CONTENT
1. Methodological preconditions for the assessment of the (un-) successful course of privatization

2. Forms of Privatization
2.1. Restitution
2.2. "Privatization" of the land

3. Privatization of state-owned and municipal enterprises (The Transformation and Privatization of State-Owned and Municipal Enterprises Law - TPSMEL)
The supply of state-owned enterprises
The demand for state-owned enterprises
The progress of privatization
The employed privatization techniques
Privatization expenses
The revenues from privatization

4. The effect of privatization on former state-owned enterprises  

1. Methodological preconditions for the assessment of the (un-) successful course of privatization 

Analyses of the results of privatization in Bulgaria typically consider only denationalization of state-owned and municipal enterprises under the provisions of the Transformation and Privatization of State-owned and Municipal Enterprises Law (TPSMEL). According to Art. 1, Par. 3, privatization constitutes transfer to natural and legal persons of:

1. Shares and interests of companies owned by the state and the municipalities; 
2. The ownership of whole enterprises, separate parts thereof, property of liquidated enterprises or incomplete construction sites; 
3. State-owned or municipal non-residential real estate property which is not part of state-owned or municipal enterprises and is being used for economic purposes. 

As is evident, privatization as defined in the Privatization Law does not include other important property held by the state and municipalities and sold under the provisions of other acts of legislation - the land, petty urban property, housing, the property of the former Collective Farms.

In the economic literature privatization covers all forms of transformation of state-owned and municipal property - not only enterprises but likewise the land, social services (social and old-age security, health care, education)^*.

Such a broad conception of privatization best fits its general definition as a process of denationalization. Privatization in Bulgaria includes at least three interrelated processes: 

• privatization of state-owned and municipal enterprises under the provisions of the Privatization Law; 
• privatization of the land and property of the former Collective Farms under the provisions of the Ownership and Use of Farmland Law; 
• restitution under the provisions of the package of restitution laws^*. 

These three processes combine legal and institutional mechanisms for the sale and use of different types of state, municipal and cooperative property. Some authors argue that privatization ought to include the privatization of public housing. In Bulgaria that process was completed as early as 1992, when privately owned housing in the whole country constituted 82% of the total available housing. This share is among the highest in the world.

Privatization in the social sector is only just beginning in Bulgaria and reflects the process of withdrawal of the state from the total monopoly on these social activities. Regrettably, there lacks any adequate information about the scope of this process. 

The general evaluation of the course of privatization usually only concerns the privatization of the large state-owned enterprises. It is the aim of the present analysis to outline the progress of privatization in the reforming Bulgarian economy with all its diversity and range. Any evaluation of the general course of privatization has to take into account at least the following circumstances: 

• the actual beginning of the process - there was a completion of the legal and institutional framework of denationalization. In fact, Bulgaria did not really begin privatization until the end of 1992, when a considerable part of the legislation and the subsequent regulations were adopted, when the Privatization Agency was set up, as well as the respective privatization departments in the authorities defined under Art. 3 of the Privatization Law. The evaluation of the progress of privatization therefore has to cover a two-year period. It is important to note that the whole legal framework is constantly undergoing further changes in the course of the process itself as it is quite unfamiliar to the Bulgarian legal and economic system. Even the latest regulations adopted by the Government in November are intended to complete the legal framework of privatization with the adopted market (capital) mechanism, i.e. without changing the fundamental choice of privatization method. 
• democratic regimes are generally more conservative by nature and institutional changes are more time-consuming and difficult to carry out. If that really is the case then Bulgaria should be regarded as a very democratic country. The lack of strong political power and the presence of a dynamic and fragile parliamentary majority in the Bulgarian parliament do not provide sufficient political support and guarantees for a comprehensive institutional change such as privatization. 
• the state of the country's economy and above all its income level are crucial in determining the potential for participation in privatization. Whether it is a low-income or middle-income country is of great importance as this is what determines the privatization demand. Bulgaria is a middle-income country, which poses a serious barrier to capital privatization. Of course, experience (Chile, for instance) has shown that a successful capital privatization is possible in such countries as well. The privatization method itself puts a number of limitations with respect to the speed and effect of privatization. Capital privatization is generally slower than the free-of-charge distribution of bonds because it involves time-consuming procedures for valuation, legal analysis, negotiations (tenders) and lawsuits. The data indicate that in all of the reforming countries the speed of the realized transactions is quite slow. Thus for instance, 47 enterprises were sold in Poland in 1994, 16 in Slovenia, etc. 

In this sense the Bulgarian privatization may be regarded as not that slow in view of the employed capital method and the limitations and difficulties ensuing from the as yet not fully established legal and institutional framework of market economy.

• Level of market development (perfect, imperfect competition). Unlike the advanced countries, in those undergoing reforms markets are still characterized by underdevelopment, lack of perfect competition, preservation of monopolistic structures and building up of new ones. Free markets, free competition, an advanced market system are all vital for the realization of lawful price transfer and for inducing high efficiency of the privatized enterprises. 

The choice of capital privatization under the conditions of emerging market economy and markets was a serious challenge insofar as the absence of such conditions and their creation, together with privatization itself, involve substantial risks, both as regards obtaining an adequate price for the privatization objects, and with respect to a sufficiently high privatization demand, to administrative and bureaucratic difficulties, and political support. However, not only has the experiment demonstrated that privatization is possible, but a number of quite profitable transactions have actually been concluded, at rather advantageous conditions for both sides; there has been relatively high stability of the concluded transactions and they are acceptable from a social point of view. One of the chief obstacles to privatization in Bulgaria is the absence of developed capital markets. Parliament's unwillingness to regulate the trade in securities accounts for the fact that one of the most important laws for the transition to market economy - the Securities Law - has still not been passed. The development of capital markets is an important condition for the success of market (capital) privatization. That is why the sale of shares of state-owned enterprises is not being used as a privatization technique.

• An important precondition for privatization is the liquidity ratio of the companies offered for sale. The fact that the process was delayed until mid and late 1992 reduced their liquidity, both on account of running up huge debts, the settlement of which becomes impossible, and due to the delayed structural adjustment which cannot be carried out in the absence of clear prospects regarding ownership. The attempt to settle the non-performing loans (the so-called "Bad Debt" Law) failed to produce a tangible positive effect on the liquidity of state-owned enterprises because they had already incurred debts after 1991 as well. The adoption of the Ordinance on the Acquisition by Banks of Interests and Shares of Privatized Enterprises against Debt also had a limited effect. 

• A key precondition for the evaluation of the course of privatization is the definition of its success. Such a definition always has specific national dimensions. According to Hachette and Luders, Chile had a successful and speedy privatization, meaning that 500 state-owned enterprises and 50% of the farmland were privatized in the period 1974-1989^*. 

The Latin-american experience has shown that privatization initially pursues above all the goals of maximizing the revenues from privatization and limiting public spending on state-owned enterprises. Following the first wave of privatization the countries usually set as a priority the efficiency of the privatized enterprises. Accordingly, there occurs a transition in the employed privatization techniques, with controlling interest being offered to one owner, rather than parcelling out the ownership.

What does successful privatization imply in Bulgaria? This has not been defined and there is no concerted privatization strategy. The selection of privatization objects is made on the principle "whatever is in demand should be sold". The lack of conception about what part is to be privatized of the key public sectors, such as the power industry, public transport, communications, the extractive industry, social services and others, is not only an obstacle to privatization itself, but to structural reform as a whole. Determining the privatization objects within the frames of a one-year program does not in itself prevent the privatization of those outside this program. On the other hand, the one-year period is all too short in the sphere of privatization, which contributes to the instability and uncertain prospects of Bulgarian enterprises. Hence, in the absence of clear priorities and goals, the very meaning of the success of privatization is blurred.

One of the important conditions for privatization is the public and political support for the process, the leadership, the stable institutional system. Regrettably, none of those preconditions is present in Bulgaria and political will itself was put to the test in the past two years. 

Despite all obstacles and limitations, privatization in Bulgaria has started and already has certain achievements, which are all the more praiseworthy in view of the difficulties faced. The process has run without any major political or social opposition and is unfolding with a balance of interests of the key actors, which is equally important for its success.

2. Forms of Privatization

2.1. Restitution
One of the elements of privatization in Bulgaria which has been subject to widest political criticism is restitution. Legislatively the process was based on the package of so-called restitution laws. Rather than the advantages and criticisms regarding this essentially political process, we shall here consider its outcomes, which are largely of an economic character. However, it is this very aspect that is usually overlooked.

Restituted properties by September 31, 1993

Source: Restitutsiata v Bulgaria 3 (Restitution in Bulgaria), Statistical Publishing House, Sofia 1994, p. 20

As is evident from the data, restitution covers above all housing, plots and yards. Together they amount to 64.2% of the number of claimed objects and 62.1% of their total value.

Of the remaining restitution objects, most are businesses. Taking into account that a significant portion of restituted housing is converted into shopping or storage area and the fact that its use following restitution is not always known, we may assume that a substantial part of the restitution objects - not less than half, which means about 30,000 - are used for economic purposes. In this sense, restitution creates the conditions for the formation of a real estate market, for encouraging free enterprise and the development of the private sector.

With the adopted restitution approach and the complicated legal procedures, the data indicate that more than half of the claimed objects, both in terms of number, and of area and value, have been restituted. The share of actually restituted housing out of the total claimed is the smallest (32.8%), together with that of courtyards (46.5%). This is due both to legal disputes over ownership, and to the difficult compensation of objects which are impossible to restitute. Last but not least, the restitution of social and cultural facilities ran into to opposition from the general public.

The process of restitution is practically over in the small and medium-sized business sector with respect to the large part of shops, storehouses, restaurants, hotels, pharmacies, etc. I.e., restitution may be viewed as one of the forms of small-scale privatization. 

The data about regional differences indicate that restitution is impeded by the same fundamental drawback as privatization. Restitution is largely dependent on the political will and the competence of the different institutions. This finds confirmation in the fact that whereas in some regions restitution is more or less completed - in the region of Kyustendil (86.2% of the value of the properties), Bourgas (74..5%), Veliko Turnovo (78.1%), Vratsa (76.8%), Gabrovo (86.1%), while in others the results are quite poor - the region of Plovdiv (10.6%), Dobritch (40.0%), Kurdzali (25%), Varna (47.1%), Pazardhik (47.7%), and others. 

The failure to resolve the problems concerning ownership of 49% of the claimed objects, incl. plots and yards, is among the chief obstacles to the privatization of state-owned and municipal enterprises. In other words, the three forms of privatization - restitution, the returning of the land, and privatization of state-owned and cooperative enterprises, have entered into internal contradictions and conflicts. That is a serious obstacle to the normal course of the three processes. Thus restitution obstructed and halted privatization, and the returning of the land also complicated the legal analysis and transfer of ownership. One of the reasons is to be found in the failure to provide adequate mechanisms for maintaining the balance and hierarchy among the processes (as achieved in East Germany, for instance) in the Privatization Law itself.

Despite the slow pace the process of restitution proceeded relatively more successfully than privatization, if we consider - with certain reservations owing to the methods of price formation and the time of restitution (respectively, of the sale in the case of privatization) - the following two criteria: 

• the value of the restituted objects amounts to BLV 8.5bn, and of privatized objects about BLV 2bn. 
• objects have been restituted, which means that this process has in any case created a great many more new owners than privatization. In this connection, the conclusions about the effect on the stratification of society and the emergence of a new class of restitution owners are politically exaggerated. As evident from the data, the average price of a restituted object is about BLV 225,000, and the average size 549 sq.m. Of course, the market price of a considerable portion of these objects is much higher, but on the whole the objects have a limited designation and are of small economic significance.^* 

Therefore, leaving aside the political motives and implications of restitution, from the point of view of the denationalization of state and municipal property, restitution has created additional opportunities for the development of the private sector in trade and services, which facilitates the accumulation of capitals and the speeding up of privatization in industry. The institutional and legal problems of restitution, which could have been solved had there been sufficient political will, delayed the process of privatization. Financially, the revenues from privatization proved smaller than expected, and an additional burden was laid on state institutions and the judicial system which had its financial implications.

The possible mechanisms for completing the restitution include indemnifying the former owners and providing financial instruments for participation in privatization. Naturally, that calls for a consensus about continuing restitution in the next parliament. 

For the purpose of speeding up the process of settling the restitution claims, the Council of Ministers adopted Decree 198 of September 22, 1994, on the grounds of Art. 6, paragraph 3 of Transitional and Final Provisions of the Privatization Law. The CM adopted an Ordinance on the Procedure of Filing Claims for Compensation by Investment Bonds of Persons whose Property is to be Restored under the Restoration of Property Rights in Nationalized Real Estates Law.

2.2. "Privatization" of the land
Whereas in the privatization of state-owned and cooperative enterprises the approach is gradual (within the frames of the annual privatization programs), in the transformation of the land the approach is more radical and envisions returning the whole farmland within short terms. While the privatization process was criticized for being slow and gradual, in the case of the land restitution criticisms are rather the opposite, against the destructive approach of full returning of the land within real boundaries.

The selected procedures and the returning of the land in real boundaries are conditioned by the traditional organization of Bulgarian agriculture prior to 1944. The approach was widely criticized due to the difficulties connected with the transfer of ownership. 

A comparison with the selected approaches to land privatization in the other countries of Central and Eastern Europe shows that the process is inevitably painful and time-consuming, and much slower than expected and desired. Moreover, Bulgaria is not the only country which has chosen to return the land within real boundaries. Naturally, the scope of this process in Bulgaria is much larger insofar as the whole farmland is subject to restitution.

Despite the difficulties and the economic effect on agriculture, the land restitution in Bulgaria is in itself one of the most sweeping and comprehensive processes in Central and Eastern Europe. Its outcomes (using the two criteria - share of privatized land of the total farmland area and the duration of that transformation) are among the most significant.

In all of the countries the transformation of ownership directly affected the organization of agriculture and brought about a reorientation of the rural population to new forms of farming. These reforms had the weakest negative impact in the countries where private ownership of the land predominated (Poland, Hungary), and affected more seriously those where state and nationalized cooperative ownership occupied monopolistic positions in agriculture (Roumania, Bulgaria, Slovakia). The data indicate that all of the countries of Central and Eastern Europe (and not just those engaged in radical ownership reforms in agriculture) are experiencing great difficulties - fall in output, reduction of cultivated farmland, negative foreign trade balance in agricultural produce. For instance, the fall in agricultural output in Hungary is very high although the ownership reforms are not conducted on such a large scale as in Bulgaria, owing to the fact that a considerable part of the land was private or truly cooperative property even before the outset of the reforms. 

The decline in agriculture is quite serious in Slovakia, with a fall of about 26% in 1992. Although in Poland most of the land was privately owned before the reforms there is a significant decline there as well - 12%.

There are consequently no sufficient grounds to claim that the fall in agricultural output is largely to be accounted for with the changes in ownership. It is due to the restructuring of agricultural produce markets and the general decline of the economy, rather than the transformation of the land into private property. 

Gross Agricultural Output

Source: OECD, Committee for Agriculture, Trade Committee, Review of Agricultural Policies - country reports 1993

Ownership restructuring in agriculture involved three interrelated processes which took place in all countries in transition: 

• transformation of cooperatives; 
• restitution (returning) of the land; 
• privatization of state property in agriculture. 

The different countries chose different ownership models in agriculture. Some of the countries have retained large-scale concentrated economic units, while others are aiming at the creation of small private economic units.

In Roumania a model was chosen of small-scale private agriculture through restoration of property rights in farmland. In 1993 the number of private land owners reached 4.9m holding 9.142m hectares arable land, i.e. an average of about 2 hectares per owner.

In Hungary half of the agricultural output before the reforms used to be produced in private farms. The symbiosis between private and cooperative land is the reason for the relatively successful ownership transformation in agriculture in Hungary. After 1989 in Hungary there was partial compensation and to a lesser degree, restitution of the land. Restitution itself was carried out through compensation bonds. Nevertheless, the process proved slower than expected. By July 1993 only one third of the land in the so-called compensation fund had been acquired by the owners. Furthermore, Hungary, similarly to Bulgaria, undertook privatization (selling off) of all state farms and small firms servicing agriculture. The collective farms are in the process of transformation. Structurally, cooperatives are the dominant unit in Hungarian agriculture.

Czech agriculture plays a lesser role in the economy than in the other countries in transition. Nevertheless, the Czech Republic also experienced a fall in agricultural output. This is above all due to the reduced demand as a result of increased competition of imported agricultural produce. Czech reforms in agriculture did not have such a pronounced negative impact on employment as the structure and size of the farms were retained. 

Slovakia is also engaged in the process of land restitution, privatization of state farms and restructuring of cooperatives. The Slovak approach is rather similar to the Bulgarian one. The changes have brought about an increase in the number of cooperatives from 630 in 1989 to 968 by mid-1993. The average size of the land held by one cooperative is 1,755 hectares, though compared to 1989, one cooperative used to cultivate 2,667 hectares on average. The management of the new cooperatives, not only in Slovakia but in the other countries in transition as well, is impeded by the parcelling out of the property within the frames of the cooperatives and the significant number of cooperative members who own land but do not participate in its cultivation. Thus a specific class of land owners is emerging, who are not involved in production but partake of the profit of the cooperative through their property. Within the cooperative managing authorities this group is typically more inclined to increase dividends at the expense of reinvestment of the profit. In such a situation the management of the newly created cooperatives is quite difficult.

Generally speaking, in all of the countries both the restoration of former property rights and the privatization of state property are taking place at a much slower pace than expected. The delay of the reforms in agriculture contributes to the general decline in agriculture and employment.

The first stage of the land ownership transformation was completed at the end of 1993. All state farms were handed over to the State Property Agency. To a great extent this brought the process under centralized control, depriving the regions of the possibility to elaborate independent policies although it facilitated a speedier implementation. As a result of the difficult financial conditions, for both state-owned and private farms, privatization of the land is taking place very slowly. By the end of 1993 the State Property Agency had sold merely 1.3% of the land and had leased 21%. Leasing has proved to be the most popular privatization method in agriculture in Poland. Privatization of the state property in that sector is leading to an expansion of the existing private farms.

In Bulgaria the chosen model of ownership transformation is among the most difficult to implement - closing down the former cooperatives and restoring the land property in real boundaries. Those processes were realized following complicated procedures of land division, legal analysis and actual restoration, which accounted for the delay of the process and had a serious negative impact on the development of agriculture. Yet, the restoration of private ownership of the land and the selling of the property of the former Collective Farms also had a certain positive effect which is usually underestimated: 

• limiting the public sector in agriculture. There is a serious methodological problem in estimating the share of the private sector in farmland ownership. Formally, from a legal point of view obtaining a title to property is regarded as the final stage of the transfer of property rights. All analyses of the land restitution use this criterion and reach the conclusion that the process has made little progress because only 3,304 title deeds covering about 62,000 decares of land have been issued in the country. To facilitate and speed up the process, the Council of Ministers decided that the documents certifying ownership issued by the Land Boards were to be authenticated in court. From this point of view, if we assess the progress of land restitution on the basis of the criterion "decisions of the Land Boards", it proves to have reached a very advanced stage. As to November 2, 1994, the land boards had certified ownership of 75.8% (39,757m decares) of the farmland. About 54.4% of the arable land is not an object of disputes, i.e. title deeds may be issued. 

In any case, farmland is no longer state property, it has assumed transitional forms in which it is actually used by the private owners. In other words, regardless of the speculations around the title deeds, from an economic point of view it is possible to maintain that the land has been denationalized, moreover, within extremely short terms - 2-3 years, and despite the decline in agriculture that ought to be assessed as a significant step forward in ownership restructuring.

• The creation of new cooperatives based on real private property is another positive outcome of land ownership transformation. Over 1,000 new cooperatives had been set up by the end of 1993. Agriculture in Bulgaria will clearly be developing in two forms of ownership - small and medium-sized private individual or family farms and large new cooperatives. 

A significant small-scale private sector is emerging in agriculture, which encourages free enterprise.

• Similarly to the privatization of state-owned and municipal enterprises and the restitution of urban property, in the case of the land restitution there also appear significant disparities in the development of the process by regions. This confirms the lack of a unified policy and control over the process and the absence of concerted will for its implementation. 

As evident from the map (see Appendix) the process of returning the land is slowest in the region of Russe and most successful in the Sofia district.

Another important factor accounting for the slow restructuring of agriculture is the lack of established farmland markets in the countries in transition. Restrictions on foreign investment in farm land also contribute to the stagnation in agriculture. 

3. Privatization of state-owned and municipal enterprises (The Transformation and Privatization of State-Owned and Municipal Enterprises Law - TPSMEL)

In Bulgaria the Privatization Law was not adopted until the beginning of 1992 and the institutional and legal framework for its implementation was only finalized in late 1992. In such a situation one could hardly expect that a great many enterprises would be sold in two years time. On the other hand, the adopted approach included only capital privatization - the selling, rather than the free-of-charge distribution of state property. In this sense, the course of privatization depends on the supply and demand for state-owned enterprises. In other words, it is not only the late start of privatization, but the very logic of market privatization that makes each transaction time-consuming.

The supply of state-owned enterprises 

An overview of the legal framework of market privatization in the other countries of Central and Eastern Europe indicates that Bulgaria has adopted one of the most liberal regulations of the offer of enterprises for sale. The Law allows for enterprises to be offered and sold even in the cases when they have not been included in the annual privatization programs. 

An even more flexible mechanism was adopted in the privatization of municipal enterprises where the offer of privatization objects depends entirely on the intentions of the municipal councils. 

Unlike most countries undergoing reforms, in Bulgaria there are no restrictions regarding the number of enterprises on offer. According to Art. 2 of TPSMEL, "the adoption of the annual privatization program is not a condition for taking the decision to privatize or the authenticity of the concluded transactions". I.e., the program does not limit the scope of privatization.

There are those who believe that the large number of enterprises offered for sale deflates their price. It is therefore recommended to limit the supply in order to raise prices. This logical construction, however, is countered by two important circumstances. The strategic goal of the reforms is to denationalize within the shortest possible delays, and a limitation of the enterprises on offer would further constrict the space of privatization and would put off in time the transformation of the economy on market principles. On the other hand, the data about the privatization transactions refute the claim that the large supply limits competition in the sale of state-owned enterprises. 83% of the transactions have been concluded through auctions or tenders, in the presence of at least two competing buyers. Only 17.9% of the transactions have been concluded through negotiations with potential buyers, and even that technique does not exclude competition between different buyers.

One could hardly argue that the privatization objects are being sold for less than they are worth, as the price is determined by the market (naturally, using the market techniques of privatization) and that is the only real price. On the other hand, the price does not only depend on purely market, but likewise other, not price-related factors, such as the general state of the economy and the microeconomic situation. In other words, the privatization objects should be treated as a specific category of goods. In an economically and financially unfavorable environment it is but natural for the price to fall. Another argument in favor of the view that the transactions concluded so far have been based on real market prices and that those prices have been relatively high is the fact that most privatization transactions include additional contributions to the economy, such as investments, jobs, and others.

The demand for state-owned enterprises 

The demand for state-owned and municipal enterprises is determined by the financial possibilities of the potential buyers and their access to privatization. Market privatization has not introduced any restrictions in those respects, with the exception of the cases stipulated in paragraph 9 of the Transitional and Final Provisions of TPSMEL. According to it, buyers are required to provide guarantees that they are participating in privatization with lawfully acquired financial means.

The data about the transactions for the privatization of state-owned enterprises concluded so far indicate the following structure of buyers.

Privatization transactions* by type of buyer

Note:

* refers only to state-owned enterprises

As evident from the table, capital privatization has created opportunities for all possible groups of buyers to participate individually or jointly in the privatization of state-owned enterprises. I.e. privatization has been open to all types of buyers, which is its undeniable advantage. The unlimited access is a condition for equal treatment in privatization and allows the possibility for competition and obtaining the real market price of the enterprises in the course of denationalization. 

The information about the concluded transactions suggests a preference for those forms of denationalization where the property is transferred to an individual owner. The cases of joint buying of state-owned enterprises with a combination among the above enumerated types of buyers are more of an exception.

60.5% of the privatization transactions have been concluded with Bulgarian private companies, which makes up 53.5% of the value of all transactions. In other words, the most active and significant buyer of Bulgarian state-owned enterprises is Bulgarian private business. Its participation in privatization suggests that it has already expanded to an extent where possibilities for "green field" growth have been exhausted. That indicates that the capital accumulations of private business are considerable and allow participation in privatization. Bulgarian companies are not only buying small enterprises, but large ones as well. Several companies have already bought two enterprises each. The biggest privatization transactions with Bulgarian companies have been concluded with Multigroup, Siberia, Burt, Teracon, Fincom. 

One of the preconditions for the realization of capital privatization is the wide access of foreign investors to the process. 

Bulgarian privatization provides for equal treatment of local and foreign buyers. Ten state-owned enterprises have been sold to foreign companies, all but one by the Privatization Agency. 

It is interesting to note that the ministries, as privatization authorities defined in Art. 3 of TPSMEL, have not concluded any transactions with foreign buyers. These authorities usually account for that with the weak interest on the part of foreign companies. The latter are interested chiefly in large enterprises while the ministries, including those which own large enterprises as well, sell small ones or separate parts of enterprises.

One possible explanation for this tendency is that the ministries, as authorities exercising the property rights on the enterprises in the respective sector, prefer to set up joint ventures, rather than sell the companies. In this way the Bulgarian enterprise is preserved, as well as the role of the owner - namely, the respective ministry. In some countries (Poland) this conflict of interests has been solved legislatively, with the setting up of joint ventures being treated as privatization and subject to the same procedure and regulations.

The personnel appears as one of the chief agents in Bulgarian privatization. The data refute the idea that market privatization does not create opportunities for participation of the employees. In fact, the selected privatization approach leads to increased employee participation in the ownership and control over the enterprises. The share of the transactions with companies set up by employees in the respective enterprise is 19.2 of the total number of privatization transactions. Those are typically small enterprises in the trade and services sector. A considerable part of the "small privatization" is carried out through market mechanisms. 

One of the changes in the Privatization Law adopted in June 1994 was aimed at expanding possibilities for the so-called "small privatization" regulated in Art. 35 of TPSMEL. State-owned and municipal enterprises with fixed assets under BLV 10m and separate parts of them under BLV 5m may be bought without auctions or tenders according to the estimate of their employees or lease-holders. It is still too early to assess the effect of the introduction of that new privatization technique. From the very beginning, however, there arose problems mainly in municipal privatization as it involves largely objects with a similar asset value.

The data indicate that in most cases it is only part of the employees, rather than the personnel as a whole, that participate in privatization. As will be discussed in the analysis of postprivatization behavior, the most serious difficulties after privatization are experienced by the enterprises bought by the personnel. In a country with a shortage of cash, the employees frequently get into debt in order to buy shares of their enterprise. Encouraging the participation of citizens in privatization may be done with techniques employed in other countries - providing automatic long-term loans with zero interest rate and low taxes.

One of the principal shortcomings of the adopted market privatization model in the country is the limited participation of management in denationalization. The preparation of privatization is reduced to the preparation of the legal analysis and asset valuation, without any promotion campaign within the enterprise itself aimed at involving the personnel and the managers in the process. Privatization is not preceded by financial recovery and actual commercialization. A formal transformation is carried out of the enterprises into companies as defined by the Commercial Law without this being related to specific measures for stabilization of the market positions and restructuring of the state-owned enterprises subject to privatization. This further limits their liquidity.

According to TPSMEL, the management of the enterprise are not treated differently from the personnel and there are no additional conditions attached to their participation. The ministries, which exercise the property rights on state participation in the respective sectors, tend to have a distrustful attitude to privatization through management buy-out.

In most countries of Central and Eastern Europe (the Czech Republic, Poland) the management are required to prepare the enterprise for privatization and elaborate a specific privatization project as part of the commercialization of state-owned enterprises.

In this country managers are isolated from the preparation of privatization and the procedure for its implementation. In this way, privatization is deprived of technical and managerial experience, the managers assume a negative attitude to the process and therefore very frequently create problems regarding the provision of information and the access to the enterprises.

Of all privatization transactions concluded by the end of December only 4 enterprises were bought by managers. In the remaining cases managers are frequently "concealed" behind personnel buy-outs, which, as becomes evident from the case studies gives rise to postprivatization problems in the management of the enterprises. The equal treatment of managers in the course of personnel buy-outs makes both the rationalization of the organization and management structure of the enterprise and the investment policy difficult to implement. The personnel are typically inclined to reinvest a smaller part of the profit, leaving a larger part aside for incomes and social benefits. This gives rise to difficulties in the restructuring of the privatized enterprise. 

The demand for state-owned enterprises is to a great extent determined by capital accumulation. The data about savings indicate the presence of considerable financial resources diffused among numerous small depositors but likewise large potential investors. These resources could be invested in privatization. Naturally, that presupposes a favorable economic situation and suitable credit conditions. The high interest rates do not favor the operation of companies with loan capital. In other words, a reduction of interest rates can be expected to bring about more active participation of citizens in capital privatization.

The demand for enterprises subject to privatization was given a boost, and buyers were granted new and advantageous payment conditions through the introduction of two new payment instruments in privatization - long-term bonds under the "Bad Debt" Law (in leva and foreign currency) and bonds in the country's external debt (discount bonds and front loaded interest reduction bonds). The implementation of these two instruments together with the possibility for cash payment constitute a unique case in privatization practice. The effect of their application may be found not so much directly in privatization itself, but rather in the settlement of the problems with the internal and external debts, which are among the chief obstacles to privatization. At the end of October 1994 the country's internal debt amounted to BLV 258,336.7m, of which BLV 155,199.7m state securities issued for the settlement of non-performing loans of state-owned companies from the banks. (Bulgarian National Bank Information Bulletin, N 11/1994).

According to the adopted approach, these two means of payment may be used for all state-owned enterprises subject to privatization. In other words, the applicability of one instrument is not restricted within a specific segment of the market for enterprises. This means that the two instruments enter into mutual competition. And despite the stipulation in the Ordinance on the procedure for participation in privatization through government external debt bonds, paragraph 2 of the final provisions, that "the use of external debt bonds cannot restrict the other forms of acquiring property in enterprises subject to privatization" (State Gazette, N 99, 2 December 1994), the appeal of the internal debt bonds appears to have declined since the introduction of external debt bonds. On the other hand, payment by bonds is definitely on the rise at the expense of cash payments, which will have an unfavorable effect on revenues from privatization. The total purchasing potential of the two instruments amounted to BLV 382,408m as to the end of December 1994 (USD 3.5bn external debt bonds and internal debt bonds of BLV 32bn and USD 1.808bn), i.e., assets totalling that value may be bought with the two instruments. Bearing in mind the fact, that the assets of state-owned enterprise amount to some USD 17 bn in the end of 1993, it is obvious that there is a considerable excess supply of privatization money.

The data indicate that by the end of December 1994 25 transactions were concluded and paid by internal debt bonds which is about 1/3 of the total privatization revenues. 

Revenues from privatization as to December 31, 1994

The data indicate that 34.5% of the privatized enterprises have been paid with internal debt bonds. This instrument is popular and is used by nearly all of the authorities defined in Art. 3 of TPSMEL, with the exception of the Ministry of Transport and the Tourism Committee. Compared with the total amount of the bonds issued under the provisions of the Non-performing Loans Law (BLV 155 bn), the total sum of privatization transactions with such bonds is merely 0.94%. I.e., at present, there are paying instruments that can not be absorbed in privatization. This problem can not be solved entirely even if internal debt bonds are exchanged for equity. 

The first privatization transaction with external debt bonds was concluded in December 1994 and was probably the first swap operation in Central and Eastern Europe. Moreover, the conditions of the debt-for-property swap in Bulgaria are far more liberal than the mechanisms adopted in Latin America. The profit repatriation, the conditions of the privatization contracts are no different than those for other foreign investors using different instruments of payment. I.e., there is equal treatment of buyers paying with external debt bonds and buyers paying in cash or internal debt bonds. These extremely liberal conditions are supposed to attract back to Bulgaria withdrawn capitals and on the other hand generate additional demand for privatization objects. The reduction of the external debt through debt-for-property swaps will have a positive effect on the financial stability of the country.

The progress of privatization 

The state of the privatization process in this country reflects the actual correlation between the supply and demand for state-owned and municipal enterprises. By the end of December 1994 229 state-owned enterprises had been privatized in Bulgaria, which in terms of numbers amounts to 5% of the state-owned enterprises^*. 

The data about privatized municipal enterprises by the end of November show increased activity of the municipalities in privatization. Up to now 431 municipal enterprises have been sold, with 262 in the period October-November alone. One of the reasons for that is the positive effect of the changes in TPSMEL in the part regulating the use of the revenues from municipal privatization. The fact that 88% of the revenues now remain at the disposal of the municipal councils motivates them in the fulfillment of the municipal privatization programs.

Privatization Transactions as to 31 December 1994

Source:

Privatization Agency

In general, market privatization is more time-consuming owing to the time necessary for contracting, assets' valuations, clarification of the legal status, e.g. The data about initiated privatization procedures indicate that despite its late start, Bulgarian privatization is gaining momentum. 166 deals for state-owned enterprises and 379 for municipal enterprises were concluded in 1994 aginst 63 and 52 in 1993 respectively. More than 22% of the Bulgarian state-owned enterprises and more than 7% of the municipal ones are in the process of privatization. 70 deals were concluded in the last quarter of 1994 , i.e. that much that were concluded in 1993. Obviously, market privatization is accelerating and it should not be limited or terminated. On one hand, it is due to the political will of the care taker goverment which was in power in the end of 1994; on the other hand it is comntributed to the established institutional and legislative framework, too, the accumulated experience and knowledge.

The correlation between the number of taken decisions to privatize and of concluded transactions suggests that the privatization process is difficult and time-consuming. On average the conclusion of a transaction takes from 6 months to more than a year. This is the major reason for the unsatisfactory number of transactions. The most time-consuming is the stage between the conclusion of the asset valuation and the signing of the contract. The reasons for that delay are well-known:

• The unsettled question of property rights in the buildings and land of the enterprises subject to privatization. With Decree 201 of the Council of Ministers of October 25, 1993 about the transfer of real rights on real estate in the setting up, transformation and privatization of state-owned enterprises (State Gazette, N 93 of November 2, 1993) the authorities under Art. 3 of TPSMEL were granted the right to transfer property rights in the land and other real estate property part of the balance sheet of the companies. This change considerably facilitated privatization insofar as it allowed buyers to acquire the land on which the enterprises have been built as well. 

It is above all the unsettled property rights that account for the termination of 6 privatization transactions.

• The limited information about the enterprises subject to privatization. In the course of the last few months there has appeared a tendency for the enterprises not to provide full and proper information to potential buyers. Undisclosed at the conclusion of the transaction debts of the enterprises, unknown economic problems and others can lead to its termination. On the other hand, the lack of sufficient information about the enterprises subject to privatization reduces the interest of potential buyers. An Ordinance on the conditions and manner of providing information in the case of sales under TPSMEL was adopted (Decree 10 of the Council of Ministers of January 22, 1993) with the aim of solving this problem. Its practical implementation, however, encounters serious difficulties due to the lack of interest in carrying out privatization on the part of company management. 

• The absence of a mechanism for settling restitution claims in privatization.