Home Site map Contact us Switch to Bulgarian
www.csd.bg
Quick search
 
CSD.bg
 
 
Changes and Amendements to the Privatization Law Adopted by the National Assembly in June 1994, by Valentin Karabashev
 

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.



 
CSD.bg
 
E-mail this page to a friend Home | Site map | Send a link | Privacy policy | Calls | RSS feed Page top     
   © Center for the Study of Democracy. © designed by NZ