Corruption in Privatization in the Public Utility Sector and Growth in South-East Europe: Contracts and Regulations in Telecommunication

Case 1: Okta vs. Macedonia

The dispute surrounding the privatized Macedonian oil refinery, OKTA, has raised legal questions about the creation of commercial contracts and privatization, the rule of law, and the effect of foreign investment on a country’s growth and development.

The Macedonian Government sold OKTA at a highly controversial low price (US$32 million) and reduced oil tariffs from 20 percent to 1 percent. A Cyprus firm, EL.P.E.T. Balkanika, bought the only refinery in the country. The refinery, worth more than US$180 million, was given to Greek Hellenic Petroleum, a state-owned firm. Between US$5 and 15 million is rumored to have ended up in the private accounts of government officials from the sale of OKTA.

The dispute between OKTA (EL.P.E.T) and Macedonia arose when the government that privatized OKTA refused to extend the exclusive rights for refinery supply of crude oil granted to the Greek investor, Hellenic, based on allegations that Hellenic distorted market competition and created a monopoly. The Greek-owned OKTA oil refinery filed suit against Macedonia that was related to the privatization in the Paris Arbitration Court. The case is pending, with OKTA demanding approximately 60 million euro in restitution for damages from Macedonia. ¹⁰

According to government officials and economic analyses, privatization contract has caused losses to Macedonia of up to 80$ U.S. million since 1999–2003. Except for completing the 230-mile Thessaloniki-Skopje pipeline, Hellenic hasn’t followed through on other promised investments. The privatization contract provided Hellenic with monopolized oil import rights based on granting exclusive rights, meaning that Macedonia was essentially frozen out of its own market. OKTA sued Macedonia in the Paris Arbitration Court to recover damages already paid to Jetoil, around US$13 million, based on an arbitration award granted in London (Jetoil vs. Okta) for a breach of oil handling contract. The investor also claimed other damages related to the privatization process, including the priority right to supply the refinery with crude oil totaling approximately 60 million euro.

The privatization contract concluded for the OKTA refinery between the government and the investor is unbalanced financially. It protects the interests of the strategic investor, EL.P.E. T. (Hellenic), as well as the exclusive rights granted to the investor, which distorts market competition thereby creating a monopoly. The Agency and Anti-corruption Commission in Macedonia appealed and reported corruption of high government officials for the OKTA sale, but there has been no judicial enforcement due to public prosecutors and judicial corruption.

The contract was valid for 10 years (from 1993 to 2003) and provided that the manipulation fee should be US$4.00 per mt. until the end of 1994. The contract did not contain a provision for fees paid after 31 December 1994, so the court was asked to decide what should happen if the parties were unable to agree on a manipulation fee for any period of time.

Under English law “an agreement between two parties to enter into an agreement in which some critical part of the contract is left undetermined is no contract at all” (Lord Buckmaster in May and Buther vs. The King, 1934). The Court of Appeal had to balance this principle against the need for commercial certainty in contractual relations, and the commercial implication of the judgment is that even vague promises can be given legal force where the commercial context permits.¹²

The London Court interpreted the 1993 contract as a binding agreement for a minimum of 10 years, and that the reasonable fee after the end of 1999 should be paid. A judgment was granted in favor of Jetoil and ordered OKTA to pay 13 million euro in damages. Jetoil recovered the damages from OKTA.

The International Arbitration Court in Zurich resolved in March 2006 a long running ownership battle over Mobtel. The Serbian government and a group of foreign investors agreed to split ownership of Mobtel, with the government holding a 70% stake.