In privatization, rules on state aid must be respected

In the process of privatization, it is important for the state to ensure compliance with the rules on state aid and to act as a private owner selling its assets, striving to achieve maximum revenue or minimal loss upon sale, as otherwise it could be considered that public funds or state aid have been granted to the buyer or the privatized company, according to the Agency for the Protection of Market Competition (AZTN).

From AZTN, in a review of the rules on state aid in the privatization of state-owned enterprises, they note that the economic and financial crisis in the EU has intensified the processes of privatization of state-owned companies in some member states, and a similar situation is occurring in Croatia, where the privatization of Hrvatska poštanska banka, Croatia osiguranje, and HŽ Cargo is being announced.

In privatization, it is also important to consider compliance with the rules on state aid, and the Agency reminds that when privatization is carried out with, for example, the write-off or reduction of state claims or if the state otherwise assists in the privatization, it will not be considered state aid only if it can be “reasonably assumed and proven that the state behaves in that process in the same way as a private owner, that is, according to market principles.”

To determine or exclude the existence of state aid, it is necessary to conduct a so-called private investor test, which in the context of privatization should be viewed as a test of a private seller intending to sell its company under the most favorable possible conditions, that is, at the highest price and without imposing additional conditions that could jeopardize that price.

If the privatization does involve state aid, it must be reported to AZTN, or from July 1 of this year to the European Commission, as otherwise it could involve illegal aid, which is subject to recovery.

AZTN points out the European Commission’s guidelines on the manner and conditions of privatization of state-owned companies, ensuring that such privatization does not involve state aid.

According to these guidelines, the sale should be conducted through a public tender open to all potential buyers, which must also be unconditional, meaning it should not contain additional requirements regarding future activities, retention of employment levels, and similar. It is also necessary to accept the offer from the buyer who has offered the highest price, and the bidder should be given enough time and information to make an accurate assessment of the value of the company being privatized.

In assessing whether there was aid in the privatization or not, AZTN states that the existing practice of the EC and European courts assumes that a private investor would strive to sell their company at the highest price under normal market conditions, without imposing additional conditions that could affect the reduction of the sale price.

In cases where a so-called negative price is achieved in privatization, meaning if the state invested more in preparing the privatization than the revenue it generated from the sale, the price should be compared with the results that would be achieved through bankruptcy or liquidation, to ensure that the state has chosen the most economically rational option and thus minimized the loss.