by Maria Prohaska

The Privatization Act was passed by the Bulgarian parliament in 1992, allowing privatization of state-owned enterprises (SOEs) to move forward. Since February 1993, when the first state-owned enterprise was privatized, privatization has slowly been gaining momentum in Bulgaria. Despite this progress, however, the environment in Bulgaria was anything but conducive to privatization until 1997. The economic and political situations were unstable, scaring off potential investors. High inflation, high interest rates, an unstable banking system, an undeveloped financial sector, and a volatile political environment were the rule.

With privatization developing more slowly in Bulgaria than elsewhere, it was difficult for its supporters to overcome the resistance of certain groups, such as SOE managers, government officials, and large banks. Even today state officials remain unwilling to give up heir direct influence on the economy for personal reward, which has effectively been blocking privatization's progress.

By 1995, rapid progress was being made at least in some areas. During that year more favorable conditions prevailed, including clear political support, intensive preparation, the availability of new types of financial instruments, and the simple fact that the officials responsible for privatization had nearly three years of experience under their belts. In fact, many small-scale privatization deals were finalized.

The Center for the Study of Democracy (www.csd.bg) is an independent organization expert in systematic observation and analysis of privatization and its results; the development of recommendations for state institutions on how to overcome existing problems; dissemination of information among the general population; and training for privatization experts.

CSD boasts political independence in every sense of the word. Without this independence, CSD would be severely hampered in its objectivity, critical to its success in the area of privatization. Just as important, CSD's flexibility allows it to react quickly to the constantly shifting political and economic environment, typical of societies in transition.

In 1991, CSD launched its first privatization project with support from the Center for International Private Enterprise. This project was grounded in the conviction that privatization and the development of the private sector are the foundation for all democratic reforms. Even after the completion of this multi-year project, CSD continues its research and advocacy activities on various aspects of privatization, as well as on other economic reform issues.

Participating in the debate
CSD's research activities and opinion poll surveys have enabled it to be a major participant in the debate on privatization and economic reform issues. CSD has articulated In 1997, CSD assisted the government in its efforts to accelerate privatization and to promote the development of small- and medium-scale enterprises (SMEs) and capital markets in Bulgaria. CSD's activities included drafting legislation, preparing alternative analyses and policy recommendations based on research results, monitoring public attitudes and behavior, public education, and dissemination of results.

Public opinion on privatization has been divided since 1990. Regardless of the twists and turns of economic policy, each successive Bulgarian government has come out in favor of accelerated, transparent, and just privatization. Not one of them, however, has succeeded in allowing Bulgarians to become shareholders in privatized firms in anything like a manner. As a result, distrust toward privatization has developed, as registered by regular opinion polls conducted by CSD since 1990. These polls show that, during the transition years, 60% to 80% of Bulgarians preferred that most of the SOEs remain state-owned.
Even when privatization and structural reform receive nationwide support, most people in Bulgaria prefer to work in a state-owned enterprise rather than in one that is privately owned. In order to address this negative bias, CSD supports the government's positive actions, so that trust toward the privatization process can be developed.

Bansko municipality privatization

One of the best examples of CSD involvement in Bulgaria's privatization was the program it carried out for the municipality of Bansko, a small town in southeast Bulgaria, during 1993-95. The program included the refinement of a regional development plan and the development of a municipal privatization program as a critical strategy for spurring the municipality's development. CSD's specialists provided Bansko advisory assistance at each stage of its privatization drive, and eight privatizations were concluded successfully in that two-year period.

The Center's legal experts also helped the Bansko municipality to prepare the regulations for the privatization investment fund and wrote a reference manual for the use of standard privatization contracts. Having clearly defined rules for the privatization fund helped other municipalities as well because uncertainty about the working of privatization funds had until then impeded their effective allocation of revenues and slowed down their own privatization efforts.

Despite the overall slow rate of privatization of SOEs in Bulgaria, the privatization of municipal-owned property has been successful from the start. In order to replicate the positive results in the Bansko municipality, CSD has concentrated its efforts on informing other municipalities about its model and providing know-how to local government officials and business communities regarding the establishment of a regional privatization investment fund.

Is there a future for privatization?

In early 1997, Bulgaria was on the edge of economic disaster. In order to address quickly in the country's most acute problems, the cabinet and the pro-reform Union of Democratic Forces bit the bullet, and demonstrated political will and the capacity to undertake further reforms in the economy. The main stabilization factor was the creation of the currency board on July 1, 1997.

As expressed in the government program "Bulgaria 2001", quick and transparent privatization is the best tool for combating high inflation and financial instability which are characteristic features of any economy during transition. Accelerating the privatization process requires major amendments in the legislative framework, accompanied by a fundamental change in the approach of all government authorities toward privatization.

Accelerating the process
The privatization of the remaining SOEs requires new accelerated approaches. Speeding up the process will require the use of centralized public tenders, competitive bidding, public offerings on the stock exchange, direct negotiations, management and employee buy-outs, and debt-for-equity swaps. In order to be successful, the government should contract the services of consulting firms, investment banks and other private sector advisors even if the overall control and coordination of the effort remains with the privatization agency.

In enterprises where most assets have passed into private hands, there is no single owner with a controlling stake, which means there is no strategic investor with a strong incentive to inject much needed capital into those companies. In most cases, individual participants and privatization funds have short-term speculative interests. The lack of viable capital markets hampers the transfer of corporate stock from passive small investors to owners of majority holdings.

An important priority for the next few years will be the development of capital markets, including the necessary legal framework for trading government and corporate securities. A properly functioning capital market that has the confidence of companies and investors will add significantly to the country's economic growth. An underdeveloped capital market is a disincentive to both domestic and foreign investors. The stock exchange is the natural source of fresh financial resources, and is sorely needed by the Bulgarian enterprises undergoing major restructuring in the environment of a currency board.

In 1997, CSD assisted the government in its efforts to accelerate privatization and to promote the development of small- and medium-scale enterprises (SMEs) and capital markets in Bulgaria. CSD's activities included drafting legislation, preparing alternative analyses and policy recommendations based on research results, monitoring public attitudes and behavior, public education, and dissemination of results.

CSD also has pioneered the effort to develop stronger corporate governance structures. The Center actively provides assistance to government institutions in transferring SOEs to the private sector, and is effectively advising the enterprises' managers to implement policies based on market principles and mechanisms. CSD's CIPE-sponsored project, "Privatization and Economic Restructuring in Bulgaria," is a long-term information and training program designed to educate the general public and selected professional groups on the importance of putting strong corporate governance institutions in place.

One successful component of this program has been the creation and publication in October 1997 of a brochure titled "How to Trade with Shares from Mass Privatization." To date, 5,000 copies have been printed. This is the fourth successive publication from the CSD series of brochures on privatization targeting the public at large.

Another successful initiative in introducing the corporate governance concept to the Bulgarian public was the town-hall meeting on corporate governance and capital markets issues held in Veliko Tarnovo in May 1997. The meeting was organized by CSD and conducted in cooperation with the Veliko Tarnovo municipality, the Sever privatization fund and the consulting firm Fynsis. The objective of the meeting was to bring the topics of corporate governance and shareholders' rights into the public domain. With that in mind, short presentations were made by a number of speakers including representatives of the Center for Mass Privatization, the Securities and Stock Exchanges Commission, the Central Depository, the Stock Exchange, managers of to-be-privatized and privatized enterprises, as well as the managers of privatization funds.

The town-hall meeting helped introduce small investors to their rights as shareholders and to the mechanisms of the capital market. For the first time, the Bulgarian public at large learned of the possibilities for its participation in the management of privatized enterprises. In 1998, CSD plans a continuation of its town-hall meeting program to educate the general public on its rights and responsibilities in corporate governance and the capital markets system.

CSD also is now supplementing its activities by promoting an improved legal framework. This framework primarily targets the acceleration of the privatization process through the issue of investment vouchers and the centralized sale of SOEs. CSD and its partners will create and submit draft legislation to aid in the second wave of mass privatization and the coordination of social security reforms with privatization. In order to ensure the broadest possible representation, this effort will include collaboration with privatization experts, representatives from the structural reform department of the council of ministers, the privatization agency, the Center for Mass Privatization, ministries, and independent consultants.

A Strategy for Reform

Bulgaria now has the opportunity to implement a coherent mid-term privatization strategy to overcome the impediments to privatization apparent in recent years and to resolve some specific problems. Bulgaria’s Strategy for Accelerating Privatization, prepared by CSD experts together with government officials and private sector consultants, aims to accelerate the privatization process while achieving greater transparency and efficiency for the economy as a whole and protecting the public interest. Goals that need to be reached in this process include the following:

• Increase the involvement and the role of the privatization agency as a coordinating authority;
• Accelerate privatization by grouping the large enterprises into pools and by using international consultants as intermediaries;
• Sell state-owned shares on the stock exchange;
• Increase the role of tenders in privatization;
• Issue investment vouchers and selling through centralized public tenders;
• Private infrastructure enterprises;
• Facilitate management and employee buy outs as a means of accelerating privatization;
• Accelerate privatization trough stimulating debt-for-equity swaps; and
• Combine reforms in social security with the acceleration of privatization.