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.
|