Members of the Supervisory Board, Privatization
Bulgaria welcomes foreign investment in the ongoing
process of privatization, including, of course, American
investment. This short paper describes Bulgaria’s privatization
regulations, the transactions completed to date, the program for
1995, and three new instruments in privatization, namely: (a) the
mass privatization scheme, (b) internal debt-for-equity swaps, and
(c) foreign debt-for-equity swaps. We hope that this information
will be of interest to the participants in the Bulgarian-American
Economic Cooperation Forum.
The paper argues in favor of foreign investment in
the privatization process for several reasons. First, this
involvement can accelerate the process. Second, the attracted
foreign capital can be an important way of overcoming the inherited
isolation of Bulgaria from Western markets. Third, foreign
debt-for-equity swaps can reduce Bulgaria’s current credit burden.
Fourth, and perhaps most importantly, foreign investment can
transfer modern know-how, revitalize struggling companies, and lead
to more employment and new products and services for the Bulgarian
So far capital privatization has been accepted as
the chief form of privatization in Bulgaria, unlike other Central
and East-European countries, where mass privatization was mainly
supported. Underlying this decision is the conviction that
Bulgarian enterprises will come to be owned by persons potentially
capable of ensuring prosperity through investments and modern
management, and this fact alone counts more than the speed of
privatization alone. Among the important aspects of privatization
equal opportunities for investors, be they Bulgarian
opportunities for employees to acquire shares under
preferential conditions (50% discount);
sound procedures ensuring public control and
An active process of commercialization
(corporatization) of state and municipal enterprises has been going
on in Bulgaria. Up to now about 95% of the state firms have been
transformed into public and private limited companies, where the
state owns the shares. This allows for the implementation of
standard procedures for transfer of property under the
Privatization Law and the Commercial Code.
The Bulgarian Privatization Law envisages the
concept of multicentrism of the organization and implementing of
privatization activities. The Act and the complementary regulations
issued by the government extensively define the prerogatives of
state and local government taking into account the specifics of
forms of public property in Bulgaria and of the economic sectors
supervised by different branch ministries.
The institutional scheme for privatization in
Bulgaria provides good opportunities for flexibility, the
application of different techniques and restricting the danger of
bureaucratization of the process. Practically all government
institutions are more or less actively involved in the process of
privatization. This fact motivates them in assisting and enhancing
it, as well as improving their expertise.
The main government institution in charge of
privatization in Bulgaria is the Privatization Agency. It is a
state institution with the Council of Ministers but the way its
ruling bodies are constituted and the main functions defined within
the Law render it virtually independent.
The Privatization Agency is responsible for:
the general organization and control of
privatization of all state enterprises;
the elaboration of annual privatization
the privatization of state-owned enterprises,
provided their fixed assets exceed 70 million BGL;
managing the fund covering the expenses for
privatization of state enterprises;
licensing of appraisers;
collecting information on the entire process of
privatization in the country.
The sector ministries are in charge of the
privatization of state-owned enterprises whose long-term assets do
not exceed 70 million BGL. In their structure they have departments
specialized in organizing and implementing privatization
The Municipal councils are in charge of privatizing
enterprises owned by the municipalities. All common procedures
envisaged by the Privatization Act for the state-owned enterprises
are applied in the privatization of municipal enterprises as
The Law provides the possibility for the managing
bodies of enterprises and/or the employees to motion decisions for
the respective enterprise. Most of the enterprises within the
programs for 1993, 1994 and 1995 have been proposed by their
managers and employees. One of the principles underlying the
Agency's decisions on privatization is to take into account the
considerations of managers and employees, although the law does not
explicitly state this.
The Law furnishes certain possibilities for
?privatizing privatization?. The institutions in charge of making
privatization decisions may authorize other persons to make
privatization transactions. The evaluation of enterprises to be
sold is almost entirely ?privatized? owing to the special
requirement that it should be performed by independent appraisers,
most of whom are individuals and private consulting firms. The
appraisers for each privatization project are chosen by
Significant amendments of Privatization law took
place in June 1994. Some of them were aimed at clarifying and
speeding up the procedures and improving the effectiveness of
privatization institutions. Special provisions made employee
participation in privatization more attractive and favorable. The
most important amendment concerned mass privatization and made the
implementation of the Check-style scheme possible. This means that
Bulgarian citizens will have opportunities to chose among different
investment solutions, more or less risky, requiring a different
amount of information and knowledge. It could be expected that the
likely mass privatization program, if realized within the original
scope of design, will have significant macroeconomic
Privatization activities completed to date
The first steps of privatization in Bulgaria were
marked by an opportunistic approach - privatization started
wherever immediate interest existed. The same was observed in
Central European countries. This approach can be justified to a
great extent, as the process develops quickly and privatization
criteria and technologies will thus crystallize.
Nevertheless, within the center of attention is now
coming the systematic approach towards privatization, based on
sector projects. It will allow government institutions and
potential investors to form a clearer picture of the respective
market - its size, level of competition, prospects, substitutes,
suppliers, etc. - factors which are relevant for the organization
of privatization and estimation of the prospects for investment.
The Privatization Agency and some branch ministries put
considerable efforts in elaborating analyses and programs for
different sectors. Institutions like USAID have made important
contribution to this process.
By the end of October 1994 decisions for
privatization have been taken concerning 838 state enterprises and
units and 177 privatization transactions have been signed. The net
revenues for the budget from the finalized privatization
transactions are about 4 bln. BGL. The investors are obliged to
invest more than 4.6 bln. BGL during next 5-6 years and to maintain
and create about 14, 000 jobs. Most of the biggest transactions
have been made with well-known foreign companies like Amilum,
Nestle, Kraft Jacobs Suchars, Willy Betz, Brewinvest (a Greek
subsidiary of Heineken and Coca-Cola), and some others.
The privatization program for 1995
The draft program for 1995 is based on the
assumption that enterprises to be privatized as a priority should
performing in sectors with comparative
their privatization could affect positively other
companies, technologically and financially linked with them;
they should be attractive for investors;
they should not be in or cannot exercise
their privatization will not result in significant
The program for 1995 is based on the new strategy of
moderate expectations. The total number of privatized enterprises
is expected to be 400-450 (12-13% of the state-owned enterprises).
The Privatization Agency itself is to privatize 100-120
enterprises. The total revenues from privatizing state-owned
enterprises in 1995 are planned to be 12-15 bln. BGL. About 10-12
bln. should come from transactions performed by the Privatization
Among the enterprises which could be excluded from
the privatization list for 1995 are those in defense industry, oil
processing industries, power plants and railway transport.
New instruments in privatization
There are three large scale operations pending that
can reshape the Bulgarian privatization. All of them will
occasionally coincide and become active probably in 1995. All of
them will create additional instruments of payment in privatization
and will significantly substitute the expected payments in cash.
All of them have a clear macroeconomic impact. These are:
1. The mass privatization scheme.
2. The internal debt-for-equity swaps.
3. The foreign debt-for-equity swaps.
The mass privatization scheme
The Bulgarian mass privatization is based on the
parallel implementation of two basic schemes of participation -
direct and indirect. The supply side of the mass privatization
(selection of enterprises, legal analysis, restitution claims) and
the demand side (printing and distribution of the means of payment,
establishment and licensing of the financial intermediaries,
control) will be institutionally separated. The supply side could
be carried out by the Privatization Agency and the final word will
be for the Parliament, while the demand side is to be managed by
the recently established Center for mass privatization.
According to the law all adult Bulgarian citizen
have the right to participate on an equal basis if they register in
a special registration network and possess a privatization
certificate with face value of 25_000 BGL. After registration the
certificates will not be tradable, but can be trusted to the
established intermediaries ? investment funds.
About a quarter of the state-owned equity in the
real economy is concentrated in the enterprises selected for mass
privatization. The program will cover about 500 state-owned
enterprises from all the sectors and branches of the real
According to the preliminary time-table the whole
process will last between 12 and 15 months. A successful
implementation of the scheme would mean that within one year a
dramatic increase in the speed of privatization can be expected.
Through acquiring shares - directly in the enterprises or
indirectly from the privatization funds - the citizens will be
involved in the securities market and hopefully in the corporate
Internal debt-for-equity swap
At the end of 1993 the Parliament adopted the Law on
restructuring of the non-served loans negotiated until 31 December
1990. Debts owed by the enterprises to the banks totaling 32 bln.
BGL and 1.8 bln. USD were taken by the state, and transferred into
debts owed by the state to the banks. To cover the debt the
Government issued 20-year bonds with front loaded reduced
As the privatization law allows the creditors of the
state debt to swap it for equity in a way determined by the Council
of Ministers, a Decree was issued to regulate the procedure. The
bonds will thus be an eligible means of payment in all the
privatization deals. In this case they will be counted at face
value in spite of their market price.
At the time being the internal debt bonds are widely
used in privatization transactions and are an important factor for
speeding up the process.
Foreign debt-for-equity swap
According to the agreement between Bulgaria and the
commercial bank-creditors two kinds of government bonds could be
used by investors in privatization transactions ? collateralized
discount bonds and front loaded interest reduction bonds. Recently
the Council of Ministers adopted special regulations on this
The foreign debt-equity swaps ? often opposed on the
grounds of "national sovereignty" ? could significantly accelerate
privatization and the inflow of foreign investments. On macro-level
they could reduce the credit burden in the critical phase of the
economic reform. The attracted foreign capital is an important way
of overcoming the inherited isolation from the world markets. On
micro-level they can be a good criterion for choosing prospective
long term motivated foreign partners.
In the present situation within a restrictive
macroeconomic framework and lack of reliable foreign investors, all
the additional payment instruments can accelerate privatization.
Vouchers in mass privatization scheme and bonds in debt-equity
swaps offer a premium to the investor ranging from 95% to 30%.
Because of the chances it gives to foreign investors
to gain positions on the Bulgarian market within a relatively short
time and the new debt-equity swap options, privatization should
generally be preferred to greenfield investment or joint ventures
with Bulgarian enterprises (mostly state ones). Such investment may
often prove to be a quick solution to the problems of state firms
and prevent their closing down.
Hence, the government, and especially the
Privatization Agency, consider privatization transactions within a
framework of priorities, foremost among which is the investor's
willingness to take a long-term perspective of the firm's future by
transferring modern know-how, maintaining and increasing the number
of employees and offering new products and services on the
Bulgarian and American organizations could
facilitate more effectively the process of privatization along the
1. Establishing effective information systems
American companies planning investments in certain
industries in Eastern Europe;
checking the reliability and investment potential of
2. The Bulgarian Embassy should organize a publicity
campaign to present the Privatization Agency, its work and
investment opportunities in Bulgaria.
3. Wide distribution of printed materials
publicizing privatization in Bulgaria.
4. The organization and funding of sectoral analyses
and privatization projects with the participation of Bulgarian
experts in project teams.