Valentin Karabashev
August 1994
This analysis is published within the
framework of the "Privatization and Private Sector Development in Bulgaria" project supported by the Center for International Private
Enterprise - Washington DC
The opinion of the author is personal and does not necessarily
reflect the opinion of the Center for the Study of Democracy.
Mr. Valentin Karabashev is former Deputy Prime Minister and
Minister of Trade, Member of the Advisory Team, Center for the
Study of Democracy.
Bulgaria adopted its Privatization Law in 1992 - later than the
other Central and Eastern European countries. (Actually, under the
provisions of other Bulgarian governmental regulations, some
privatization started before the adoption of the Law; however, most
enterprises became eligible for privatization beginning in mid -
1992.) The Privatization Law favors capital privatization, i.e.
sale, rather than free distribution of state property. This
approach was accepted because of the belief that ownership should
be transferred to persons with proper management skills and the
ability to provide fresh investment.
The institutional framework was established and started operating
at the end of 1992. It includes three main privatization
institutions: (1) the Privatization Agency, (2) the ministries
managing state participation in various areas of the economy and
(3) the municipalities as owners of municipal property. These
institutions have approached privatization differently, and their
contribution to privatization has varied. For example, in some
industries, such as those controlled by the Ministry of Trade,
privatization is at an advanced stage, while in others it has not
even started. In the tourism industry - one of the most attractive
industries for privatization - a privatization deal has yet to be
struck.
The principal reason for the delay in privatization is because the
responsible institutions have no strong interests in privatizing.
Another reason for the delay is limited potential for Bulgarian
citizens and the domestic private sector to participate in the
privatization process. Large-scale privatization has been primarily
accessible to foreign buyers only. These factors led to the
introduction of a mass privatization scheme in Bulgaria. In May
1993, Prime Minister Lyuben Berov proposed a basic scheme of
privatization through public distribution of coupons with deferred
payment.
A working group of experts headed by Deputy Prime Minister
Valentin Karabashev worked separately on another scheme for mass
privatization.
The course of privatization became a complicated political process
and an arena for fierce political discord. Conflicts related to the
particular form of mass privatization to be employed arose among
members of the government and was one of the reasons for the
destabilization of the Government. In an effort to jump-start the
mass privatization process, on September 8 1994, the government
introduced in the National Assembly a bill, which amended the
Privatization Law. This bill allowed Bulgarian citizens over
eighteen who are permanently residing in the country to participate
in the mass privatization program.
1. PURPOSES OF THE AMENDMENTS.
The changes and amendments of the Privatization Law in this bill,
which was passed in April 1992 were meant to bring about an
acceleration of the privatization process in Bulgaria. The
implementation of the Law and the practical realities of
privatization had demonstrated the need for certain changes in the
applied privatization scheme which would rationalize and make it
more effective. Furthermore, many now believed that market
privatization should be supplemented with a mass privatization
scheme which would be implemented parallel to the market
privatization. Such a simultaneous process would speed up the
transformation. This theory underlies the adopted changes which can
be divided into two groups:
(1) changes concerning the procedures in traditional market
privatization and
(2) changes setting up the legal framework for conducting mass
privatization.
2. PROBLEMS WITH PARLIAMENTARY PROCEDURE AND
CRITICISMS OF THE AMENDMENTS.
The changes and amendments which were finally adopted are the
results of a bill proposed by the government and several draft laws
introduced by members of parliament. A number of parliamentary
procedures were not observed in the adoption of the bill. For
example, the legislative commission was isolated from the
preparation of the bill during the second reading, and the second
reading took place in the absence of a large number of deputies.
All of this had a negative effect on the quality of the adopted Law
for it contains a number of legal and technical imperfections, as
well as some substantial shortcomings from the point of view of
actual practice and economic viability. The section regulating mass
privatization is too general, and many of the essential issues have
not been dealt with in the Law, and therefore, will have to be
settled on an executive level. Additionally, critics have warned
that certain texts of the Law may actually block the privatization
process launched last year, rather than accelerate it.
3. AMENDMENTS RELATED TO THE MARKET SCHEME OF
PRIVATIZATION.
The scope of the Law has been extended with the newly adopted
changes. Not only are entire enterprises and separate parts of
enterprises covered by the Law, but interests and shares owned by
the state and the municipalities also become the object of
privatization transactions.
Additionally, the amendments have increased the number of
enterprises which may be privatized by individual ministries rather
than the Privatization Agency. Under the original Law, only
enterprises with a net worth of their fixed assets up to 10 million
lev could be privatized by individual ministers. With the
amendments, this level has been raised to 70 million lev. This
change is expected to bring about an acceleration of the
privatization process.
Some of the changes significantly improve the possibilities for
preferential participation of staff members in the privatization of
specific enterprises. Other privatization possibilities have been
provided for including leasing with a buyout clause, management
buyouts sales with conditional clauses, etc.
A more controversial element, and probably the one
which will raise the most serious problems in its practical
implementation, is the introduction of "automatic privatization"
for lease-holders, renters and employees. The new procedure
contradicts the underlying logic of the former law (even while the
former law has been preserved in its greater part). The competitive
element has been dropped, as well as the possibility for the seller
(the state and municipalities) to select the most appropriate
privatization method for a given enterprise.
The amendments in this section of the Law also raise the following
issues and risks:
- The break-up of the enterprises that have remaining parts that
cannot be sold;
- The impossibility of covering the liabilities of the enterprises
to their creditors and the state budget during the process of
privatization;
- The possible conflicts among different groups of employees and
between employees and lease-holders/renters;
- Allowing certain persons to enjoy rights on the basis of their
own unlawful behavior (this is due to the fact that some lease or
rent contracts have been concluded in violation of acting
regulations; this does not prevent those persons from taking
advantage of the preferential terms of privatization).
Those risks, along with valuation problems, the lack of procedural
links with the other types of privatization and the unrealistic
time frames provided for by the Law, suggest that this
privatization mechanism, presumed to have an accelerating effect,
will actually hold up small privatization for several months at the
very least.
4. THE MASS PRIVATIZATION SCHEME.
A new chapter has been added to the Privatization Law which
establishes the legal framework for carrying out mass
privatization. In very broad terms, the scheme allows all citizens
over 18 years of age to obtain privatization bonds worth 25,000
investment lev, against which they can acquire interests or shares
of state-owned enterprises. At first glance this scheme appears
similar to those applied in other countries, such as the Czech
Republic, Slovak Republic and Russia.
It is very difficult to analyze the chapter on mass privatization
at this stage, because, as has been mentioned above, the text is
too general and does not regulate a number of important issues,
which will have to be settled by additional regulations. At any
rate, it is possible to outline a number of key problems emerging
with respect to the implementation of mass privatization. Some of
the problems are due to the underlying principles, and other
problems are of a technical nature.
The effectiveness of mass privatization in achieving the goals of
the structural reforms (i.e. creation of real owners, realizing
additional investments and enhancing the effectiveness of the
enterprises) is lower than that of the market type of
privatization. This is particularly true when the enterprises are
in poor financial condition and lack management skills, as is the
case with a large number of state-owned enterprises in Bulgaria.
Mass privatization can therefore only be an additional instrument -
it cannot supplant market privatization. Additionally mass
privatization should be implemented together with other possible
instruments of capital (market) privatization, such as, issuing
long-term state bonds on the internal debt under the swap
operations within the agreement on Bulgaria's foreign debt with the
London Club. The changes in the Law, however, were adopted without
preliminary clarification regarding its correlation with various
other privatization instruments. Such questions will have to be
settled by the government and parliament upon the endorsement of
the specific privatization programs.
The social benefits of mass privatization under the conditions,
which exists in Bulgaria, are also quite debatable. Individual
citizens cannot gain much from it, and in addition, it does not
further the setting up of social security system.
The chapter on mass privatization does not contain any clear-cut
provisions regarding the mechanism of citizen participation in this
type of privatization. The only mechanism that is mentioned is
centralized computerized tenders, and thus, the impression is
created that direct participation of citizens through centralized
computerized tenders will predominate. The participation through
investment funds is not clear in the Law.
The Law also fails to provide positive answers to a
number of questions, such as:
- Exactly how will these centralized computerized tenders be
carried out? Will they involve actual tendering or simple
applications?
- How are ordinary citizens supposed to obtain sufficient
information on the various enterprises within the short terms
envisioned by the government?
- How will the legal status of a large number of enterprises be
cleared within those short terms as is absolutely indispensable in
the case of direct participation of citizens?
- What will be the approach to limited liability companies, which
predominate among the state-owned enterprises and whose legal form,
unlike that of joint-stock companies, is not suitable for a large
number of owners?
In the case of privatization through direct participation of
citizens, there is a serious danger of retaining the present
management of the enterprises for a certain period of time not less
than 8 months when the first stage of mass privatization will be
completed, as well as a risk of blocking new investments, and the
attraction of foreign investors. Meanwhile many of the enterprises
will become insolvent because the restructuring will be stopped
since the owners are not clear till the end of the first stage.
The Law vaguely suggests there is a possibility for investment
funds to act as intermediaries in mass privatization. In the main
text of the Law, there is only one reference to this possibility,
so at this stage the role of investment funds is still
uncertain.
Additionally, it is unclear how these investment funds are to act
as intermediaries - whether in the exchange of bonds for shares of
specific enterprises alone, or also at a later stage, in the
management of those enterprises. The main text of the Law prohibits
the transfer of bonds, which seems to suggest the former option.
Yet, in the transitional and final provisions of the Law there is a
reference to "depositing the bonds in the funds", i.e. there is a
possibility for the citizens to receive shares from the investment
funds, rather than the enterprises themselves. This is, in fact,
the second form of mediation, which can be managed far more
effectively.
The regulation of investment funds and their
activity will be forthcoming - at first, most probably by a
government regulatory act, and later, by a law. The legislative
regulation of the securities market and the functioning of the
stock-exchange is of equal crucial importance to the successful
progress of mass privatization and the structural reform in
general.
5. FINAL CONCLUSIONS.
The general character of the Law (in some of its parts) makes the
related government regulations particularly important. The success
of the privatization process, including mass privatization, will to
a great extent depend on their speedy adoption and the quality of
these regulations. Furthermore, the outcome of mass privatization
will also depend on:
(1) The organization and management of the enterprises selected
for mass privatization by the government,
(2) An efficient advocacy and promotion campaign,
(3) The suitable choice of enterprises for mass privatization;
(4) The general economic and political situation in the
country.
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