Available in: Montenegrin

Author: Jan-Peter Olters, World Bank Representative in Montenegro
Published in Monitor, Vol. 20, No. 954 (January 30, 2009),
“Iskričenje struje,” pp. 32–33.

In times of crises, solace tends to be found in tradition. Exactly fifty years ago, in mid-April 1959, John F. Kennedy, at the time US senator, invoked the philosophical wisdom inherent in Chinese calligraphy when arguing that, in this language, the word “crisis” was composed of two characters—one representing “danger” and the other one “opportunity”. A long list of prominent speakers has since anchored arguments on this (as it turns out, not entirely accurate) interpretation of the two characters forming the Chinese word wei ji (crisis). Irrespective of the linguistic precision in the interpretation of these two linguistic building blocks, such an outlook remains a highly constructive approach to any particularly difficult situation, in which options become increasingly limited, by calling for an open mind, willing to search for potential openings that would help to overcome mounting challenges and, at the same time, strengthen one’s position in its wake. There is no better time than a crisis to reassess, soberly and intelligently, previously held positions that might have outlived their usefulness.

Recent developments in the main sectors comprising Montenegro’s economy—whether banks, heavy industry, or tourism—have highlighted the fact that the fallout from the global financial crisis has brought the economic boom to an abrupt end. As is the case elsewhere in the world, 2009 will be an exceptionally challenging—but not necessarily disastrous—year. Foreign capital inflows will not materialize at a level anywhere close to what Montenegro has seen in its immediate post-independence period, affecting detrimentally the liquidity that will be available to enterprises in Montenegro. World market prices for aluminum have fallen by 60 percent from the latest peak last summer, with no indications of a reversal any time soon. The government’s fiscal surpluses, which have been heavily reliant on VAT receipts from imports, will disappear with the dramatic change in the international economic environment. Should economic developments, as they will unfold during the months to come, prove even more difficult than currently foreseen in budgetary projections, the Finance Minister is left with only a few option, viz., to (i) increase tax rates and bolster the budget’s revenue side; (ii) delay public investments; (iii) seek budget support from various multilateral donors in the context of an IMF-led program; or (iv) take decisions that would permit a sufficiently high inflow of foreign-direct investment, including from remaining privatizations.

There are long lists of arguments highlighting harmful or politically unwanted side effects of any of the first three options, and there is some validity in the government’s attempt to avert having to resort to these policy responses. In itself, the fourth alternative is the most attractive approach to the current crisis, even though it is least evident what exactly needs to be done to generate the necessary level of investments from abroad. For the right reasons, the government is devising and implementing a set of policy measures aimed attracting projects financed by companies from abroad. Discussions between the government and potential investors are ongoing. Results, however, remain uncertain. The UN Conference on Trade and Development has recently reported that global foreign direct investments has fallen by more than one-fifth already in 2008, and expectations point to an acceleration of this negative trend in 2009. The indecision by foreign investors is therefore no surprise and not (necessarily) a reflection of an unattractive offer from Montenegro.

The key to injecting some energy to Montenegro’s economy lies, in all likelihood, with its power utility. It appears that the planned recapitalization of EPCG forms the cornerstone of the government’s broader crisis deflection strategy, built on the objective of securing a few large-scale investments, which would—in an economy as small as Montenegro’s—be sufficient to ensure growth rates somewhere in the vicinity of budget’s underlying growth projections of 5 percent. The recent investors’ conference that outlined the “non-classic” offer of a 22-percent share plus management contract to potential strategic investors appears to have attracted considerable interest. However, from an investor’s perspective, owning a company to less than one-quarter, as only the second-biggest partner, is neither here nor there. The company per se has considerable potential, as does the sector in a region constrained by energy bottlenecks. Very substantial investments, both in rehabilitation and construction, need to be made to unlock EPCG’s ability to generate profits.

A very interesting and constructive idea has been injected into the debate on EPCG’s future by the Association of Minority Shareholders, proposing to have their combined portion of EPCG shares added to the government’s offer so as to increase the attractiveness to potential investors. If this route were taken, a number of market participants would benefit. The strategic investor would control slightly more than 40 percent of EPCG shares, increasing its incentive to advance the company’s modernization agenda (and subsequent profit share). In addition, such a step would help to reinvigorate the flagging capital market, as argued by the minority shareholders, and facilitate the return of loans (and liquidity) to the domestic banking sector suffering from, inter alia, a gradually declining deposit base.

It might be worthwhile taking this idea one step further, taking inspiration from the recent inauguration speech by President Obama: “The question we ask today is not whether our government is too big or too small, but whether it works, whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified.” In the current context, this implies a reassessment as to the inherent benefits and costs of having the government control the majority of EPCG shares, to the implications for this company’s consumers, both enterprises and households, and its employees. In light of the government’s public infrastructure investment priorities, the recent World Bank report entitled Beyond the Peak: Growth Policies and Fiscal Constraints has already proposed to re-open the debate on the possible private-sector participation in EPCG beyond the 45 percent currently foreseen. 

The advantages would be evident. By supplementing the current recapitalization offer with the minority shareholders’ proposal and the government’s willingness to privatize some of its share so as to permit the strategic investor to own at least 50 percent-plus-one of EPCG shares, investors’ interest would increase and, possibly, result in a higher price per share. EPCG would receive the necessary funds for required investments, while the minority shareholders’ revenue would find its way into the banking sector in urgent need of further liquidity. The government’s privatization receipts would cover (some of) the revenue gap caused by the fallout from the international financial crisis. The severity of effects from the crisis on the Montenegrin economy warrants a prudent analysis of whether such a step would not, in the end, inhibit benefits in excess of its costs. What better time to reassess, soberly and intelligently, whether the state should really be in charge of both producing and regulating electricity, whether this alternative is, in the end, not more beneficial than the other options available? There is a spark of electricity with the potential to jumpstart a stuttering economic engine…