Making a sense of the new privatization policy

During the election campaign, the NMS2 spoke of shady privatizations as evidence of the failure and clientelism of the previous administration. It was a message that touched on the very core of public discontent with the lack of transparency. Once in power, the newcomers had to do something to prove that their accusations had been just. In early October, they announced they had reason to believe that the sale of 210 public enterprises had been suspicious and the chief prosecutor opened an investigation into the activities of those who were responsible. The Government Program could not avoid the issue and the section on privatization and the respective draft bill may only be part of it.

Goals and effects

As a main goal of privatization, the governmental program identifies the need to adopt a new Law on Privatization and Post-privatization control. The key features of the bill are to:

a) Drop insider privileges;

b) Use auctions as the main privatization technique;

c) Launch auctions and sales procedures in response to provisional buyer interest. (However, the sale of monopolies and quasi-monopolies remain at government discretion);

d) Transfer the right of sale from multiple agents (ministries, etc.) to a single agent – the privatization agency. The latter has also been granted exclusive control over all post-sale issues and is requested to keep a public registry of the completed deals.

There are other details of a more questionable nature. For example, privatization revenues are to finance a government owned high tech fund. But for reasons of space we will not go into these in detail here.

We are confident, however, that the results of the new privatization policy will be:

a) A faster privatization process;

b) Greater transparency (at least in part) of the deals, after the transition period;

c) Simpler procedures (and, possibly, lower administrative costs).

Repercussions

At the same time, as the debate suggests, the inclination to attract "strategic investors" will probably mean that certain non-quantifiable (non-price) criteria will apply, and that tenders (i.e. less transparent and slower procedures) will be used instead of auctions. Eventually, we believe the inclusion of non-price commitments, such as job preservation and investments, in the privatization contracts will necessitate more stringent controls, higher costs (of dealing with the government), and reduced transparency and speed gains.

If the post-privatization control is maintained this would restrain the freedom of new owners to restructure companies. This would most probably result in less and postponed productivity gains.

Realities

What remains to be privatized are the former state monopolies in communication, energy and transport.

The tobacco giant, Bulgartabak (BT), is a special case and is already on the table. What matters in this case are price commitments to the tobacco growers in the monopolistic Tobacco Fund (TF), which is the exclusive Bulgarian supplier of BT inputs. The sale price of BT will depend on whether the company and the fund will effectively be expected to offer a social welfare service to the predominantly Muslim tobacco growers. The Movement for Rights and Freedoms (MRF) – the junior coalition partner of NMS2- is the party Bulgarian Muslims vote for. Since 1999, FT is managed by a Muslim or ethnic Turk political appointee. Less dependence on TF and commitments to tobacco growers would presumably be critical for the sale and respective revenues of BT.

Investor interest in the other state-owned companies -Bulgarian Telecommunications Co. BTC, National Electric Co. (NEK), Bulgargas (BG), and Bulgarian State Railways (BDZ) -is unlikely to be significantly affected by the current performance and management of these companies. Investor interest in highly rated investments is determined mainly by the amount of freedom the new owners will have to restructure these companies and introduce better management. In the case of these companies, this freedom will also depend on the deadlines of individual monopolies, pre-sale restructuring and the overall regulatory environment. BDZ is a key loss maker. By setting the price of gas, BG is an important source of budget revenue. The sale of BTC is reopened at a time when the market is down. Regulatory environment for parts of NEK is either unfavorable or unclear (See the special feature of Energy Policies).

The key difference is administrative

Obviously, the new privatization policy will not be a key factor when it comes to improving revenues and increasing FDI. There is difficult trade-off between political stakes and FDI which is fairly visible in the case of BT. In the case of BG, the government would prefer to retain its monopoly position, while the challenge in BDZ is to close the loss-making services, most of which are passenger lines, and to subsidize freight in order to avoid additional export costs.

The above-mentioned companies are still the major asset holders and employers in the country. Their combined estimated asset-value is equivalent to about 40-45% of the government's total assets. The government would remain a key business player instead of resigning to the role of a regulator.

Hence it emerges that the objectives of the new privatization philosophy refer to the minority government stakes in privatized enterprises, industries and some untouched sectors, such as the former military industries.

The key change is administrative rather than conceptual. It lies in the fact that the right of sale and control has now been transferred to the reformed privatization agency. The reshuffling of duties and reopening of the privatization agency will require time, administrative effort and the flow and transfer of documents. By the time the new privatization desk will be opened, the first in "the line of new buyers" will most probably have insider information. The next stage of the privatization history will probably be fairly transparent. Those who have enjoyed insider information up to now will probably be frightened off by the mass investigations which have been launched by the prosecutor and are likely to welcome the new rules that would prove that there has been no formal conflict with the law. It is also likely that post-privatization control combined with targeted prosecutor initiatives will be used to benefit NMS2 friends. Again this would happen within the framework of the law! Otherwise, the more sensible ideas enshrined within the new policy – such as discontinuing the privileges to insiders and focusing on auctions and tenders – could have been achieve faster and in a cost-effective manner through minor amendments to the existing legal framework.