One Step Forward, Two Steps Back: Ataka and the Effects of Nationalization

Author: Kevin P. Allen / 29.01.2007
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Despite recent scandals which have resulted in internal discord amongst members of Ataka, the party retains relatively stable levels of support among its core constituents. The upcoming protests in regard to the visit of U.S. Secretary of State Condoleeza Rice will illuminate to what effect, if any, these scandals have had on the party. Irrespective one can assume that the party will persist and that its’ very existence should be a cause for concern as the social and economic proposals endorsed by Ataka will undoubtedly hinder the development of Bulgaria and the Bulgarian people. These proposals (usually delivered in the form of populist rhetoric) are encompassed in two documents, one of which is known as the “20 Principles.” Among the more damaging directives in the “20 Principles” is the idea to ‘reconsider’ the privatization process in Bulgaria, a euphemistic manner of calling for the nationalization of private property. The effects of such an action would be far reaching in that the realization of the policy would:

  • deprive the government of large fiscal gains resulting from the sale of state-owned enterprises.
  • result in severe economic damage to the general public by nationalizing the 216,00 plus small and medium sized enterprises.
  • have a significant negative effect on foreign direct investment (FDI) in the country.

 

The Economic Impact of Privatization

Prior to discussing the possible fiscal gains associated with the privatization process, I would like to insert a disclaimer regarding the utilization of funds resulting from privatization. One might be quick to argue that money acquired by the state is often funneled off into the pockets of avaricious politicians and the impact of privatizing large companies is thus diminished. I recognize the potential for such behavior however the issues are very much different and the existence of corruption is a much more serious impediment to the well being of the country than is privatization. As such I speak of privatization in a theoretical sense i.e. in a sense that lawmakers will one day give the problem of corruption serious consideration, strip MP’s of their immunity and make a concerted effort to identify and prosecute all those engaged in illicit activities.

That being said, the privatization of larger enterprises has a very significant impact on Bulgaria’s economy. One example to reference is that of the Bulgarian Telecommunications Company (BTC). The total financial effect of the sale of 65% of the company to Viva Ventures amounts to over EUR 1.1 billion alone(1). The remaining 35% of BTC was offered in the form of 2.8 million shares on the Bulgarian Stock Exchange. As of April 4 th the selling price of one share of BTC stock was 10.20 leva(2) giving all shares a value of approximately BGN 28.5 million or just over EUR 14 million. Other examples of large fiscal transfers resulting from privatization can be seen in the energy and banking sectors.

The partial privatization (67%) of seven state-owned electricity distribution companies garnered approximately EUR 693 million(3). The project was partitioned into three regions and the winning tenders were as follows: the Czech company CEZ paid EUR 281 million for the western package, German company EON paid almost EUR 141 million for the northeastern package, and Austrian company EVN paid EUR 271 million for the southeastern package. If fully privatized, we can assume the total fiscal effect would reach approximately EUR 1.03 billion. In another deal worth EUR 260 million, a consortium of Mitsui & Co, Toshiba, and the Japanese Bank of International Cooperation will redevelop four units of the Maritza Iztok 2 thermal power plant.

The long-term process of privatizing the banking sector has also had a significant effect on the Bulgarian economy. One major player in the process was the Banking Consolidation Company (BCC). The BCC, established in 1992, was designed to expedite the banking consolidation process, manage the State interests in commercial banks, and establish an effective banking system within the country.(4) The first major step came in 1994 when the BCC sold its entire interest in six banks and reduced its shares in two others. In 1997, the company adopted a privatization strategy for each of the state-owned banks in which it was a major shareholder. These banks include Bulbank, Express Bank, Post Bank, Hebros Bank and Biochim. The 1998 sale of approximately 78% of BCC’s shares in Post Bank brought USD 38 million. The BCC later sold its stakes in Bulbank to a consortium of Unicredit and Allianz for some EUR 360 million.(5) As well, Express Bank was purchased by the French firm Societe Generale for some EUR 36 million.

In short, privatization brings in a great deal of money for the state. As of December 2004, the total number of state-owned enterprises sold was roughly 2,878. In addition, stakes and shares in around 5,181 enterprises and 2,303 self-contained facilities have been sold. Over the course of twelve years, the total overall financial effect from the deals signed concerning the transfer of enterprises is approximately USD 9.74 billion(6) (an amount roughly equal to the country’s 1995 GDP(7) and approaching 1/6 th of the country’s 2005 GDP(8)) while the actual payments made amount to approximately USD 4.6 billion(9).

SME’s and the Effect of Reconsidering Privatization

The decision to reconsider privatization would not only affect large enterprises in the banking and energy sectors but would have severe consequences on small and medium-sized enterprises in the country. As previously mentioned there are some 216,000 SME’s which account for 99.2 percent of total enterprises and 99.8 percent of all private enterprises.(10) In 2003, small and medium-sized enterprises were responsible for the employment of some 1.1 million people in Bulgaria, approximately 79 percent of the total number of employees in the private sector.(11)

An examination of the impact of SME’s across various sectors will assist in understanding the negative impact of nationalization in Bulgaria. In manufacturing, SME’s comprise 98.9 percent of all enterprises in the sector. The number of people employed by SME’s constitutes just over 63 percent of all employment in the sector. Regarding construction, SME’s account for 99.6 percent of all enterprises in the sector and employ over 85 percent of those working in the sector. Medium sized enterprises alone account for over 35 percent of the employment. SME’s dominate the wholesale and retail trade, repair of motor vehicles, and personal and household goods sectors. Large enterprises account for only .03 percent of all enterprises while micro enterprises make up just under 95 percent. Trade is the most attractive sector for SME’s who employ over 95 percent of all people working in the sector. In the hotel and restaurant sectors, SME’s account for over 99 percent of all enterprises while similar numbers can be found in the transport, storage, communication, real estate, and business activities sectors. Due to the nature of production in some sectors such as mining and electricity, SME’s are not nearly as dominant.(12)

A brief look at the introduction to the Annual Report on the Condition and Development of SME’s in Bulgaria, 2004 will provide perhaps the most compelling argument against the nationalization of private property.

“Small and medium-sized enterprises account for 99 percent of total Bulgarian enterprises. They generate 79 percent of employment, 75 percent of the turnover, and 61 percent of the value added of private enterprises.” The report later adds: “They account for 54 percent of the export and 73 percent of the import of private business.”

To reverse the process of privatization would have serious negative effects on Bulgarian SME’s. Due to the number of people who are employed by SME’s, one could assume that the implementation of such a policy would result in extremely high unemployment, serious deterioration of a large part of the service sector, and acute macro-economic damage to the Bulgarian economy.

 

Nationalization and Foreign Direct Investment

In regards to FDI, it should first be noted that the effects of FDI are not sole monetary; foreign firms also bring access to global markets, transfer technologies, train local executives, and often provide better paying jobs than domestic firms.

That being said, the reversal of the privatization process will virtually halt all foreign direct investment (FDI) into Bulgaria. This is significant as inflows of FDI account for a sizeable portion of funds in the country. The pending entry into the European Union has heightened investor interest in both Bulgaria, a trend that is clearly visible when one considers the increases in FDI over the past few years. In 2000, FDI in Bulgaria measured around EUR 1.08 billion. Since that time it has fallen once in 2001 (down to EUR 896 million) and steadily increased measuring approximately EUR 2.5 billion in 2004.(13)

One of the largest investors is Business Park Sofia, a Bulgarian firm who, in conjunction with the construction group German Lindner, was awarded a First Class Investor certificate upon the agreement of a three-year investment amounting to BGN 1.6 billion. There are numerous other examples in the same vein. The Canadian firm Dundee Precious Metals agreed to a two-year, BGN 1.1 billion investment to modernize the process of extracting and processing ore in Chelopech. The company is slated to invest another BGN 101 million in the future. In May 2005, the French company Montupet agreed to a BGN 70 million investment to establish a car part factory in Rousse. Trakya Glass Bulgaria, a subsidiary of the Turkish holding Sisecam, is investing some BGN 367 million to produce glass in the town of Turgovishte.(14) To allay any fears stemming from the last example (i.e. that Turkish companies are buying up Bulgaria), the largest investors by country are Austria (32.5%), Switzerland (14.2%) and the United Kingdom (13.5%)(15). The point here is that foreign direct investment is crucial for the Bulgarian economy and according to the website invest.bg, accounts for almost 11% of the country’s GDP.

As demonstrated by the preceding paragraphs, Ataka’s plan to ‘reconsider’ privatization is deeply flawed in many respects. As well, it would erroneous to assume that 1Siderov and his party have the capacity to somehow successfully reverse the privatization process without causing severe damage to the country’s economy and leaving hundreds of thousands unemployed. Thus we are left with the following questions:

 

  • Does Ataka have the USD 4.6 billion to cover the income gained from financial transfers stemming from privatization?
  • How will the party provide employment for the roughly 1 million people who stand to lose their jobs as a result of nationalization? (This is particularly important considering the current levels of unemployment in the country.)
  • How will they preserve the country’s service sector as it is largely dependent on SME’s who will ultimately be put out of business as a result of nationalization?
  • How will the party recover the BGN 3 billion lost in foreign direct investment as a result of nationalization?
  • Does the party have a definitive plan on how to go about engaging in nationalization without an end result that parallels that of Zimbabwe?

Siderov and his party members have plenty of bad ideas and the party has neither the financial resources nor the experience to adequately handle the consequences of their own proposals. As shown by the preceding examples, the party offers little more than implausible and poorly thought out solutions. Committing economic suicide will do absolutely nothing to improve the quality of life in Bulgaria. It is time for the general public to look past populist slogans and realize that Ataka can only set Bulgaria on a regressive economic path.

 

 

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(1) Summary Report of the Privatization Process – Privatization Agency, Rep. of Bulgaria

(2) Bulgarian Stock Exchange, Sofia

(3) Ibid.

(4) A Review of Bulgarian Privatization – OECD, 1998

(5) Press Review - b-info.com, July 2000

(6) Summary Report of the Privatization Process – Privatization Agency, Rep. of Bulgaria

(7) Black Sea Energy Review.

(8) CIA World Factbook - Bulgaria.

(9) “Summary Report of the Privatization Process.” Privatization Agency - Rep. of Bulgaria.

(10) “Annual Report on the Condition and Development of SME’s in Bulgaria, 2004– SME Promotion Agency.

(11) Ibid.

(12) Ibid. All of the statistics in the preceding paragraph can be found in the Annual Report.

(13) “Bulgarian Reforms Foster Growth, Foreign Investment.” World Bank.

(14) “FDI in Bulgaria up by 11.5% Jan – Sept.” Bulgaria National Bank / Evroportal.bg

(15) Ibid.