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Part 3

Privatization Techniques and Character of the Privatization Transactions

The Bulgarian Privatization Law allows the use of extremely wide-ranging privatization techniques.The data about the employed privatization techniques confirm the all too high level of decentralization of privatization. Each institution carrying out privatization has a specific policy of its own regarding the employed privatization techniques. This policy reduces the revenues from privatization, limits the competition in the process and respectively, reduces the selling price.

As a privatization technique the auction is most widely used in the case of smaller objects in the sphere of trade and services, as well as the sale of separate parts of enterprises. Its shortcoming is that it limits the possibilities to include non price-related conditions in the contracts. The data about conducted auctions at the Ministry of Trade indicate that in 71% of the cases the selling price was considerably higher than the initial one.

Table 3.


Privatization Agency

Ministry of Trade

Ministry of Industry

Ministry of Agriculture

Ministry of Construction























Public Sale of Shares





















Source: Privatisation Agency.
Note: December, 1994.

Negotiations with potential buyers are the most frequently used technique in the sale of large-scale objects. The changes in the Privatisation Law in June, 1994 introduced additional privatization techniques with the aim of facilitating the process and providing new possibilities for the participation of the small business such as leasing for a term of 25 years with a buy-out clause, management with a buy-out or sale clause, sale by installments with subsequent transfer of ownership, sale with non-financial conditions of deferment or termination, and others.

One of the chief problems of the enterprises in the process of privatization is the lack of know-how and information about the procedures, techniques and legislative framework. It is important to launch an information campaign for the popularization and clarification of the content, advantages and disadvantages of the various privatization techniques. This would be of considerable help to the potential participants and would in many cases actually generate interest in privatization.

Another problem of the privatization transactions concluded up to now is that the financial conditions for participation in the privatization of similar or comparable objects tend to vary significantly. The case studies suggest that this is not so much due to the different market value as determined by the character and location of the particular objects, but rather, depends on the authority carrying out the privatization and the privatization technique implemented by the respective authority.

The different prices at which similar from a market point of view objects may be bought from the different authorities and under the different privatization techniques are a cause for segmentation and disturbances on the market. They deter certain buyers by encouraging expectations for "cheaper" deals.

However, this problem is difficult to overcome owing to the large number of privatizing authorities and possible techniques, as well as to the lack of established tendencies on the real estate, corporate and security markets.

The presence of non-financial conditions in privatization transactions has been common practice up to now. In the studied cases those include commitments to make additional investments, preserving and/or increasing the number of jobs, ecological activities and commitments, etc. (See Table 4.)

Table 4.

Case No

Initial Value (BLV million)

Investment Intentions (BLV million)


Trade Unions



Case No1



20 new jobs





Case No2



preserved 113 jobs


rescheduledby bonds

paid etirely

Case No3



preserved 9 jobs; 25 new jobs



paid ent-irely, by bank loan

Case No4



preserved 150; new 150


4 mln

paid entirely

Case No5


500 made redundant out of 750


4 mln

paid entirely

Recently, one of the privatisation policy debates is that to what extent the inclusion of non-price conditions in the contracts is justified. One view is that the inclusion of commitments for additional investments, preservation or increase of the number of workplaces, retaining the principal activity, and others, complicates the privatization procedure and in this way impedes the speeding up of the process. Another argument used to back that view is the fact that additional conditions require subsequent monitoring involving considerable administrative expenses.

Without disputing these shortcomings of the inclusion of additional conditions in the privatization contracts, it should be stressed that their presence is related to the general strategy of privatization. It does not only seek to achieve a price effect, i.e. immediate revenues from sales, but also the restructuring of the enterprises and improvement of their market positions, which undoubtedly calls for investments. Certain social objectives are also pursued through privatization, i.e. it is necessary, where economically justified, to guarantee the employment of the workforce, to create conditions for normal ecological development, etc. The most important aspect of non-price conditions is, of course, that they are a factor drawing public support for the process and above all the support of the employees, for whom access to privatization under capital privatization is relatively more difficult. Last but not least, the commitments related to investments and jobs reassure the state authorities regarding the good faith of the buyer with respect to the motivation of the purchase and limits possibilities for purchase for the purpose of reducing production and limiting competition, especially in the case of foreign buyers.

All of these advantages of the non-price conditions make them an important element of privatization policy. It is true, however, that this practice should be regulated and brought under control. There also arise logical problems with the value of the negotiated investments. Those agreed in leva are obviously not equivalent to those in foreign currency due to the high inflation.

The study has shown that privatization is not completed with the conclusion of the transaction. There emerges a tendency towards prolonging privatization both on account of problems arising with already concluded transactions and owing to the transition to methods of payment requiring subsequent transfer of ownership. Experience has shown that a number of actual circumstances and problems are not regulated efficiently enough in the contracts for the privatization of enterprises, such as:

- subsequent finding of unknown prior to the conclusion of the transaction defects in the respective privatization objects - in facilities, equipment, infrastructure. This is largely due to imperfect preparation and conclusion of the privatization transaction;

- deterioration of the property and financial state of the enterprises subject to privatization. Experience has shown that this process is nearly always present and develops extremely rapidly, especially in the period from the conclusion of the contract until the new owner actually assumes possession;

- finding of undisclosed as a result of poor financial and legal discipline liabilities and legal obligations (mortgages, property put up as security, etc.);

- nonfulfillment on the part of the buyer of certain stipulations of the contract for financial and non-financial commitments of the new owner.

The privatisation of state owned enterprises turn out to be middle-term process. The procedure for all five cases was prolonged from 8 to 4 months. The employed privatisation technic auctions, tenders, negotiations with a potential buyer. (Table 5.)

Table 5.


Procedure Instituted

Procedure Completed

Bought by:

Final Privatization Technique

Other Privatization Techniques

Case 1

Jun 93

Oct 93



2 tenders

Case 2

16 Aug 93

Mar 94


negotiations with potential buyers


Case 3

Jun 93

Dec 93

Sole Merchant


conducted 3 times

Case 4

Oct 93


2 partners



Case 5


used preferences

sale of shares


One extremely serious question generating tension in the seller-buyer relations is post-privatizatio+n control. The analyzed cases indicate that at this stage such a control is only exercised by the Privatization Agency. To a certain extent that is understandable in view of the short period of time since the conclusion of the transactions (approximately a year has passed since the conclusion of the first more substantial transactions). In most cases the stipulations of the contracts refer to a period of 3 or 5 years.

Furthermore, the attention of the privatizing authorities is focused on the problems related to the increasing number of privatization procedures. The scope and significance of post-privatization control will inevitably grow. With the increase in the number of privatization transactions under the conditions of deferred payment, payment by instalments where the ownership remains with the seller and is to be transferred subsequently, as well as leasing or management with a buy-out clause, etc., post-privatization control will also be exercised by extending the privatization procedure itself until the final transfer of ownership.

Due to the limited scope of privatization and the virtually non-existent post-privatization control there have occurred no instances of annulment of privatization transactions owing to nonfulfillment of sale contract stipulations. There have been cases of dissolution shortly after the conclusion of the sale contract largely due to nonpayment of the agreed price by the buyer within the specified term. However, such developments are certain to arise in the future, with the speeding up of privatization and the growing number of privatization transactions.


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