Intro

The combination of mass and market privatization as a specific element of the Bulgarian model acquires more and more distinct outlines as days go by. On January 8, 1996, mass privatization made its official start by the commencement of the citizens' registration for participation. The dead-line for this phase was extended twice and as a result a little above 40 percent of the eligible Bulgarian population bought their voucher booklets. Despite the not particularly attractive public awareness campaign and the non-participation in it of the privatization funds, a fairly good result was achieved in the registration for participation in the mass privatization process.

The first six months of 1996 can certainly be considered the birth date of the privatization funds as an unknown by then economic entity. During this period, more than 90 privatization funds were established and their prospectuses received approval by the Securities and Exchange Com-mission. By the Fall of this year, those who succeed in accumulating a capital of minimum 70 million BG Leva will go through a lengthy procedure of final licensing by the Commission and of court registration. Despite the relatively unfavorable investment climate in Bulgaria, considerable interest is being exhibited by foreign legal entities, mainly from Austria, Germany, the Czech Republic and the U.S., towards the privatization funds. In this sense, it can be expected that mass privatization will foster the inflow of foreign investments. Still, inter-national investors demonstrate a higher level of trust in private owners and market mechanisms.

The list of companies for the first mass priva-tization round comprises 1,050 enterprises. Of them, upon completion of the first round 911 will be above 67 percent privately owned. The balance is as follows: against 75 billion investment BG Leva in the population assets amounting to 92 billion BG Leva (in 1992 prices), or about 20 percent of the state-owned enterprises' assets, are being offered for denationalization.

While for technical and administrative reasons all phases of mass privatization in Bulgaria had to be prolonged, the centralized auctions are expected to start before the end of 1996. Most probably this will be an extremely strenuous period for the state administration because some basic issues of a substantive as well as of a procedural nature are still awaiting normative solutions.

Parallel to the mass privatization preparation and under unfavorable macroeconomics and financial conditions over the past several months, market privatization continued its onerous development. Unfortunately, during 1996 a number of negative factors continued to impede the privatization processes. Despite the explicitly declared political will in support of privatization, the process is being obstructed by the unwillingness of the state administration to sell the enterprises. It is com-plemented by perpetual changes in the legal framework and in the practice of its imple-mentation.

For the period January 1-June 30, 1996, a total of 147 privatization transactions were concluded. Of them 112 were for detached parts and 35 for entire enterprises. In practice, this means slightly above 30 percent fulfillment of the adopted by the Parliament on May 14 Program for Privatization of State-Owned Enterprises in 1996. Of the total number, 31 transactions were concluded by the Privatization Agency. Most active in the first half of 1996 were the Ministry of Trade (48 deals), Ministry of Construction (22 deals), and, unlike during previous periods, the Ministry of Industry (21 privatization transactions).

Number of Transactions Concluded by Institutions (For the period 01.01.96 - 30.06.1996)

Source: Privatization Agency

Direct negotiations with potential buyers were more widely used as a privatization method than ever before and the cases of selling through auctions or tenders were rare. Inconsistencies between provisions in the Privatization Law and in the Securities, Stock Exchanges and Investment Companies Law continue to be an obstacle to the implementation of methods for public offering and sale of shares in the privatization process. The priority of mass privatization in the current year will postpone for awhile the solution of this problem.

The appointment in January of the Securities and Exchange Commission by the Council of Ministers and the timely adoption by the Commission of the most urgent regulations concerning trading with securities and the activities of the stock exchanges laid the ground for the capital market development in Bulgaria. In June, the Central Securities Depository was established as a joint stock company with the participation of the Bulgarian National Bank, the Ministry of Finance, the Center for Mass Privatization and some 30 commercial banks.

In about 70 percent of the concluded in the period January-June privatization transactions, buyers were workers-managers teams, tenants or lessees. The boom of this type of deals was probably due to the upcoming mass privatization and the expected changes in the Privatization Law which were indeed adopted by the Parliament in May and affected this circle of buyers. These changes were an attempt at a more stringent regulatory frame-work of the opportunities and preferences with regard to the buyers and to certain enterprises.

In terms of branch priorities in the annual privatization program, the first place is occupied by tourism. In June a decision was made to offer for cash privatization the first 14 sites of the tourist complex Zlatni Piassatzi. This decision put an end to the lengthy discussions about the method of privatization of such enterprises - as a complex or in detached parts.

Despite the March 1996 Council of Ministers' decision in principle for opening procedures for privatization of the Bulgarian Telecommunication Company and the chemical enterprise "Sodi" - Devnya, the preparation of these deals has barely started and is proceeding at a very slow pace.

During the first half of 1996, the good traditions of municipal privatization established over the previous years continued to produce results -- a total of 934 transactions for privatization of municipal properties were concluded. June 30 was the deadline for submission of applications under Art. 35 of the Privatization Law - i.e. preferences for workers and employees, tenants and lessees to buy properties without auctions or tenders. It is difficult to foresee how municipal privatization will proceed from now on but most probably its rate will diminish.

Privatization of Municipal Enterprises (by 30.06.1996)

Source: Privatization Agency

Since the beginning of 1996, there were several cases of serious tension between the Supervisory Board of the Privatization Agency and its Executive Director. The reason for this dis-agreement were several important privatization transactions which became dismally infamous. This lead to the formation of the opinion that changes in the management of the market privatization process in Bulgaria were needed. It is currently characterized by a mixture of political, administrative and operational functions which are hard to be performed within the existing two-tier management structure - Supervisory Board, com-posed of representatives from the Parliament and from the Cabinet, and Executive Director.

Meanwhile, changes in the Privatization Law were drafted and approved by the Cabinet which pertain to the Privatization Agency structure. The changes suggest reduction of the Supervisory Board from eleven to five members to be appointed by the Council of Ministers based on a proposal by the Minister of economic development. The annual program of the Privatization Agency is to be prepared by the Ministry of Economic Develop-ment and to be approved by the Council of Minis-ters, not by the Parliament as the present Law envisages. Should these changes be adopted by the Parliament, which is very likely to happen given the current majority of the Bulgarian Socialist Party, the Parliament will be isolated from the privatization process and will no longer have the opportunity to intervene and exercise public control.

The proposed changes in the Privatization Law are unlikely to improve the management of the process. They would rather provoke a negative attitude towards cash privatization in Bulgaria and would breed distrust on the part of potential investors in the institutions responsible for its implementation.

The analysis of the results from the privatization process in Bulgaria since the beginning of the year indicates that no substantial changes in the methods and the approach of the state institutions managing and conducting privatization have occurred, neither are there signs that the weaknesses exhibited in prior years have been overcome. On the contrary, it seems that the crisis in the banking system and the mass privatization preparations have further exacerbated some of the problems and have made the execution of already concluded privatization deals questionable.

The Bulgarian market privatization model is based primarily on transactions financed by Bulgarian banks and this in practice aggravates the problems of both the banks and the enterprises. The high interest rates are unacceptable even for the big economic groups, and are entirely unfavorable for the enterprises' management teams which are aiming at buy-outs. Under the influence of the Central Bank's restrictive policy, the commercial banks have considerably limited the access to credit for privatization purposes. Delays in payments under already signed privatization contracts have also been witnessed due to the liquidity crisis in the banks. In addition, the new owners suffer a chronic lack of working capital and find it harder and harder to observe their obligations for additional investments.

By the end of 1996 and over the next year, no substantial improvements in the environment for privatization in Bulgaria can be expected. It will be characterized by an excess of supply over demand, unstable financial and economic conditions, and unachievable for the state administration tasks related to both mass and market privatization. The problems will be intensified by the anticipated liquidation and isolation of a considerable number of state-owned enterprises.

Under these circumstances, the opinion begins to prevail that Bulgaria should seek a solution to these problems in the attraction of more foreign investors in the privatization process. To this end, work on the changes in the foreign investments regime should be speeded up in order to make it more attractive. The lack of conformity between the privatization and concessions procedures is another obstacle for selling some of the biggest Bulgarian enterprises which are subject to foreign investment interest.

Currently, it seems that more than ever Bulgaria needs a long-term comprehensive approach to the issues of privatization and economic restructuring. The transformation of state ownership should be perceived as an integral process which is limited in time. Only the conceptual clarity about the privatization model in all its forms and the preparation of a strict time table can lead to success in the transition to a market economy and democracy.