point of the relevant SOEs’ life cycle.
Successful development and implementation of restructuring plans in SOEs facing financial difficulty will inter alia increase SOEs profitability (e.g. EBITDA and/or EBIT), improve management structure, enhance business processes and increase the utilisation of company resources promoting thus commercialisation and economic growth.
1.2.Relevance of the project
According to the latest EU Country Report on Croatia, the country continues to experience excessive macroeconomic imbalances. In particular, SOEs, being on average less productive than private firms, “exert a negative impact on allocative efficiency, and contribute to low productivity growth in the economy.” Accordingly, the 2017 Country-Specific Recommendations for Croatia call to speed up the divestment of SOEs and other state assets and improve corporate governance in the SOE sector[6].
Successful restructuring of SOEs in financial difficultycontributes to both attaining adequate price for assets divestment and improving SOEs effectiveness with a view to optimising contingent fiscal liabilities.
This project underpins the objectives defined in the strategic plan of the Ministry for the period up to 2020[7]as well as builds on past efforts of the Croatian authorities for setting up a framework for SOE restructuring through the 2013-2017 Strategy for management and disposal of assets.
1.3.Beneficiary institutions and other parties involved
Technical SupportRecipient
(1)Ministry for State Assets; Dezmanova 10, 10 000 Zagreb
web page:
(2)Ministry of Finance; Katančićeva 5, 10 000 Zagreb
web page:
(3)Restructuring and Sale Center (“CERP”); Ivana Lučića 6, 10 000 Zagreb
web page:
Technical SupportProvider
European Bank for Reconstruction and Development (EBRD)
Headquarters: One Exchange Square
London EC2A 2JN, United Kingdom
Member State Technical Support Partner
Structural Reform Support Service
Rue de la Loi 170, CHAR 10/009
B-1049 Brussels
European Commission
1.4.Sustainability of the project
The project is about developing a framework (guidelines/methodology) for SOE restructuring that will provide guidance for the Ministry, CERP, MINFINand SOEs[8]in undertaking the restructuring of SOEs in financial difficulty in line with available good practices. The project includes capacity-building activities (workshops) for the Ministry, CERP and MINFIN in order to transfer knowledge and to enable them to support, guide and supervise the respective companies during the restructuring process. The capacity building activities (workshops) will also transfer knowledge to SOEs to enable them applying the proposed methodology. The project will also showcase how to apply the developed framework (guidelines/methodology) for 2 pilot projects.
- DESCRIPTION OF THE SUPPORT TO BE PROVIDED
The specific objectiveof the proposed technical support is to support the Ministry, CERP and MINFIN in establishing a frameworkfor preparing and implementing restructuring plans in SOEsin financial difficulty. Restructuring plansare foreseen to be an integral part of medium-term business plans of the respective SOEs (i.e. those in financial difficulty)(based on the guidelines proposedin the SOE Governance project undertaken by the EU and the EBRD)[9].
Establishment of a frameworkfor the preparation andimplementation of restructuring plans for SOEs in financial difficultyTask1.
Output: Recommendations on the current processes regardingSOEs restructuring
Activities / 1.1.Review of the current processes and capacity at the Ministry/CERP/MINFIN regarding SOE restructuring, including activities, controls, tools, roles, responsibilities and capacity. The review will alsoinclude two SOEs selected as pilot projects.
1.2.Issue recommendations on improving organisational structures within the Ministry/CERP/MINFIN, their processes, reportingand communication between key stakeholders(e.g. line Ministries).
1.3.Organise up to threetwo-day workshop for SOEs, the Ministry, CERP and MINFIN and relevant line Ministries.[10]
Task 2.
Output: Draft guidelines for the Ministry/CERP/MINFINconcerning thepreparation and implementation of SOE restructuring plans
Activities / 2.1Developdraft guidelinesto guide the Ministry/CERP/MINFINthrough the SOEs restructuring process, including:
2.11a methodology for identification of SOEs in financial difficulty and in need of restructuring as well as assessment of strategic options;
2.12a methodology for setting restructuring targets and expected outcomes for such SOEs, including the identification of roles for all stakeholders (e.g. SOES, Ministry/CERP/MINFIN, line ministries etc.) in the process, including:
- Identification and assessment of a small set of KPIs and milestones,
- Guidance for setting their target levels/ranges;
2.3Develop a methodology for implementing restructuring plans with focus on the responsibilities of the Ministry/CERP/MINFIN, in particular monitoring against the applicable targets;
2.4Organise up to three two-days workshops for selected SOEs, Ministry CERP, MINFIN and relevant line Ministries.[11]
This Task will refer to the two pilot projects and the results of review under Task 1.
Task 3.
Output: Draft guidelines for SOEs concerning the preparation and implementation of their restructuring plans
Activities / 3.1Develop draft guidelinesto guide the SOEs through the restructuring process, including:
3.1.1 a methodology foridentification and evaluation of strategic options for the development of the restructuring plan, includingidentification and assessment of financial and operational risks, financing needs (gap), etc.
3.1.2 a methodology for the preparation of restructuring plans, which will include, inter alia:
- Information on obligatory content of financial models, targets, KPIs and supporting narrative
- Identification and analysis of the causes of distress and the stage it has reached
- Identification of measures to be taken and restructuring milestones
- Identification of expected outcomes of the restructuring process, i.e. strategic options (e.g. privatisation, repositioning on the market, etc.)
- Atemplate of a standardised restructuring plan (the methodology developed under this 3.1.2 should provide necessary guidance to fill this template of a standardised restructuring plan);
3.3Based on the methodology developed under 3.1 assiston the preparation or update of a restructuring plan, in two pilot projects (e.g. Railways Infrastructure). The companies to be included in the pilot projects will be determined as part of the project in close consultation with the Ministry.
3.4Organise up to three two-days workshops for SOEs, Ministry,CERP, MINFIN and relevant line Ministries.[12]
All deliverables will be provided first in the draft form and will be updated, to the extent possible, based on comments from the Ministry, the European Commission and the EBRD.
The workshops shall be organised for staff members of the Ministry, CERP, MINFIN and selectedline ministries as well as SOEs(up to 60 participants in total) - to be identified in the consultation with the Ministry, CERP and MINFIN.
- PROJECT RESOURCES
- EBRD
The Project shall be managed by the Operation Leader(s) of the EBRD in consultation with the Ministry and the SRSS.
3.2.Consultant
The EBRD will procure a firm or a consortium of firms (the “Consultants”) to perform activities under this Agreement. The Consultants shall have significant knowledge in the preparation of operationaland financial restructuring plans in line with available best international practices, as well as experience in successful implementation and/or monitoring of restructuring initiatives in state-owned companies, preferably in Croatia. Further, knowledge of the international as well as Croatian context and knowledge of the legal, regulatory and institutional framework governing the SOE restructuring internationally and in Croatia (e.g. local pre-bankruptcy legislation) will be required. It is expected that one set of Consultants will provide services forall activities under the Agreement.
The Consultants shall report to and work under the guidance of the Ministry and the Operation Leader(s). The Consultant shall ensure that all the outputs are in line with the acquis communautaire.
3.3.Resources to be made available by the Ministry
The Ministry shall provide its experts and any documents, data and information necessary for the implementation of this project. It is expected that the Ministry will be the national contact point for the activities, and will coordinate with other Ministries,CERP staff and other national stakeholders. The Ministry will also provide full support of technical equipment to consultants, including available rooms for meetings in its premises, the internet access, teleconference facilities, organisation of the meetings and other support of its help desk on potential IT issues.
3.4.Relations with the European Commission
A Representative of the SRSS will be invited to attend all missions and all pertinent events or activities, whose timing will be dictated by project’s needs and Croatian authorities' availability. To facilitate the organization and efficiency of such missions, events and activities, the EBRD will share with the SRSS in a timely manner the relevant documents.
- IMPLEMENTATION ARRANGEMENTS
- Project schedule
The schedule of activities and deliverables is set out below (indicative timeline). The activities are expected to start in Q1 2018andit is anticipated that the Project will be delivered by the end of Q4 2018 (indicative timeline), assuming that there is continuing support and commitment by the Croatian authorities and there are no delays in establishing meetings with stakeholders, selection of the Pilot Project, access to relevant policy, legal and regulatory documentation and organisation of relevant workshops and availability of participants for the workshops. The timetable also depends on all contractual and administrative procedures, including selection of the Consultants. The total duration of this project is expected to be ten months from the kick-off meeting, provided no delays in provision of information and other support from the Croatian authorities.
The Project shall start with a kick-off meeting in which all key parties – the Ministry/CERP/MINFIN, the EBRD, SRSS and the subcontracted consultant – will participate.
In order to provide direction and consistency to the Project, a Steering Committee shall be established which will provide the authorizing environment for the activities undertaken by the project. The Steering Committee will oversee, monitor and guide the technical aspects of the project, follow up activities and discuss and approve the reports, work plans and deliverables.
The EBRD, representatives of SRSS, the Ministry/CERP and MINFIN will meet on a quarterly basis to discuss the progress of the project, verify the achievement of the outputs and mandatory results and discuss actions to be undertaken in the following months. The Steering Committee will also discuss the draft of quarterly and half yearly reports submitted to it beforehand and recommend corrections. The responsibility for the organization of the meetings of the Steering Committee lies with the project manager of the EBRD.
4.2.Language
Reports and meetings will be provided/conducted in English.Depending on the needs of the participants of the workshops and the meetings of the Ministry and other local stakeholders, translation from/to Croatian will be provided by the Consultant.
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INDICATIVE LOGICAL FRAMEWORK
Expected Results (logic of intervention) / Indicators / Baselines / Means / Result goals / Sourcesof
verificat ion / Assumptions/Risks
Impact
Support the Ministry of State Assets in its role to coordinate and manage state’s stakes in SOEs, including SOE restructuring. The state should act as an informed and active owner, ensuring that restructuring of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness. / NA
COMPONENT
Outcome 1
Establishment of a framework for the preparation and implementation of restructuring plans for SOEs in financial difficulty. / Adoption of the proposed framework / No framework in place / New frameworkis in use. / Assuming:
1)commitment and support from the Croatian authorities, including in providing relevant information;
2)cooperation from the SOEs and the Ministry in providing information and implementation of the assignment and participating in the workshops;
3)political stability/no changes in government;
4)no delays in selection and procuring the consultant;
5)high quality performance by the Consultant.
Output 1.1
Recommendations on the current processes regarding SOEs restructuring / Review and recommendationscover: current processes and activities, roles and responsibilities of the Ministry, CERP and MINFIN relating to the restructuring of SOEs, as well as their relationship with key stakeholders; practices and capacity at two SOEs selected as pilot projects; and taking into account international best practices.
Review covers two pilot SOEs.
Relevant staff group from Ministry, CERP, MINFIN,relevant line ministriesandselected SOEs is chosen for the workshop to cover analysis and recommendations. / 0 (no review has been done) / Personnel: 4-5 experts/month
Travel: locally based experts are expected to be hired, no travel is envisaged. / Review and recommendationscover at least the indicated topics and take into account best practices / relevant experiences from other countries and are country-specific, i.e. adjusted for the Croatian context.
Targeted selection of group for the workshop and positive feedback from the Ministry/CERP on the usefulness of the workshop. / Ministry, CERP, MINFIN, selected SOEs, EBRD/Consultant’s reports.
Output 1.2
Draft guidelines for the Ministry/CERP/MINFIN concerning the preparation and implementation of SOE restructuring plans / Draft guidelines should include methodology for: (i) identification of SOEs facing financial difficulty and requiring restructuring; (ii) setting restructuring targets and expected outcomes for such SOEs; (iii) evaluation of the restructuring targets and then restructuring plans submitted by the SOEs; (iv) overseeing implementation of the SOE restructuring plans, focusing on monitoring responsibilities of the Ministry/CERP and if applicable, MINFIN.
Material on two pilot projects is being used in the preparation of the guidelines.
Relevant staff group from the Ministry, CERP, MINFIN, relevant line ministries and selected SOEs is chosen for the workshop to cover analysis and recommendations. / 0 (no guidelines currently exist). / Personnel: 4-5 experts/month Travel: locally based experts are expected to be hired, no travel is envisaged. / Draft guidelines cover at least the indicated topics and take into account best practices / relevant experiences from other countries and are country-specific, i.e. adjusted for the Croatian context.
Targeted selection of group for the workshop and positive feedback from the Ministry/CERP/MINFIN on the usefulness of the workshop. / Ministry, CERP, MINFIN, selected SOEs, EBRD/Consultant’s reports.
Output 1.3
Draft guidelines for SOEs concerning the preparation and implementation of their restructuring plans / Draft guidelines should include methodology for: (i) identification and evaluation of strategic options for the development of the restructuring plan; (ii) preparation of restructuring plans for SOEs in financial difficulty, including a template of a standardised restructuring plan; (iii) a methodology for implementation of the SOE restructuring plans, including obligations for monitoring and reporting on the progress towards achieving progress under the restructuring plans.
Restructuring plans for two pilot SOEs are updated/developed.
Relevant staff group from Ministry, CERP, MINFIN, relevant line ministries and selected SOEs is chosen for the workshop to cover analysis and recommendations. / 0 (no guidelines currently exist). / Personnel: 4-5experts/month Travel: locally based experts are expected to be hired, no travel is envisaged. / Draft guidelines cover at least the indicated topics and take into account best practices / relevant experiences from other countries and are country-specific, i.e., adjusted for the Croatian context.
Targeted selection of group for the workshop and positive feedback from the Ministry/CERP/MINFIN on the usefulness of the workshop / Consultant’s data, confirmation from the Ministry / Assuming:
1)commitment and support from the Croatian authorities, including in providing relevant information;
2)cooperation from the SOEs and the Ministry in providing information and implementation of the assignment and participating in the workshops;
3)political stability/no changes in government;
4)no delays in selection and procuring the consultant;
5)high quality performance by the Consultant.
Action:the cooperation program or project partly or wholly financed by the EU, which maybe carried out by the Organisation as described in Annex I.