Bulragtabac Privatization: No Problems

Privatization technique

The procedure resembled very much a negotiation with strategic buyers. First, indicative offers, which are secret, are being submitted. Then the seller makes up the evaluation methodology. At the end, there is a public opening procedure of the submitted offers. Thereafter only clarifications are possible. The choice of buyers is made then. The selected buyers go on to negotiate the privatization contract as well as agreement with the shareholders. It is not before that stage that seller can ask for a price increase.

Change or cancellation of the procedure is allowed only if: (1) any changes of the financial and legal statues of the company occur, or (2) the prices offered by all candidates are obviously low.

Selection criteria and alternative options

The criteria for the buyer selection are known publicly: quantity of the future tobacco purchases – 47 points, price – 43 p., investments and employment – 5 p. each. The seller's expectations are clear: tobacco must be bought.

This is a silly decision. The privatization would look normal if the production and the sale of tobacco had not been monopoly and no "social policy" was served by it. To put it clearly, there should be no Tobacco Act and no Tobacco State Fund; the market would be free to enter on and the basic goal of the industry developers would not be to double the output (although the global perspectives are short the tobacco product market contracts).

Different understanding

The differences between the indicative and the final offers show how the buyers see the seller's hopes.

Tobacco Capital improved significantly their "tobacco" and "investment" suggestions. Metatabac increased a bit their "tobacco" and "price"; they cut down some promised "investments" (they mentioned previously nothing with respect to "employment"). Tobacco Holding generally kept their first offer. Rosbulgartabac cut drastically their suggestion for the most important criteria; however they increased the promised investment and job creation. This is a practical exit from the race. The rest of the candidates obviously have been looking in the shoes of each other. They acted according to the knowledge about each other.

The price

Everybody thinks that Blagoevgrad BT – a daughter company of Bulgartac Holding – is worth more than the holding itself. It is claimed however that the holding cannot be worth less than one of its companies.

When you buy a package of things, some of which make profit and others make loss, the price must be lower. In the case of Bulgartabac the profitable companies subsidize the loss on the maker, and thus the profit of the whole is less than the most profitable part. By the way, the privatisation of the holding instead of the separate companies predetermined the lack of interest on behalf of tobacco market players. If separate companies had been sold, the price for the profit makers would have been higher than the price for the whole now; the loss makers would have been liquidated.

The importance of the debt repayment

The fact that the selected buyer will repay the company's debt to the state budget (about EUR 38.5 million) has an implication on the future development of the company. It can be seen as an additional payment as well (i.e. higher price), or as an investment too. As part of the price, the offer of Tobacco Capital is significantly higher than the rest of the candidates. Since these funds will be transferred after the transfer of property rights, they must be viewed as an investment. The effect is significant: the holding will reduce its total indebtedness; the companies in it will have access to more funds for their development.

The price of democracy

The current policy towards the tobacco production and Bulgartabac is an instrument for buying votes of the tobacco producers, paying with taxpayers' money. In years of elections, the Tobacco State Fund increases by 20% to 50%.

Preserving "democracy" at the expense of all citizens is not a precedent. The debts of Kremikovtzi vis-a-vis the Social Security System, which the government never collects, amount at some EUR 36 million. This makes about EUR 2,560 per vote. The government subsidised the state railways company by some EUR 31 million in 2001 and cancelled about EUR 66 million. As the company has about 35,000 employees, the price of a vote is about EUR 2,760. Regarding the tobacco production, it is much harder to give concrete estimation. However the subsidy of the Tobacco State Fund in 2002 is EUR 33 million. The tobacco growers are probably about 80 – 100 thousand. Then the price of a vote is a far below EUR 500. In a way, it is cheaper that the analogical cases.

The deal keeps the currents policy unchanged; thus it is preserves the current majority. There are no problems.