Metodi V. Metodiev
Researcher, Finance and Macroeconomics
Institute for Market Economics
Privatisation in transition economies like Bulgaria might be the biggest economic event of the past 15 years. And it’s not over yet.
Privatisation has many theoretical economic benefits. One of the main reasons countries pursue privatisation is to reduce the size of the government, based on the rationale that government is overextended, bureaucratic and harmful to enterprise.
The private sector responds to incentives in the market, while the public sector often has non-economic goals. In other words, the public sector is not highly motivated to maximise production and allocate resources effectively, causing the government to run high-cost, low-income companies.
Privatisation directly shifts the focus of a state-owned firm from political to economic goals, which leads to the development of a market economy.
Losing those political goals is also important because bad government policies and government corruption can play a large, negative role in economic growth. By privatising, the role of the government in the economy is reduced, thus there is less chance for the government to negatively impact the economy.
Privatisation usually gives ownership to a larger percentage of the population. Given the level of established property rights, individuals become more motivated and driven to invest in their property, since they are directly compensated for their efforts. State ownership, on the other hand, also often crowds out private-sector investment.
In order to retain a monopoly in a particular industry, state enterprises prevent the private sector from accessing credit. Privatisation does the opposite. It leads to an increase in foreign investment, which has the potential to play a significant role in growth. Foreign investment has “positive spillovers of improved technology, better management skills, and access to international production networks,” according to a 2002 World Bank report.
The Bulgarian experience
Bulgaria’s privatisation processes is clearly marked by two distinct periods. The privatisation process in Bulgaria started in 1992 with the adoption of the Transformation and Privatisation of State-Owned and Municipal Enterprises Act and the setting up of the Privatisation Agency. The Privatisation Agency sold bigger state-owned enterprises and ministries sold public firms as well.
The privatisation process that started in 1992 was slow, and by the end of 1997 the amount of privatisation assets was less than 15 per cent of the total state-owned enterprises assets or 22 per cent of all state-owned assets.
In the context of a politically unstable climate, Socialist Party rule between 1993 to 1997 brought substantial budget deficits and a suspension of payments of the state’s debt to foreign creditors. That rule also chose to solve the country’s financial difficulties through inflation. Thus, from 1996 to 1997, Bulgarians experienced their first hyperinflation in modern, post-totalitarian history. Subsequently, bank runs and the dollarization of the economy led one-third of the banks to publicly avow their bankruptcy. Real GDP per capita reached its pre-1990 level.
The second major period began in 1997. The government that took power in 1997 oriented its efforts towards stabilisation of the economy and the creation of conditions for economic growth. The most important reform that was achieved was related to privatisation.
The Democrat government that ruled from 1997 to 2001 put forward privatisation as a major part of government structural reform. As a result, more than 44 per cent of state-owned assets subject to privatisation were privatized.
In 2002, a new Privatisation and Post-Privatisation Control Act that centralised all sales of state interests in the Privatisation Agency, while the privatisation of municipal property was done by municipal councils or bodies specified by councils. Ministries preserved their role of principals and representatives of the state, as owners of the state interests.
The government that succeeded in 2001 and ruled until 2005 under Prime Minister Simeon Saxe-Coburg followed the same policy, even though at a substantially slower rate. Only eight or nine per cent of state-owned assets subject to privatisation were ceded to private owners.
The National Movement Simeon II (NMSII) government was characterised by one of the biggest privatization deals, that of the Bulgarian Telecommunication Company (BTC). The sale of BTC was the largest and most important privatisation deal in Bulgaria. It has had significant implications for the Bulgarian economy. The BTC privatisation was part of the liberalisation of Bulgaria’s telecommunications market.
Nearly 60 percent of state-owned assets have been privatised. More than 90 per cent of assets subject to privatisation have been privatised.
Interests and shares of 5200 state-owned enterprises have been privatised; 2900 whole enterprises and 2300 detached parts. Almost 4000 minority packages left non-privatised after concluded deals have been sold. Concluded deals have amounted to $10 700 million, including $5 450 million agreed payments under the deals, $1 170 million liabilities undertaken or paid by the buyers, and $4 100 million investment commitments.
More than 1600 industries have been privatised, almost 1200 trade-related firm, more than 600 agricultural concerns, more than 500 construction companies and more than 500 tourist facilities.
About 170 deals have been concluded with foreign investors. Brewinvest S.A. – Greece purchased Zagorka in Stara Zagora 1994. Belgium’s Interbrew purchased Kamenitza of Plovdiv in 1995. Heidelberg Cement AG of Germany bought Zlatna Panega and Granitoid in Batanovtsi in 1997. In 1997, SOLVAY of Belgium bought Sodi, Devnia. Lukoil Petrol bought Neftochim of Bourgas in 1999.
In 2004, Viva Ventures Ltd., of Vienna, Austria bought the Bulgarian Telecommunication Company; E.ON Energie AG of Germany purchased EDC Varna and EDC Gorna Oriahovitsa; EVN AG of Vienna, Austria bought EDC Stara Zagora and EDC Plovdiv; CEZ a.s., of the Czech Republic, bought EDC Stolichno, EDC Sofia Oblast and EDC Pleven.
The present Government has done very little in terms of privatisation, except for the two major privatisation deals concluded a few weeks ago – Bulgaria Air and Yuri Gagarin BT.
Between August 2005 and June 2006, according to the Ministry of Finance, privatisation receipts reached about 110 million euro resulting from the deals made before. According to Privatisation Agency data, the ratio of privatised assets to assets subject to privatisation and to total assets is 91 per cent and 60 per cent respectively in 1995 prices.
It should be noted is that the Government intends to privatise companies in the energy, transport, machinery and production sectors but missed hospitals, schools, land and dams — infrastructure that could and should be privatised quickly.
Privatisation methods may divided into three major groups:
1)Public Auction - the public auctions may be attended or unattended. The organisation and the conduct of public auctions are charged to an auction commission. The auction documents are approved by the Privatisation Agency simultaneously with the adoption of the decision on sale that is published in the Official Gazette and in at least two central newspapers
2)Public Tender - The public tender could be held in two stages - preliminary and final. The organisation and the conduct of the public tenders are charged to a tender commission. The tender documents are approved by the Privatisation Agency simultaneously with the adoption of the Decision on Sale that is published in the Official Gazette and in at least two major newspapers.
3)Stock Exchange - Minority or majority packages of shares in enterprises are privatised through the Bulgarian Stock Exchange - Sofia against cash and non-cash instruments of payment. One should take into consideration the positive fact that part of recently conducted deals were done through the stock exchange. A good example of “best practices” was the deal with Yuri Gagarin BT.
Throughout the privatisation process, the government should take into account the key principles of privatisation: transparency, equal treatment of participants, speed and efficiency. They could only be realised if there are mature financial markets and, last but not least, the political will.
