Svilen Parvulov
Stephan Hadjitodorov


Members of the Supervisory Board, Privatization Agency

December 1994

Bulgaria welcomes foreign investment in the ongoing process of privatization, including, of course, American investment. This short paper describes Bulgaria’s privatization regulations, the transactions completed to date, the program for 1995, and three new instruments in privatization, namely: (a) the mass privatization scheme, (b) internal debt-for-equity swaps, and (c) foreign debt-for-equity swaps. We hope that this information will be of interest to the participants in the Bulgarian-American Economic Cooperation Forum.

The paper argues in favor of foreign investment in the privatization process for several reasons. First, this involvement can accelerate the process. Second, the attracted foreign capital can be an important way of overcoming the inherited isolation of Bulgaria from Western markets. Third, foreign debt-for-equity swaps can reduce Bulgaria’s current credit burden. Fourth, and perhaps most importantly, foreign investment can transfer modern know-how, revitalize struggling companies, and lead to more employment and new products and services for the Bulgarian economy.

So far capital privatization has been accepted as the chief form of privatization in Bulgaria, unlike other Central and East-European countries, where mass privatization was mainly supported. Underlying this decision is the conviction that Bulgarian enterprises will come to be owned by persons potentially capable of ensuring prosperity through investments and modern management, and this fact alone counts more than the speed of privatization alone. Among the important aspects of privatization legislature are:

equal opportunities for investors, be they Bulgarian or foreign;

opportunities for employees to acquire shares under preferential conditions (50% discount);

sound procedures ensuring public control and transparency.

An active process of commercialization (corporatization) of state and municipal enterprises has been going on in Bulgaria. Up to now about 95% of the state firms have been transformed into public and private limited companies, where the state owns the shares. This allows for the implementation of standard procedures for transfer of property under the Privatization Law and the Commercial Code.

The Bulgarian Privatization Law envisages the concept of multicentrism of the organization and implementing of privatization activities. The Act and the complementary regulations issued by the government extensively define the prerogatives of state and local government taking into account the specifics of forms of public property in Bulgaria and of the economic sectors supervised by different branch ministries.

The institutional scheme for privatization in Bulgaria provides good opportunities for flexibility, the application of different techniques and restricting the danger of bureaucratization of the process. Practically all government institutions are more or less actively involved in the process of privatization. This fact motivates them in assisting and enhancing it, as well as improving their expertise.

The main government institution in charge of privatization in Bulgaria is the Privatization Agency. It is a state institution with the Council of Ministers but the way its ruling bodies are constituted and the main functions defined within the Law render it virtually independent.

The Privatization Agency is responsible for:

the general organization and control of privatization of all state enterprises;

the elaboration of annual privatization programs;

the privatization of state-owned enterprises, provided their fixed assets exceed 70 million BGL;

managing the fund covering the expenses for privatization of state enterprises;

licensing of appraisers;

collecting information on the entire process of privatization in the country.

The sector ministries are in charge of the privatization of state-owned enterprises whose long-term assets do not exceed 70 million BGL. In their structure they have departments specialized in organizing and implementing privatization transactions.

The Municipal councils are in charge of privatizing enterprises owned by the municipalities. All common procedures envisaged by the Privatization Act for the state-owned enterprises are applied in the privatization of municipal enterprises as well.

The Law provides the possibility for the managing bodies of enterprises and/or the employees to motion decisions for the respective enterprise. Most of the enterprises within the programs for 1993, 1994 and 1995 have been proposed by their managers and employees. One of the principles underlying the Agency's decisions on privatization is to take into account the considerations of managers and employees, although the law does not explicitly state this.

The Law furnishes certain possibilities for ?privatizing privatization?. The institutions in charge of making privatization decisions may authorize other persons to make privatization transactions. The evaluation of enterprises to be sold is almost entirely ?privatized? owing to the special requirement that it should be performed by independent appraisers, most of whom are individuals and private consulting firms. The appraisers for each privatization project are chosen by competition.

Significant amendments of Privatization law took place in June 1994. Some of them were aimed at clarifying and speeding up the procedures and improving the effectiveness of privatization institutions. Special provisions made employee participation in privatization more attractive and favorable. The most important amendment concerned mass privatization and made the implementation of the Check-style scheme possible. This means that Bulgarian citizens will have opportunities to chose among different investment solutions, more or less risky, requiring a different amount of information and knowledge. It could be expected that the likely mass privatization program, if realized within the original scope of design, will have significant macroeconomic implications.

Privatization activities completed to date

The first steps of privatization in Bulgaria were marked by an opportunistic approach - privatization started wherever immediate interest existed. The same was observed in Central European countries. This approach can be justified to a great extent, as the process develops quickly and privatization criteria and technologies will thus crystallize.

Nevertheless, within the center of attention is now coming the systematic approach towards privatization, based on sector projects. It will allow government institutions and potential investors to form a clearer picture of the respective market - its size, level of competition, prospects, substitutes, suppliers, etc. - factors which are relevant for the organization of privatization and estimation of the prospects for investment. The Privatization Agency and some branch ministries put considerable efforts in elaborating analyses and programs for different sectors. Institutions like USAID have made important contribution to this process.

By the end of October 1994 decisions for privatization have been taken concerning 838 state enterprises and units and 177 privatization transactions have been signed. The net revenues for the budget from the finalized privatization transactions are about 4 bln. BGL. The investors are obliged to invest more than 4.6 bln. BGL during next 5-6 years and to maintain and create about 14, 000 jobs. Most of the biggest transactions have been made with well-known foreign companies like Amilum, Nestle, Kraft Jacobs Suchars, Willy Betz, Brewinvest (a Greek subsidiary of Heineken and Coca-Cola), and some others.

The privatization program for 1995

The draft program for 1995 is based on the assumption that enterprises to be privatized as a priority should be:

performing in sectors with comparative advantages;

their privatization could affect positively other companies, technologically and financially linked with them;

they should be attractive for investors;

they should not be in or cannot exercise monopolistic position;

their privatization will not result in significant jobs reduction.

The program for 1995 is based on the new strategy of moderate expectations. The total number of privatized enterprises is expected to be 400-450 (12-13% of the state-owned enterprises). The Privatization Agency itself is to privatize 100-120 enterprises. The total revenues from privatizing state-owned enterprises in 1995 are planned to be 12-15 bln. BGL. About 10-12 bln. should come from transactions performed by the Privatization Agency.

Among the enterprises which could be excluded from the privatization list for 1995 are those in defense industry, oil processing industries, power plants and railway transport.

New instruments in privatization

There are three large scale operations pending that can reshape the Bulgarian privatization. All of them will occasionally coincide and become active probably in 1995. All of them will create additional instruments of payment in privatization and will significantly substitute the expected payments in cash. All of them have a clear macroeconomic impact. These are:

1. The mass privatization scheme.

2. The internal debt-for-equity swaps.

3. The foreign debt-for-equity swaps.

The mass privatization scheme

The Bulgarian mass privatization is based on the parallel implementation of two basic schemes of participation - direct and indirect. The supply side of the mass privatization (selection of enterprises, legal analysis, restitution claims) and the demand side (printing and distribution of the means of payment, establishment and licensing of the financial intermediaries, control) will be institutionally separated. The supply side could be carried out by the Privatization Agency and the final word will be for the Parliament, while the demand side is to be managed by the recently established Center for mass privatization.

According to the law all adult Bulgarian citizen have the right to participate on an equal basis if they register in a special registration network and possess a privatization certificate with face value of 25_000 BGL. After registration the certificates will not be tradable, but can be trusted to the established intermediaries ? investment funds.

About a quarter of the state-owned equity in the real economy is concentrated in the enterprises selected for mass privatization. The program will cover about 500 state-owned enterprises from all the sectors and branches of the real economy.

According to the preliminary time-table the whole process will last between 12 and 15 months. A successful implementation of the scheme would mean that within one year a dramatic increase in the speed of privatization can be expected. Through acquiring shares - directly in the enterprises or indirectly from the privatization funds - the citizens will be involved in the securities market and hopefully in the corporate governance.

Internal debt-for-equity swap

At the end of 1993 the Parliament adopted the Law on restructuring of the non-served loans negotiated until 31 December 1990. Debts owed by the enterprises to the banks totaling 32 bln. BGL and 1.8 bln. USD were taken by the state, and transferred into debts owed by the state to the banks. To cover the debt the Government issued 20-year bonds with front loaded reduced interest.

As the privatization law allows the creditors of the state debt to swap it for equity in a way determined by the Council of Ministers, a Decree was issued to regulate the procedure. The bonds will thus be an eligible means of payment in all the privatization deals. In this case they will be counted at face value in spite of their market price.

At the time being the internal debt bonds are widely used in privatization transactions and are an important factor for speeding up the process.

Foreign debt-for-equity swap

According to the agreement between Bulgaria and the commercial bank-creditors two kinds of government bonds could be used by investors in privatization transactions ? collateralized discount bonds and front loaded interest reduction bonds. Recently the Council of Ministers adopted special regulations on this matter.

The foreign debt-equity swaps ? often opposed on the grounds of "national sovereignty" ? could significantly accelerate privatization and the inflow of foreign investments. On macro-level they could reduce the credit burden in the critical phase of the economic reform. The attracted foreign capital is an important way of overcoming the inherited isolation from the world markets. On micro-level they can be a good criterion for choosing prospective long term motivated foreign partners.

In the present situation within a restrictive macroeconomic framework and lack of reliable foreign investors, all the additional payment instruments can accelerate privatization. Vouchers in mass privatization scheme and bonds in debt-equity swaps offer a premium to the investor ranging from 95% to 30%.

Because of the chances it gives to foreign investors to gain positions on the Bulgarian market within a relatively short time and the new debt-equity swap options, privatization should generally be preferred to greenfield investment or joint ventures with Bulgarian enterprises (mostly state ones). Such investment may often prove to be a quick solution to the problems of state firms and prevent their closing down.

Hence, the government, and especially the Privatization Agency, consider privatization transactions within a framework of priorities, foremost among which is the investor's willingness to take a long-term perspective of the firm's future by transferring modern know-how, maintaining and increasing the number of employees and offering new products and services on the Bulgarian market.

Some recommendations

Bulgarian and American organizations could facilitate more effectively the process of privatization along the following lines:

1. Establishing effective information systems about:

American companies planning investments in certain industries in Eastern Europe;

checking the reliability and investment potential of interested companies;

2. The Bulgarian Embassy should organize a publicity campaign to present the Privatization Agency, its work and investment opportunities in Bulgaria.

3. Wide distribution of printed materials publicizing privatization in Bulgaria.

4. The organization and funding of sectoral analyses and privatization projects with the participation of Bulgarian experts in project teams.