Written by Vesselin Passev
October, 1993
Sponsored by Center for International Private
Enterprise, Washington DC
As in the other East European countries, the
expectations for speedy privatization of a significant portion of
the state-owned property proved unjustified in Bulgaria. The more
essential reasons for this are the following:
- weakly developed private sector in the
economy prior to the start of reforms. In 1989 the high share of
the public sector in Bulgaria's economy was paralleled only in the
former DDR and USSR;
- the strong centralization of the
privatization process and the lack of adequate economic interests
on the part of the participants in that process. Bulgarian
legislation does not allow managers of state-owned enterprises to
freely set up joint enterprises with Bulgarian or foreign companies
or to participate in what has come to be known in Hungary as
"spontaneous privatization";
- lack of experience on the part of both the
Privatization Agency and the other state authorities involved in
the privatization process;
- weakly developed domestic capital market and
lack of legislation on stock exchanges and securities;
- lack of consensus among the political forces
on the goals and techniques of the privatization of state-owned
property.
The process of privatization only started in 1993, with the
conclusion of the first privatization transactions. This took place
nearly a year following the adoption of the Transformation and
Privatization of State-Owned and Municipal Enterprises
Law.
The belated start of privatization made the
realization of the government's privatization program for 1993
impossible. Merely 2 per cent of the designated enterprises will be
sold by the end of the year. The work of the Privatization Agency
on preparing the companies for privatization is slowed down by the
fact that in a great many instances the legal state analysis
indicates that the ownership of long-term assets is unestablished.
Due to the fact that for decades all property in the country was
self-evidently presumed to belong to the state, the state-owned
enterprises do not have any titles on the lands and facilities in
their possession. There frequently occur disputes with respect to
the ownership which have to be settled in court and consume much
time.
The difficulties encountered by the
privatization methods employed up to now imposed the search for new
forms and alternative techniques for the transformation of state
property. Mass privatization is now perceived as another
possibility for speeding up the privatization process.
As a measure furthering the realization of the
mass privatization project, on September 8th the government
introduced in the National Assembly a bill for the revision and
amendment of the Privatization Law, allowing Bulgarian citizens
over eighteen who are permanently resident in the country to
participate in the mass privatization program.
This version of mass privatization was adopted
following discussions of the two projects.
In the month of May Prime Minister prof. Lyuben Berov put forth
for discussion a basic framework for privatization through personal
privatization bonds with deferred payment.
A working group of experts headed by Deputy
Prime Minister V. Karabashev elaborated another mass privatization
project.
The principal aims of the two projects coincide and can broadly be
summarized as follows:
- speeding up the privatization
process;
- creating opportunities for all citizens of
the country to take part in the acquisition of part of the national
wealth in an equitable and fair manner;
- creating the conditions for more efficient
management and operation of a large number of enterprises through
the transfer of property rights from the state to private
owners.
Prime Minister Berov's project provided for
mass privatization through privatization bonds with deferred
payment after ten years and did not exclude the option of handing
out the bonds free of charge. Citizens were differentiated
depending on the length of service, with persons whose length of
service was over 12 years being entitled to bonds worth 10,000
Leva. The minimum amount for privatization bonds per person was
fixed at 1,000 Leva, i.e. equal to the nominal value of one share
of the privatized enterprise. The planned total amount for the
emission of privatization bonds with deferred payment was 48
billion Leva.
One characteristic of the Prime Minister's
project was that citizens were to acquire shares in enterprises (a
total of 1,200 enterprises from different branches of the economy)
at public auctions. A possibility was provided for the buying of
shares and the exercise of shareholder's rights to be realized
through private funds licensed by a special advisory board of
representatives of the Ministry of Finance, Bulgarian National
Bank, and the Privatization Agency.
An advantage of the mass privatization project
through nominal bonds with deferred payment was that it did not
imply changes in the acting Privatization Law. All regulation acts
were to be created entirely by the Council of Ministers, in
compliance with the authority delegated to them by the
Privatization Law, and more specifically, by Art. 29, paragraph 1.
The principal shortcoming was found in the proposed system of
acquisition of shares with the direct participation of
approximately 5,700 000 people.
The project of the expert group headed by
Deputy Prime Minister Karabashev involved a considerably smaller
number of enterprises to be privatized through investment
(privatization) funds acting as intermediaries between the citizens
and the enterprises.
According to the Karabashev project the first
step would have been setting up the investment funds and
distributing among them the interests and shares of the enterprises
(selected among 353 enterprises proposed by the expert group),
which
are to be privatized within the mass privatization scheme. The
second step involved signing contracts for the management of the
funds. At the third stage it was planned to proceed with the
privatization of the funds through the buying up of shares by
citizens. The characteristics of the project required changes in
the privatization law. Unlike the Berov project, the Karabashev
project allowed for government bonds to be sold freely on the
secondary market.
Following several months of discussions an
agreement was reached among the different views of mass
privatization. The resulting, in fact third, project was approved
by the Council of Ministers. In order to realize the idea for mass
privatization, the Council of Ministers developed and put forth in
parliament a bill for the amendment and revision of the
privatization law.
For the purposes of the mass privatization project the bill
proposes the creation of a new chapter in the privatization law -
"Privatization of Investment Funds and Enterprises". In the
proposed bill the larger part of the activities related to the
carrying out of mass privatization are placed within the
prerogatives of the Council of Ministers with the aim of securing
the proper organizational conditions for the speedy realization of
the first preparatory stages of the project.
Along with the new chapter on mass
privatization, the changes in the privatization law are aimed at
diversifying the forms of privatization, extending the rights of
the municipalities and enhancing the economic impact of
privatization. Thus for instance, in addition to the defined in the
now acting privatization law forms of privatization, the following
new ones have been proposed:
- leasing for a term of 25 years with a buy-out
clause;
- conceding for management with a buy-out
clause or a clause for sale to third persons;
- sale through installed payments with
retention of ownership;
- sale with condition precedent, such as
preserving the functions and sphere of activity, the work places,
making investments, achieving certain results and
others.
The bill for the amendment of the
privatization law envisions increasing the share of the funds
remaining at the disposal of the municipalities upon sale of
municipal enterprises. A number of administrative sanctions are
provided for, against officials violating or failing to discharge
their obligations as stipulated by law.
The bill includes certain amendments related
to the need to change the established practice in the
implementation of the law.
It is proposed to extend the scope of the
privatization law so as to cover the sale of interests and shares
owned by state and municipal enterprises, as well as those in
privatization objects which are as yet inoperable or unfinished. In
the acting law these questions are only treated in very general
terms. There is currently no possibility for the state to transfer
its own shares and interests to companies which are not 100 per
cent state-owned or to other persons. The bill for the amendment
and revision of the privatization law allows for such options.
Another shortcoming of the existing privatization law is found in
the fact that the moment of establishing a privatization procedure
does not coincide with the decision on the type of privatization
technique. In practice, in a number of cases, this has led to a
deterioration in the state of the company following the
announcement of the privatization procedure and the conclusion of
unprofitable transactions. The new project is aimed at eliminating
this shortcoming through restricting the possibilities for
transactions involving the property of the enterprise following the
announcement of the privatization procedure. In the project
proposed by the government the rights of the state institutions
exercising property rights on the enterprise are regulated in a
more specific and strict manner and thus the possibility is
excluded for delay of privatization due to the intervention of
state institutions.
Although the bill does create further
possibilities for speeding up privatization, it could arguably have
been more rational. The general principles and the strong
centralization of privatization characteristic of the existent law
have been preserved. The only substantial changes are related to
the introduction of mass privatization.
The Bulgarian version of mass privatization
involves setting up ten investment funds. They are to be registered
as holding companies with a two-stage system of management. The
shares and interests - owned by the state - in the companies
included in the mass privatization program are to be deposited in
the funds. The management of the funds is to be assigned upon
tendering open to Bulgarian or foreign persons. The larger part (8
funds) are intended to allow the individual participation of
citizens in the acquisition of assets owned by the state, and two
of the funds are designated for the accumulation of assets
necessary for the creation of health service and social security
systems.
All questions related to the profit
distribution, the work of the boards of directors, the rights and
obligations of share-holders, etc., will be regulated through the
statutes of the funds. In the preparatory period prior to their
privatization the titles to the investment funds will be held by
the Council of Ministers, subject to the obligation not to change
their statutes or capital.
Following the adoption of the changes in the privatization law,
the investment funds will gain full control over the assets at
their disposal.
The eight funds will hold a majority of voting
shares in the companies giving them control over their management.
Thus these financial institutions acquire features characteristic
of holding companies. The distribution of the companies among the
funds will take place on the basis of the following general
principles:
- the enterprises should be from different
branches of the economy;
- the enterprises should have different levels
of rentability;
- the total size of the capital of the funds
should be approximately the same.
All entitled citizens aged over 18 will receive an equal number of
privatization bonds to be deposited in one, several, or all eight
investment funds. Following the distribution of the bonds among the
funds, citizens obtain shares whose number corresponds to the
relative share of the privatization bonds they have deposited with
respect to the total number of deposited bonds in the respective
fund.
The entire organization of the creation,
operation and privatization of the investment funds will be managed
by the Council of Ministers. The number of privatization bonds,
their value, what part citizens will be required to pay in advance
in order to acquire the right to use the privatization bonds, the
manner of payment, etc., will also be regulated by the Council of
Ministers.
The mass privatization scheme in Bulgaria
allows for competition in the acquisition of shares from the funds.
The speculative element characteristic of the accumulation of
investment points, as revealed in the mass privatization scheme
used in the Czech and the Slovak Republics, is avoided.
A crucial question for the realization of the
mass privatization project is the selection of the companies. A
specific category of enterprises will be selected for the creation
of the investment funds. Will be excluded:
1. Enterprises from the branches and
subbranches of the economy where privatization is excluded
according to the program of the government, namely: power
engineering, the mining industry, railroads, oil refining, the
defense industry;
2. Enterprises included in the program of the Privatization Agency
for 1993;
3. Enterprises whose privatization it is economically more
rational to carry out in stages;
4. Enterprises in a poor financial state;
5. Enterprises which have not been transformed into companies
according to the Trade Law;
6. Enterprises subject to restitution;
7. Enterprises in which prospective Bulgarian or foreign buyers
have already demonstrated an interest and for which negotiations
are already under way.
In addition to the above general criteria, the
enterprises to be included in the mass privatization program should
also meet the following financial criteria.
1. The property valuation in accordance with Decree X 179 of the
Council of Ministers of 1991 should have been carried out and
indicated in the company's capital;
2. The amount of each company's equity should not be less that BLV
70m.
3. The sales revenues, including the received advances, should
exceed or be equal to the liabilities to suppliers.
4. Financial ratios should have the following values:
- the ratio of asset financing should exceed 1
(this is the correlation between capital and assets);
- the ratio of asset utilization should exceed
1 (this is the correlation between the net amount of sale revenues
and assets);
- the solvency or general liquidity ratio
should exceed 0.75 (this is the correlation between the total value
of current assets and the sum of current liabilities);
- the ratio of current liquidity should exceed
1 (this is the correlation between current assets less the
inventories and current liabilities. Inventories include the
materials, unfinished products, stored output and packaging. Assets
include available money, dues, and delivered goods and
services);
- indebtedness ratio should exceed 0.5 (this is
the correlation between capital and general indebtedness -borrowed
capital plus all other liabilities);
- ratio of financial results from operation
should exceed 0.60 (this is the correlation between the accumulated
interests and the excess of income over expenditure).
From a technological point of view the
enterprises should have the proper technical and technological
level to secure good prospects for their operation without
necessitating large investments and restructuring.
One problem in the selection of the
enterprises will be the fact that very few will be able to meet all
of the established criteria. Many of the enterprises have
liabilities to the banks and other companies and their solvency is
below the normal level. Due to the relatively high interest rate on
credits, the financial state of the enterprises is
deteriorating.
The reluctance of Bulgarian citizens to
participate in the privatization process may pose another obstacle
to the successful start of mass privatization. A number of
sociological surveys and opinion polls indicate that barely 10 per
cent of the Bulgarian citizens will participate in privatization,
regardless of its form. The negative attitude of the general public
is determined by the following factors:
- the relatively higher profitability of
deposit accounts as compared to the expected dividends from shares
in privatized enterprises;
- the lack of experience among the general
public and the insufficient information about opportunities offered
by the participation in privatization and the ways of investing
capital in privatization;
- the financial difficulties of part of the
households, above all pensioners and the unemployed.
The mass privatization project expects the
initial stage of preparing the creation of the funds and the
organization of their activity to be concluded by mid-1994, when
the actual privatization of the funds may begin. As a means of
saving time and reducing costs, the project allows for the possible
substitution of the privatization bonds with some other suitable
arrangement which would not require issuing bonds.
All specific deadlines will be set once
parliament adopts the changes in the privatization law.
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