TABLE OF CONTENTS
I. PRIVATIZATION UPDATE
1. POLITICAL CONTEXT
2. ECONOMIC FRAMEWORK
3. PRIVATIZATION
II.
ACTIVITIES
III.
MEDIA COVERAGE
IV.
FINANCING
APPENDICES
I. PRIVATIZATION UP DATE
1. Political Context
The political situation in Bulgaria for the period
under review was unfavourable regarding the continuance of the
economic reforms so necessary for the country. The urgent and
decisive measures for reaching macro-economic stability and
speeding the market reforms have been once again postponed by the
announced for the end of October '96 presidential elections and the
will of the governing Bulgarian Socialist Party to win those
elections at all costs.
On October 27, 1996 the candidate from the
pro-market opposition party, the Union of Democratic Forces, won
the presidential elections. Although the President of Bulgaria has
a rather representative function, results are interpreted as being
a rejection to the socialist government, which politics brought
about the worse economic crises this country has ever witnessed
since 1989.
The loss of the presidential elections increased the
tension between fractions in BSP and as a result senior party
officials as well as the minister of foreign affairs resigned. The
announced for December extraordinary congress of BSP was expected
to provide answers to the numerous questions concerning the future
of the party and the country as well as the prospects for
constructive reforms in the governing of the left party.
Since November 1996 the political life has been
mainly focused on IMF's idea of introducing currency board in
Bulgaria. Economic and political aspects of the problem are closely
interrelated and the taken decision by the government in favour of
the currency board variant will continue in the next few months to
strongly influence the political situation in Bulgaria.
The currency board will force both government and
Parliament to execute the necessary legislative and regulatory
reforms, which would guarantee the transition to market economy in
Bulgaria. They include full liberalization of all markets,
simplifying bankruptcy procedures and rapid sale of insolvent
companies and banks, as well as explicit refusal on the part of the
state to cover any longer the liabilities of enterprises and
banks.
In November 1996 the Parliament passed a bill draft
for amendments to the Act on economic activity of foreign persons
and protection of foreign investments. "Economic activity" has been
omitted in the formulation of the Act and substituted with "for
promotion and protection of foreign investments", which however
does not change the substance of the Act. In fact, amendments
provide more restrictions rather than preferences for the foreign
investments. This has been the reason for the President to put a
veto on the Act and return it for a reconsideration in the
Parliament.
2. Economic Framework
The last months of 1996 have still more intensified
the negative tendencies in Bulgarian economy, which had prior been
observed: crucial decrease in production and exports, liquidity
crisis in the banking system, high inflation rates, constant
devaluation of national currency, unemployment increase, and
impoverishment of the population that reaches the extent of
physical survival.
Government assurances that Bulgarian economy will
soon improve have been devalued beyond worth by so much repetition.
In a last minute attempt to halt the Leva's free fall and a run on
the banks, Bulgarian National bank hiked its key interest rate to
an annual 300% in late September 1996. (The annual inflation is
running around 300 %.) Wages are now less than . The government
quickly put nine private and state banks under special supervision
and 15 major state companies up for sale. IMF has stalled the
second tranche of a 0 million standby loan, explicitly citing
sluggish privatization and insolvent banks.
Overall the economy is expected to contract by some
10% in 1996; both exports and imports have fallen. As of now the
government has no way to meet the ,4 billion in foreign debt
repayment due in 1997.
A certain improvement has been achieved in the
restructuring of enterprises from industry earmarked for
liquidation and isolation from the banking system. Five of the
companies were successfully sold off. They continue to work and
have started repaying their debts; employees keep their jobs; new
investment is made making possible new products and technologies.
Bankruptcy procedures were launched for ten enterprises and they
are no longer in operation. The condition of the remaining
(approximately 50 in number) companies is directly observed and
controlled by the Ministry of Finance as different variants have
been considered: declaring insolvency, privatization or partial
liquidation.
3. Privatization
Being pressed by the serious economic problems and
by the IMF's recommendation as a condition of continuing
negotiations, the government took decision for quick privatization
of 17 large industrial enterprises not included in the annual
program for privatization. On this basis, revenues for about 1
billion USD are to be expected, which will be purposely used to
reduce the internal debt and to finance the State Protected
Deposits Fund. In fact, by the end of 1996 no enterprise from this
list has been sold, mainly because of the unwillingness on the part
of government to apply the Law on Concessions.
As of December 13th '96, there are 444
transactions for privatization of state enterprises, out of which
132 are for entire enterprises. Only 50 per cents of the contracted
payments have been effectively received. These qualitative and
financial results are better compared to last year, yet the problem
of revenues from privatization will be hard to solve, because of
the instability of the banking system.
Along with the urge of the government to
sufficiently speed up the privatization process, there have also
been observed cases of competition restrictions and preferential
treatment of certain clients, lack of openness and manipulated
privatization transactions. Delayed privatization is better than
none, but public opinion in Bulgaria as well as the international
financial institutions are concerned about these negative
tendencies.
With the adoption of the amendments to the Law on
Privatization in October 1996 the number of the members of the
Supervisory Board of the Privatization Agency was reduced from 11
to 7 in order to ease the work of this controlling authority. As a
matter of fact, this has been an attempt to eliminate the tension
between the Supervisory Board and the Executive Director
(respectively the government). This thesis has also been supported
by the submitted short time earlier resignation of the Chairman of
the Supervisory Board together with the collective resignation of
his colleagues. A new Supervisory Board has not been appointed by
the end of 1996, which has impeded the work of the Privatization
Agency and as a result numerous contracted transactions could have
not been approved.
Relatively without problems and according to the
affirmed plan have the following stages of the first round of mass
privatization been held: licensing and registration of the
privatization funds and first centralised auction for obtaining
stocks, the results of which were announced in the end of the year.
A priority comes to be the problems of post-privatization
enterprise management, the mass privatization shares trading and
protection of the rights of the individual shareholders. There is
insufficient information on these matters as well as legally
undefined questions in Bulgaria. The Center for the Study of
Democracy may very efficiently intermediate foreign experience and
initiate wide public discussion with the participation of all
interested parties.
II. ACTIVITIES
For the first report period (September 16 - December
15,1996) Project Team's efforts were pointed to identify the
activities, defined in the project and to plan them in time. The
first three-month period has covered all major components of the
project in their preliminary stage. Some of the activities were
finalized and they have concrete practical results.
1. Facilitating Public Policy Debate
1.1.Acquaint the Public with Top Economists
Findings:International Conference 'Restructuring of Economies in
Transition', October 11-14, 1996
The conference was a meeting of policy makers,
bankers, managers of enterprises and investement funds on one side
to get the understanding of the problem from a practical point of
view and of researchers bringing to the conference the results of
several years of research work on the challenges of the
transitional period and the consequences for restructuring the
economies in the 90's.
The international conference on "Restructuring
Economies in Transition in the 90s: Enterprise Behavior and the
Role of Financial Intermediaries" was organized jointly by the
Center for the Study of Democracy and the East-West Economic and
Financial Center with the financial support of the EU Program for
Scientific Cooperation in the Field of Economics.
The conference was attended by eminent experts and
researchers of the economies in transition from Austria, Great
Britain, France, Italy, Greece, Canada, the U.S., Albania,
Macedonia, the Czech Republic, and Bulgaria. Among them were Saul
Estrin (London Business School), Jean-Louis Brillet (National
Institute for Economic Studies and Statistics-France), Ioanis
Katzulakus (Athens Institute of Economic Research), Robert Kennedy
(Harvard Business School), etc. The conference host country was
represented by Gancho Ganchev (Ministry of Economic Development),
Zdravko Balyozov (Bulgarian National Bank), Christian Tanushev
(Securities and Stock Exchange Commission), Garabed Minassian,
Mariela Nenova, and other institutions and experts.(See Appendix
1)
During the conference, a number of issues related to
the enterprise restructuring and the economy as a whole were
discussed. They encompass generally the relationship between
privatization and enterprise restructuring, the trends in the
capital markets development and the banking sector reform. The
highly professional reports and materials prepared in advance
served as a basis for discussions. They contain a great quantity of
empirical results and major theoretical conclusions from all
notable studies on these topics over the past several years. A
method widely used in the conference was the comparative analysis
of achievements and failures in the transition to a market economy
in the countries in Central and Eastern Europe.
The prevailing opinion of the participants was that
the conference had been very timely in light of the upcoming
structural reforms in Bulgaria. It provided a possibility for a
friutful exchange of ideas and information and turned into a kind
of assessment of the results from the economic reforms in the
region. The conferenve was also a challlenge for the Bulgarian
participants to use to the highest degree the shared experience and
its lessons in order to achieve rapid and notable results in
privatization and economic restructuring.
1.2. Promoting SMEs Sector Growth: The Agenda for
Implementing Policy Change
In October 1996 the Center for the Study of
Democracy initiated a process aimed at producing a recommendation
paper addressing the policy and legal constraints facing small and
medium size enterprises (SMEs) in Bulgaria, and identifying a set
of possible solutions designed to encourage the growth of this key
sector of the economy. The main purpose of the paper was to set out
a specific and comprehensive agenda for an assistance program in
this area.
Building upon this experience, and its extensive
network of contacts, CSD started a process of development of the
SME policy paper consisting of two stages of consultations. Each
stage was completed by a public discussion at CSD. The first stage
included the initial drafting of the paper and consultations at the
expert level. The second stage aimed at providing bi-partisan
political support for the policy agenda outlined in the paper and
endorsement of its priorities by policy makers from across the
political spectrum. (See Appendix 2)
With a view of adopting a comprehensive approach in
the paper, CSD contacted a number of Bulgarian and international
institutions, involved in the development of SMEs, with a request
for providing suggestions and comments to the paper. As a result,
the paper reflected a variety of the viewpoints and experience thus
ensuring a consensus on its recommendations.
The paper was presented to over 50 experts at
government agencies, business associations, research NGOs, trade
unions, international and foreign donor organizations, and
individual SMEs. The input from the experts included suggestions as
to the structure, additional action line items, and clarification
of certain recommendations.
Stage 1: The Policy Workshop
The first stage of consultations was completed by a
policy workshop held on November 20, 1996 at CSD. Following an
introductory plenary session, the workshop continued in two
separate sessions - on economic policy and on the legal and
institutional environment.
Following the workshop discussions, members of the
task force groups and CSD experts held individual meetings with a
number of policy makers who had been invited to participate in the
forum. The draft paper, amended as a result of the expert
discussion, had been circulated in advance together with some
background information about the objectives of the forum. During
the meetings, the experts provided additional clarification on the
action lines as well as on the overall context of the drafting
exercise.
Believing that in order for the paper to provide an
agenda of a feasible long term assistance program it needs to enjoy
widespread support among politicians and the business community,
CSD invited representatives of the major parliamentary parties, the
government, the governor of the National Bank, leaders of business
associations and trade unions to comment on the paper and take part
in the forum discussions. By enlisting the support of key political
figures and institutions CSD managed to build a consensus for the
agenda which is a key prerequisite for its successful
implementation.
Throughout the process CSD also held several rounds
of consultations with representatives of USAID who provided general
guidelines for the expected output.
Stage 2: The Policy Forum
The policy forum was held on November 29 at the
conference hall of CSD. Following some introductory remarks by
CSD's President, Dr. Ognian Shentov, Mr. John Tennant, USAID
Representative, and Ms. Rose Likins, Charge d'Affaires at the US
Embassy presented the Implementing Policy Change Program. In his
introductory remarks, Mr. Petar Stoyanov, President-elect of the
Republic of Bulgaria, expressed his support for a program
encouraging the development of the private sector in Bulgaria, and
particularly SMEs. CSD's President, Dr. Ognian Shentov informed the
audience about the letter of support on behalf of CIPE.
The first session of the forum was chaired jointly
by Mr. Atanas Paparizov, Minister of Trade and Foreign Economic
Cooperation and Dr. George Prohaski, Executive Director of the Open
Society Fund-Sofia and discussed the economic policy
recommendations of the paper. The second session, dealing with the
policy and legal environment for SMEs was chaired by Mr. Atanas
Zhelezchev, Deputy Chair of the National Assembly. The concluding
part of the forum included a presentation by Mr. Alexander Stoyanov
and Professor Zahari Karamfilov, Chairman of the National Institute
of Statistics on a system monitoring both the state of the SME
sector and the implementation of the policy agenda outlined in the
paper.
2. Mass Privatization and Business Climate
Research
2.1. Tracking the Progress of Mass Privatization:
Survey "Public Preferences and Attitudes Towards Mass Privatization
"
In October 1996 The Center for the Study of
Democracy conducted a national opinion poll survey, dealing with
the problems of denationalization , and mainly with how common
people felt about mass privatization. A total of 1096 respondents
from all parts of the country, of ages above 18 were interviewed.
The sample of respondents was compiled from the names of the voters
listed in the municipal election lists (October, 1995).
The poll results were disseminated among the circle
of professionals and the general public in the form of a series of
articles in the Cash weekly, always dealing with current problems
of mass privatization and the people's opinion about them. (See
Media Coverage) An analysis of these results, accompanied by a
complete set of data, including numerous tables and charts has been
provided to the experts of the Center for Mass Privatization upon
their request.
This poll was part of one of the Center's long-term
programs, which aimed at identifying the overall opinion towards
the process of privatization in each one of its phases, as well as
at following the change in the social attitudes.
The main goals of the survey were:
- to identify the preferred ways of taking part in
the privatization with investment vouchers;
- to collect information about the expected results,
the social and economic consequences of this stage of the mass
privatization.
The data collected provides us with information
about the reasons people choose to participate in the mass
privatization by themselves or through privatization funds, about
their preferences towards specific sectors for investment, about
their trust in the information provided on the privatization funds
and on the enterprises, about the expected results from the mass
privatization, the periods in which profit is expected following
the participation in the mass privatization, the groups of people
and the institutions which are expected to benefit the most from
the process of mass privatization.
The conclusions of the poll had been confirmed by
the factual data available at the moment, which showed that the
greater number of the people, who had bought voucher booklets,
transferred their investment vouchers later to one or more
privatization funds. This situation is accounted for by the fact
that people felt they did not have sufficient information to
participate individually in the process of privatization and opt
for surrendering their right to the competent organizations. The
relative share of people participating in the auctions by
themselves is small. We should also mention the fact that a
significant number of the respondents stated they were not going to
take part in the process of privatization. (See Appendix 3)
If we were to consider the goals of the survey we
can conclude the following:
- The privatization through investment vouchers is
perceived as a useful and necessary for the country process, whose
consequences and results are usually seen as positive in a
personal, as well as in a general for the economy way.
- The favored way for participation in the mass
privatization was through privatization funds. The main reason for
this is the fact that the people have little knowledge about the
process of privatization.
- The leading motive in selecting a privatization
fund is for it to be recommended by proficient individuals as well
as the trust in its founders.
- In general, the people who will be participating in
the auctions on their own do not count on the information about the
enterprises they are given.
- A relatively large number of the respondents refuse
to predict the results of the process of privatization.
- People have shown considerable curiosity for the
investment activities of the privatization funds, despite the low
attendance level in the founding meetings.
- For the people who opted to participate
individually in the mass privatization, the combination of
prospering enterprises from the light industry, trade, and/or
tourism sectors seemed to be the best for their choice of
investment.
- The process of privatization is seen by the people
as an opportunity to restructure the economy, raise the efficiency
of the enterprises, and develop an investment culture in the
general population
- It is expected that the economy will begin to
improve in about 6-10 years, whereas individually, the people
expect profits in 1-5 years.
2.2. Monitoring Business Attitudes towards
Government Economic Policies and Practice
The qualitative survey Business Climate in
Bulgaria was conducted in October simultaneously with the
representative sociological survey. It included interviews with 100
presidents and directors of private companies in small, medium, and
large towns around the country. The companies were selected
according to the number of people they employed - under 50, 50-200,
and over 200 employees This survey was requested by the World Bank
Resident Mission in Bulgaria and its final results will be used in
the preparation of the World Development Report 1997.
The goal of this survey was to collect information
about the evaluation and opinion of the managers of the direction
the economic reform in Bulgaria is taking, their attitude towards
the process of distributing state property and the basis for the
development of entrepreneurship.
In general, the opinion of the leaders of the
private enterprises about the result of the economic reforms in
Bulgaria is categorical - their evaluation is either totally
negative or mostly negative. Their evaluation about the pace at
which the economic reforms are taking place in Bulgaria is even
more categorical - 918% of the respondents said the reforms were
going too slow.
According to more than half of the presidents and
directors interviewed (69.5%), virtually all enterprises ought to
be privatized. It is the largest relative share consisting of those
who said that the privatization will contribute somewhat to
the restructuring of the economy and the improvement of its
effectiveness (41.8%). Despite the fact that most managers of
private firms think all enterprises should be privatized, one out
of four respondents stated that the privatization will contribute
only little to the development of the economy. Furthermore, 11.2%
of the respondents think that the privatization will not help to
improve the effectiveness of the economy in the least.
The initial liberalization of the business community
was not followed by any clear and coordinated activities for
process of distributing state property and the basis for the
encouragement of entrepreneurship. Additionally the constant
instability in the legal, institutional, and financial systems
undermines the economic situation. According to the representatives
of private business most laws cannot be adequately applied in
practice, and corruption is growing in a frightening manner.
3. Introducing the Corporate Governance Concept and
Practices to Bulgarian Experts
3.1. Corporate Governance Agenda for Bulgaria
As one of the pioneer organizations, CSD envisages
to prepare and implement a long-term program for dissemination of
information and training of the population and of selected
professional groups in Bulgaria on the problems of corporate
governance. As a prerequisite for the successful start of the
program in the framework of the Privatization and Economic
Restructuring in Bulgaria project, a CSD team consulted a group
of core experts on its content and time framework for
implementation.
The good CSD institutional contacts, as well as its
continuous research and advocacy work on privatization issues,
allowed the Center, in a mediator's role, to contribute for the
achievement of an expert level consensus, supported by all
concerned institutions as regards the corporate governance agenda
for Bulgaria and the corresponding action plan. As a result of the
expert discussion (November 27, 1996) with the participation of
representatives from the Center for Mass Privatization, the
Securities and Stock Exchanges Commission, the Bulgarian Stock
Exchange, the privatization funds, as well as of researchers and
consultants , the following thematic trends were decided upon to be
included in the Corporate Governance Program. The agenda envisages
the following activities:
- working out and dissemination of an acceptable work
definition of "corporate governance" in Bulgarian;
- research and analysis of the specific problems of
corporate governance in the privatized enterprises and
privatization funds;
- common activities with the privatization funds'
associations;
- study of the foreign experience on the problems of
shareholders' rights protection, and introducing it to the
Bulgarian public.
3.2. Securities Safe Custody and Administration in a
Central Depository seminar (December 12-13, 1996)
The idea for this seminar belongs to the CSD, and it
was carried out with the support of the Fordergesellschaft fur
Borsen und Finanzmarkte in Mittel- und Osteuropa mbH (Germany).
(See Appendix 4)
The conclusion of the first centralized auction of
mass privatization, and the transition to a secondary market of the
privatized enterprises' shares, make the matter of building of the
Central Depository in Bulgaria especially urgent. With the purpose
of supporting its successful functioning, and giving answers to
some unsolved legal matters, the Center for the Study of Democracy
and the Institute for Market Economics organized a seminar on the
above theme.
The seminar gave the Bulgarian participants
(privatization funds, stock exchanges, state institutions) the
opportunity for detailed acquaintance with the organizational
structure and practices of the stock exchange and Central
Depository in Germany. The representatives of the Bulgarian
institutions - the Center for Mass Privatization, the Securities
and Stock Exchanges Commission, the Bulgarian Stock Exchange, and
the Central Depository, together with the rest of participants,
discussed a number of specific problems, connected with the
functioning of the capital market in Bulgaria. They explained the
enforcing of some texts from the Securities and Stock Exchanges
Law, and gave examples of forthcoming changes in the normative
regulations.
4. Privatization Monitor
In the period under review, the regular publishing
and distribution continued of the Monitor of Privatization and
Foreign Investment, based on publications in the Bulgarian
press, on statistic data, and on CSD research findings and advocacy
achievements. With the successful start of the 1996-97 project, the
Monitor is now released via the Internet too, once a month
in Bulgarian and once in two months in English, on CSD's WWW
server.
III. MEDIA COVERAGE
A greater part of the publications, reflecting the
activities on the Privatization and Economic Restructuring in
Bulgaria project, treat strictly professional problems of the
capital markets and corporate governance. For the dissemination of
this information, specialized economic periodicals, having
circulation around 5-10 thousand, have been chosen. A part of the
activities found coverage in brief reports in the electronic media
as well, the strongest accent being put on the Policy Forum
Policy and Legal Environment for the Growth of the SME Sector in
Bulgaria. The Forum was covered by both channels of the
National Television in the evening of the same day. Four major
dailies: 24 hours, Democratsia, Continent, and
Pari - published articles about the Forum on the following
day.
The list of publications is as follows:
1. How To Create an Investment Portfolio, Nikola
Hristovich, Member of CSD Advisory Board, Ikonomicheski
zhivot weekly, October 9, 1996.
2. Achieved and Expected Profitability of
Enterprises (Risks for the Privatization Fund), Nikola Hristovich,
Member of CSD Advisory Board, Ikonomicheski zhivot weekly,
October 16, 1996.
3. Different Models of Corporate Governance in USA,
Germany and Japan, Geoffrey Mazullo, Member of CSD Advisory Board,
Ikonomicheski zhivot weekly, October-November 1996.
4. Calculate Well Your Bid for an Enterprise, Lidya
Shuleva, Member of CSD Advisory Board, Cash weekly, October
17, 1996.
5. Interests and Procedures Slow Down Foreclosures
of Enterprises, Vesselin Passev, Member of CSD Advisory Board,
Cash weekly, October 24, 1996.
6. The Investor's Ideal: A Profitable Firm (CSD's
survey results), Cash weekly, October 24, 1996.
7. Mass Privatization Does Not Always Create a
Capital Market, Banker weekly, November 4, 1996.
8. Mass Privatization: Procedures and Institutions
(CSD's survey results), Cash weekly, November 7, 1996.
9. By December 15 the New Owners Will Be Known
(CSD's survey results), Cash weekly, November 28, 1996.
10. Management And Safe Custody Of Securities (CSD
seminar), Pari daily, December 1996.
11. If the Process Fails, the Reason Will Be the
Force Methods of Government, Vesselin Passev, Member of CSD
Advisory Board, Ikonomika, September 1996.
12. Progress in Mass Privatization, Petkan Iliev,
Member of CSD Advisory Board, Ikonomika, October 1996.
13. Mass Privatization and the Forming of Middle
Class, Petkan Iliev, Member of CSD Advisory Board,
Ikonomika, November 1996.
14. Structure of the Privatization Funds'
Portfolios, Dimitar Batchvarov, Member of CSD Advisory Board,
Capital Market, November 1996.
15. Bulgaria: Summing Up Privatization, Maria
Prohaska, Occasional paper, CSD: October 1996.
IV. FINANCING
All project activities during the period under
review were covered by CIPE funds. Some activities (1.1., 2.2 and
3.2) were covered by matching grants too.
APPENDICES
Appendix 1. Restructuring Transitional Economies in
the 90's (International Conference, October 11-14, Sofia)
Appendix 2. Implementing Policy Change Program
Appendix 3. National Opinion Poll Survey "Public
Preferences and Attitudes Towards Mass Privatization"
Appendix 4. Seminar "Securities Safe Custody and
Administration in a Central Depository" (December 12-13, 1996)
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